Make Portfolio more simple

[MartynC27]

My (SIPP + ISA) asset allocation is 75% Equity (£600K) in ETFs & ITs / 25% Fixed Income . I am 62 years old and retiring now with DB pension paying £18K pa (Pension is index linked with full dependants pension) . My state pension will start in 3 years time and will pay £ 8325 pa (£ 6660 after all taxed @ 20%) . Our house is fully paid off house worth 450 K . My wife (Age 57) works part-time and earns about 10 k pa and only has a small DC pension pot worth about £65K.

We have two children living away from home renting after starting their first job's after finishing university

My (SIPP +ISA) 75 % (£600K) equity allocation on my platform is:-

USA ---- - 40 % ----- ( VUSA----+---ISP6)
UK ------- 13% ----- ( VUK ---+ --- VMID ---+ --- SLET --+ £5K RDSB--+-- £5K Nat Grid)
Euro ----- 20% --- - (VERX -- + ----XESX )
Japan ----- 8% --- - (VJPN-----+---JFJ )
Asia Pac --- 7% --- - (VAPX-----+----HFEL)
EM ------- 10% --- - (VFEM ---+--TEM----+--UEM)


The 25 % (£200K) in SIPP and ISA Fixed Income platform is invested as follows :-

Comm Property IT
Standard Life Property Income Trust --(£16K)

High Yield ITs
NCYF -- (£16)
HDIV -- (£16)
IPE -- (£16)

Quality Bonds
IS15 (£25K)
SBEG (£10K)

Cash ISA (100 K)

Investments outside SIP & ISA (£20K)
Legacy Shares held in Paper Certificates - £13K Severn Trent + £2K LLoyds + £4 BT + £1K Pets at Home)

We have an emergency Cash fund of £50K.

Do reader think my portfolio is too risky for a new retiree and how can I make the portfolio easier to manage . Should I sell the remaining Investment Trusts or are they providing some diversification to the ETFs ? How much income would a pure ETF portfolio provide if I sold all of the ITs ?

[tjh290633]

Do reader think my portfolio is too risky for a new retiree and how can I make the portfolio easier to manage . Should I sell the remaining Investment Trusts or are they providing some diversification to the ETFs ? How much income would a pure ETF portfolio provide if I sold all of the ITs ?

I suspect that you are looking at this from the wrong point of view. You are talking about income, yet provide no information on how much your portfolio generates, in terms of yield.

If you want to make it easy to manage, I would suggest about 10 ITs would make life much simpler that what you currently have, It should be possible to get between 3% and 4% without too many problems. The objective has to be to obtain an increasing income from the dividends.

The income from your SIPP will be taxable at your marginal rates. Don't forget that the State Pension will be paid without deductions, and the tax will all fall on your DB pension and whatever you draw from the SIPP.

I have long avoided fixed interest securities, because the income is just that. With 4-5% available from a portfolio of directly held equities, as opposed to in a collective investment, it has never been possible to do better with Fixed Interest over the last 20 years. Others will say differently, but they have never convinced me.

If you want a quiet life, I think that your portfolio is far too extensive. Most ITs pay quarterly these days and some like FRCL offer a very wide geographical spread.

Have a good think about it.

TJH

[MartynC27]

If you want to make it easy to manage, I would suggest about 10 ITs would make life much simpler that what you currently have, It should be possible to get between 3% and 4% without too many problems. The objective has to be to obtain an increasing income from the dividends.

Thanks for the reply.

The Total value of my ISA is £470K and SIPP is £240 K and cash ISA is 100K with roughly a 75 % (equity)/ 25% (Fixed income + cash) split across these wrappers

As the charging structure of my platform is similar to Hargreaves I understand that I have three options for a retirement portfolio :

1. HYP - (Needs a lot of work to manage)
2. Basket of Investment Trusts
3. Global Portfolio of ETFs

My options are to sell the all the ETFs and invest in a dividend producing basket of ITs OR sell the ITs and invest in a global portfolio of ETFs.

I believe there are advocates of both the IT portfolio and ETF portfolio approach on this site.

It seems that a IT Basket should produce higher and regular dividends and be more stable and may be easier to manage and the ETF Global portfolio will produce smaller dividends but more capital gains and be more volatile. As I have an 18K DB pension I am not totally reliant on the maximum dividend. I don't suppose we know which option would produce the greatest total return ?

MartynC

[tjh290633]

Time for a bit of maths, then.

TJH

[MartynC27]

Am I correct in assuming these are the Pros and Cons of each retirement portfolio option ? :-

1. HYP - (Highest Yield due to low charges - but needs a lot of work to manage 30+ shares - so not an option)

2. Basket of Investment Trusts - (Higher regular dividends than 3 below . ITs capita more stable, less monitoring & work, but higher charges)

3. Global Portfolio of ETFs - (lower dividends than ITs, more capital gains, Capital more volatile, Higher total return than ITs due to lower charges)


As I have an 18K pa DB pension covering most Basic needs (plus a State pension starting in in 3 years time, I do have a separate modest stable income ?

MartynC

[BarrenWuffett]

Am I correct in assuming these are the Pros and Cons of each retirement portfolio option ? :-

1. HYP - (Highest Yield due to low charges - but needs a lot of work to manage 30+ shares - so not an option)

2. Basket of Investment Trusts - (Higher regular dividends than 3 below . ITs capita more stable, less monitoring & work, but higher charges)

3. Global Portfolio of ETFs - (lower dividends than ITs, more capital gains, Capital more volatile, Higher total return than ITs due to lower charges)


As I have an 18K pa DB pension covering most Basic needs (plus a State pension starting in in 3 years time, I do have a separate modest stable income ?

MartynC

You are correct regarding option 1 - you can really do without all this work when you are retired (unless it is your pet hobby I suppose).

I hold a few investment trusts in my sipp drawdown - City of London, Finsbury Growth & Income, etc. and these have provided a reasonable natural yield of around 3 or 4% plus capital appreciation with very little maintenance. I also hold Vanguard Lifestrategy 60 (40% bonds) which adds a lot of stability and I take 'income' from the annual sale of units as the natural yield is low but the returns are very much in line with my trusts but less volatility/risk.

So a mix of trusts and low cost global index works well for me...don't focus too much on natural yield as what really matters long term is total return and ensuring your level of risk meshes with the type of person you are and whether you can stick with it when the going gets a little rough.

You may be interested in this article on diy investor which covers various aspects of income drawdown
http://diyinvestoruk.blogspot.co.uk/201 ... wdown.html

[77ss]

As I have an 18K pa DB pension covering most Basic needs (plus a State pension starting in in 3 years time, I do have a separate modest stable income ?

MartynC

A key factor, in my view.

I have been running what is largely an HYP for some 15 years.

A few years back, when my pensions started to kick in, I decided that, as Ihad a reasonable non-dividend income, I would look outside the HYP envelope - with the focus on ITs and total return - rather than high yield. Also looking for improved diversification, into areas where my HYP did not go

I don't see your options as being mutually exclusive. I am happy with my HYP shares (well, most of them anyway). I am even happier with my low-yielding ITs. One provides me with a fairly solid income, the other with capital gains. A simplification, of course.

[MartynC27]

Thanks for the comments,

I suppose I could start simplifying my portfolio by selling my individual legacy shares (RDSB, NG, SVT, LLoyds, BT, PETS) and invest the proceeds in the collective investments.

Whether a passive Global ETF portfolio or basket of Investment Trusts is best is debatable. ( I built up the regional ETF's instead of trackers due to a charging structure similar to HL)

I also need to decide whether I should simplify my investments (described above) :-

£16K Commercial Property IT,
£32K of High Yield ITs,
£35K of Bond ETFs

and replace these with a single IT or ETF or do I need any Fixed Income as I have a £18K Pa DB Pension providing a Bond like function ?
and whether I should be holding £100K in cash ISAs earning a 0.75% interest rate?

[mrbrightside]

Am I correct in assuming these are the Pros and Cons of each retirement portfolio option ? :-

1. HYP - (Highest Yield due to low charges - but needs a lot of work to manage 30+ shares - so not an option)

2. Basket of Investment Trusts - (Higher regular dividends than 3 below . ITs capita more stable, less monitoring & work, but higher charges)

3. Global Portfolio of ETFs - (lower dividends than ITs, more capital gains, Capital more volatile, Higher total return than ITs due to lower charges)

As I have an 18K pa DB pension covering most Basic needs (plus a State pension starting in in 3 years time, I do have a separate modest stable income ?

MartynC

You are correct regarding option 1 - you can really do without all this work when you are retired (unless it is your pet hobby I suppose).

Eh ? I am not retired and manage a 35 share HYP. It must take me about 1 hour a month. There is the odd corporate action or takeover but the most time-consuming element is checking the dividends have been banked.

[OLTB]

I agree with mrbrightside - a HYP is 'supposed' to be a hands-off system (argghh - I'll get collared for that!) so once it is set up, it's just a few minutes checking that the dividends have arrived when they should do.

Cheers, OLTB.

[kempiejon]

I do spend some time on my HYP each month because I am regularly adding new money so I need to do a little shortlisting to make purchases. If I was in spending mode I doubt there'd be much to do until a corporate action came along and then often the default position is harmless anyway.
I do have a spreadsheet where I record monthly income, and each week there's a pleasant distraction checking all is as should be but it's hardly arduous.
However a tracker/eft/fund/IT etc is I think no effort, except perhaps something exceptional regarding ownership.

[hiriskpaul]

Am I correct in assuming these are the Pros and Cons of each retirement portfolio option ? :-

1. HYP - (Highest Yield due to low charges - but needs a lot of work to manage 30+ shares - so not an option)

2. Basket of Investment Trusts - (Higher regular dividends than 3 below . ITs capita more stable, less monitoring & work, but higher charges)

3. Global Portfolio of ETFs - (lower dividends than ITs, more capital gains, Capital more volatile, Higher total return than ITs due to lower charges)


As I have an 18K pa DB pension covering most Basic needs (plus a State pension starting in in 3 years time, I do have a separate modest stable income ?

MartynC

I am not interested in managing a portfolio of individual shares - I am down to 2 and they will go at some point.

In general the capital is NOT more stable in ITs than basic ETFs, but the income is. But the income is only more stable because ITs reinvest some of the income they receive when there is a surplus and disinvest when there is a shortfall. The underlying income is typically no more stable in an IT than a similarly invested ETF.

ITs are likely to underperform ETFs over the long term, but that is only part of the risk with them. As well as aggregate underperformance, they can have a very wide dispersion of returns, which means you run the risk of significantly underperforming the aggregate. The flip side of this is the possibility of outperformance, but over the long haul you would have to be very lucky to outperform lower charging ETFs.

I assume you are talking about cheap cap weighted ETFs here. There are of course lots of others such as higher yield, minimum volatility, growth, value, momentum, small caps, etc. All of these come with higher charges and higher turnover, so again the aggregate of them all should underperform the aggregate of the cap weighted lot. The problem with all these alternate weights and strategies is similar to that of active management in that they may work really well for a while, but then you will have periods of underperformance. So you need to make a call as to when something is likely to underperform in order to swap to something else. Unless you are trying to make judgements about different geographical regions, that is not something you need to consider with cap weighted funds. They deliver the market return minus a small predictable tracking error.

As an example, I have quite a lot of my US equity allocation in a US listed minimum volatility fund. This has performed well, beating the S&P 500 with less volatility. The p/e and p/b used to be lower than that of the S&P (min vol used to tilt to value), but now they are higher, consequently I am concerned the strategy has become too popular and I may see a period of underperformance. Should I swap to cap weighted? I don't know, but if I did swap it would be one less thing to have to think about.

I think the best answer is a core set of cap weighted trackers, on a low charging platform. Then if you want to, add non-cap weighted ETFs and ITs to give exposure to carefully selected areas and strategies not covered by the core. For example, a few months ago I invested in some UK small cap ITs. That gives me more exposure to small companies than I can get through a FTSE 250 tracker or other small cap ETF. Whether this does any good long term remains to be seen and I think there is much to be said for just sticking with cap weighted trackers.

[hiriskpaul]

One other comment I would make is that it looks as though your wife is unlikely to use all her personal allowance in retirement. If that is the case, I would suggest boosting her pension pot as far as you can so you can make good use of the 25% uplift. Even if you leave in cash or short dated bonds, that 25% is well worth going after.

P.s. holding some cash and high quality bonds may not look to clever now, but it will do if global stock markets are 50% lower in 12 months time

[BarrenWuffett]

Eh ? I am not retired and manage a 35 share HYP. It must take me about 1 hour a month. There is the odd corporate action or takeover but the most time-consuming element is checking the dividends have been banked.

The OP is looking at options to simplify a retirement portfolio. I expect there are one or two here who enjoy running their 35 share hyp but, for the vast majority of investors, myself included, its not in any way simple.

For me and the majority of small investors flocking to index funds, SIMPLE would be choosing the appropriate Lifestrategy option from a choice of FIVE and see how things have panned out at the end of the year (more likely better return than hyp). Meantime get on with life and all the things you want to do in retirement.

[syrio]

> Do reader think my portfolio is too risky for a new retiree

You have to answer this for yourself, how much of a drawdown in your investments are you able to tolerate?

You do seem to have a reasonable amount of pension income, so perhaps you wouldn't be worried about the value of your investments.

You give no indicate of how much income you need or what your plans are.

> how can I make the portfolio easier to manage

It's easy to simplify this, just go for a single all world tracker, e.g. VWRL, or a Vanguard Lifestrategy fund (and change your broker to a fixed fee one).

You have too many miscellaneous small shareholdings that are too small to really give you any diversification benefits.

If you want to make your portfolio easier to manage, then you shouldn't look at the HYP or IT Basket approaches.

> Should I sell the remaining Investment Trusts or are they providing some diversification to the ETFs ?

Yes sell them. They are equities, your ETFs are equities, it is a relatively small amount. They are not going to make any noticeable difference to your performance.

> How much income would a pure ETF portfolio provide if I sold all of the ITs ?

Probably around 2% depending on your asset allocation.

For instance, from the Vanguard website:

Vanguard FTSE All-World UCITS ETF yield is 2.4%
Vanguard Lifestrategy 60% yield is 1.55%
Vanguard Lifestrategy 40% yield is 1.47%
Vanguard FTSE 100 UCITS ETF (VUKE) yield is 3.89%
Vanguard FTSE All-World High Dividend Yield UCITS ETF (VHYL) yield is 3.06%
Vanguard U.K. Gilt UCITS ETF (VGOV) yield is 1.64%

(I got most of these figures from my post on another thread recently, so they are probably slightly out of date)

I believe it is a mistake to chase yield, I'd always look at the total return.

> It seems that a IT Basket should produce higher and regular dividends and be more stable and may be easier to manage and the ETF Global portfolio will produce smaller dividends but more capital gains and be more volatile.

I'm not a fan of the IT basket idea. It will be less diversified than a global ETF with higher charges. I wouldn't try to predict either the volatility or performance. Personally I'd choose the global ETF approach.

[syrio]

The OP is looking at options to simplify a retirement portfolio. I expect there are one or two here who enjoy running their 35 share hyp but, for the vast majority of investors, myself included, its not in any way simple.

Well said.

There is a tendency for advice to be "just do what I like doing", rather than attempting to answer the question that the OP is asking. I can't see how a HYP or IT Basket is making a portfolio simpler.

[Itsallaguess]

I agree with mrbrightside - a HYP is 'supposed' to be a hands-off system (argghh - I'll get collared for that!) so once it is set up, it's just a few minutes checking that the dividends have arrived when they should do.

I completely agree that anyone suggesting that a HYP approach is 'a lot of work, and not an option' is having to carry out some processes that many of us simply don't see a need for.

I've self-managed a 40-share/IT 'mainly-HYP' portfolio for many years now, and can't imagine a less time-consuming investment-strategy with zero charges beyond trading-costs and account-fees.

Of course you can choose to make it as high-maintenance as you like, but that's not to say that those tasks necessarily need doing....

Let's face it, many of us here (and I certainly include myself in this group) spend far more time discussing the damned things than actually operating them!

I do personally like a mix of HYP-specific-shares and income IT's, and find the mix suits my own investment-personality, but I think people need to find these types of balances out for themselves, as I do think one of the first initial challenges with regards to these types of investment-strategies is to 'know thyself' first and foremost...

Cheers,

Itsallaguess

[Itsallaguess]

There is a tendency for advice to be "just do what I like doing", rather than attempting to answer the question that the OP is asking.

I'm not sure that's completely fair, especially regarding this thread at it's current juncture.

There's clearly a clash of opinions on this thread as to how much work is generally 'involved' with running a HYP, and a number of people who own HYP's have said that they are unsure what all this work that 'needs doing' actually consists of, and are asking for some clarification that until now hasn't appeared.

I think that's a fair situation, given the accusations that a HYP is 'too much work', and whilst what you say is bound to have some ring of truth to it when regarding message-boards such as these, I'm not quite sure that's what's going on in this particular thread at the moment.

Cheers,

Itsallaguess

[hiriskpaul]

Do you HYP investors not read and consider the annual and half year reports & accounts, updates, RNS? Do you look out for and consider a response to say profit warnings, or proposed takeovers, changes to policy, etc? Do you ever think about company or sector specific risks and react (or not) accordingly? Does it ever occur to you to consider whether a company might be taking on excessive debt, or otherwise acting recklessly?

Similarly for IT investors, do you not read published reports, or consider the portfolio risks? Are they still invested as you are expecting them to, with acceptable risk taking? Ever considered performance and deemed it acceptable/unacceptable?

If the answer to all the above is all no, then yes these investments are uncomplicated to you and unlikely to absorb much of your time.

[MartynC27]

Thanks for the replies this has helped clarify my thoughts (As I don't Have a HYP I don't think it is worth starting one now) -

As 62 years old retiring now I think I will simplify the portfolio in stages:-

Stage 1 - Keep ETFs and sell the ITs and Individual shares in the (SIPP & ISA) platforms and invest equity proceeds into equity ETFs to keep same regional breakdown. This will leave me with the following investments:-

(SIPP +ISA) Equity allocation - 75 % (£600K) :-

USA ---- - 40 % ----- Vanguard-(VUSA)----+---ishares (ISP6)
UK ------- 13% ----- -Vanguard-(VUK) ---+ ---Vanguard (VMID)
Euro ----- 20% --- --- Vanguard-(VERX) -- + ----DBX (XESX )
Japan ----- 8% --- - Vanguard-(VJPN )
Asia Pac --- 7% --- - Vanguard-(VAPX)
EM ------- 10% --- --- Vanguard-(VFEM)


(SIPP and ISA) Fixed Income Allocation - 25 % (£200K) :-

Sale proceeds (not invested (£64K)
Quality Bond ETFs - Ishares IS15 (£25K) + UBS (SBEG) (£10K)
Cash ISA - (100 K)


Investments outside SIP & ISA
Legacy Shares (20K) - £13K Severn Trent + £2K LLoyds + £4K BT + £1K Pets at Home

Emergency Cash fund - £50K.

DB pension paying £18K pa (index linked with widows pension) + state pension starting in 3 years time £ 8325 pa (£ 6660 after tax @ 20%) .
House is fully paid off - value 450 K .
Wife (Age 57) works part-time and earns about £10 K pa with small DC pension pot worth about £65K.

Stage 2 - Invest the ( uninvested £64 K sale proceeds) in either Fixed income or equity ETFs within SIPP & ISA wrappers)
Stage 3 - Review if I can get better rate than current instant access rate of (0.75%)
Stage 4 - Sell the Legacy Shares held outside SIPP & ISA wrappers and invest the £20K proceeds in either wife's ISA or SIPP in tracker or ETF