Global Passive portfolio risk reduction

[TimR]

I am 63 years old and about 1/3 of my total assets are invested in Global Equity ETFs within an ISA. The rest of my assets are 1/3 is in Cash ISAs and 1/3 is the capital value of my home. I have a modest DB pension which covers all bills and basic living expenses.

Although my Global Equity ETF ISA has done well over the last 12 months I now feel that I should introduce some other assets into my ISA to reduce risk. I will also need to take money out occasionally for holidays and expenses, etc

My ISA is on the Best Invest platform which does not offer direct Bonds (only ETFs and ITs or expensive funds)

Does anyone have any experience of the risk/reward of any types of Fixed income ETFs ?

I note that some readers are using defensive investment trusts for portfolio risk reduction.

I have been put off up to now because some Bond ETFs have fallen over the last few months but now could be a better time to consider reducing risk of my portfolio with a proportion of fixed income.


Tim R

[GeoffF100]

Top rated bonds currently pay less interest than cash ISAs, which are guaranteed by the government. Bond funds have added costs and fees. Best to stick to cash ISAs.

[xxd09]

Hi Tim R
If you are happy with that Asset Allocation ie one third equities ,one third cash and one third house-why not keep it like that?
Top up your cash ISA by selling some of the Tracker Fund -keep the Portfolio balanced. Should work OK
xxd09

[hiriskpaul]

Best Invest looks expensive. If you mainly want to hold tracker ETFs and tracker funds I would recommend iWeb. There is a £25 account opening fee, but after that there is no annual platform charge and dealing costs only £5.

iWeb Bond trading is a little better than Best Invest, but not great and has been getting worse. I currently hold a bond that they have dropped completely (Co-op Group 11% 2025) and so I can only sell over the phone, not buy more. I also hold Balfour Beatty convertible preference shares with them and it is the same story. No sensible explanation why, that is just how it is. They did try to claim that the Balfour Beatty prefs were high risk, but that is total nonsense as they are safer than the common equity which they allow to be traded. If you want bond funds though, iWeb are very good in that they don't level a platform charge and support most if not all of the Vanguard bond tracker funds.

For bond funds as a counterweight to a global equity tracker portfolio I would suggest The Vanguard Global Bond Index Fund. This is GBP hedged, so should be relatively insensitive to exchange rates, contains something like 8,000 global bonds and has a TER of only 0.15%. You should expect a return a little better than cash, but the primary advantage over cash is that the fund is likely to do much better when we get the next big slump in equity markets. Vanguard, do other cheap bond trackers, but this one seems ideal for someone following your strategy. I would suggest moving some of your cash ISA over to the bond fund rather than your equities, but if you want to reduce risk, transfer some of the equities as well and perhaps buy the Vanguard UK Investment Grade Bond Index Fund fund as well. This is higher risk (in credit and duration) than the Global Bond fund, will likely give you higher returns, but is less likely to protect your portfolio when the next equity market slump comes.

If you want a very easy life, an alternative would be to transfer say 60% of your cash ISA over to iWeb along with your global trackers, sell the lot and buy a Vanguard 60/40 LifeStrategy fund. That would give you 48% in global equities, 32% in global bonds and 20% in cash ISAs.

Definitely review your choice of broker though once you work out what you want to invest in. I suspect that Best Invest will be far from the Best place for you to Invest.

[hiriskpaul]

If you want to invest in a higher risk/higher expected return fixed income ETF in place of some of your equities, Vanguard have recently launched a USD Emerging Markets Government Bond ETF which looks interesting. The bonds are denominated in USD, so you are exposed to the GBP/USD rate rather than exotic currencies. Yield to maturity is quite reasonable at 4.8% and the TER is 0.25%, which is very good for a LSE listed EM bond fund.

Other high yield bond trackers are a bit thin on the ground on the LSE. To get exposure in an ISA you really need to look at actively managed funds and unfortunately pay the high costs. Individual UK bank preference shares are quite a good proxy for high yield sterling denominated debt and are still available at reasonable prices. Safer, undated ones are the familiar SAN, SANB, LLPC, LLPD, NWBD, STAB, STAC. All yielding about 6.3%.

None of these high yield options should be considered a replacement for cash or the other investment grade bond funds I mentioned previously. Lower risk than equity, but a fair bit higher than cash/investment grade. Prices are much more correlated with equity prices than investment grade bonds as well, so will not give the same diversification benefits in an equity market slump.

[TimR]

If you want to invest in a higher risk/higher expected return fixed income ETF in place of some of your equities, Vanguard have recently launched a USD Emerging Markets Government Bond ETF which looks interesting. The bonds are denominated in USD, so you are exposed to the GBP/USD rate rather than exotic currencies. Yield to maturity is quite reasonable at 4.8% and the TER is 0.25%, which is very good for a LSE listed EM bond fund.

Other high yield bond trackers are a bit thin on the ground on the LSE. To get exposure in an ISA you really need to look at actively managed funds and unfortunately pay the high costs. Individual UK bank preference shares are quite a good proxy for high yield sterling denominated debt and are still available at reasonable prices. Safer, undated ones are the familiar SAN, SANB, LLPC, LLPD, NWBD, STAB, STAC. All yielding about 6.3%.

None of these high yield options should be considered a replacement for cash or the other investment grade bond funds I mentioned previously. Lower risk than equity, but a fair bit higher than cash/investment grade. Prices are much more correlated with equity prices than investment grade bonds as well, so will not give the same diversification benefits in an equity market slump.

Thanks for the Replies,

The Vanguard ETF looks interesting and is cheaper than 'Ishares Global High Yield Corp Bond Gbp Hedged Etf (GHYS)' which I was considering for replacing small part of the equity allocation.

I was also considering introducing a chunk of Bond ETFs eg Shorter dated Corporate Bond ETFs (IS15 / ERNS) plus longer dated (SLXX / ISXF) plus say UBS Barclays USd Emerging Markets Sovereign ETF (SBEG) to diversify between my zero risk Cash and higher risk Global Equity ETFs.

I would prefer to use ETFs if possible to keep things simple on the current (my platform shares holding costs are similar to what H L charges as I have a legacy deal) and don't really want the hassle / pay for in-specie moving). Although I could do a partial cash transfer for the slice I decide to allocate away from equities to bonds to better platform for Bonds / Bond funds .

I was thinking of using a percentage from both my Cash and Equity % allocations to purchase the new 'Bond' allocation.

[TimR]

.

50/50 stock/gold as a alternative to bonds can be held tax efficiently, such as paying no regular interest (rolled up instead).

This compares (US data) 75/25 stock/gold to 50/50 stock/bonds

50/50 stock/gold as a bond proxy will typically have one or the other up 20%/year on average each year (in a volatile manner), that can be profit taken to both top up the other asset and keeping some as a withdrawal/spending. Its nice to have years of 'this year gold is paying for x' and in other years 'this year stocks are paying for x' type mentality.

Thanks for the reply

I am considering adding say up to 5% gold in the form of an ETF as this is what the investment gurus ? on the TV suggest ?

Tim R

[TimR]

50/50 stock/gold as a alternative to bonds can be held tax efficiently, such as paying no regular interest (rolled up instead).
This compares (US data) 75/25 stock/gold to 50/50 stock/bonds



Thanks,

As I have a Bond like DB pension which covers basic living expenses and Bills

The 50/50 or 75/25 stock/gold as a alternative to bonds looks interesting.

Would the gold be held through an ETF ?

[greygymsock]

If you hold something like BRK-B stock (US Berkshire Hathaway) which is somewhat like a diverse stock mutual fund, then the ongoing costs are low and there are no US dividend withholding taxes involved, nor any dividend taxation. Just capital gains to worry about.

... until BRK starts paying dividends (which they've said may happen). then you have the dilemma of paying tax (US withholding + UK) on the dividends, or switching to something lower-yielding - after paying tax on a (perhaps large) capital gain.

also, it may have behaved like a diversified mutual fund in the past, but that's when WB has been running it, which he won't be for ever. it's a conglomerate; they are not generally fashionable. under different management, people might start to question why it exists; the price might fall below the sum of the parts; people might demand a break-up. what would the tax consequences of that be? BRK has large unrealized capital gains on some of its long-term share portfolio (and no exemption from capital gains tax, unlike UK investment trusts / unit trusts / OEICs).

i think there are various kinds of concentrated risks involved in holding BRK, which you don't have when using a simple tracker fund/ETF to get your exposure to shares. you shouldn't optimize for tax savings at the price of overlooking bigger risks.

(in any case, if this is inside an ISA, most of the tax issues don't apply.)

[greygymsock]

A consequence was that the likes of David Bowie and the Rolling Stones up and left the UK, (royalties that might otherwise have been collected/taxed in the UK were lost).

realistically, hardly anybody leaves the country because of high taxes. almost nobody can leave and keep the identical job. few can get an equally good replacement job in another country. people have family ties. people are not just motivated by money. and so on, and so forth.

For instance under those terms a pensioner living in a London home valued at £1.02 million with no other assets might be liable for £12K/year tax. The disadvantages of such policy however is that of capital flight, economic effects, valuation issues, disproportionate effect on seniors, social effects (work ethics, incentives), and property rights, such that the UK has avoided that choice of taxation and instead focussed upon income taxation, where at times the investors risk from such taxation have been considerable.

the only real issue among those is pensioners with no major assets except their now-valuable home. and that's easily solved by taking a charge against their house for the tax, to be paid back when they no longer need the house and it's sold.

wealth taxation is becoming easier to enforce, with the recent advances in automatic exchange of information and disclosure of beneficial ownership. and IMHO is a good idea, as just 1 way of countering growing inequality.

getting back to practical issues, the only useful take-aways i can see are:

1) be aware that taxation may become less favourable to investment income / capital gains.

2) probably own your own home. because it is always going to be a bit harder to tax the "imputed rent" you get from that home than to tax investment income which you use to pay your rent.

3) perhaps favour lower-income, higher-capital-gain investments - but not at the price of being poorly diversified. capital gains has usually been taxed more lightly than investment income - but this could change - actually, that's an obvious reform, IMHO.

[mswjr]

A consequence was that the likes of David Bowie and the Rolling Stones up and left the UK, (royalties that might otherwise have been collected/taxed in the UK were lost).

realistically, hardly anybody leaves the country because of high taxes. almost nobody can leave and keep the identical job. few can get an equally good replacement job in another country. people have family ties. people are not just motivated by money. and so on, and so forth.
.

But a majority of the top one percenters almost certainly can leave. From long haul airline pilots to successful authors, 'Subject Matter Experts' to sports stars, computer programmers to tech entrepeneurs.
Most cannot leave, I agree, but the tax take is hit hardest by those who can.

[greygymsock]

we've slipped off-topic now, so i'll just make a few brief points ...

After having paid in a lifetime of national insurance contributions for health and pension cover in their old age, and gone without to save hard out of taxed wages to pay off their own home ... now they're being told to sell that asset to pay for their care and you suggest also have a additional taxation burden levied.

you're conflating a tax on wealth with a tax on hard-working grannies. most rich people are relatively old, but most old people are not rich. hard work is among the factors which enable some people to become rich. but many people work hard all their lives and never accumulate any wealth. and others inherit wealth, so no work at all involved. if you want to reward hard-working people, you should favour taxing earned income less, and wealth more (which could be via actual wealth taxes, or via higher taxes on unearned income and gains than on earned income).

you're also simultaneously implying that the state should pay for care (by objecting to people being expected to use the value of their own former home to pay for it) and that people shouldn't have to pay taxes which enable the state to pay for care. make your mind up.

A wealth tax is a clear signal to not bother accumulate wealth. Slows the economy and is a disincentive. Burdens the state more when individuals would rather blow it all on a good time today and let the state fund tomorrow.

we're talking about something like 1% or 2% a year wealth tax (and i wouldn't suggest starting anything like as low as after the first €21k of capital, which you mentioned re the netherlands). nobody's going to spend all their capital to avoid that kind of tax. maybe if it were 20% a year, so they could see their capital disappearing pretty quickly. all we're talking about is a situation in which you can see that, after a few decades, you might have 10% or 20% less capital than you would otherwise expect. and you could still hope to grow your capital if you held enough higher-return assets.

slows the economy? actually, it's precisely the opposite. excessive concentration of wealth slows the economy, because the higher your income, the smaller the proportion of it that you spend. greater inequality in developed economies is causing persistently weak demand, hence low growth.

But a majority of the top one percenters almost certainly can leave. From long haul airline pilots to successful authors, 'Subject Matter Experts' to sports stars, computer programmers to tech entrepeneurs.
Most cannot leave, I agree, but the tax take is hit hardest by those who can.

most of the richest 1% are very high earners; it's only when you get to the richest (say) 0.01% that you're looking at people who mainly live off their capital. very few can work from anywhere in the world. novelists can. recording artists who are already very successful can (but less established artists probably need to stay near the people and studios that they want to work with). footballers will have to live in the UK, if they want premiership salaries. tennis players could perhaps live anywhere, but will more likely choose to live where they think is best for their training, not where tax is lowest, because maximizing pre-tax income is more important than minimizing tax.

most of this 1% need to go where the jobs are, which means the major economies, not tax havens, where there are very few jobs. so would they move to low-tax major economies if the UK tax them significantly more heavily?

there's a good way to test this. the USA already offers significantly higher earnings for the top 1% than the UK does, and with tax that is overall not obviously higher, perhaps a bit lower. so why isn't the UK's top 1% all moving to the USA now? since nearly everybody cares more about maximizing after-tax income than about minimizing tax paid. OK, the USA might not accept so many immigrants, but most of the UK's top 1% are not even trying to move there. i think that answers the question.

(just why they don't try to move is a bit more complicated. but i'd guess it's a combination of:
1) money isn't the over-riding motivation for most people, despite what economists say.
2) it's not that easy for most people to move and get an equivalent status job in another country. it's only relatively easy if there are US firms directly recruiting people from overseas and sponsoring their visas; which only happens for a limited number of areas of work, and stages of career. many people (e.g. lawyers) would need to re-qualify.

[saechunu]

we're talking about something like 1% or 2% a year wealth tax (and i wouldn't suggest starting anything like as low as after the first €21k of capital, which you mentioned re the netherlands). nobody's going to spend all their capital to avoid that kind of tax. maybe if it were 20% a year, so they could see their capital disappearing pretty quickly. all we're talking about is a situation in which you can see that, after a few decades, you might have 10% or 20% less capital than you would otherwise expect.

Increased longevity combined with the unavailability of defined benefit pensions for most mean that people will need to acquire large amounts of capital if they are to enjoy a pleasant, self-funded retirement. A wealth tax could present a large additional hurdle to overcome, particularly in a low return environment, where the wealth tax might represent a significant percentage of any returns being enjoyed.

Over 'a few decades' (say 25 years), a 1.5% wealth tax would result in up to a 31% reduction in capital. Over 40 years, a 2% wealth tax would result in up to a 55% reduction in capital. Even longer timeframes are relevant when we consider that in order to self-fund extended retirements from age 60s onwards, people may already need to have acquired significant capital by their peak earnings years in their 40s or else face never attaining retirement goals.

In other words: 1% here, 2% there, and soon you're talking serious money.

[greygymsock]

In other words: 1% here, 2% there, and soon you're talking serious money.

absolutely. though i was thinking of something more like 1% or 2%, excluding the first £1m. so it depends on what sort of capital and spending levels you're aiming for. it will still make a significant difference to some, i agree. but still: nobody's going to spend all their capital, and plan to rely on the state in retirement instead, as a result; they'll just tweak their plans a bit.

do remember that, on these boards, many of us have far more investable capital than most of the population. the bigger picture is that hardly anybody can manage a comfortable retirement from their own capital, without any assistance from the state. the route to secure retirements for most people can only be via a higher state pension (the new flat rate is very low compared to other european countries) and sufficient public funding for health and social care. of course, on top of that, those of us who've had high earnings will also want to save and invest to give us higher income in retirement, too, on top of the universal amounts. and the tax and pension systems shouldn't obstruct that. but there are levels of wealth which go far beyond providing for your own retirement. passing on wealth intact for several generations is a very different aim, and 1 which has more negative than positive consequences. especially when the focus becomes on protecting capital, rather than taking risks by investing in the real economy (by real, i mean actually making and building things, as opposed to, for instance, secondary trading of listed shares).

[saechunu]

The obvious concern with such a tax policy is that if, as you might imagine, the small cohort upon whom it's imposed go to very great lengths to avoid it, the temptation will be to target those with less wealth but who make an easier target.

It's also very easy to imagine that any initial high threshold would firstly lose inflation linking and then be lowered progressively, perhaps in response to some fiscal difficulty that governments regularly encounter, or to supposedly fund some well-meaning spending policy or other. I believe it'd be almost certain that such creep would occur, resulting in a tax that was introduced on a promise of affecting only a privileged few eventually affecting large swathes.

A lot of people would probably agree with me, and so many would be very wary of ever voting for any politician proposing such a tax. That's not to say it won't happen though if inequality reached a sufficiently high level that enough people felt they had nothing to lose.


NB in my post above I obviously meant to write 40 years not decades. And apologies for the off-topic - but interesting - discussion!

[tjh290633]

Over 'a few decades' (say 25 years), a 1.5% wealth tax would result in up to a 31% reduction in capital. Over 40 decades, a 2% wealth tax would result in up to a 55% reduction in capital. Even longer timeframes are relevant when we consider that in order to self-fund extended retirements from age 60s onwards, people may already need to have acquired significant capital by their peak earnings years in their 40s or else face never attaining retirement goals.

In other words: 1% here, 2% there, and soon you're talking serious money.

Isn't the point that, if you are getting 4% per annum, say, in dividends from your capital, at 1.5% this amounts to 3/8ths, i.e. 37.25% tax on your dividends? This just increases the amount of capital that you need to amass to generate sufficient income.

TJH

[greygymsock]

The obvious concern with such a tax policy is that if, as you might imagine, the small cohort upon whom it's imposed go to very great lengths to avoid it, the temptation will be to target those with less wealth but who make an easier target.

i think the line that the richest can always (legally or illegally) avoid tax if they try is becoming less plausible. the new laws being brought in about disclosure of beneficial ownership and automatic exchange of information can change this, if the remaining loopholes are closed off - which isn't happening yet. it's a matter of political will: i.e. are the government trying to crack down on tax avoidance and evasion by the very rich, or trying to make it look like they're doing that, while actually only catching a few less sophisticated tax cheats, and leaving enough loopholes open that the rest can carry on as before by slightly different means?

from studies of the wealth of UK residents, IIRC the 2 very big categories of wealth are property and pensions. most of the property will be property in the UK - no way to hide that. nearly all of the pensions will be UK-based schemes, which have to be known to HMRC. presumably most of the rest is tradable securities (shares and bonds - plus collective investment schemes holding tradable securities); that is a bit harder, because it can be held outside the UK - but this is where the new disclosure laws will help, if they are applied thoroughly.

i don't find the slippery slope argument very convincing. you can apply a slippery slope argument to any policy change if you try; but it isn't always plausible. the policy changes of the last several decades have brought continually lower taxation of capital: is that a slippery slope? i look at it as just a series of policy changes, some of which i might agree with while not necessarily agreeing with all of them nor with corporation tax being cut to 0% (which is surely where we're going, if it's a slippery slope).

That's not to say it won't happen though if inequality reached a sufficiently high level that enough people felt they had nothing to lose.

i think there is a serious issue with a lot a people getting nothing out of the economic system (e.g. GDP rising, but real wages falling). i don't think the current system can survive without some quite drastic changes; this is not just about the tax system, of course, but it plays a part in it.

[greygymsock]

if you want to reward hard-working people, you should favour taxing earned income less, and wealth more (which could be via actual wealth taxes, or via higher taxes on unearned income and gains than on earned income).

That was the situation after the WW2 ... up to the 1970's when the UK in effect was bankrupted.

taking out another loan isn't being bankrupted. a country which issues its own currency, and only borrows in that currency, can't go bankrupted, because it can produce the cash to repay loans at will, because IOUs issued by the state are cash (read what it says on any BoE note).

the crisis in the 1970s was really about the current account deficit.

but whatever the nature of that crisis, it doesn't invalidate the previous 25 years or so, commonly known as the "golden age of capitalism". it had the highest growth of any era, and (more importantly) the benefits of that growth were felt by just about all of the population.

rewarding hard-working people is not just fair, it also makes the economy stronger. higher growth makes rich people richer than slower growth. so lower inequality is also in the interest of rich people - assuming they care about their absolute wealth, rather than about how much richer they are than other people.

The richest 1% pay around a third of the total income tax take. Push them away (they would most certainly flight to 'less punitive' taxation alternatives) and the rest have to plug that hole.

wrong. as i said in an earlier post, if that's true, all the richest 1% would already be trying to move to the USA, where they'd be significantly richer (mainly because of higher pre-tax earnings, not because of tax). the fact is that very few even try to move. clearly, either there are things more important to them than money, or it's a lot harder than you suppose for them to move and get jobs of equivalent status, or a bit of both.

The counter side is the better choice. Double up the number of richest and the tax burden on the remainder is lightened. Treble the number and

money doesn't grow on rich people. money can be made in an advanced economy because of a complex set of factors: a well-educated, skilled, healthy workforce, a population rich enough to buy products and services, good infrastructure, a reliable legal system, etc. if all the 1% moved to some tiny tax haven, they'd lose most of their high earnings, which is the main source of wealth for most of the 1%.

In Holland only around the first £15 - £18K is exempt. The rest of wealth is considered as having earned 4% and those 'gains' are taxed at 30%. So most portfolio's/investments have to achieve 1.2% just to offset that tax, and perhaps another 2% to offset inflation. 3.2% real just to break-even. That's a certain incentive for potential investors to look elsewhere and with less capital inflow ... a economic death spiral.

oh, are you implying it's a 1.2% wealth tax instead of paying tax on actual investment income and gains, not as well as? because i was assuming it was "as well as", and thinking that was rather high (given the low exempt amount). but if it's "instead of", it's not bad at all.

[greygymsock]

Isn't the point that, if you are getting 4% per annum, say, in dividends from your capital, at 1.5% this amounts to 3/8ths, i.e. 37.25% tax on your dividends? This just increases the amount of capital that you need to amass to generate sufficient income.

exactly. a wealth tax doesn't make it impossible to live off your capital; it means you need more capital to generate your target income.

(you've expressed it in terms of income - i know that's the approach you favour. some people prefer to look at total returns. but it doesn't affect the conclusion: either way, the wealth tax means you need more capital to cover the same spending plan.)

[saechunu]

Isn't the point that, if you are getting 4% per annum, say, in dividends from your capital, at 1.5% this amounts to 3/8ths, i.e. 37.25% tax on your dividends? This just increases the amount of capital that you need to amass to generate sufficient income.

exactly. a wealth tax doesn't make it impossible to live off your capital; it means you need more capital to generate your target income.

These two quotes appear to be written in a way that suggests some great insight is being made: you 'just' need more capital. Well, obviously.

From my earlier post, in scario 1 (1.5% wealth tax applying over 25 years) you'd need up to 45% more capital; in scenario 2 (2% wealth tax applying over 40 years) you'd need up to 122% more capital. Tell that to the people who are attempting to build a pot of capital to live off during the latter 1/3 or 2/5 of their lives - something that's very difficult to do anyway - and then try to have them vote (and keep voting) for you.

from studies of the wealth of UK residents, IIRC the 2 very big categories of wealth are property and pensions. most of the property will be property in the UK - no way to hide that. nearly all of the pensions will be UK-based schemes, which have to be known to HMRC. presumably most of the rest is tradable securities (shares and bonds - plus collective investment schemes holding tradable securities); that is a bit harder, because it can be held outside the UK - but this is where the new disclosure laws will help, if they are applied thoroughly.

I know a few super-rich; money is held in non-transparent ways as is probably the norm for people with such high wealth. Perhaps disclosure rules will become hugely more effective but I wouldn't hold my breath because of the complexity of such matters. Instead I'd expect much of any wealth tax burden to fall on better off normal people with conventional financial affairs rather than those with extreme wealth. That is the key point of my argument.

Knowing the burden was falling on those most readily targeted rather than those most able to pay, I would think it likely that resentment would be high and the tax imposition come to be viewed as illegitimate. In such circumstances, I think it probable that the size of the pie could shrink significantly as the disincentives changed the behaviour of a large cohort of the population who come to view moderate success as being penalised.

I understand the appeal of such a policy but see major practical flaws in terms of targeting, and the unintended negative consequences then flowing from that flawed targeting.