Global Equity ETF \ Bonds

Index tracking funds and ETFs
MartynC27
Posts: 7
Joined: November 20th, 2016, 8:44 pm

Global Equity ETF \ Bonds

Postby MartynC27 » December 15th, 2016, 1:52 pm

Stocks & Shares ISA

I am moving my existing Stocks & Shares ISA to a Global ETF 90 /10 split based on Warren Buffet's Portfolio. My existing Stocks & Shares ISA has been built over many years using Investment Trusts and OEIC Funds (sold to me in the past by an IFA)

Over the last year I have been progressively selling the Investment Trusts and Funds to build a Global ETF portfolio using individual ETFs to roughly copy the breakdown of the All World ETF (VWRL) but with a 15% UK bias. I have now completed Global Equity ETF 90% portion.

I am thinking about the remaining 10% of the portfolio following all of the recent news of Bond prices falling in value which has recently accelerated following election of Donald Trump and USA (0.25%) rate rise.

With regard to 'safe' Bond funds for the 10% portion.

How safe are these ETF's ;- Short dated gilts (GLTS @0.15 ocf) or Ultrashort Corporate Bond (ERNS @0.09 ocf) – The coupon is low < 1% before costs

I understand these are supposed to be equivalent to cash .

Alternatively I could put 5% of the cash in say 0-5 year Corporate Bond ETF (IS15 @0.2 ocf) which I understand is a bit higher return but higher risk or an index-Linked Gilt ETF ?.

Does anyone have any experience of these ETF's and the risk / reward of each or any other suggestions for the 'safe' / hedge part of the portfolio ?

Thanks in advance,

Martyn

Note: Note am 63, with Mortgage paid off. I have a Final Salary pension in payment which covers basic needs and I have a year’s emergency Cash reserve in a separate Cash ISA (0.75%). I also have a separate SIPP which is still growing and invested in ETFs with the aim of a similar 90/10 split portfolio. I plan to take the natural income from the Stock s& Shares ISA (described above) and reinvest any unused income s back into my separate SIPP with the aim of drawing down in a few years time.

GeoffF100
Lemon Pip
Posts: 81
Joined: November 14th, 2016, 7:33 pm

Re: Global Equity ETF \ Bonds

Postby GeoffF100 » December 15th, 2016, 7:06 pm

Why not put the 10% in a cash ISA? Higher rate of interest and guaranteed by the government.

MartynC27
Posts: 7
Joined: November 20th, 2016, 8:44 pm

Re: Global Equity ETF \ Bonds

Postby MartynC27 » December 15th, 2016, 10:04 pm

Thanks for the reply GeoffF100,

Unfortunately I have used my ISA allowance this year so if I transferred 10% out of the ISA platform it would probably loose its ISA status.

Having said that a non-ISA savings account pays just as good rates as cash ISA's at present with a guarantee by the government.

I assume Short dated gilt ETFs or Ultrashort Corporate Bond ETfs which are claimed to be low risk are not guaranteed at all.

Thanks,

MartynC27

AJC5001
Posts: 33
Joined: November 4th, 2016, 4:55 pm

Re: Global Equity ETF \ Bonds

Postby AJC5001 » December 16th, 2016, 12:07 am

MartynC27 wrote:Stocks & Shares ISA

With regard to 'safe' Bond funds for the 10% portion.

I have a Final Salary pension in payment which covers basic needs


Some posters consider a Final Salary pension to be the equivalent of a bond fund, without some of the risks. This allows the investments to be 100% equity.

If you did so, how would that affect the %age split?


Adrian

GeoffF100
Lemon Pip
Posts: 81
Joined: November 14th, 2016, 7:33 pm

Re: Global Equity ETF \ Bonds

Postby GeoffF100 » December 16th, 2016, 7:09 am

You should be able to transfer funds from your stocks and shares ISA to a cash ISA. A quick Google search brought up this:

https://www.which.co.uk/money/investing ... -transfers

hiriskpaul
2 Lemon pips
Posts: 114
Joined: November 4th, 2016, 1:04 pm

Re: Global Equity ETF \ Bonds

Postby hiriskpaul » December 16th, 2016, 11:05 am

Buffet stipulated the highest quality short dated paper for the 10% - effectively cash, but I suspect large cash deposits are problematic in the US for some reason (no FSCS equivalent protection?), hence short dated treasuries. You could go for GLTS or even IGLS, but the charges are such that the expected returns are less than 0.5%. If things get really messy, short yields could go even lower, but you would still struggle to make more than 1% on these after running costs. On the other hand, you could potentially lose money should yields start heading back up again (but not much money). Stepping up the risk to short dated corporates would be likely to give a better return, but with increased downside risk. This is your portfolio insurance policy and volatility reducer, as such it is best to not take credit risk with it.

Like others I think for the moment you would be better off in a cash ISA for this element of the portfolio, assuming you do not want to move away from Buffet. NS&I are offering 1% on their ISA at the moment (instant access, transfers in accepted) and there are no problems with FSCS limits with them either.

GeoffF100
Lemon Pip
Posts: 81
Joined: November 14th, 2016, 7:33 pm

Re: Global Equity ETF \ Bonds

Postby GeoffF100 » December 16th, 2016, 11:24 am

Buffet stipulated the highest quality short dated paper for the 10% - effectively cash, but I suspect large cash deposits are problematic in the US for some reason (no FSCS equivalent protection?), hence short dated treasuries.


It may simply be a question of the sums of money involved. The FSCS is not much use if you are investing billions. If you are a small investor, however, the FSCS is free protection for what may be a risky deposit in a second line bank. As a small investor, you can also profit from a premium interest rate at the expense of other investors who cannot be bothered to keep moving their account.

mc2fool
2 Lemon pips
Posts: 138
Joined: November 4th, 2016, 11:24 am

Re: Global Equity ETF \ Bonds

Postby mc2fool » December 16th, 2016, 12:50 pm

hiriskpaul wrote:...I suspect large cash deposits are problematic in the US for some reason (no FSCS equivalent protection?)...

Depends on what you call "large". The Federal Deposit Insurance Corporation (a US govt body) offers much better protection than the FSCS, covering $250,000 per depositor for each account category in a bank. Single accounts, joint accounts and retirement accounts are separate categories, and for joint accounts it's £250K per co-owner, so a couple could have up to $1.5million covered. https://www.fdic.gov/deposit/deposits/b ... glish.html

The National Credit Union Administration offers similar protection for depositors in credit unions (their equivalent to building societies).

1nv35t
Lemon Slice
Posts: 261
Joined: November 4th, 2016, 8:18 pm

Re: Global Equity ETF \ Bonds

Postby 1nv35t » December 16th, 2016, 2:12 pm

MartynC27 wrote:I am thinking about the remaining 10% of the portfolio following all of the recent news of Bond prices falling in value which has recently accelerated following election of Donald Trump and USA (0.25%) rate rise.

With regard to 'safe' Bond funds for the 10% portion.

How safe are these ETF's ;- Short dated gilts (GLTS @0.15 ocf) or Ultrashort Corporate Bond (ERNS @0.09 ocf) – The coupon is low < 1% before costs

I understand these are supposed to be equivalent to cash .

Alternatively I could put 5% of the cash in say 0-5 year Corporate Bond ETF (IS15 @0.2 ocf) which I understand is a bit higher return but higher risk or an index-Linked Gilt ETF ?.

Does anyone have any experience of these ETF's and the risk / reward of each or any other suggestions for the 'safe' / hedge part of the portfolio ?

Buffett I believe keeps 10% reserves in T-Bills. When SHTF you want liquidity (access) and Treasury Bills are the most protected/liquid - backed by the state to unlimited (well not strictly true but as good as) levels, who can always borrow or print more money to maintain their integrity. All other choices have counter party risks involved or risk that in some cases such as stock (bond) markets being closed (such as can occur after a outbreak of war) funds might not be accessible.

Assuming however you are prepared to accept some illiquidity, then something like a three of five year gilt ladder of directly bought gilts is pretty good. Each year you have a third/fifth of cash reserves in hand, and roll those over into replacement 3/5 year gilt. After 3/5 years you in effect earn the average of 3/5 year gilt yields.

90/10 is a interesting choice IMO. Assuming 2% safe withdrawal rate for instance and stocks paying 3% dividend even if stock prices and dividend values dive by two-thirds you still have in effect 1% dividend income coming in, supplement that with 1% from reserves and you maintain your desired income without having to sell stock ... and that can be sustained for a decade. More often such deep dives start recovery well before then such that 10% reserves is more than enough.

Compare mid to longer term portfolios (20, 30, 50 years for instance) of stock heavy (90/10) against more 'conservative' alternatives (lower levels of stock weighting) and the worst case periods of 20, 30 ...etc. outcomes are somewhat similar ... its not as though stock heavy induced higher risk. On a more average case of 20, 30 whatever years however and the average rewards from stock heavy 90/10 tend to be significantly more than more conservative alternative portfolios. In effect similar risk (worst case outcomes) but higher reward on average ... which translates to higher risk adjusted reward. Combined with a broad stock index, that is night on impossible to fail and Buffett's advice seems sound. I only recently saw a (historic) video recording transcript where he confirms that the 90/10 is what we advocates for general use, not just for his particular circumstance (wife). Its a very long transcript, something like 3 hour 'chat', but the relevant part is ...

https://blogs.cfainstitute.org/investor ... investing/
I laid out what I thought the average person who is not an expert on stocks should do. And my widow will not be an expert on stocks. And I wanna be sure she gets a decent result. She isn’t gonna get a sensational result, you know? And since all my Berkshire shares are going to philanthropy, the question becomes what does she do with the cash that’s left to her? Part of it goes outright, part of it goes to a trustee. But I’ve told the trustee to put 90% of it in an S&P 500 index fund and 10% in short-term governments. And the reason for the 10% in short-term governments is that if there’s a terrible period in the market and she’s withdrawing 3% or 4% a year you take it out of that instead of selling stocks at the wrong time. She’ll do fine with that. And anybody will do fine with that. It’s low-cost, it’s in a bunch of wonderful businesses, and it takes care of itself.

1nv35t
Lemon Slice
Posts: 261
Joined: November 4th, 2016, 8:18 pm

Re: Global Equity ETF \ Bonds

Postby 1nv35t » December 16th, 2016, 2:27 pm

As a guide BoE stats database shows historic 5 year gilt yields of :

Code: Select all

End year level of
   yield from British
   Government
   Securities, 5 year
   Nominal Par Yield
   IUASNPY
   [a]
31 Dec 94   8.7537
31 Dec 95   6.899
31 Dec 96   7.296
31 Dec 97   6.5319
31 Dec 98   4.4451
31 Dec 99   6.0892
31 Dec 00   5.1556
31 Dec 01   5.1196
31 Dec 02   4.1811
31 Dec 03   4.6459
31 Dec 04   4.476
31 Dec 05   4.1458
31 Dec 06   4.9866
31 Dec 07   4.4607
31 Dec 08   2.6836
31 Dec 09   2.944
31 Dec 10   2.2894
31 Dec 11   0.9846
31 Dec 12   0.8638
31 Dec 13   1.9661
31 Dec 14   1.1641
31 Dec 15   1.3385

such that a 5 year gilt ladder would typically earn the rolling 5 year average of those yields i.e. current year seeing a 1.26% yield (being the average of the last 5 year yield values).

1nv35t
Lemon Slice
Posts: 261
Joined: November 4th, 2016, 8:18 pm

Re: Global Equity ETF \ Bonds

Postby 1nv35t » December 16th, 2016, 5:27 pm

To put some meat on the bone, and at the offset make it clear that the data I used is unreliable such that the observations at best are just a guide, the figures I saw when I compared 90/10 from a UK investors perspective, holding UK T-bill (yields) and US stock after assuming a constant 15% dividend withholding tax rate, for all 50 year periods since 1896 had a worst case, after 2% SWR (safe withdrawal rate = 2% of value drawn the first year and the inflation adjusted value of that drawn in subsequent years) had the portfolio value = 2.34 times the original inflation adjusted start date amount after 50 years. Compared to 2.57 for a Talmud asset allocation (equal amounts in home, US stock and Gold (where for gold 75% (i.e. after allowing for a amount of tax) of the T-bill yield was used when on the gold standard (convertibility)). That of course is based on UK inflation and after all assets had been converted to Pounds.

Near as identical worst case 50 year outcomes.

In the average case however, the 90/10 provided (in addition to 2% SWR) a 5.3% real benefit compared to 4.4% for the Talmud. So if instead of just applying the conventional inflation adjusted uplift of the SWR amount each year, you uplifted either by that inflation amount, or to 2% of the portfolio value as the new SWR value amount, then the 90/10 would have seen income on average grow at a 5.3% real rate, compared to 4.4% real for the Talmud.

The conclusion I personally came to was that the Talmud offered the better risk reduction, for only a moderately lower potential wealth (or income) expansion rate. On the tax risk front, your primary home is exempt from CGT and imputed rent benefit (which were included in the above figures) isn't taxed. Gold legal tender coins are CGT exempt. When interest rates and inflation are high, so also do taxes tend to rise in percentage terms, which is a greater risk for holding 90% compared to holding just 33% stock. That 0.9% difference (5.3% versus 4.4%) might easily have narrowed right down after costs and taxes. More so when you consider that historically both dividend yields/interest rates and costs were relatively high. George Harrison (Beatles) for instance sang about punitive tax rates ('Taxman'). "Let me tell you how it will be / There's one for you, nineteen for me / 'Cause I'm the taxman, yeah," in reflection of 95% tax rates.

Another benefit of the Talmud is that it liability matches your 'rent'. Sell a home to rent instead and the stock or whatever investment needs to see price appreciation that broadly compares to house price appreciation, and dividends that cover the gross rent amount. Liability matching eliminates such risk.

It does take a certain type of character trait to own a home and split the remainder 50/50 between stocks and gold however. But perhaps no more than extending out to 90% in stocks. The Talmud is a pretty good sleep-well choice, installing a mindset of next years spending will either be covered by gold or stocks (but sometimes can be a bit of both, or some years maybe neither). Typically (on average) one of the two pops +20% (nominal) such that it feels like you're profit taking some of the gains to fund spending. For instance for the 2008 calendar year gold jumped +42% such that you were less inclined to capitulate compared to having held perhaps 90% in stocks. In 1974 as another example when inflation was 19% and stocks dropped -26%, gold rose +65%. In other years it might be the other way around (but more often less extreme), in which case its like profit taking (reduce-high) out of one to provide a income and buy more of the other (add-low).

MartynC27
Posts: 7
Joined: November 20th, 2016, 8:44 pm

Re: Global Equity ETF \ Bonds

Postby MartynC27 » December 17th, 2016, 10:18 pm

Thanks for the replies,

There was an article in CItywire on Sep 28, 2016 comparing Buffet's 90/10 with a Target retirement fund.

http://citywire.co.uk/money/buffett-vs- ... er/a953009

Whatever ratio or other assets I finally decide I need to use ETF's unless I hold some cash in a separate bank account instead of using GLTS or IGLS (in addition my emergency cash fund)

I seem to remember an article on Bogleheads advising not to consider a final salary pension like a bond but to consider it as a regular salary. In my case my final salary pension only covers my bills, food and basic needs so I think I would only consider a pension to be like a bond if there was an excess amount above my basic needs)


Return to “Passive Investing”

Who is online

Users browsing this forum: Plutus and 2 guests