Author Topic: UK Q - new investor balance between UK & US index - & emerging market & Covid-19  (Read 453 times)

EddieDee

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Hello from the UK - simple question below the preamble...

First time post - apologies if this is the wrong place or etiquette.
Stumbled on the Mustache from a blog post by him on UK article in The Guardian on bitcoin. Great site.
And have just finished 'Simple Path to Wealth' by JLL Collins.
Very happy to be able to invest in Vanguard in the UK now.

Simple Question
I have followed the advice of 'Simple Path' and invested in index funds.
FTSE U.K. All Share Index Unit Trust (0.06% fee) and U.S. Equity Index Fund (0.1% fee).
Wanted some exposure to the US market and thought it acted as a bit of a currency hedge.
I invested a few weeks ago and despite the insane volatility am slightly up.
My question is what kind of % balance should I ideally aim for with the split of funds? I was thinking 65% UK and 35% US. But I'd love some input here.

Second Simple Question
I was thinking about getting exposure to emerging markets. I know they have been hit hard. And I also read that markets such as Brazil and India soared after the last recession so money managers are eyeing these markets for cheap deals now.
I was tempted to invest in the Emerging Markets Stock Index Fund (0.23% fees). However, with the higher fees (0.23% vs 0.06% and 0.1% for UK and US), I wanted to know if this is really worth it?
And if it isn't a bad idea, then what kind of balance of the portfolio? I was think about 5% or so.

Essentially wondering if having three index funds is overly complicating things and to just stick with the UK and US?
Or indeed, is there a need to be UK and US? Would 100% Uk index be a better bet?

Thank you all in advance. Happy for someone to point to another forum post if a similar question has been answered there.

Eddie

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Hi Eddie.

The UK forum members tend to use the UK Tax Board to talk about all things UK specific. Itís not just about taxes but contains a vast array of investing info. Feel free to take a look on there.

To directly answer your question the vast majority of UK people invest globally I.e. either in a single global index fund e.g. Vanguard LifeStrategy 100 or Global All Cap/All World. Or if you want to make it as cheap as possible use separate UK, Europe, US, Japan, Pacific, Emerging Markets index funds to create the same thing, but as youíve rightly pointed out you then have the issue of allocations and rebalancing.

I wouldnít recommend investing 100% in the UK. We are only about 6% of market cap, so youíre missing out on a lot of other companies by doing that.

I would recommend one of the Global funds plus a bond fund depending on your time horizon and attitude to volatility.

Monevator is also a really great resource for UK investors if you havenít seen that site.

EddieDee

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Hi

Thanks for coming back to me and the advice. I'll definitely take a look at the UK taxes section - thanks for the tip.

That is what I thought about the UK.

I'm currently 100% stocks and not looking at bonds or anything else right now. I'm just starting my investment journey and plan to be throwing money in for another 20 years before worrying about reduce some of the equity risk with bonds. Want to keep it all simple.

I did like the look at of the LifeStrategy funds, but decided to go for cheapest fees, hence the UK index, followed by US index.

I could add in a Europe index and Asia/Pacific one to give it global focus.

Or even go for FTSE Developed World ex-U.K. Equity Index Fund, which has fees of 0.14%.

However, I just not certain if it is better to go with the global one rather than individual US, Europe, emerging market ones etc. I guess this is what I am exploring.

I have seen Monevator, but not indepth as yet.

Thanks again

Eddie

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Cost is very important yes, but I tend to think the simplicity of the global fund and the automatic rebalancing between the country allocations is worth it. It is still a very cheap fund. Itís the 1.5% active funds we want to avoid.

You could go with the UK fund, the developed world one you mention and the Emerging Markets one to reduce complexity a little, decide how much home bias you want and minimise costs.

Here are a couple of useful links.

https://monevator.com/asset-allocation-construct/

https://monevator.com/why-a-total-world-equity-index-tracker-is-the-only-index-fund-you-need/

EddieDee

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Thanks once again

You make some good points worth considering.

Thank you for the links - very kind. They were both helpful and I will mull them over this weekend.

I am tempted by the LifeStrategy 100% Equity Fund as it gives exposure to everything and keeps it all simple, with fee of just 0.22%.

However, the 0.06% fee on the Ftse All Share Index is very attractive. And I just can't decide on the benefits of moving from the US tracker with fees of 0.1% to a global one that also includes the US. Are you not losing the benefits of the US by having it diluted in a global fund?

I guess I could go with the FTSE Developed World ex-U.K. Equity Index Fund at 0.14% and shift my US index into that and keep the UK index. Again, my question is allocation. Have 60-65% in mind for Uk. Not sure why I have picked that number.

Or just shift everything into LifeStrategy 100% Equity Fund or FTSE Global All Cap Index Fund and just invest into one pot.

Thanks again


Playing with Fire UK

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Hi there, welcome!

I guess I could go with the FTSE Developed World ex-U.K. Equity Index Fund at 0.14% and shift my US index into that and keep the UK index. Again, my question is allocation. Have 60-65% in mind for Uk. Not sure why I have picked that number.

Noooooooooooo. Don't do that. :) I'm not against the UK and a bit of home bias (I have some too), but that is really unbalanced. Think about 6% as a starting point, double or triple that is fine, much more than 30% and I will be demanding an essay on both why the UK will out perform the rest of the world and why you know this and no-one else does.

Lifestrategy is brilliant, strongly recommend. FTSE all cap good too. Second the recommendation for Monevator, look at the Passive Investing tab at the top.

The best lesson you can learn right now is to get used to the feeling when the market drops a little (or a lot). Don't try to optimise fees to within an inch of your life. You can always shift new contributions to a global fund.

You've found us, it'll all be good from here.

never give up

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You are of course free to invest however you like. I am not qualified in any way and canít advise you on what to do. I can only reference general passive indexing guidance and my own experience. I agree the 0.06% charge is unbelievably cheap. However have you looked at how the FTSE All Share is constructed? 6 companies make up 20% of the fund! Just think about that. Do you want to invest 65% of your assets in a fund where that is the case? That certainly isnít achieving much in the way of diversification.

In the All Cap fund the country weightings are based on market capitalisation, so the UK only accounts for 5% of the fund. The LifeStrategy100 fund has home bias and provides 20% allocated to the UK. So these two global funds do allow a scope of choice as to how you allocate to your home market.

If you want to minimise costs go with the separate geographical index funds. But if you do you will need to choose how much you allocate to each country. I would stay within these two boundaries (5%-20%) though for the UK. 65% is too high in my opinion.

Bit of a cross post with Playing with Fire UK, but left my comment in as hopefully it provides value.
« Last Edit: April 09, 2020, 10:10:29 AM by never give up »

daverobev

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Home country bias is a thing, and it can make some sense to be a little over exposed.

The general baseline of exposure is market cap. So, the UK is about 5% of global market cap. Anything over 5% exposure is over exposed. For an American, that percentage is 55% (bearing in mind of course that there are a LOT of multinationals in the US indices, as well as companies that do little to no business in the US).

There are other reasons - for example the UK does not charge dividend withholding, while most countries do.

Still, I would not want more than 15-20% UK. As has been mentioned, if you look at FTAS or FTSE100, I mean... HSBC is over 6% of the FTSE 100. Shell is almost 8% when you add the two share classes together.

The Lifestrategy funds are too UK-focussed IMHO. I would maybe do 40% one of them and then the rest a global tracker.

Depending on where you're invested, be aware that ETFs often don't have as high an account charge (eg AJ Bell Youinvest SIPP, IIRC there is no cap on their fee if you hold mutual funds, but it is capped at 0.25% of 40k of ETFs).

EddieDee

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Playing with Fire, Never Give Up, Daverobev - thank you one and all. Very helpful indeed. Exactly what I was looking for - some debate, pointing out a few flaws and a jumping off point to go away and do some of my own research and thinking.
I've done just that this weekend and explored Monevator (paying particular interest to the article on Vanguard LifeStrategy) and the UK Tax thread on this forum where there are subjects that relate to my question.

Without going into too many details, some info about me and the investment:
I opened the S&S ISA with Vanguard on 10 March 2020, buying £500 of the FTSE U.K. All Share Index Unit Trust - Accumulation (0.06% ongoing fees) and £500 of U.S. Equity Index Fund - Accumulation (0.1% ongoing). Since then I have drip fed in small amounts to both. I now have about £2,500 in the ISA, with 59.7% in the UK and 40.3% in the US.
I have also transferred an old work pension from Aegon to the Vanguard SIPP. It is almost £10k. I have yet to allocate funds and the transfer has just completed this weekend.

I am 38 years old. These are my only investments as I have travelled the world extensively and saw that as my investment previously - an investment in life if you will. I have no dependents and no mortgage. Essentially, I'm working, I'm frugal by nature and I can kick in a high percentage of what I earn every month to my ISA. I've always been interested in the financial world and after landing on Money Mustache and the JLL Collins 'Simple Path...', I want to invest for the rest of my life. I'm happy with big risk and will stay 100% equities for the time being as I feel i need to catch up. I will reassess that in 15 years or so. I have yet to figure out all my figures for when I want to be FI etc, but that is to follow. For now, I am just keen to get started.

This is where I am at:

LifeStrategy looks so damn appealing for the simplicity, a bit of home bias and decent fees. However, one question. If I go LS100 and want to balance risk at a later point, down, say, to LS80 or under, how do I go about that? Is it is a case of just shifting from one pot to the other? Whereas if I am invested in 100% equities in a few funds of my own on Vanguard, I can then balance risk by just buying some Bond index funds to make 20% of portfolio and up etc.
Also, with LS if it extremely passive (an advantage and disadvantage) as I'm very interested in learning about investment and I find the whole area fun so will likely be reading more and more. And, with that in mind, I maybe would prefer a more active role in my passive portfolio.

I take all of your points about not being too overexposed to the UK and also the point about a small number of companies making up a large part of the UK index fund i mention.

So, I'm leaning now towards, having the FTSE U.K. All Share Index Unit Trust - Accumulation that I already have, ditch the U.S. Equity Index Fund - Accumulation (although, rather than switch this into another fund, I'll just leave as is to just do its business - unless I should switch out?), buy FTSE Developed World ex-U.K. Equity Index Fund - Accumulation (ongoing fees 0.14%), and buy Emerging Markets Stock Index Fund - Accumulation (0.23%) to give some exposure to those markets such as China, India, Brazil etc.

So, three funds, to keep it simple(ish). UK - 20%, World - 75%, EM - 5%.

Am I far wrong here?

Am I just been silly and should really just be bunging all the money so far in the LS 100 (fees 0.22%) or FTSE Global All Cap Index Fund - Accumulation (fees 0.23%) and all future money into the one pot?

Thanks for all the interesting pointers so far.

never give up

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Iím a big believer that we get out what we put in. It sounds as though you have been doing a lot of reading so Iím sure future you will appreciate it.

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LifeStrategy looks so damn appealing for the simplicity, a bit of home bias and decent fees. However, one question. If I go LS100 and want to balance risk at a later point, down, say, to LS80 or under, how do I go about that? Is it is a case of just shifting from one pot to the other?
You would just perform a switch from one fund to the other just as you would if you were rebalancing a proportion of a stock fund to a bond fund for example.

I donít think being too passive is a problem. Donít let the simplicity of the plan give the impression that it isnít as effective as something more sophisticated. You are buying a slice of the world economy with index funds.

If youíre interested in learning about investment then thatís great but I would recommend keeping 90-95% of your portfolio passive.

The three fund UK, developed world and emerging market set up is fine if you want to minimise fees. The single fund approach saves the need to rebalance and the desire for any tinkering. Thatís the trade off there. Either approach will be fine. If you go with the three fund set up then I would switch your US fund into the developed world fund so it doesnít skew your country allocations.

Good luck on your journey to FI.

EddieDee

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Thanks Never Give Up. I am a believer in that as well. And also in 'more is lost by indecison than wrong decision'.
I do like to read a lot around a subject.

I'm definitely committed to passive investing. I may at some point in the distant future look at things such as VC funding or EIS/SEIS stuff or other kinds of investing. But this is a distant distant pipe dream.

For now I'm sticking 100% to passive investing. I do take your point about LS being simple and effective and also stopping the urge to tinker. And the fees of 0.22% aren't bad at all. But I think for me, the slightly more active role of having to keep them in balance will be more suited. And maybe in the future (years in the future), I may decide to rebalance risk and just switch it all to a LifeStrategy one with bonds, say the LS80 or LS60.

Thanks again for your opinion and encouragement.

Cheers