Author Topic: Dollar cost averaging a UK Government Bond ETF  (Read 769 times)

BlikuBluku

  • 5 O'Clock Shadow
  • *
  • Posts: 4
Dollar cost averaging a UK Government Bond ETF
« on: October 20, 2017, 09:13:50 AM »
Hi guys,

Complete newbie here trying to get money smart and somewhat of a late bloomer on the wrong side of 25. I need advice from someone, anyone willing to offer it - specifically surrounding UK Government Bond ETFs. I guess my aim is to create a portfolio that allows me a defensive and passive approach to investing as I currently work full-time, I don't have the time realistically to invest any differently. I intend to diversify across equities and bonds using ETFs making them easily trackable but investing more into equities and then using bonds as a fallback, while re-investing the dividends for compounding - all of this will be operated inside a SIPP and I haven't really thought about anything past that. I leave the higher-risk investing separate from my SIPP, so I'm thinking a purely, low-risk, large exposure and long-term strategy - it's just that my understanding of bonds is not great.

I feel I do have the basic understanding of investing yet feel that my analytical skills are lacking a little in order to effectively make an informed decision on the most cost-effective and financially rewarding investment. Therefore I thought best to try and gather some advice from the kind folk on this board. As an example, if I was to invest in the Vanguard UK Gilt UCITS ETF (VGOV) with monthly investments of 100 to take advantage of Dollar/Pound cost averaging, over an indefinite period and wrapped inside a SIPP, would the cost of monthly broker fees make this type of investment not worthwhile and would I be better off investing a lump sum of 1,200 a year into this ETF instead?

I know it's difficult to give an accurate response to my question given that I've not included much detail but I'm not sure what other detail to include in order for this to be answered properly so please do fire away any questions to fill the blanks.

Thanks in advance!


Playing with Fire UK

  • Handlebar Stache
  • *****
  • Posts: 2166
Re: Dollar cost averaging a UK Government Bond ETF
« Reply #1 on: October 20, 2017, 09:35:41 AM »
Welcome.

25 is in no way old.

Look at Monevator for the best SIPP for your needs (it will include the cost of trading). Consider using funds instead, some are free to buy when you pay the SIPP fee, so it won't cost you anything more to DCA.

Check out the UK tax board.

It's unusual to put lower risk assets in a SIPP and higher risk assets outside it. What's your thinking here?

BlikuBluku

  • 5 O'Clock Shadow
  • *
  • Posts: 4
Re: Dollar cost averaging a UK Government Bond ETF
« Reply #2 on: October 20, 2017, 10:12:43 AM »
Thanks!

My thinking is I want slow and steady growth of a pension and re-investing all dividends I may accrue.

Right now, I have a pretty secure job and I do have quite the appetite for risk so I'm being aggressive outside the SIPP but plan to be uncharacteristically reserved inside it, once I transfer all the workplace pensions from previous companies I have into this.

Sorry if my first post wasn't clear, but I do already have a SIPP with TDDI, I have just not made any investments as yet because I'm still trying to figure out if it's worth Dollar cost averaging Government Bond ETFs as they are low-risk and low-return, or piling in annually or even quarterly or bi-annually  - how can I go about researching this in order to get the best returns?

Alongside this, I plan to buy monthly an ETF of one the major index trackers as I do believe it is definitely worthwhile to buy this monthly over many years, whether it's up or down, yet I could not say that with confidence when it comes to UK Government bond ETFs and nor do I know where to begin researching this?

I want to have both in my portfolio to balance it and then maybe down the line add slightly more risky assets to it if I feel it's a little light.

Tyler

  • Handlebar Stache
  • *****
  • Posts: 1059
Re: Dollar cost averaging a UK Government Bond ETF
« Reply #3 on: October 20, 2017, 10:25:40 AM »
Hi BlikuBluku.  Congrats on taking charge of your investments!

Here's one resource you might take the time to look through:  https://portfoliocharts.com/british-portfolios/  It's a collection of popular index portfolios calculated specifically for the UK market.  I don't yet have specific UK fund recommendations for each asset, but you can look for yourself using justetf.com. Just look for the ones with the lowest expense ratios, and you should be in pretty good shape.

The most important step is to decide on the asset allocation you'll be comfortable holding for the long haul without worrying about it.  After that, buy the required funds in the right proportions.  Whether you do it all at once or over time is up to you, and honestly it's more a comfort thing than an optimization problem.  Then once it's set up, just contribute every once in a while to whatever asset is below its target percentage at the time and (if necessary) rebalance once a year. 
Browse portfolios calculated for your own home country at PortfolioCharts.com

Playing with Fire UK

  • Handlebar Stache
  • *****
  • Posts: 2166
Re: Dollar cost averaging a UK Government Bond ETF
« Reply #4 on: October 20, 2017, 02:10:45 PM »
Sorry if my first post wasn't clear, but I do already have a SIPP with TDDI, I have just not made any investments as yet because I'm still trying to figure out if it's worth Dollar cost averaging Government Bond ETFs as they are low-risk and low-return, or piling in annually or even quarterly or bi-annually  - how can I go about researching this in order to get the best returns?

Generally, if you have the cash at the start of the year, it's better to dump it all in on day one (as growth generally outweighs the DCA effect). I haven't looked at Gov Bonds specifically, but I'd expect them to be less volatile than equities, so the DCA effect would be lower.

If you want to work out what would have worked out best in the past (past performance is no guarantee of future success and all that), the monthly returns are available here. Just pop it into a spreadsheet and run calculations for monthly, quarterly, etc contributions (don't forget buying and holding costs, which you'll know as you already have your SIPP set up).

If you are set on holding the risk outside your SIPP then carry on. It is the opposite of what I'd expect a 20-something to be doing but you do you.

BlikuBluku

  • 5 O'Clock Shadow
  • *
  • Posts: 4
Re: Dollar cost averaging a UK Government Bond ETF
« Reply #5 on: October 20, 2017, 06:27:10 PM »
Thank you both for your thoughts - I feel like I'm beginning to piece this together with your help and starting to think maybe I'm over-complicating it a bit.

PWFUK - interested to know why you think my strategy outside my SIPP is the opposite of what someone my age should be doing? My rationale is that if I blow out, I'm young enough to recover from it and at least I would have safe and secure investments elsewhere in the SIPP.  I'm a stickler for risk but wouldn't go near anything like binaries etc, I prefer to buy and hold rather than buy and sell, albeit with stock that is higher risk than what the usual investor would be comfortable with having in their portfolio. Genuinely interested to hear your thoughts to see what I can learn...

Coming back to Bonds -  Tyler, really appreciate the links, never knew there were so many allocation options. So in short, you think it's won't make a difference whether I buy consistently over a long period or in bulk every once in a while, as long as I nail my allocation?


Tyler

  • Handlebar Stache
  • *****
  • Posts: 1059
Re: Dollar cost averaging a UK Government Bond ETF
« Reply #6 on: October 20, 2017, 07:08:12 PM »
Coming back to Bonds -  Tyler, really appreciate the links, never knew there were so many allocation options. So in short, you think it's won't make a difference whether I buy consistently over a long period or in bulk every once in a while, as long as I nail my allocation?

Sometimes one method may work a little better and sometimes the other will.  Personally, I'd pick whatever you're most comfortable with and not over-think it.  Just be smart about trading commissions.  If your funds are commission-free it doesn't matter how often you make a purchase.  But if you pay every time you trade it could make sense to save up a little and buy in larger chunks. 
Browse portfolios calculated for your own home country at PortfolioCharts.com

Playing with Fire UK

  • Handlebar Stache
  • *****
  • Posts: 2166
Re: Dollar cost averaging a UK Government Bond ETF
« Reply #7 on: October 21, 2017, 12:07:54 AM »
Coming back to Bonds -  Tyler, really appreciate the links, never knew there were so many allocation options. So in short, you think it's won't make a difference whether I buy consistently over a long period or in bulk every once in a while, as long as I nail my allocation?

Sometimes one method may work a little better and sometimes the other will.  Personally, I'd pick whatever you're most comfortable with and not over-think it.  Just be smart about trading commissions.  If your funds are commission-free it doesn't matter how often you make a purchase.  But if you pay every time you trade it could make sense to save up a little and buy in larger chunks.

I agree with this.

I don't know if you've invested much in the past, but if you are new to investing, it can be a lot easier psychologically to invest a little bit at a time at first, rather than all the cash you've ever saved. It's good to get into the habit of setting up a regular monthly investment, as automatic as possible (ideally without having to log in), and ignoring what the funds are doing apart from annual (or whatever) rebalancing.

Heckler

  • Handlebar Stache
  • *****
  • Posts: 1303
Re: Dollar cost averaging a UK Government Bond ETF
« Reply #8 on: October 21, 2017, 12:13:56 AM »
https://www.bogleheads.org/wiki/Bogleheads_investment_philosophy

- dont attempt to time the market
- keep costs low.


I pay $10 to buy any amount of an ETF, thus have set a personnel minimum value  to buy and hold bond funds.   Spending $10 to DCA a hundred per month would give me a 10% trading cost.
« Last Edit: October 21, 2017, 12:17:21 AM by Heckler »

Playing with Fire UK

  • Handlebar Stache
  • *****
  • Posts: 2166
Re: Dollar cost averaging a UK Government Bond ETF
« Reply #9 on: October 21, 2017, 01:19:42 AM »
PWFUK - interested to know why you think my strategy outside my SIPP is the opposite of what someone my age should be doing? My rationale is that if I blow out, I'm young enough to recover from it and at least I would have safe and secure investments elsewhere in the SIPP.  I'm a stickler for risk but wouldn't go near anything like binaries etc, I prefer to buy and hold rather than buy and sell, albeit with stock that is higher risk than what the usual investor would be comfortable with having in their portfolio. Genuinely interested to hear your thoughts to see what I can learn...

This is what I'd have wanted to know in my mid-20s:

There are different types of risk. One flavour of risk is that you invest everything in one company that goes to zero (eg Enron). This is obviously a bad thing. You get around this by diversifying. So if you invested in a Japanese index fund, with 100 companies in it, the likelihood of all those companies going to zero is vanishingly small, however you are exposed to the risk that the whole country barely grows for a decade. You get around this by investing in different countries (a world tracker is great, but there are other good options too). Once you are diversified enough, the type of events that would cause your entire investment to go to zero are the type of events that money won't help you with (collapse of the entire economy or government, alien attack, zombies, all out war).

Another flavour of risk is that you need to sell your equities when they are worth less than you'd like. If you have 100 shares in Tesco, or VW, or the FTSE100, then that represents an ownership in all the stores, factories, contracts, and stock that make up those companies. The inherent value of these does change over time, but the price tag (the stock price) changes much more, and much more rapidly (like the Tesco accounting issue or the VW emissions thing). It's like the pricing at Amazon, the inherent enjoyment of a book doesn't change if it is 50% off today compared  to being full price yesterday. However, if you need to sell your shares on a certain date (say you are buying a house), you are a forced seller, so you need to take whatever price you are offered for the shares on that date. If you have no need to sell the shares, then it doesn't matter to you what the share price does in the interim. In a way, the sticker price of your pension is totally irrelevant to you until your 58th birthday (the inherent value of it is important, but a market crash doesn't change the inherent value).

Another flavour of risk is that you save into your pension (or FIRE fund) and the growth isn't enough to sustain your spending. This is particularly acute when there is high inflation (so if you hold your money in cash, while there is a tiny tiny risk it could go to zero, and it isn't volatile, it is losing value everyday).

In your SIPP, you need to be diversified, but your bond fund would relate to only one country. You can totally accept volatility - it doesn't matter if your investments go up and down as long as the general trend is up (by the time you are taking your pension you can switch to something less volatile). You need to make sure that your SIPP grows enough to support your spending by the time you can access it, so inadequate growth is risk that you want to avoid. A bond fund trades the volatility risk that you can accept for the risk of adequate growth and concentration in one country, that you shouldn't be taking.

That's why I'd be putting 100% global equities in the SIPP for a 20-something. This is not advice, DYOR.

I do have quite the appetite for risk


You know the saying "everyone has a plan until they get punched in the face"? Many, many 20-somethings think they have a high risk appetite. Until you have actually lived through seeing a decade's earnings drop by 30%, 50%, or more, you don't know what your risk tolerance is.

shelivesthedream

  • Magnum Stache
  • ******
  • Posts: 2673
  • Location: London, UK
Re: Dollar cost averaging a UK Government Bond ETF
« Reply #10 on: October 21, 2017, 01:25:15 AM »
Thank you both for your thoughts - I feel like I'm beginning to piece this together with your help and starting to think maybe I'm over-complicating it a bit.

PWFUK - interested to know why you think my strategy outside my SIPP is the opposite of what someone my age should be doing? My rationale is that if I blow out, I'm young enough to recover from it and at least I would have safe and secure investments elsewhere in the SIPP.  I'm a stickler for risk but wouldn't go near anything like binaries etc, I prefer to buy and hold rather than buy and sell, albeit with stock that is higher risk than what the usual investor would be comfortable with having in their portfolio. Genuinely interested to hear your thoughts to see what I can learn...

Coming back to Bonds -  Tyler, really appreciate the links, never knew there were so many allocation options. So in short, you think it's won't make a difference whether I buy consistently over a long period or in bulk every once in a while, as long as I nail my allocation?

The way you phrase this makes it sound like your strategy is:
1. Go bond-heavy (which, by the way, will struggle to outpace inflation) in a SIPP (which, by the way, is an excellently tax-effective vehicle for the employed but not much good for seriously early retirees because you can't get at it so you need other savings to bridge the gap) and reinvest the dividends (like duh, you should be doing that anyway, that's where compounding comes from) for your actual retirement money.
2. Piss around with some complicated individual stock strategy (just because it's buy and hold doesn mean it's better than index funds) outside your SIPP (where? ISA?) for your higher risk money (which, by the way, you will be trying to access first unless you don't want to retire until 60)

So by my understand you've got it the wrong way round. You've got your high risk investments in your medium term pot and your low risk investments in your long term pot. The point of high risk equalling long term is that you're young and have the time to ride out a lot of shit before you hit 60.

I have a very low risk tolerance emotionally but I have engaged my rational brain to accept that I am not unique and what I really need to do is to invest in a broad-based Vanguard equities fund (currently 100% equities because I am also 26, but will start transitioning towards 80/20 round about 30/35) just like everyone else. Come the first sustained drop in the market I will be on this board begging people to hold my hand and stop my selling everything based on an emotional panic but my rational brain knows I am doing the right thing. The only concession I make to my 'unique' circumstances is to keep most of my investments in an ISA rather than a SIPP because I am a self-employed low earner who would like my investments to be accessible (I don't need to worry about willpower problems and protecting them from myself - this is also about my low risk tolerance and fear of ill-defined catastrophic emergencies/the fact that I am young and so much of my life is yet to settle down and be remotely predictable) and I now also want the LISA bonus. Also, I sort of DCA purely for convenience. With a 100 minimum, I put money in when I have it because that's a weight off my mind. I'm self-employed so it can be irregular but I think it's a reasonable reason to not save it up and try to time the market.

The point is that you should go for the risky assets NOW so you have time to ride them out and allow for the most growth and then rebalance towards less risk later, not the other way round. "Risk", in my opinion, is a misnomer here. Buying and holding index funds, the risk is either total world collapse (TEOTWAWKI) or that the market crashes temporarily just when you need the money. High-volatility would be a better way of putting it, reflecting that as long as you buy and hold the risk is only mistiming withdrawals in the future, not RISK risk of objectively and forever losing all your money. So you WANT high risk/volatility now when the ups and downs don't matter and then less risk/volatility as you draw closer to wanting to withdraw money. The longer you plan to hold an investment (SIPP!!!!!!!!!!!) the higher risk (more equities, not crystal ball stock picking) it should be.

Have I misunderstood your investment strategy? If so, please be more specific about where the SIPP it's in and what your "alternative high risk" plans are and I will be happy to comment further.

BlikuBluku

  • 5 O'Clock Shadow
  • *
  • Posts: 4
Re: Dollar cost averaging a UK Government Bond ETF
« Reply #11 on: October 22, 2017, 07:47:36 AM »
https://www.bogleheads.org/wiki/Bogleheads_investment_philosophy

- dont attempt to time the market
- keep costs low.


I pay $10 to buy any amount of an ETF, thus have set a personnel minimum value  to buy and hold bond funds.   Spending $10 to DCA a hundred per month would give me a 10% trading cost.

I'm looking at 1.50 per purchase, making two separate purchases a month would cost me 36 per year, plus a 100 annual fee. I'd have to be doing something very wrong if my investments, even if conservative, could not offset these costs, right?

Coming back to Bonds -  Tyler, really appreciate the links, never knew there were so many allocation options. So in short, you think it's won't make a difference whether I buy consistently over a long period or in bulk every once in a while, as long as I nail my allocation?

Sometimes one method may work a little better and sometimes the other will.  Personally, I'd pick whatever you're most comfortable with and not over-think it.  Just be smart about trading commissions.  If your funds are commission-free it doesn't matter how often you make a purchase.  But if you pay every time you trade it could make sense to save up a little and buy in larger chunks.

I agree with this.

I don't know if you've invested much in the past, but if you are new to investing, it can be a lot easier psychologically to invest a little bit at a time at first, rather than all the cash you've ever saved. It's good to get into the habit of setting up a regular monthly investment, as automatic as possible (ideally without having to log in), and ignoring what the funds are doing apart from annual (or whatever) rebalancing.

I've given it strong consideration over the weekend and armed with your insights, I concur it makes more sense to purchase bonds less frequently, perhaps around four buys a year while buying into equity fund ETFs much more aggressively every month. I just need to give final thought to my ratios and research what I want to buy and I'll learn as I go along.

Thank you both for your thoughts - I feel like I'm beginning to piece this together with your help and starting to think maybe I'm over-complicating it a bit.

PWFUK - interested to know why you think my strategy outside my SIPP is the opposite of what someone my age should be doing? My rationale is that if I blow out, I'm young enough to recover from it and at least I would have safe and secure investments elsewhere in the SIPP.  I'm a stickler for risk but wouldn't go near anything like binaries etc, I prefer to buy and hold rather than buy and sell, albeit with stock that is higher risk than what the usual investor would be comfortable with having in their portfolio. Genuinely interested to hear your thoughts to see what I can learn...

Coming back to Bonds -  Tyler, really appreciate the links, never knew there were so many allocation options. So in short, you think it's won't make a difference whether I buy consistently over a long period or in bulk every once in a while, as long as I nail my allocation?

The way you phrase this makes it sound like your strategy is:
1. Go bond-heavy (which, by the way, will struggle to outpace inflation) in a SIPP (which, by the way, is an excellently tax-effective vehicle for the employed but not much good for seriously early retirees because you can't get at it so you need other savings to bridge the gap) and reinvest the dividends (like duh, you should be doing that anyway, that's where compounding comes from) for your actual retirement money.
2. Piss around with some complicated individual stock strategy (just because it's buy and hold doesn mean it's better than index funds) outside your SIPP (where? ISA?) for your higher risk money (which, by the way, you will be trying to access first unless you don't want to retire until 60)

So by my understand you've got it the wrong way round. You've got your high risk investments in your medium term pot and your low risk investments in your long term pot. The point of high risk equalling long term is that you're young and have the time to ride out a lot of shit before you hit 60.

I have a very low risk tolerance emotionally but I have engaged my rational brain to accept that I am not unique and what I really need to do is to invest in a broad-based Vanguard equities fund (currently 100% equities because I am also 26, but will start transitioning towards 80/20 round about 30/35) just like everyone else. Come the first sustained drop in the market I will be on this board begging people to hold my hand and stop my selling everything based on an emotional panic but my rational brain knows I am doing the right thing. The only concession I make to my 'unique' circumstances is to keep most of my investments in an ISA rather than a SIPP because I am a self-employed low earner who would like my investments to be accessible (I don't need to worry about willpower problems and protecting them from myself - this is also about my low risk tolerance and fear of ill-defined catastrophic emergencies/the fact that I am young and so much of my life is yet to settle down and be remotely predictable) and I now also want the LISA bonus. Also, I sort of DCA purely for convenience. With a 100 minimum, I put money in when I have it because that's a weight off my mind. I'm self-employed so it can be irregular but I think it's a reasonable reason to not save it up and try to time the market.

The point is that you should go for the risky assets NOW so you have time to ride them out and allow for the most growth and then rebalance towards less risk later, not the other way round. "Risk", in my opinion, is a misnomer here. Buying and holding index funds, the risk is either total world collapse (TEOTWAWKI) or that the market crashes temporarily just when you need the money. High-volatility would be a better way of putting it, reflecting that as long as you buy and hold the risk is only mistiming withdrawals in the future, not RISK risk of objectively and forever losing all your money. So you WANT high risk/volatility now when the ups and downs don't matter and then less risk/volatility as you draw closer to wanting to withdraw money. The longer you plan to hold an investment (SIPP!!!!!!!!!!!) the higher risk (more equities, not crystal ball stock picking) it should be.

Have I misunderstood your investment strategy? If so, please be more specific about where the SIPP it's in and what your "alternative high risk" plans are and I will be happy to comment further.

Yep. I plan to use bonds as merely a balancer and safety net as I will go heavier towards index fund trackers - as I initially pointed out, I need this to be as independent and self-preserving as possible as I'm a full time worker and quite active in many other aspects so the only time I want to put into this is when I'm checking in every now and again; I also have the other side of the portfolio, which I "piss about" with, as you put it so succinctly. This is completely separate to my SIPP though, and have been doing this for some time now, hence why I'm enquiring more towards the SIPP side of things as I've just started thinking about this and retirement.

I'm struggling a little to see why I've got it the wrong way round if I adhere to DCA over the long-term, whereas you may fear a long-term downturn in broad-based Vanguard US equities for example, I would welcome it as I would continue buying into it and wait for recovery, because what are the chances of something like this never recovering, unless of the US and North Korea send us all back to the stone age?

To summarise:

1. I currently do hold high-risk assets NOW in an ISA, albeit holding long-term (1 year +)
2. I want to expand my portfolio to now include safe, slow growth assets inside a SIPP

Eager to know why this is the wrong way around?

PWFUK - interested to know why you think my strategy outside my SIPP is the opposite of what someone my age should be doing? My rationale is that if I blow out, I'm young enough to recover from it and at least I would have safe and secure investments elsewhere in the SIPP.  I'm a stickler for risk but wouldn't go near anything like binaries etc, I prefer to buy and hold rather than buy and sell, albeit with stock that is higher risk than what the usual investor would be comfortable with having in their portfolio. Genuinely interested to hear your thoughts to see what I can learn...

This is what I'd have wanted to know in my mid-20s:

There are different types of risk. One flavour of risk is that you invest everything in one company that goes to zero (eg Enron). This is obviously a bad thing. You get around this by diversifying. So if you invested in a Japanese index fund, with 100 companies in it, the likelihood of all those companies going to zero is vanishingly small, however you are exposed to the risk that the whole country barely grows for a decade. You get around this by investing in different countries (a world tracker is great, but there are other good options too). Once you are diversified enough, the type of events that would cause your entire investment to go to zero are the type of events that money won't help you with (collapse of the entire economy or government, alien attack, zombies, all out war).

Another flavour of risk is that you need to sell your equities when they are worth less than you'd like. If you have 100 shares in Tesco, or VW, or the FTSE100, then that represents an ownership in all the stores, factories, contracts, and stock that make up those companies. The inherent value of these does change over time, but the price tag (the stock price) changes much more, and much more rapidly (like the Tesco accounting issue or the VW emissions thing). It's like the pricing at Amazon, the inherent enjoyment of a book doesn't change if it is 50% off today compared  to being full price yesterday. However, if you need to sell your shares on a certain date (say you are buying a house), you are a forced seller, so you need to take whatever price you are offered for the shares on that date. If you have no need to sell the shares, then it doesn't matter to you what the share price does in the interim. In a way, the sticker price of your pension is totally irrelevant to you until your 58th birthday (the inherent value of it is important, but a market crash doesn't change the inherent value).

Another flavour of risk is that you save into your pension (or FIRE fund) and the growth isn't enough to sustain your spending. This is particularly acute when there is high inflation (so if you hold your money in cash, while there is a tiny tiny risk it could go to zero, and it isn't volatile, it is losing value everyday).

In your SIPP, you need to be diversified, but your bond fund would relate to only one country. You can totally accept volatility - it doesn't matter if your investments go up and down as long as the general trend is up (by the time you are taking your pension you can switch to something less volatile). You need to make sure that your SIPP grows enough to support your spending by the time you can access it, so inadequate growth is risk that you want to avoid. A bond fund trades the volatility risk that you can accept for the risk of adequate growth and concentration in one country, that you shouldn't be taking.

That's why I'd be putting 100% global equities in the SIPP for a 20-something. This is not advice, DYOR.

I do have quite the appetite for risk


You know the saying "everyone has a plan until they get punched in the face"? Many, many 20-somethings think they have a high risk appetite. Until you have actually lived through seeing a decade's earnings drop by 30%, 50%, or more, you don't know what your risk tolerance is.

Thanks for the answer PWFUK, noted a lot of what you said but can you expand on your last point?

You say I should diversify but then go onto say I should put 100% global equities in a SIPP. I see I can still be diversified by using an index fund, but surely true diversification can only be achieved over more than one asset class? What if there's a global downturn like we had back in 2008 but this time it last longer? Admittedly, I would keep buying but I would want something to offset this scenario for the time being?

I did have a big think over the weekend and feel that I was made up in my decision but seeing your reply, I'm curious now...?

Thanks all

Playing with Fire UK

  • Handlebar Stache
  • *****
  • Posts: 2166
Re: Dollar cost averaging a UK Government Bond ETF
« Reply #12 on: October 22, 2017, 10:11:16 AM »
Volatile assets should go in a SIPP as you have time to recover from a downturn.

dreams_and_discoveries

  • Pencil Stache
  • ****
  • Posts: 911
  • Location: London, UK
Re: Dollar cost averaging a UK Government Bond ETF
« Reply #13 on: October 22, 2017, 12:47:44 PM »
The advise is usually riskier assets in SIPP - as you won't be accessing for 30+ years, then less risky in ISA / taxable, as you'll want those funds to bridge from FIRE date to the date you can access your SIPP, which is say 10-20 years.

If the ISA taxable performs badly, FIRE is off and you'll have to work longer. If the SIPP performs badly, you've got time to wait out a correction.

Playing with Fire UK

  • Handlebar Stache
  • *****
  • Posts: 2166
Re: Dollar cost averaging a UK Government Bond ETF
« Reply #14 on: October 22, 2017, 11:54:01 PM »
Quote
There are different types of risk. One flavour of risk is that you invest everything in one company that goes to zero (eg Enron). This is obviously a bad thing. You get around this by diversifying. So if you invested in a Japanese index fund, with 100 companies in it, the likelihood of all those companies going to zero is vanishingly small, however you are exposed to the risk that the whole country barely grows for a decade. You get around this by investing in different countries (a world tracker is great, but there are other good options too). Once you are diversified enough, the type of events that would cause your entire investment to go to zero are the type of events that money won't help you with (collapse of the entire economy or government, alien attack, zombies, all out war).


Thanks for the answer PWFUK, noted a lot of what you said but can you expand on your last point?

You say I should diversify but then go onto say I should put 100% global equities in a SIPP. I see I can still be diversified by using an index fund, but surely true diversification can only be achieved over more than one asset class? What if there's a global downturn like we had back in 2008 but this time it last longer? Admittedly, I would keep buying but I would want something to offset this scenario for the time being?

A global tracker is diversified enough. The market recovered from 2008. The risk from 2008 was if you needed money in 2008 you locked in a loss, not that the market would never, ever recover. The longer your timeframe (eg a SIPP), the more you should lean towards higher growth, higher volatility investments. If you had 100% equities in an ISA, and needed to sell them for a one of purchase, or because you were FIRE and needed to eat, then you'd have needed to sell in 2008 and that would have locked in the loss.

Tim Hale's book "Smarter Investing" has a great explanation on this.

Could you be letting your thoughts about vulnerable older people without enough money cloud your judgement here? Your responses are coming across like someone who is scared of equities, not someone who has "quite the appetite for risk".

shelivesthedream

  • Magnum Stache
  • ******
  • Posts: 2673
  • Location: London, UK
Re: Dollar cost averaging a UK Government Bond ETF
« Reply #15 on: October 23, 2017, 02:23:52 AM »
Have you read the JLCollins stock series? It explains risk, diversity and volatility very well.

shelivesthedream

  • Magnum Stache
  • ******
  • Posts: 2673
  • Location: London, UK
Re: Dollar cost averaging a UK Government Bond ETF
« Reply #16 on: October 23, 2017, 02:32:47 AM »
Also, perhaps I've missed it, but when are you actually planning to FIRE? Even a vague answer like "my forties" or "dunno, I quite like work so I'm more interested in FI" will change people's advice.