Investment strategy for next 20+ years

[Plutus]

Happy New Year, and thank you to those who have taken the time to create these forums.

I am in the process of reviewing my asset allocation and investment strategies and would be very grateful for any ideas or comments.

Some background information:

Age: 45 this year. Retirement age assumed to be 67.

Current debts:
Interest only mortgage approx 150k, 50% LTV, 3% fixed until 2019. Overpaying with lump sums and £300 each month.

Current assets:
20 years membership of the Local Governement Pension Scheme + approx x3 months salary invested in Additional Voluntary Contributions (AVCs).
x4 months salary for emergency cash.
x4 months salary earmarked for investing or paying off some of the mortgage.
Shares ISA value < 10k with about £2000 added each year. Current comprises high yielding shares.

My personal view is that I could reduce the mortgage or invest more over 20+ years to either pay off some of the mortgage and to provide some diversification. I have found that I'm too nervous and impatient to invest in individual companies and I am investing using index trackers for the Additional Voluntary Contributions. I don't need income at the moment but I do like to receive dividends as they can be re-invested even if the capital value of holdings is volatile.

Would income producing investment trusts be a good idea? Perhaps a few such as CTY (City of London) and EDIN (Edinburgh) etc. and then some others to cover the international markets? I don't think that I'm comfortable with world trackers such as VWRL or SWDA because of the high weighting towards the USA market.

Thanks for any thoughts.

[Urbandreamer]

Unhelpful I know, but if you tossed a coin or rolled a dice to pick from your choices I don't think that you would do too badly.

Paying down mortgage capital is the default easy option. Almost a "no-brainer".
Buying high yield IT's and reinvestimg the income, likewise isn't a bad idea (provided you avoid the need to pay tax on the income or any captial gain).
Index trackers and ETF's can be cheap. They could do slightly better, or worse than income IT's. Who can say?

Individual shares, well I like holding a portfolio of shares that I picked. However if it isn't for you then enough said.

Why not pick a different methodology for new money each year? As I said, I see nothing wrong with any of them and you will achive diversification over time that way.

[Plutus]

Thanks for that @Urbandreamer. I should have added that the AVC portfolio is being ran as a quasi Lifestrategy 80 fund so that I could trial a passive portfolio as well as avoid entering the higher rate tax band. The weightings are 40% UK tracker fund, 40% international tracker fund, 20% fixed interest.

I think that in my mind I'd answered my own question, I am lucky in that I don't currently have to focus on investing for a pension but I do want some exposure to equities as a counterbalance.

For 2017 I will dip my feet into investment trusts.

[BarrenWuffett]

For 2017 I will dip my feet into investment trusts.

The 3 that have done well for me over the past decade have been City of London, Edinburgh and Finsbury Growth & Income and I expect they will continue to outperform over the coming 20 yrs or so. They would be my choice therefore but I suspect the Lifestrategy 80 will do just as well!

[Plutus]

For 2017 I will dip my feet into investment trusts.

The 3 that have done well for me over the past decade have been City of London, Edinburgh and Finsbury Growth & Income and I expect they will continue to outperform over the coming 20 yrs or so. They would be my choice therefore but I suspect the Lifestrategy 80 will do just as well!

Thanks for the reply, I have a few ideas based on the B7 and B8 portfolios and part of the exercise is to compare and contrast how comfortable I am with different strategies, if I ever find myself with larger sums to invest.

I am trialling:

1. 80/20 passive via the AVC contributions. I cannot access this cash until I'm 55 and I sense that this will perform better as I don't scrutinise the performance.
2. A small HYP that I may consider adding funds into but I'm not confident with individual stock picking.
3. For 2017 a selection of investment trusts for growth+income with reinvested dividends.

[ermintrade]

Hello Plutus
I don't think that you can fix your selections for 20 years! An awful lot can happen in that period. With 20 years to go to retirement you can afford to be more growth oriented - I agree with the choice of Finsbury Growth and Income. I also suggest Scottish Mortgage Trust which has an excellent record of investing in more cutting edge stuff. And diversify globally (especially with all the BREXIT unknowns). You should review your portfolio perhaps once a year and make any changes, eg rebalancing it. At, or a few years before retirement, you could change you portfolio to a mainly income-producing one.

I think you would do well to look at John Baron's portfolios - you can get a week's free access to his website, beyond that there is an annual subscription. He also publishes 2 of his portfolios in Investors Chronicle every month.
Best wishes
ermintrade

[Plutus]

I appreciate your reply @ermintrade I shall take a look at the John Baron portfolios.

I like the HYP concept in that the dividends can be used to buy more dividend paying shares during the accumulation phase and then the switch can be made to spend the dividends during the distribution phase. My idea was to replace the individual HYP shares with a collective instrument such as an investment trust. I can cope with fluctuations in the capital value of a portfolio if I see dividends hitting my ISA account to be reinvested at a lower price, although of course in theory the same is happening if I invested regularly into an accumulation fund or ETF.

At this stage I just want to build up a meaningful investment outside of the pension and to diversify from property and cash.

I think that I'm confusing myself by trying to be too clever. I should maybe just pay into VRWL (Vanguard FTSE All-World UCITS ETF) and forget about it for a long time.

[Plutus]

I've found this thread where someone else has asked a similar set of questions.

viewtopic.php?f=54&t=1523

Thank you to everyone who has contributed I shall review all of the suggestions and do a lot of reading.

[tjh290633]

I like the HYP concept in that the dividends can be used to buy more dividend paying shares during the accumulation phase and then the switch can be made to spend the dividends during the distribution phase. My idea was to replace the individual HYP shares with a collective instrument such as an investment trust. I can cope with fluctuations in the capital value of a portfolio if I see dividends hitting my ISA account to be reinvested at a lower price, although of course in theory the same is happening if I invested regularly into an accumulation fund or ETF.

At this stage I just want to build up a meaningful investment outside of the pension and to diversify from property and cash.

I think that I'm confusing myself by trying to be too clever. I should maybe just pay into VRWL (Vanguard FTSE All-World UCITS ETF) and forget about it for a long time.

I don't think that you are confusing yourself. My thoughts (back in 1998) were that I should be switching to fixed interest securities in the then accepted way, but it was never an attractive alternative. I have stuck to the HYP model for my main investments, only withdrawing some of the dividend income when required. I might switch into a basket of ITs producing a similar yield (4.4% currently) when I no longer feel able to actively manage it, but ETFs do not appeal to me, particularly any lifestyling ones. At 83 I still feel happy carrying on as I am.

With luck, you could be in a similar position when you retire.

TJH

[Plutus]

It's very kind of you TJH to take the time to add your thoughts.

I may post the constituents of the HYP that I've constructed onto the relevant board to garner opinions. My main problem is that I 'tinker' too often and either sell shares when I've made a profit or if I think that they'll be susceptible to capital losses. I have also tried to be overweight in certain sectors when I believe the valuations are tempting, at the cost of diversification.

It might be more suitable for me to invest via vehicles where I cannot meddle too much rather than an online shares isa account.

[moorfield]

Age: 45 this year. Retirement age assumed to be 67.

Hi Plutus, we are in a similar age bracket. A lot of discussion on this thread about asset allocation and the merits or not of paying off the interest only mortgage now. Not much discussion or thought about the endgame and what level of income you want from your strategy then.

I would start by guesstimating the level of income you want at 67 and work backwards from there. Tot up what you have now and you should be able to work out an IRR you can measure your strategy against each year. (I do this chiefly to stop myself tinkering unnecessarily.)

I've posted my own update here which I hope gives some illustration of my comments.

M

[tjh290633]

I may post the constituents of the HYP that I've constructed onto the relevant board to garner opinions. My main problem is that I 'tinker' too often and either sell shares when I've made a profit or if I think that they'll be susceptible to capital losses. I have also tried to be overweight in certain sectors when I believe the valuations are tempting, at the cost of diversification.

It might be more suitable for me to invest via vehicles where I cannot meddle too much rather than an online shares isa account.

I think that you have to decide when you will "tinker" with a holding, set out your rules and stick to them. You need rules for when to trim back a holding and when to sell it completely.

Given at least 20 holdings, I would set 10% or twice the value of the median holding as the criterion for trimming a holding. With 37 holdings and a fairly high valuation, I set 1.5 times the median holding value as the criterion, which is nearer 5%.

For selling completely the principal reason is when a share price rises so much that the yield falls below 2% or half the current market yield. The secondary reason is when a share ceases paying dividends with no prospect of a resumption in the short term. However I believe in letting the dust settle before I make any complete selling decision. There is usually an initial knee jerk reaction leading to a sharp fall, and this is often followed by a partial bounce back.

A bit like measure three times, cut once.

TJH

[Plutus]

I would start by guesstimating the level of income you want at 67 and work backwards from there. Tot up what you have now and you should be able to work out an IRR you can measure your strategy against each year. (I do this chiefly to stop myself tinkering unnecessarily.)

I've posted my own update here which I hope gives some illustration of my comments.

M

Thanks for posting the link, and it's a very salient point that you've made.

The conundrum I have is that if I assume I will continue working in my current position I'll have built up a decent pension even since the LGPS switched to a career average scheme in 2014. With my current service I would at this point receive a pension that's equivalent to about 1/3 of my annual salary. If I'm mortgage and child free in 23 years then my wife and I should have a comfortable retirement if I continue being a member of the LGPS.

My rationale for building isa investments was as a hedge against the possibility that I change jobs or if I would require access to the capital before I retire. I also have a nagging feeling that I would have fewer sleepless nights if I paid off the mortgage instead of having a relatively large sum invested in equities.

I should really have considered this a decade ago but life got in the way!

[Plutus]

I think that you have to decide when you will "tinker" with a holding, set out your rules and stick to them. You need rules for when to trim back a holding and when to sell it completely.

Given at least 20 holdings, I would set 10% or twice the value of the median holding as the criterion for trimming a holding. With 37 holdings and a fairly high valuation, I set 1.5 times the median holding value as the criterion, which is nearer 5%.

For selling completely the principal reason is when a share price rises so much that the yield falls below 2% or half the current market yield. The secondary reason is when a share ceases paying dividends with no prospect of a resumption in the short term. However I believe in letting the dust settle before I make any complete selling decision. There is usually an initial knee jerk reaction leading to a sharp fall, and this is often followed by a partial bounce back.

A bit like measure three times, cut once.

TJH

Hi TJH.

I did set some rules for the HYP but to be honest I have the psychological weakness of wanting to protect capital at the expense of building a substantial (for me) portfolio. I also over monitor the ISA account and gauge my success by taking a profit before a rising income or portfolio value.

Conversely I've let the passive portfolio run untouched for 3 years as I receive an annual valuation from prudential and I haven't yet needed to rebalance.

[Urbandreamer]

My rationale for building isa investments was as a hedge against the possibility that I change jobs or if I would require access to the capital before I retire. I also have a nagging feeling that I would have fewer sleepless nights if I paid off the mortgage instead of having a relatively large sum invested in equities.

I should really have considered this a decade ago but life got in the way!

All very sensible. I'm 53 and started in the early 90's so have a bit more practice.
Can I make a few points?

Paying down mortgage capital is the SAFEST investment that there is. Also once gone the payments that you use to make to it can go elsewhere.
A standard ISA has huge flexibility and no upper limit. As you say you can take money out if you need to and put money back in when able to.

As you get older situations change. For example any money that I pay into my SIPP I can get back in the next two years. With careful planning I'd also pay no tax and get the 20% uplift, as money paid in is tax free while money taken out is at your tax rate at that time (if not working under 67 I could ensure I took less than the personal allowance from any pension). Were I to then decide to start work again pension contributions would be limited by law, but I could put the surplus into an ISA. TBH I doubt that I'd look for work.

Personally I was buying shares while paying mortgage (gone now). Sometimes I paid off mortgage capital, sometimes I bought shares in an ISA. I believe that I would be less good at choosing shares if I hadn't been doing it for 25 years.

Tinkering, well I only know one way to learn patience. Practice.

[Plutus]

...
Can I make a few points?

Paying down mortgage capital is the SAFEST investment that there is. Also once gone the payments that you use to make to it can go elsewhere.
A standard ISA has huge flexibility and no upper limit. As you say you can take money out if you need to and put money back in when able to.

As you get older situations change. For example any money that I pay into my SIPP I can get back in the next two years. With careful planning I'd also pay no tax and get the 20% uplift, as money paid in is tax free while money taken out is at your tax rate at that time (if not working under 67 I could ensure I took less than the personal allowance from any pension). Were I to then decide to start work again pension contributions would be limited by law, but I could put the surplus into an ISA. TBH I doubt that I'd look for work.

Personally I was buying shares while paying mortgage (gone now). Sometimes I paid off mortgage capital, sometimes I bought shares in an ISA. I believe that I would be less good at choosing shares if I hadn't been doing it for 25 years.

Tinkering, well I only know one way to learn patience. Practice.

Good morning and thank you for raising those points. I decided to start investing about 10 years ago whilst still paying off a mortgage for similar reasons that you mentioned in that I didn't want to be a complete novice if I reached the point where I need to start investing. I have dipped in and out of various investment strategies and although I haven't lost money I feel that I could have made more.

The flexibility of ISAs is one reason why I wanted to hold a proportion of my assets outside of the pension, and I don't want all of my eggs in one basket so to speak. The problem as I said is that I tend to lack the discipline to leave the contributions to accumulate and instead I have used profits from share sales to fund large purchases instead of using cash savings. This leads me to conclude that my attitude to risk and my upbringing favours the reduction of debt and a cash buffer over the riskier yet potentially more rewarding gains from equity investments.

At least this as been a learning experience and I may have finally found out more about my investing style.

[OLTB]

Hi Plutus

We're the same age-ish (I'm 47) and FWIW I've recently remortgaged at a fixed rate of 1.99% for seven years. There are no certainties of course, but I'm confident that the returns (yields) overall on my portfolio will exceed this fixed rate so my choice would be to plump more into savings and just let the mortgage take care of itself.

Cheers, OLTB.

[moorfield]

We're the same age-ish (I'm 47) and FWIW I've recently remortgaged at a fixed rate of 1.99% for seven years. There are no certainties of course, but I'm confident that the returns (yields) overall on my portfolio will exceed this fixed rate so my choice would be to plump more into savings and just let the mortgage take care of itself.

Agree with this. I'm fortunate my offset mortgage is tracking base rate +75bp and I'm quite happy to continue paying that for the luxury of having a large and liquid line of credit available for life's unknown unknowns (or expensive new cars).

[MaraMan]

I would also concur that paying off a mortgage is not ALWAYS the best way of saving. Some of us are on very favourable historic interest rates (my case 0.35% above base with 10 years left to run), I am in my mid fifties but that mortgage was one of my best financial decisions, the money I have invested as result far outweighs the mortgage and I fully expect that to continue (a born optimist!). I will probably retire in a year or two but even then barring a significant increase in the base will be in no rush to pay off the mortgage.

MM

[hiriskpaul]

Interest only mortgage approx 150k, 50% LTV, 3% fixed until 2019. Overpaying with lump sums and £300 each month.

After the 5th consecutive year of positive stock market returns, culminating in the World index delivering over 28% in £ terms last year, it is very easy to start thinking that little can go wrong by taking on increasing amounts of risk. Why not gear up? Borrow money to invest in equities at 3%? What could go wrong?

I have an offset tracker mortgage at 1% above BoE base, but at the moment most of it is paid off. Right now I would love to be able to achieve a risk free, tax free return of 3% fixed until 2019. For one thing I would max out my offset account and pay it into the 3% 2019 fix.

That said, a downside I can see to reducing your mortgage is that it may be difficult to access that cash should you want to, unless you have an offset mortgage.

If the stock market crashes within the next couple of years, you might consider yourself (and me?) a genius if you chose to reduce your mortgage instead of piling yet more money into stocks. On the other hand if markets go up another 50% from here, you will no doubt be kicking yourself and wishing you never listened to me.

Only you can decide how much risk you want to take and how to spread those risks, but the market will at some point go into reverse.