KISS Investing: The best investment portfolio is...the one you can stick with for the long term. Buy & hold. Keep it Simple. We discussed the rationale behind holding a balance of Equity and Bonds in the last post 'Investing 101'.
Over the last decade, the investment world has changed considerably and now everybody has access to wealth creation tools that only the wealthy had access to in the past. There are a plethora of investment platforms on the internet and it is now significantly easier to ‘Do It Yourself’ without the need for a financial adviser.
What are investment platforms?
Investment platforms enable you to buy and hold a range of investment funds in one place and are designed to make it simple for individual investors. Investment platforms allow you to put your investment funds inside a tax-efficient wrapper - normally an ISA, LISA, or Pension.
Grad Rags to Riches is a big fan of the Vanguard investment platform (www.vanguardinvestor.co.uk)
Vanguard was founded primarily to provide low-cost passive index funds for the general public. It offers a limited range of funds and charges extremely low fees. When you go to the website you will find all the funds listed and more details when you dive into the fund.
Each fund has a NAV Price (Net asset value) which represents a fund's per-share market value or purchase price which is quoted on the stock market. The important point is that you do not have to buy a whole share – you can now invest in small amounts and buy portions of a share. For example, you can invest £50 per month by direct debit into the Vanguard Lifestrategy 20% equity fund even though the NAV price is £171.49.
Passive investing via Vanguard is all about investing in low cost global index funds of Equities and Bonds. Index funds with no active management, hence passive. Global diversification to lower risk. Low management charges keep costs down. Investing for the long term - buy and hold.
There are lots of alternative investment platforms providing access to a universe of passive and managed funds alongside investment research and analytical tools to help you make decisions on which funds to buy. Some examples are AJ Bell Youinvest, Hargreaves Lansdown, Interactive Investor, and Fidelity.
Robo-adviser investment platforms offer a halfway house by asking 10-15 questions about your attitude to risk and your investment aims, then choosing a suitable fund for you. They then manage this for you, usually charging higher fees than the likes of Vanguard. Established providers include Nutmeg, Wealthify, and Wealthsimple.
If you invest in an ISA or Pension via the Vanguard platform the charges you pay are kept very low. The average fund management charge is 0.20% p.a. The annual account fee is 0.15% p.a. This is a total annual cost of just 0.35% p.a. Some platforms/funds charge anywhere between 1% and 2%. Saving 1% in fees may not sound much, but if you are investing £200 per month over a 40-year working lifetime, assuming an equity return of 7% is reduced by 1% in fees, this would reduce your retirement pot by £125,000!
KISS Investing: 3 sample portfolios
The following 3 sample investment portfolios are available through Vanguard:
Option 1: One Fund. Very simple, set and forget.
The simple option is a Target Date Retirement Fund which is specifically designed for investing towards a pension. It provides a balance of Global Equities and Global Bonds; the balance of Equity and Bonds change automatically over time i.e. more bonds as you get closer to retirement. You never need do anything. Set up your monthly direct debit, turn your chair sideways, look out of the window and do nothing else until you retire and start spending!
Option 2: One Fund. Simple set and check occasionally.
Vanguard provides 5 LifeStrategy funds which provide a balance of Global Equities and Global Bonds; the ratio of Equities and Bonds is maintained constantly at a set value. You can choose an Equity/Bond balance depending on the ‘risk’ you are willing to take: 100/0, 80/20, 60/40, 40/60, 20/80, and then change to different balances when you wish, or even hold multiple funds.
We will cover both Target Date Retirement Funds and LifeStrategy funds in later posts along with the best balance of Equities and Bonds.
Option 3: Two Funds. A little more involved.
Option 3 involves using 2 separate funds in the understanding that Equity provides higher returns than Bonds, but with more volatility. With a long time horizon, you can afford to ride the short-term ups and downs with a higher proportion of Equity to achieve higher returns. For example, hold both The Vanguard FTSE Global All Cap Equity Index Fund, and The Vanguard Global Bond Index Fund, to a balance you decide, and then manage them over time choosing to change the balance depending on your risk appetite, time to retirement, and occasional rebalancing i.e. buying and selling portions of your portfolio in order to set the balance back to its original state, as assets grow or fall.
The Vanguard FTSE Global All Cap Index Fund tracks the performance of The FTSE Global All Cap Index by actually buying and holding shares in 7,196 companies across the world. There is no manager choosing which shares are the best to buy, the 7,196 shares are bought from stock markets across the world depending on the size of those markets. The USA is the largest of the markets and comprises 57% of the shares, Japan is the next largest at 7%, and the UK is just 4%. The global fund is also spread across all the different sectors of the market: technology, financial, industrial, consumer, health, etc. Vanguard maintains the balance of the fund always at the same specified proportions regardless of markets and sectors' ups and downs. The Vanguard Global Bond Index Fund tracks an index fund of global government, government-related agencies, and corporate bonds from around the world with maturities greater than one year and incorporates 13,291 bonds.
Portfolio option 3 is for building wealth in a Pension for retirement, or an ISA for the now and future, and for post-retirement when you are spending your funds. This is because holding separate funds has the advantage of being able to take money out without having to sell at a loss; if you need to withdraw money for a planned event, e.g. new car, and Equity is down, Bonds are likely to be up, so you can take from the Bonds…….and vice versa.
Old Chinese proverb: The best time to plant a tree was 20 years ago. The second best time is now. Go Do It!