Author Topic: Equity allocations for a Brit  (Read 2047 times)

edgema

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Equity allocations for a Brit
« on: February 07, 2018, 05:54:02 AM »
I had a look through and could see related but not quite the same threads. Interested to hear how people are thinking about equities as a Brit at the moment. We have collectively looked/read jealously at US markets marching relentlessly upwards and somewhat missed out (although I do have decent exposure). However, as I sit here today I feel pretty good about where equities sit in the UK/Europe compared to our US cousins.

FTSE 100 yielding 4.4% in 2018 / Stoxx 600 yielding 3.8% - both growing earnings/dividends in 2018. S&P yielding less than half that 1.9%. I get that the US is 'full' of high growth tech and the like (versus the UK which is banks, oil, drugs and fags - only slightly joking), but with interest rates still rock bottom in the UK/Europe, earning those kinds of yields feels good value. This is certainly true on traditional metrics like 'equity risk premium' against other assets like government bonds / credit so unless you believe you can successfully time markets I am a buyer.

If one is really serious about simply achieving FIRE, rather than getting richer, then surely achieving 4% from dividends (at least at the point of FIRE) reduces the volatility of outcomes. i.e. you won't have scenarios where you die with multiple millions in the bank, but you will have a reduced potential for failure / a hairy ride.

I get that people will argue that is completely the wrong way to look at it, its all about long term EPS growth, and that VW is going to get murdered by Tesla etc, which is why I am not saying have nothing in the US.

UKMustache

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Re: Equity allocations for a Brit
« Reply #1 on: February 08, 2018, 12:46:42 AM »
I'll be first to jump in and say that I don't believe restricting yourself to one market to be a wise plan.
Sure, historic returns show the US as the place to invest but past performance is not a guide to future growth!

My allocation (recently set up with Vanguard directly after some years with HL, it was incredibly easy to do) is as follows:
  • 33%     Vanguard lifestrategy 60 / 80 (the logic being that this creates a 70, which I'm comfortable with)
  • 33%     FTSE 100 and FTSE 250
  • 16.5%  Emerging markets index tracker
  • 16.5%  U.S. Equity Index Fund

I believe that this will give me some flexibility when I start to draw down.  For example if the US is in recession while emerging markets are flourishing, I can draw from the frothy and leave the falling stocks to recover.

I've included lifestrategy because it's about as broad as you can get and covers most markets.
The FTSE's because I believe we're due some volatility resultant of brexit but it won't affect long term growth / dividends.
Emerging markets because technology is now so readily available and mobile that it's transforming countries like India.
The US index fund because if it DOES continue to give higher returns than the rest of the world, who wants to miss that boat?

PhilB

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Re: Equity allocations for a Brit
« Reply #2 on: February 08, 2018, 04:00:51 AM »
I don't like VLS because it's too heavily focussed on home markets - the UK version is more than 25% UK equities which is way overweight for a global tracker.  I personally can see no reason to do anything other than try and track global equities - anything else is just the index version of stock picking and only really justifiable if you think one market is wrongly priced compared to the others and that you or your manager of choice can reliably spot those wrong prices.
I also think it's a big mistake to pay any attention to dividend yield instead of total growth.  Although maybe I could take advantage of people who do obsess about it by starting a fund with a 10% dividend yield by extensive use of dividend stripping?

cerat0n1a

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Re: Equity allocations for a Brit
« Reply #3 on: February 08, 2018, 05:49:32 AM »
I also think it's a big mistake to pay any attention to dividend yield instead of total growth.

Take the point that money is fungible and - in theory - there's no difference between taking money from sales or from dividends or from share sales.

In practice, though, if your holdings aren't all sheltered in ISAs, it can be pretty advantageous from a UK tax point of view to take income in both dividends and capital gains. And the fact that the yield of many megacap UK listed stocks is quite high (HSBC at 5.0%, Shell at 5.8% etc.) means the money just arrives in your account without any dealing charges, currency exchange fees etc.

edgema

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Re: Equity allocations for a Brit
« Reply #4 on: February 08, 2018, 08:59:22 AM »
UK Mustache - I am similar with a mix of Vanguard Lifestrategy 80, then some UK and European equity trackers. Through my work I also have a large single stock exposure to the US, whether I like it or not. Overall equities are around 50% of my stash.

PhilB - I think is a slightly strong statement to call it a 'big mistake'. As I am sure you don't, I don't think every equity is either zero dividend, high growth and reinvesting everything, nor is every stock yielding +5% a dying company, dividend stripping its way to oblivion.

I don't think there is anything wrong with companies with well supported dividend payouts who choose to pay-out to shareholders rather than potentially 'force' reinvestment if this is not needed, nor is there anything wrong with companies which have great reinvestment opportunities so do that rather than pay me dividends. There can be good and bad companies doing either and plenty of history of both.

As cerat0n1a points out there are blue-chip companies with high dividend yields that are above the 'magic' 4%. My point was more that if you are genuinely happy living on 4% of your stash annually, and don't have a secret desire to get richer, I believe it is a lower risk/stress strategy to buy those companies and live off dividend income. The dividend yield of the FTSE 100 is expected to go up this year so it is not like these companies are not growing as well, just perhaps not at the same rate. I agree with your point not to become dividend obsessed, but buying the 700 companies in the UK and Europe (FTSE/STOXX 600) is hardly saying that, and you get around 4% on that mix.

I also like that I am not forcing any decisions when times are tough (partly why I have property as well). Yes dividends can go down, but generally far less than price (as is true of rent). Take a look at the thousands of pages of debate about what you should do in an equity downturn on this forum. People tie themselves in knots about whether to hold two years in cash to ride it out (definitely not theoretically supported) or feel the pain of selling shares when they are down 25% (theoretically supported but hard to do) and various other schemes.

Me - I get 7.5% from my property, I get 4% from my equities and I touch nothing. I will most likely not die the richest, but I am solving for the risk of running out of money (or more likely the stress of feeling like I might) first and I do believe this strategy reduces that risk (and definitely the stress).

Just a viewpoint.

mubington

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Re: Equity allocations for a Brit
« Reply #5 on: February 08, 2018, 03:49:24 PM »
I don't like VLS because it's too heavily focussed on home markets - the UK version is more than 25% UK equities which is way overweight for a global tracker.  I personally can see no reason to do anything other than try and track global equities - anything else is just the index version of stock picking and only really justifiable if you think one market is wrongly priced compared to the others and that you or your manager of choice can reliably spot those wrong prices.
I also think it's a big mistake to pay any attention to dividend yield instead of total growth.  Although maybe I could take advantage of people who do obsess about it by starting a fund with a 10% dividend yield by extensive use of dividend stripping?

Which world tracker though... vwrl etc appears overweight to US markets vs gdp. Itís hard to be truest passive there may always an element of picking involved?

daverobev

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Re: Equity allocations for a Brit
« Reply #6 on: February 08, 2018, 06:17:24 PM »
I don't like VLS because it's too heavily focussed on home markets - the UK version is more than 25% UK equities which is way overweight for a global tracker.  I personally can see no reason to do anything other than try and track global equities - anything else is just the index version of stock picking and only really justifiable if you think one market is wrongly priced compared to the others and that you or your manager of choice can reliably spot those wrong prices.
I also think it's a big mistake to pay any attention to dividend yield instead of total growth.  Although maybe I could take advantage of people who do obsess about it by starting a fund with a 10% dividend yield by extensive use of dividend stripping?

Which world tracker though... vwrl etc appears overweight to US markets vs gdp. Itís hard to be truest passive there may always an element of picking involved?

Ignore GDP. It is market cap you want.

The US is ~50% of global market cap, because - you guessed it - it has lots of multinationals.

People generally suggest some level of home bias. The FTSE 100 is actually reasonably multinational, so it isn't 'home' bias per se.

cerat0n1a

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Re: Equity allocations for a Brit
« Reply #7 on: February 09, 2018, 01:30:31 AM »
People generally suggest some level of home bias. The FTSE 100 is actually reasonably multinational, so it isn't 'home' bias per se.

About 70% of FTSE100 earnings are from outside UK. If you want home bias, you need the midcaps in the FTSE-250.

PhilB

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Re: Equity allocations for a Brit
« Reply #8 on: February 09, 2018, 02:24:30 AM »
I have little problem with the geographic spread of the FTSE 100.  I don't like its sector spread and I REALLY don't like the fact that just 5 companies make up over 28% of it.  Given that the FTSE 100 is 81% of the FTSE all share market cap the UK is just not sufficiently diversified for me to like the idea of home bias.
As regards dividends, I'd like to make it clear that I definitely don't think there is anything intrinsically bad about companies, sectors or geographies paying, or not paying, dividends.  I just don't like using it as a means of judging between companies, sectors, geographies or most especially funds.  A fund or IT has a big incentive to dividend strip to keep up its record of rising dividends.
The problem with using dividend stocks as a means of smoothing volatility is that you are frequently just changing from analog to digital in your risk.  Stock prices move up and down continuously over time.  Dividend payouts stay fairly stable until suddenly they don't.  I personally find step functions much more scary than continuous ones.

frugledoc

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Re: Equity allocations for a Brit
« Reply #9 on: February 09, 2018, 04:32:53 AM »
I have a 1 fund portfolio VWRL Vanguard all world etf

Anything else is needlessly complicating things in my view.

I have a 50k loan due to pay back to me this month and that money will go into vwrl

mubington

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Re: Equity allocations for a Brit
« Reply #10 on: February 09, 2018, 05:48:06 AM »
I have a 1 fund portfolio VWRL Vanguard all world etf

Anything else is needlessly complicating things in my view.

I have a 50k loan due to pay back to me this month and that money will go into vwrl

It always felt a bit iffy to me that China, which is about the same sized economy as the US, isn't even in the top 10 of countries in VWRL?

I get that their biggest companies are not listed on stock exchanges, but I do wonder how diversified a world equity tracker really is. If China and India explode with US in recession, VWRL doesn't capture that.
 
(This is an uninformed observation, happy to be corrected.)

Also, why Vanguard all world etf and not Vanguard FTSE Global All Cap?

Country   Weight
United States   48.08%
Japan   8.56%
United Kingdom   6.22%
Germany   3.20%
France   3.07%
Canada   2.99%
Switzerland   2.95%
Hong Kong   2.54%
Australia   2.18%
Direct Property and REITs   2.03%







« Last Edit: February 09, 2018, 08:25:29 AM by mubington »

edgema

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Re: Equity allocations for a Brit
« Reply #11 on: February 09, 2018, 06:05:57 AM »
Mubington - not sure if their are any GDP weighted ETFs as most, as you say, follow market cap. I suppose it is mostly to enable the replication of the index in the market. You buy an ETF and the manager has to go out an buy the equities. It could lead to some really strange behaviour if every global ETF had to buy as much China as US as the market is so much smaller so Chinese prices would go haywire.

PhilB - I agree on the FTSE sector mix as mentioned in the first post. I also agree at a company level about your step versus continuous function. We also agree that 'dividend' funds can skew you towards companies which are actively sacrificing growth and/or straining to show ever rising dividends so these are probably not optimal. However, at an index level that 'step' function you describe becomes pretty continuous as you have so many exposures and even in 2008/9 aggregate dividends 'only' fell 20%, versus 45+% falls in price. Of course the price of dividend stocks went down just as much so just a painful from a stash perspective, except perhaps that you could cut lifestyle by 20% and still never actually have to sell a share.

We are 'arguing' nuances anyway as I am sure we agree with more than we disagree. I suppose what it boils down to is that I feel safer in Europe/UK at a 4% dividend yield than I do in the US at under 2%. There are a few other reasons for this as this 'cheapness' is also true at a P/B, P/E and other valuation metrics and at lower margins (the US is a historical peak margins as well as high P/Es). Corporate US has also been in a levering up and buyback cycle for that last few years which has increased risk in that market. I am not a person who goes all in on that view but it incrementally has me adding to Europe/UK versus the US. 

edgema

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Re: Equity allocations for a Brit
« Reply #12 on: February 09, 2018, 06:07:05 AM »
make that there rather than their.....

PhilB

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Re: Equity allocations for a Brit
« Reply #13 on: February 09, 2018, 09:32:47 AM »
I'd definitely agree that we largely agree.  In particular I don't have much problem at all with buying whole index trackers that just happen to have good dividend yield.  The ones that scare the bejeezus out of me are managed equity income funds focussing on yield.  So easy for those managers to churn stocks by buying cum-div and selling ex-div 2 weeks later to produce a wonderful dividend yield if that's the number people are focussing on.

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Re: Equity allocations for a Brit
« Reply #14 on: February 09, 2018, 10:39:44 AM »
Quote
My allocation (recently set up with Vanguard directly after some years with HL, it was incredibly easy to do) is as follows:
33%     Vanguard lifestrategy 60 / 80 (the logic being that this creates a 70, which I'm comfortable with)
33%     FTSE 100 and FTSE 250
16.5%  Emerging markets index tracker
16.5%  U.S. Equity Index Fund

I believe that this will give me some flexibility when I start to draw down.  For example if the US is in recession while emerging markets are flourishing, I can draw from the frothy and leave the falling stocks to recover.

Hi @UKMustache. I understand the draw down flexibility you refer to here. However why have you not done the same thing with your bond allocation? I.e. invest in VG LS100 (70%) and then 1 or 2 bond funds at 30% for that part of the portfolio? Being able to draw on a bond specific part of your portfolio would be even more valuable than between country allocation wouldn't it, or what am I missing? I'm not being critical here, just trying to expand my own knowledge.

I completely understand why some like to have a single global tracker fund and trust the judgement of the manager to have picked a sensible allocation. I also completely understand why some may not like the degree of UK or European or Emerging Markets exposure and therefore like to have country/continent specific trackers so they can allocate to their preference. I don't know enough about dividend yields or how much global exposure each individual country/continent could have but it seems that both approaches are positive in their own way and the key is to not be just invested in a single area I guess I.e. one way or another be global.

cerat0n1a

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Re: Equity allocations for a Brit
« Reply #15 on: February 10, 2018, 08:26:54 AM »
I completely understand why some like to have a single global tracker fund and trust the judgement of the manager to have picked a sensible allocation.

There's no manager "picking" a sensible allocation in a global tracker (in theory, anyway.) If total market cap of all the world's stock markets today is say $60 trillion and China is $6 trillion and the UK $3 trillion, the global tracker has 10% in China and 5% in the UK. Nothing to do with GDP, people making allocations etc. It's just tracking the market of available shares and the decisions about which shares to buy or sell are made elsewhere (by active investors.)

In practice, VWRL tracks the FTSE All-World Index, and the compilers of that do make some minor simplifications, so around 5-10% of the world's market cap is excluded for one reason or another.
Of course, it still doesn't fully match the "real" economy. The proportion of enterprises listed on the stock market and available for purchase by overseas investors differs between countries. Some countries have large privately owned or state owned companies, or companies which foreigners are not allowed to invest in.

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Re: Equity allocations for a Brit
« Reply #16 on: February 10, 2018, 08:35:08 AM »
Sorry probably poor wording on my part. I donít mean global tracker. I was thinking of a single fund of funds like VG LifeStrategy that are trackers that provide global coverage. How is the selection of funds made and their allocation selected here? I assumed there was a human decision made somewhere.

rob/d

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Re: Equity allocations for a Brit
« Reply #17 on: April 11, 2018, 10:30:56 AM »
33%     Vanguard lifestrategy 60 / 80 (the logic being that this creates a 70, which I'm comfortable with)

That made me laugh out loud because i applied the same fuzzy logic to myself and wifey's allocation , 60/80 life strategy.

Thanks " never give up "