The premise behind this portfolio is simplicity, following these key principles :
- Use a tax efficient investment vehicle. In the UK this could be an ISA or Pension fund
- Set up a regular, automatic payment to your investment account. For example via direct debit
- Use investments that take advantage of global growth, inflation, and cash
- Diversify across asset class and geographical location.
- Use reputable investment funds to get access to those sectors.
- Allow the growth to be reinvested to benefit from compound returns
- Have a long term timescale, and avoid regular portfolio adjustments.
The most important part of investing, and obtaining the best growth rate on your money, is not to pay someone else interest on their money. In general the interest you pay on debt will be much higher than anything you can earn through investing. I understand there are some excellent rates at the moment, even as low as 0%. However in the long term there is always a catch, and it is generally advised to pay off as many of your debts as possible before considering investing your money long term.
The only possible exception is a mortgage, where it is often very difficult to pay it off in full. By ensuring you always have the best interest rate, and making over-payments as often as possible, mortgages can generally be kept on whilst you invest elsewhere. It could be considered better to pay tax-free into your pension plan, than clear a mortgage with taxed income.
Loans and credit cards, however, should really be paid off in full, before considering to invest your income and savings for the long term.
There is no pointing putting all your spare cash each month into a pension plan, where it can not be easily accessed, or into an investment where there are expensive early withdrawal fees ….. if you do not have an emergency fund.
An emergency fund is essentially cash savings that are readily available. These are generally in a standard savings account, with a decent interest rate. They could also be in an ISA, however bear in mind that once you withdraw from an ISA you have lost that allowance for the year.
By having a safety net of readily available cash, it allows you to invest your surplus disposable cash in the right place, without impacting your day-to-day ife.
An ISA account is a flexible way to invest, with minimal taxation. Unlike a pension you are free to withdraw from your ISA at any time, no matter your age. However, there are tighter contribution limits, and you will not be able to reclaim income tax (as with a pension). A total of £20,000 can be place in an ISA in the 2018/19 tax year (April to April).
As this portfolio plan requires diverse investments, it is important to find an ISA which gives access to a good selection of funds. Some bank ISA’s can be limited in terms of where you are able to invest. With a bit of searching online it is possible to find a good ISA investment platform. Cavendish has a very low cost ISA, and access to a good fund supermarket, at the time of writing.
Cash ISA’s are also important to consider. Available interest rates will vary daily. By researching some of the financial portals, the latest deals can be found. In general it is best to get a fixed interest rate, when rates in general are historically high. At the time rates are low, and it would be wise not to be locked into the current low rates, when the forecast is for higher interest rates in years to come.
A pension wrapper is the best place for long term investments, for a number of reasons :
- Access is not readily available, meaning you are more likely to leave it there for the long term
- Contributions come with a tax rebate
- There is no taxation within the wrapper
- There are now many low cost investment platforms which provide access to a vast range of investment funds.
- There are inheritance tax advantages.
- You can invest as a high rate tax payer, and withdraw as a low rate tax payer
- Possible employer contributions.
- direct contributions from employment income, before tax.
A contribution to both a pension and an ISA is a good idea, as they have different taxation and accessibility advantages. The largest contribution allowance is with a pension, currently at £40,000 or 100% of your income (which ever is lowest).
As with an ISA it will be important to choose the correct investment platform. For true diversification this may require the use of a SIPP, which are generally more expensive than standard pension wrappers, however costs have come down in recent years. SIPP’s provide for a much more broad investment, including funds, commercial property, and commodities. A.J.Bell have a well known, and long established SIPP offering, with a good fund supermarket.
As with all topics on this website, professional financial advice is strongly recommended.
Buy the world
As mentioned in part one, the concept is to buy into global growth, and diversify as much as possible. this includes taking advantage of a broad range of asset classes, and geographical locations. For example :
- UK and US Large, Small, and Mid cap funds (small to large US and UK company shares)
- Company shares in Europe, Japan, Asia, Latin America, Eastern Europe, Russia, India, Africa, and the Middle East.
- International Government bonds (fixed interest products backed by Governments)
- International Corporate Bonds (fixed interest products backed by Companies)
- International commercial and residential property
- Agricultural commodities
- Energy sector such as oil and gas
- Metals, for example copper, zinc, platinum, and anything that is used heavily in manufacturing
- Precious metals such as gold and silver
As can be seen this is quite a broad diversification. The commodities sector being one of the most interesting for the long term. Many of these products are used heavily in industry, and have finite resources. As recycling will never be enough to keep up with demand, price rises are likely until viable alternatives can be found.
A purist would say this does not go far enough when considering diversification. For example stocks and shares could be in the pharmaceutical, financial, building, or fintech sectors etc. For reasons of simplification, with each fund the broader the diversification the better. There are plenty of UK large cap funds that invest across ‘all sectors’, and these are the ones to look out for.
To gain access to these sectors is much easier that it used to be. It is now possible to search fund databases by sector, and find well managed funds from good established investment firms. The key things to look out for are :
- Performance history
- Fund manager history
- Financial institution history
- Liquidity of fund (can you withdraw if something goes wrong)
- Fees (initial and annual)
- How diversified is the fund itself
Example Fund Selection
Now that good investment vehicles have been established, and also the areas in which to invest, now is the time to select the actual investment funds themselves. As with all investments it is important to seek professional financial advice first. it is also recommended to stay within your risk profile. So if you are a cautious investor, stick to the low volatility funds. Al fund investment should be considered as medium to long term, with a minimum of 5 years, in order to justify the costs involved.
Almost as important as where you invest, is how much you invest. The amount you allocate to each sector will determine its volatility, and performance. The concept of this portfolio is to be an ‘all weather’ investment, that can perform in all economic conditions. It is not designed to jump on the latest bull run looking for high returns. Instead it is designed to diversify enough to cover most economic eventualities. As such the capital allocation will be broadly equal across all assets, with a reduction in the most volatile sectors (e.g. small cap firms).
The final investment decision will be down to yourself and your financial advisor.
It is much easier these days, as there are many well diversified funds. There are even ‘Global Multi-Asset’ funds which could cover almost all these sectors within one fund. In general the fewer the funds you use to achieve your goal, the lower the fees will be. It is a good idea to have more than one fund, and this will ensure a diversification of the fund managers and investment houses.
Example portfolio using Global Multi Asset Funds :
- Fidelity Global Multi Asset Fund **** EUR
- Legg Mason Western Asset Global Multi Strategy **** USD
- Blackrock Global Funds Multi Asset **** USD
- Investec Gobal Strategy Fund ***** USD
A combination of 4 funds from different managers and investment companies, helps to provide further diversification.
All these funds are in and around the ‘moderate’ category, in terms of risk. They are not to aggressive to scare the novice investor, and not too passive to have potential poor returns in the long terms. They are 4 or 5 star rated by morningstar, which is an indicator towards quality.
For those that are a little more adventurous and would like more control over their portfolio, it is possible to try and build your own Global portfolio by looking for funds that cover all (or as many as possible) sectors and countries. Below is an example of a well diversified portfolio, which attempts to reduce sector risk by being as broad as possible.
- Polar Capital Global Insurance – 5 star rated fund that invest in the international insurance sector
- AB Emerging Markets multi-asset portfolio – 5 star fund, focusing on stocks and bonds in emerging markets.
- RL Global index linked – 5 star rating, investing in global index linked bonds
- Investec global energy fund – International investment in the energy sectors
- Bakersteel Global precious metals – 5 star rated fund that invests in precious metals companies
- CMI Global Nework fund – Invests in the US large-cap equity markets
- Northern Trust world Equity – Attempts to invest in global equity indices (MSCI as benchmark)
- Vanguard FTSE Dev World ex UK – Highly rated. Developing world equity investments mid and large cap.
- AB European Equity Portfolio – 5 star rated fund investing in European equities.
- Baillie Gifford Developed Asia – Investments across Asia, using MSCI Pacific Index as benchmark.
- Carmignac unconstrained Global bond – 5 star global bond market investment
This is by no means an exhaustive list, it represents 11 funds that are well diversified at represent a portfolio that ‘buys the world’. It is easy to carry on and have many more funds in the portfolio, however around 10 funds is probably enough to manage, especially taking into account initial and trail fees. They are all very highly rated funds from establish finance houses and managers.
There is a mixture of currencies in there (USD, EUR, GBP), this helps to diversify across currencies, without going to exotic. I don’t feel it is necessary to invest in the smaller, or less stable, foreign currencies. However, it is beneficial not to put all your money into one currency.