Many investors spend a lot of time worrying about their asset allocation. What’s the magic percentage that I should put into the UK market versus the US versus Emerging Markets?

Sadly, there is no magic percentage and no perfect answers to such questions. There’s only roughly right guidance that exploits the wisdom of the market.

I’ve always wanted an easy-to-use-tool that can guide investors through the process of building a diversified DIY portfolio, to short-cut all that worrying.

And the justETF Strategy Builder is the best asset allocation tool I’ve found yet.

What I like about it

• It’s free.

• It’s simple.

• It’s attractive.

• It’s founded on sound passive investing principles that enable you to quickly rustle up a decent global portfolio.

I think it could be useful for a novice investor who’s hesitating over their asset allocation. Here’s a quick run through of how it works.

Start here

From the justETF home page click on Model Portfolios in the navigation bar.

There’s no need to sign-up but it’s fun to invent a cheeky / absurd / massively portentous name for your portfolio. (I’ve just plumped for KISS below).

Drop in your starting cash figure and you’re away.

Risk profile

How will you split your holdings between bonds and equities? This is the stage that will have the most impact on your portfolio’s fate.

Use the slider on the left to set your risk speedo.

• Lower risk means slamming more of your allocation into bonds.

• More risk means upping your equities.

Here I’m going for a 70:30 split. That is pretty adventurous and similar to the divide in our Slow & Steady portfolio.

Note: Playing with this slider bears no relation to your actual ability to handle risk. That’s an ever-shifting target that no tool can reliably hit.

You won’t really have a clue about your risk tolerance until the market puts you through the ringer but, while you wait, there are some rules of thumb and asset allocation personality types that can help move you into the right postcode.

Also, consider how your investment objectives affect your need to take risk.

One thing I would love to see here is a quick visual of your chosen split’s historic volatility. It’s one thing to be gung-ho for 100% equities, but another to see how often that resulted in a terrifying freefall that cut your wealth in half.

Choose your strategy

This is my favourite bit of the tool. Choose from three equity strategies of increasing refinement.

The first is a simple, single ETF total world equity strategy. Notice how diversified it is with 2,470 holdings spread across 46 countries.

Note too the amber concentration warning (in the bottom right) triggered by the large allocation towards the United States:

• US = 52%
• UK = 7% (no home bias here)
• Japan = 7%

This strategy will unnerve many investors who worry that the US market may be overvalued. Moreover, it’s more reflective of the US domination of a global index rather than global GDP.

The second strategy – New International Economy – offers a quick fix.

Here we add an emerging market allocation in line with justETF’s estimate of that bloc’s share of global GDP.

Just add emerging markets

Now the US share is down to 38% and emerging markets are up to 35%, with China weighing in at 8%.

This kind of integrated data is the future for DIY investors. Until now we’ve had to laboriously piece together the puzzle from Googled fragments. But justETF conveniently collates everything in one place and presents it as readily accessible headlines that don’t fry your brain circuits.

Still, some investors will fret that this strategy is nowhere near complicated enough to feel right.

Balance of power

The third strategy – Regional Approach – carves up the world into five separate ETF blocs as if we were playing Risk for money.

Now the US influence is knocked back to 26% and the Concentration bar has crabbed into the green zone. That’s because the top three countries now constitute less than 50% of our equity allocation.

Using separate ETFs to build up your global exposure like this will reduce your ongoing charges but it can increase your trading costs. It’s more suitable for investors with pretty big portfolios or those who can make large contributions.

That’s equities sorted. What other asset classes should we throw into the mix?

Diversification

The instinct to spread our bets is one of the few human intuitions that serves us well when investing.

On top of the key equity / bond split, justETF suggests reserving a slice of your risk portfolio for commodities.

Gold is good during an end-of-days crisis while broad commodities can guard against stagflation – although various question marks hang over the index trackers that cover this asset class.

I personally don’t hold commodities but as you can see from the screenshot I have taken a wedge here to show you the idea.

I’m surprised that justETF doesn’t include property trackers as a diversifying option in this section. Hopefully that will come later.

Of course, you can pile on all sorts of sub-asset classes – including risk factors – but it’s probably best to keep things simple to begin with.

Bond strategy

This section could help a lot of investors who struggle to understand the various bond classes.

Short-term, domestic government bonds are the safest (although not entirely safe) option you can choose. They’re not likely to lose or gain much but they can help prop up your returns when fear stalks the markets.

The UK Government Bond strategy will put you in an ETF holding gilts with maturities stretching from 1 to 20 years. This is liable to offer more return in exchange for greater volatility than the short term option.

Finally, if you’re prepared to accept even more volatility in a bid to earn more yield, then choose the UK government and corporate bonds option.

Corporate bonds tend to correlate with equities during a recession so this choice could add a fair degree of risk to the part of your portfolio that’s meant to offer stability.

It would be nice to see an index-linked gilt option here, as linkers have a key role to play in protecting your portfolio from inflation.

Suggested products

You need to sign up to justETF (it’s free) to save your strategy and see its suggested ETFs.

You can choose to view the cheapest ETFs, or the largest, or the oldest (handy for track record) and to screen out synthetic ETFs.

The screen clearly shows the weighting of each ETF in your portfolio, how much money you should devote to each one plus the fees you’ll pay to the ETF providers.

Click each ETF name to drill into the key features, check the factsheet and other info.

Click the orange squares on the right to see a list of alternatives and swap them out.

The major problem I have with this section is that the suggested choices are restricted to ETFs that track the MSCI family of indices. So you’re selecting from just the cheapest MSCI trackers, rather than the cheapest trackers. That screens out Vanguard ETFs and others besides.

There are plenty of good MSCI tracking ETFs out there, and it’s a decent range to choose from, but as optimiser I don’t like to feel unnecessarily restricted.

Monevator’s cheapest tracker picks show a wider range of choice.

Premium features

If you’d like to see how your proposed portfolio has performed historically then you’ll need to sign up for a paid account. This will cost you £9.90 a month for a year’s subscription or £14.90 a month for three months.

Paying up also unlocks various extra features, including rebalancing alerts, performance tracking, and transaction lists.

Frankly, I think the justETF Strategy Builder is an excellent asset allocation tool. I also recommend trying the ETF Screener to help you unearth good ETFs.

That said, you should know I have written paid-for articles for justETF’s website and that the links to the website in this article are affiliate-enabled (but there’s no cost to you).

I am recommending justETF’s tools because I think they are genuinely helpful for DIY passive investors.

However it’s only right that you’re aware that I have a commercial relationship with justETF at the time of writing.

ETFs aren’t the only fruit

The main drawback with justETF’s take on passive investing from our perspective is that it focuses exclusively on ETFs.

I believe a passive investor should consider whether ETFs or index funds make most sense for them.

Small investors who make monthly contributions are particularly vulnerable to the whittling effects of trading fees with ETFs, and will often be better off with index funds.

Finally, you need a firm grasp of passive investing strategy before you can wield the justETF tools wisely, so don’t forget to do your research before jumping in.

Take it steady,

The Accumulator

Good reads from around the Web.

I couldn’t agree more with an article I read this week on BeyondProxy talking about how the world is chaotic, so you might as well deal with it.

Stability in markets begets instability. Always has and always will.

This is one reason I think financial regulation has its limits, incidentally, and why savers and consumers should sometimes take one on the chin for the common good. That way we’re all encouraged to be more prudent and self-reliant, rather than everyone being cushioned, compensated, and bailed-out to the point of abdication.

The more people believe that something can’t fail, the more of it they will take on, eventually including leveraging up to get more – if not explicitly through debt then through some shadow agent or the dumping of diversification or in some other way getting too much of the good thing.

Nothing can be pushed beyond its limit, not even supposedly risk-free assets.

Consider the negative yields on the average German government bond. One of the safest assets in the world is now guaranteeing a loss to its holders, and stoking the potential for myriad different outcomes (which is what ‘risk’ really means) that are not all pleasant (though some are – because risk doesn’t mean that only bad things can happen).

I’ve no more idea than anyone else how or when this slow death of yield ends.

But I suspect it will be with a bang, not a whimper.

Learning to fear stability

BeyondProxy author Michael McGaughy writes:

Twenty-five years ago as a young analyst I loved analyzing companies that had steadily increasing sales, constant profit margins and growing profits. This made my financial projections easy.

However experience has taught me not to trust steady returns and stability.

The business world is competitive and anything but stable. I now believe that ‘stable’, ‘no risk’, and ‘guaranteed return’ are some of the most frightening words in business and investment.

Consider the following:

• Bernie Madoff’s funds got big by seemingly delivering steady monthly returns in both up and down markets. As we know now, it was all a fraud.

• Before it went bankrupt, Enron was well-liked by sell-side analysts and investors for meeting analyst estimates. It steadily met expectations and was considered a stable and safe company. But it was mostly smoke and mirrors before it became America’s largest bankruptcy.

• The desire for, and fallacy of, steady growth is nothing new. Adam Smith (aka George Goodman) wrote about the illusion of steady growth in his 1972 book SuperMoney. “Everywhere you looked, there was a company with a neat stepladder of growing earnings. Some kept the stepladder right up to the day they filed for bankruptcy”

• In his commentary on Dell being fined by the SEC for fraudulent accounting designed to smooth earnings, author and Darden School of Business professor Edward Hess notes that, “companies that grow for more than four consecutive years without resorting to earnings games are the exception, not the rule”

McGaughy goes on to to sing the praises of instability for giving us all the wonderful change we see in the world – at the price of the occasional wobble.

Remember every investment can fail you. Don’t put all your eggs in one basket – and ideally have a few chickens about the place, too!

[continue reading…]

A rare political rant today, which you are of course free to ignore. Alternatively please do have your say (politely, constructively) in the comments. My hope is that by keeping politics restricted to these occasional blood-letting rambles, we can hopefully keep the rest of the site and article comments relatively ideology-free.

Last time we faced a general election, the economy was uppermost in voters’ minds. I even wrote a few posts on Monevator about what I thought needed to be cut, slashed and kyboshed – and also where Government might helpfully spend some money.

Of course, over the five years that followed neither my manifesto nor anyone else’s was achieved.

That’s what you get from a Coalition government that takes office after the money has run out, and yet must minister to the needs of a country that’s grown comfortable on 15 years of economic growth and free-flowing public spending. A queer pitch indeed!

But you know what? I think it turned out okay.

Spending was reigned in a bit, taxes were cut a bit – usefully from the bottom with the personal allowance raise, and from the top, with the end of the mean-spirited 50% rate of tax – and getting the national books in order has at least became accepted lip service among all the parties, if not always the reality on the ground.

Oh, and the NHS has not been destroyed. Millions of people do not languish on the dole queues. At the same time, George Osborne is behind his own targets for tackling the deficit.

Muddling through a crisis like this is one way forward.

If I have one major criticism, it’s that there wasn’t boldness on true infrastructural investment, given the incredibly low cost of long-term borrowing.

I have no appetite for permanently higher state spending as a share of GDP from here, nor for Gordon Brown-style “investment” that walks out the door every evening in the form of higher salaries.

And I understand that some are skeptical of the value for money from any major projects.

Nevertheless, the fact is there are some things a country needs, such as roads, rails, airports, bridges, tidal and nuclear power stations (and in the UK simply more houses) where the state can usefully get involved.

In the earlier years of the crisis, I think such investment would have delivered a lot of bangs for the buck. It might have been a wash overall long-term, in terms of return on investment, but it would have meant more jobs during the downturn and making something good out of a bad situation.

Also, rather like buying shares in a bear market, the odds are surely more in your favour if you spend money as the state when demand from the private sector for the same skills and opportunities has evaporated.

Not doing more visible state spending in the UK is not the glaring failure that I think it is in the US – their roads and bridges are literally falling apart – but it’s still been a missed opportunity.

Six of one and half a dozen of the other

So what about the next five years?

I haven’t written much about the economy recently, and I won’t do so now.

In the eyes of all but the ‘house of paper money, mountain of debt’ fundamentalists, we’re clearly out of the emergency ward. Reasonable people can disagree about how much further and how fast spending should be ‘cut’ (or more likely at best held in real terms) or where the axe should fall. Plenty do elsewhere.

But I don’t think voters are so bothered in this election.

All the main parties have signed up to some sort of fiscal restraint (in the loosest sense of the word) and my gut says the existential doubts that led to everything from the Occupy movement to the rise of UKIP has waned.

Also for everyone who fears, say, a return to profligate spending by a Labour government, there’s another who worries about the rise of inequality and the fact that the super-rich have done so much better over the past five years.

Often, as in my case, those worries reside in the same numbskull!

So I don’t think people believe they are voting to save the nation this time. Rather, they are much more likely to vote based on the outlook for their own wallets.

True, we all know there’s a big economic element to that end.

If a Labour government spooked the money markets, the pound fell and interest rates soared, that could have a much bigger impact than getting a few hundred extra quid in free childcare.

Similarly, if a Conservative/UKIP alliance took us out of Europe and started dismantling public services along the way there could be massive upheaval, too.

But I think there are so many often-contradictory permutations that many floating voters aren’t even bothering to evaluate them, and they will instead resort to self-interest to guide their vote.

And it’s floating voters who swing elections.

It’s housing, stupid

I’m the most floaty voter you’ll ever meet – I have voted for four parties to my recollection, in national and local elections – and I’m finding the current choice amongst the most difficult ever.

I had pretty much resolved to go Conservative again this time. I judge we can do with another five years of half-serious attempts at curbing state spending, and Ed Milliband’s talk of price controls and unilaterally raising the minimum wage really bother me.

(I’m a fan of the minimum wage, incidentally, but only when it’s done through the painstakingly established regulatory process that’s been put in place. Not when it’s lifted on a whim by a party chasing cheap votes).

However in the past few days the Conservatives have come out with two policies that I personally find repellent.

Firstly, the proposed changes to inheritance tax to lift £1 million family homes out of the levy altogether.

I know most people hate inheritance tax, and I’m always accused of being a left-wing commie agitator when I say I want it to be raised.

But the point – which my critics never seem to address – is someone somewhere has to be taxed – unless you’re a true zero-State free market radical, which almost nobody is.

All the major parties are really talking about is 2-5% difference in State spending around the 40% share of GDP mark. So however you do it, that’s a lot of tax that needs to be collected from somewhere.

On principle, I think it’s better to more heavily tax dead people and their heirs who did nothing to earn their windfall gains, because you can then reduce the taxes levied on earnings and on the wealth created by entrepreneurs.

As I say, I know most of you don’t agree with me. Even my left-wing friends go red when they think about paying tax on their parent’s semi-detached pile with easy access to good grammar schools.

Oh well, I’ve never written articles for this website to win fans.

But even if you don’t like inheritance tax, you must surely at least question the logic of this particular Conservative move.

Because if you were going to reduce inheritance tax on any particular asset you could choose, the stupidest one to favour in the UK has to be residential housing.

Save now, pay later

It was one thing to turn pensions into inheritance tax planning vehicles for the mass-affluent, which is what has effectively happened in the past 12 months.

I didn’t agree with it, but there you go.

However to take an asset – UK housing – that is in structurally short supply, where high prices cause daily misery for millions, and to make it even more attractive to sit in it, unproductively squatting for future gains – that is downright irresponsible.

What moderately wealthy empty-nesters living in a capacious four-bedroom house are going to downsize now, knowing that all it will do is expose the money they release to inheritance tax?

On the contrary, they will be advised to consider buying even bigger and more expensive homes to try to shield their (children’s) assets.

Mass downsizing alone won’t solve the housing crisis, but it would be a start.

I want capital gains on residential property (deferred until the point of death), so you can see that this policy is the opposite of where I think we should be going.

The only other option is even more building – something in the order of 300-400,000 homes a year for at least the next decade.

We’re barely doing a quarter of that.

Many of those new homes will have to be built in green belts and pretty market towns across the South East.

I wonder how that will go down?

We need to build at least 250,000 more homes annually anyway, even if we put the housing stock we’ve already got to more efficient use.

But this policy just makes things worse.

No way to compete

One thing you need to know about me to understand my perspective is I was not born into a comfortable middle-class home in the South East. The world was not my oyster.

I came to London from the provinces with a suitcase, and my instinct is always going to be to think of other smart young people who want to do the same.

Already the wealthy middle and upper classes are re-capturing the arts and media scene wholesale – a change that has happened in my lifetime – as their children are about the only ones who can afford to do the unpaid entry-level work demanded, or who can think about a lifetime of sub-par earnings in a city where house prices are approaching 10-times the average wage, knowing they’ve an inheritance to look forward to and plenty of help in-between.

Their parents are there to assist them with tuition fees, deposits for flats, and all the rest of it.

The resultant crushing of the meritocracy that emerged in the 1950s and 1960s is bad enough when applied to the arts, but I can now foresee it impacting the sciences, engineering, and even entrepreneurship itself. (I don’t think it’s a coincidence that every new Silicon Roundabout founder I hear has a plummy Home Counties accent).

You might say you don’t give two hoots, because you’re in the haves and the have-nots can look after themselves.

Fair enough, from a personal perspective. Ugly but honest.

However what is the impact going to be nationally if we move to a society whereby wealth and opportunity is channeled down a narrowing funnel of families, and real social mobility is curbed?

I’ll tell you. It means more mediocre but well-educated offspring of parents who’ve made it (or, eventually, whose own parents made it) doing mediocre work in positions they are occupying because some smarter kid from anywhere 50 miles from London never showed up to compete.

A nation increasingly run and ruled by the Nice But Dim types who currently thrive as upscale estate agents in London.

At least until China and India come along to eat our uncompetitive lunch.

I shudder.

Flog it!

Now I’ve got my left-wing ire up, I will turn to the subsidized right-to-buy social housing association policy that’s been revealed this week by the Tories.

Yet ironically my complaint here comes more from the free-marketeer who sits on my other shoulder.

Don’t get me wrong – given my comments above, I clearly think it’s idiotic for the Conservative Party to encourage the sale at a discount of what little social housing we have left.

However I think it’s even worse when you consider low-earners who’ve scrimped and saved to buy one-bedroom flats or starter homes in the private market – or who are perhaps still renting and saving to do so.

They will be left to watch glumly as those who happened to be in housing association property are granted a one-off windfall gain by the State.

It’s another lottery. Not the genetic lottery of inheritances and the Bank of Mum and Dad, but a lottery of happening to be sitting in the right state assets when the ruling party of the day decides to give them away on the cheap.

How fair.

Nothing really fits me

At this point I’m naturally thinking I might have to cast my vote elsewhere, despite the Conservatives being the party I think is best having their hands on the tiller for the another five years – and despite the fact that they would undoubtedly be the best for my own wallet.

Sadly Labour has veered to the Left, while the Liberal Democrats have some silly anti-capitalist policies in their manifesto, particularly regarding capital gains tax.

(Before somebody pipes in and claims I’m inconsistent in being against reduced capital gains tax allowances but all for inheritance tax, here’s a clue – me and Richard Branson took risks when we allocated our money and we’ve made losses and gains along the way. Your child simply happens to be related to you – they did nothing to get the money, and the only risk they took for their inheritance was their sense of personal achievement being smothered by your generosity).

What about the fringe parties?

I think UKIP has jumped the shark – it did a useful job in making immigration something the chattering classes can cautiously discuss without being socially ostracized, but the party itself is clearly populated by rank-and-file nutters.

Indeed I’d summarize the fringe party offerings as:

• Green party – Climate change is coming! Therefore we need a bloated State-run economy that slams GDP into reverse and reduces carbon emissions by making it so that nobody can afford petrol.

• Plaid Cymru – Wales! Wales! Aren’t we good at the rugby?

• SNP – Wants another once in a generation vote on leaving the Union, six months after the last one.

• UKIP – A sword has been embedded in a stone in an English market square. Whomsoever can draw it forth will be the next king of Albion!

So those aside, I’ve collated below the three main party’s manifesto pledges that I think are most relevant to Monevator readers, from a personal finance and investment perspective.

In other words, I’ve focused on pledges that impact earned income, wealth, and spending on things like rail fares and childcare.

To that end I have not covered benefits, as I’ve assumed few Monevator readers are living in social housing on welfare. (My apologies if that’s you – and I admire your aspiration.)

If you think I’ve missed out anything important from a personal finance perspective, please do let me know below, and if I agree I’ll add it to the list.

Conservatives

• Raise the personal allowance for income tax to £12,500

• Raise the higher-rate / 40p tax rate threshold to £50,000

• Raise the inheritance tax threshold on family homes to £1m by 2017

• Pensions relief hit for high earners. Manifesto says the £1m inheritance tax lift for family homes will be paid for by: “Reducing the tax relief on pension contributions for people earning more than £150,000.”

• Extend the right-to-buy scheme to housing association tenants in England

• No income tax payable by those working 30 hours on the minimum wage

• Double free childcare allowance for three- and four-year olds to 30 hours

• No rise in VAT, national insurance contributions or income tax

• Clamp down on tax evasion and the “aggressive” tax avoidance

• Increase the minimum wage to £6.70 by the autumn and to £8 by the end of the decade

• Continue to apply the state pension triple lock system – so at least a 2.5% rise every year – and introduce a single-tier pension

You can read a summary of the rest of the manifesto at the BBC, or you can read the whole thing at the Conservative’s website.

Labour

• 50% rate of income tax for those earning over £150,000

• No increase to the basic or higher rates of income tax, National Insurance or VAT

• Unspecified pension hit for high earners. The manifesto speaks of: “…restricting tax relief on pension contributions for the highest earners and clamping down on tax avoidance.”

• Raise the minimum wage to more than £8 by October 2019

• Protect tax credits for working families so they rise with inflation

• Introduce guaranteed three-year rental tenancies and bring back rent controls

• Freeze rail fares for one year

• Extend free childcare from 15 to 25 hours for working parents of three and four-year-olds

• End marriage tax allowance

• Stop non-doms avoiding tax on overseas earnings

• New National Primary Childcare Service, guaranteeing childcare from 8am to 6pm

Read more of the manifesto via the BBC’s summary, or see the whole thing at the Labour website.

Liberal Democrats

• Increase the personal tax-free allowance to at least £12,500 by the end of the next Parliament

• Higher personal income and wealth taxes? (They say they will create “a fair plan” to reduce the deficit by ensuring the rich pay “their fair share”)

• Higher taxes on capital gains tax and dividends? (The manifesto promises: “…reforms to Capital Gains Tax and Dividend Tax relief”)

• “Refocusing” Entrepreneurs’ Relief

• Mansion tax on homes worth more than £2 million

• Hit on pension relief for high earners? Manifesto says: “Establish a review to consider the case for, and practical implications of, introducing a single rate of tax relief for pensions, which would be designed to be simpler and fairer and which would be set more generously than the current 20% basic rate relief.”

• Withdraw eligibility for the Winter Fuel Payment and free TV Licence from pensioners who pay tax at the higher rate

• Make sure rail fares do not rise faster than inflation over the Parliament

• Establish new “rent-to-own” homes, where your monthly rent builds up a deposit in the property

• Build 10 new garden cities. (All the parties say they have plans to build 200,000-300,000 new homes a year. I think it’s mostly hot air and tinkering at best, but this Lib Dem garden city plan is at least something different)

• Another remix of free/extended childcare

Read more of the manifesto via the BBC’s summary, or see the Liberal Democrat website.

Who would you vote for, from a personal finance and investment perspective, and why? Let us know below, but please note I will be deleting any swearing, frothing, or truly swivel-eyed ranting. (I’m allowed a small amount of the latter above. It’s my pub, and I’m the landlord).