Max amount per ETF (simplicity vs risk)

[stemicolt]

Hi,

First post so hopefully on the right board.

Some context first.

Myself and Mrs Stemicolt are both 56 and looking to retire in two years. She has zero interest in investing so I manage everything.

Over the years I’ve gone from holding dozens on funds, mostly active to eventually realising less than half the decisions I made paid off, resulting in too much tinkering. I’m now 40% global equity, 40% global aggregate bonds and 20% cash. I’m comfortable with this split and fully understand the potential losses. To retire I only really need 3.8 to 4.0% growth per annum so should be more than achievable.

As a couple we have 2 SIPPS and 2 S&S ISA’s all invested identically in ETF’s (2x Global Equity and 2x Global Bond) using 4 companies (Vanguard, iShares, HSBC and State Street). This is split between Hargreaves Lansdown and Interactive Investor.

I plan to drawdown from both SIPP’s once per annum, and move any spare cash into the two ISA’s once per annum. This will allow me to rebalance the 4 ETF’s annually in both SIPP’s and ISA’s. If the value has dipped I will use cash instead. Also minimal dealing fees and platform costs.

I feel this is a very simple and maintainable plan in retirement and one that my wife with family help could manage if something happened to me.

My concern, albeit slight, is that we will have roughly £350k in each of the 4 ETF’s (split between SIPP, ISA and HL and II).

1.) In terms of investment company risk Is this too much?
2.) Would anyone look to split further at a certain amount? Guessing I could go to 3x Global Equity and 3x Bond ETF’s but it does start to get more awkward.
3.) As an example does anyone hold seven figure sums with a single investment company?

Thanks in advance.

[DrFfybes]

If you are going for a Global approach and are happy with the share/bond/cash split, then one Global tracker is much the same as another. Your overall performance is far more affected by your bond/equities/cash split.

In which case pick the one with the lowest cost on your particular platform. I think about 50% of our non residence Wealth is in VEVE Vanguard ETF.

Paul

[stemicolt]

If you are going for a Global approach and are happy with the share/bond/cash split, then one Global tracker is much the same as another. Your overall performance is far more affected by your bond/equities/cash split.

In which case pick the one with the lowest cost on your particular platform. I think about 50% of our non residence Wealth is in VEVE Vanguard ETF.

Paul

Thanks.
Yes I appreciate one global tracker is the same as another. It's more about reducing provider risk should a failure occur. There must be a point where people think about splitting ETF's between different investment providers even if they track the same index?
Maybe it's not a concern when sticking to iShares, Vanguard etc.

[Newroad]

Hi Stemicolt.

I'm in a very similar scenario to you IMO. In short, I've got a lot in VWRL, VWRP and VAGP, i.e. Vanguard. As it happens, they are all held through II (Interactive Investor).

My opinion (only) is that I'd be slightly more concerned about broker risk than ETF provider risk, i.e. about II than Vanguard in my case. Notwithstanding this, as you will see from other discussions on The Lemon Fool, for most people, broker risk is more about temporary loss of access to funds, rather than absolute loss.

All that said, funnily enough, I'm thinking about switching all my ISA (but not SIPP's or the kids JISA's) from Vanguard products to their near equivalents with Blackrock (iShares). This is partly to scratch a small itch along the lines you raise, but also because I have to do something at present - my bond holding used to be 2/3 VAGP and 1/3 HDIV in the ISA, but HDIV is being merged/liquidated (depending on which option you took - I went with the cash).

Hence I'm going to go from the above to 1/2 AGBP, 3/10 GHYG and 1/5 EMHG for my bond holdings on Monday. I am also considering switching VWRL to IWRD in the ISA's to make it all Blackrock (but the others, for the passives at least, will remain all Vanguard).

Regards, Newroad

[stemicolt]

Hi Stemicolt.

I'm in a very similar scenario to you IMO. In short, I've got a lot in VWRL, VWRP and VAGP, i.e. Vanguard. As it happens, they are all held through II (Interactive Investor).

My opinion (only) is that I'd be slightly more concerned about broker risk than ETF provider risk, i.e. about II than Vanguard in my case. Notwithstanding this, as you will see from other discussions on The Lemon Fool, for most people, broker risk is more about temporary loss of access to funds, rather than absolute loss.

All that said, funnily enough, I'm thinking about switching all my ISA (but not SIPP's or the kids JISA's) from Vanguard products to their near equivalents with Blackrock (iShares). This is partly to scratch a small itch along the lines you raise, but also because I have to do something at present - my bond holding used to be 2/3 VAGP and 1/3 HDIV in the ISA, but HDIV is being merged/liquidated (depending on which option you took - I went with the cash).

Hence I'm going to go from the above to 1/2 AGBP, 3/10 GHYG and 1/5 EMHG for my bond holdings on Monday. I am also considering switching VWRL to IWRD in the ISA's to make it all Blackrock (but the others, for the passives at least, will remain all Vanguard).

Regards, Newroad

Thanks
Yes I think 2 brokers is enough. Like you say it's more than likely a temporary loss of access to funds so with another broker + cash that should be okay.
I'm guessing I'm okay with 4 ETF providers and probably little need to increase that. It's kind of the last thing I need to tick of my list I suppose as I approach retirement.

[GeoffF100]

A broker fails every few years, but they have always been brokers that I would not have been comfortable with. AFAIK, no index fund has ever failed. (Some have been wound up, but that is another matter.) All my funds are Vanguard funds. I had two brokers, but have recently added a third, benefiting from transfer cashback.

[tacpot12]

I think you are diversified enough to manage the risk, because the risk is very low - the chances of Blackrock, HSBC, or Vanguard having any problem that would affect your ability to sell the assets is very low. State Street, as a US bank, might be more exposed to a problem with a UK domiciled fund, but again the risk is very low. You have about 20% of your assets invested with a single investment compay.

I have nearly six figures with one investment company (JP Morgan) in global equity fund, representing 20% of my invested assets. I would not want to go much higher than this.

[Lootman]

I think you are diversified enough to manage the risk, because the risk is very low - the chances of Blackrock, HSBC, or Vanguard having any problem that would affect your ability to sell the assets is very low. State Street, as a US bank, might be more exposed to a problem with a UK domiciled fund, but again the risk is very low. You have about 20% of your assets invested with a single investment compay.

I have nearly six figures with one investment company (JP Morgan) in global equity fund, representing 20% of my invested assets. I would not want to go much higher than this.

State Street is mostly known as a custodian and trustee bank and, as such, is not subject to the same kinds of risks as more conventional banks that lend money and risk capital. Its income is mostly fee income.

So personally I do not perceive State Street ETFs as being any more risky than those from Blackrock (also a quoted public company), or from Vanguard or Fidelity (both private companies).

Frankly if any of those entities fail then there will be a lot of other bad things going on for you to worry about.

[GeoffF100]

I have nearly six figures with one investment company (JP Morgan) in global equity fund, representing 20% of my invested assets. I would not want to go much higher than this.

I have seven figures with Vanguard, about 60% of my portfolio. I do not see that as a significant risk.

[Howard]

You are wise to consider the risk of concentrating your portfolio. From personal experience, I am sceptical about any confident predictions about big US Financial Corporations. Can amateur investors pretend to forecast the performance of financial institutions over a retirement period - how do they know? Things could have been worse in the USA in the last financial crisis (a few gifted individuals helped avoid worse consequences) and we live in an amazingly indebted world. Nikki Haley said this week "Donald Trump added 8 trillion dollars to our debt, and our kids are never going to forgive us for this.” (Yes, she’s a politician but this fact-checks as basically true - see link below).

Mrs H and I invested in securities backed by Lehman Brothers in 2008. They didn't perform very well in a crisis! When the investments were made the professional advice was that Lehman Bros were a highly rated safe bank. Standard and Poor’s rated the bank as A up to the week before the collapse (A+ when we invested). Moody’s only de-rated the bank the day before it collapsed! The administrators eventually recovered around half of our initial investment over many years.

Luckily we had a well-diversified portfolio and I felt that it was a useful but expensive learning experience. My conclusions were to be wary of those who confidently forecast the future of major institutions and to be thankful that the overall damage to the portfolio from the financial crisis was not too great.

The US market and ETFs have been fantastic investments for us over the last 10 years or so but sensible diversification has always seemed a good strategy.

Good luck in your decisions!

Howard

CNN fact check: https://edition.cnn.com/politics/live-n ... a151dcf8e0

[Adamski]

Hi - if Vanguard or Blackrock go bust, we're at nuclear war with Russia so have bigger things to worry about

With cpi inflation at 4.6%, and target growth of 3.8-4% this is a reduction in real terms. Personally I'd up the % in stocks. Or if concerned about imminent correction (as I am), then higher cash (whilst you can lock in 1 year fixed rates of 5%).

[stemicolt]

Hi - if Vanguard or Blackrock go bust, we're at nuclear war with Russia so have bigger things to worry about

With cpi inflation at 4.6%, and target growth of 3.8-4% this is a reduction in real terms. Personally I'd up the % in stocks. Or if concerned about imminent correction (as I am), then higher cash (whilst you can lock in 1 year fixed rates of 5%).

I've actually measured my own personal inflation rate over the last 8 years.
2022 was 0.8%
2023 was 10.5%
2024 I think will be nearer zero. Energy and petrol drops from where it was in the first half of 2023 will offset any increases elsewhere (in my household at any rate). Of course a war or something unknown could change this.

I actually think 40% stocks, 40% bonds and 20% cash may deliver just over 5% over the next 10 years.
For info, my spreadsheet has 2.5% for inflation, 3.8% for investments and 2.75% for cash.

Back on topic the 'majority' of replies seem to think that having around £350k per investment house is safe (but not 100%) so will probably continue as planned.

[mrodent]

Mrs H and I invested in securities backed by Lehman Brothers in 2008.

Ow.

But can I ask what you mean by "securities backed by"? And how that then led to a financial loss?

A lot of people here obviously swear by index funds these days where your money is divided into many different pots. I'm sure that the next time a major institution goes belly-up that this will be stressful for those who happen to hold their funds with it, and it will take months to get the holdings reconstituted. But, and perhaps I'm being naive, as long as you're with a regulated biggy in the UK (or the US) I can't imagine that there's any way of losing the investments (unless an individual stock itself implodes, of course, or several of them).

[Howard]

Mrs H and I invested in securities backed by Lehman Brothers in 2008.

Ow.

But can I ask what you mean by "securities backed by"? And how that then led to a financial loss?

A lot of people here obviously swear by index funds these days where your money is divided into many different pots. I'm sure that the next time a major institution goes belly-up that this will be stressful for those who happen to hold their funds with it, and it will take months to get the holdings reconstituted. But, and perhaps I'm being naive, as long as you're with a regulated biggy in the UK (or the US) I can't imagine that there's any way of losing the investments (unless an individual stock itself implodes, of course, or several of them).

You are twisting the knife with your questions . But hopefully the answers are relevant to the initial question by the OP.

The Financial Firm who sold us the investment was “authorised and regulated by the Financial Services Authority”. The investments were described as a fixed income plan which paid 8.25% interest (slightly riskier in my view, than, say, Yorkshire Building Society who were paying 6.05% on its cash ISA) and would return the capital in full given that the FTSE 100 and the Dow 50 didn’t fall by more than 50% during the five year term and weren’t lower than their starting level at the beginning of the investment.

Securities were purchased with a fixed maturity date. The key information document stated: “The issuer of the Securities’ capacity to meet its financial commitments is considered strong. This is supported by an independent assessment from a leading credit rating agency, Standard and Poor’s which gives the issuer a rating of A+ as at 3 June 2008.” The issuer was Lehman Brothers.

In fact the FTSE and the Dow 50 didn’t fall by 50% and were well over the starting levels at the end of the term so if the bank hadn’t failed we would have had our capital returned with five years of interest in addition.

Given the regulated nature of the investment, in theory we could have claimed back the full amount from the Financial Services Compensation Scheme (ie from the UK taxpayer). However, to do this I would have had to claim that Mrs H and I were unsophisticated investors which, given the size of our overall investment portfolio, in all conscience I couldn’t do. Relevant to the OPs question, I guess anyone on this thread with a six figure portfolio or more invested in something like ETFs, ITs, bonds or equities would be similarly challenged if they lost money through a financial institution failing to meet its obligations in similar circumstances.

Grant Thornton handled the liquidation administration of Lehman Brothers in the UK and started making payments in 2013. The first and largest payment was around 20% of the principal. And of course, no interest was paid. Over the years since then we have received smaller amounts in dribs and drabs. The most recent and probably last payment (0.3% of the principal) was in early 2022.

So 2008 was a scary time for major financial companies, many large US financial institutions came close to failing and had to be bailed out and a lot of people lost a lot of money. Worth looking at the list on Wikipedia. As I wrote above, the experience was a costly but instructive one. We were lucky that overall our portfolio recovered fairly quickly.

Blackrock and others like it are termed Shadow Banks and we have investments handled by them. However, given our experience of the sudden, totally unexpected major collapse of financial companies in 2008, in my view it’s not possible to accurately forecast their future over a retirement of, say 30 years, so diversification looks a wise strategy.

regards

Howard

[GeoffF100]

The investment that you bought was clearly not slightly more risky than YBS. You appear to have been misadvised, and should have claimed for compensation for bad advice. Registering as a sophisticated investor (if you did that) does not bar you from making FSCS claims. If you were registered as professional trader (which is not easy, even if that is your day job), you could not make FSCS claims. The FSCS is not funded by the UK tax payer. It is funded by levies on the financial services industry.

BlackRock is not a bank. It is a fund manager. BlackRock does provide other services, but not banking. Banks can do whatever they like with the money that you lend them. Fund managers have to ring fence your investments, and cannot use them for their own purposes.

[mrodent]

You are twisting the knife with your questions . But hopefully the answers are relevant to the initial question by the OP.

Apologies! I think an awful experience like this qualifies as relevant to the OP's question...

My father had something, probably not too much, invested in Equitable Life when it went belly-up.

So only those who could claim they were "unsophisticated" got full compensation? Nice. Not sure I want to waste too much time trying to understand the rationale of that!

I just hope someone's checking that when a platform says it's bought £10k of stock X for me it hasn't just spent the cash on cocaine and fast cars and hacked the IT systems to pull the wool over the eyes of the FCA ("Fundamentally Complicit Authority" as Private Eye calls it), or whoever has that role.

diversification looks a wise strategy.

Concur.

[EthicsGradient]

I too would have thought that Howard would have had a right to an FSCS claim - he and Mrs H may own many investments, but that indicates that they should have understood the "drop of 50%/back to original index level" terms, not that they were capable of outthinking the S&P rating and marking Lehman Bros as "quite likely to default on their assets, taking down the investments made with them" (after all, the whole financial world didn't see that coming).

But a security cobbled together by an investment bank is a different creature from an index tracker (if it's one that actually holds the constituents rather than synthetic, anyway). The spread between 4 different managers seems plenty, to me.

[Howard]

The investment that you bought was clearly not slightly more risky than YBS. You appear to have been misadvised, and should have claimed for compensation for bad advice. Registering as a sophisticated investor (if you did that) does not bar you from making FSCS claims. If you were registered as professional trader (which is not easy, even if that is your day job), you could not make FSCS claims. The FSCS is not funded by the UK tax payer. It is funded by levies on the financial services industry.

BlackRock is not a bank. It is a fund manager. BlackRock does provide other services, but not banking. Banks can do whatever they like with the money that you lend them. Fund managers have to ring fence your investments, and cannot use them for their own purposes.

I didn't register as a sophisticated investor (was that an option in 2008?) but I was competent to understand the risk of the investment being made (*see below).

To be fair, I don't think you understand the situation that occurs in something like the 2008 crash. The FCS was overwhelmed by claims following the crash. Yes, it might have been possible to pursue the claim as the amount was a significant five figure sum. The financial services firm who advised me went into liquidation as well as Lehman Brothers. I could have spent years feeling really aggrieved and pursuing a bureaucratic process which might have achieved a little more recompense but it would have felt like being in a Dickensian novel. Given the amounts lost by less sophisticated investors, would I have felt happier?

I took it on the chin and moved on, happy to get something from the administrators.

The time which I could have spent doggedly pursuing recompense was spent adjusting our portfolio and ironically increasing our exposure to US stocks as I guessed they might recover, which they have done handsomely.

If you look BlackRock up on Wikipedia you will see it is described as the biggest shadow bank in the world. Like the big shadow banks in China they are totally secure until they aren't.

regards

Howard

*Disclosure, I was retired but my career included a senior position in an international financial services business which still is rated AA by Standard and Poor's. So I would be embarrassed to claim to be an unsophisticated investor.

Anecdote: This thread has reminded me I was lucky enough to attend a meeting in the USA early in 2000 just like the film "Margin Call". Some of the direct reports to the Group Chief Executive of the multinational company were present. A worried board member brought up the purchase of a derivative by a North American subsidiary and it was realised that no one in the meeting could understand the exposure it carried but it gradually dawned on the top executives that it could be massive. Luckily the decision was made to immediately sell the position the next day. No further exposure to such risky derivatives was authorised and the company sailed through the 2008 crash unscathed - unlike a major competitor. If you have seen the film, we didn't need the Chief Exec to helicopter in - we drank the expensive wine ourselves .

regards

Howard

[GeoffF100]

I am not an expert in financial regulation, but financial advice has been regulated since December 2001, at which time the FSCS was also set up. I think that gives an indication of the relevant time scales here.

Your claim would be against the firm that sold you the investment, and they should either self insure (if that was allowed) or have liability insurance. The FSCS would only come into play if they were unable to meet their obligations. The FSCS is funded by a levy which ultimately comes from investors' pockets. Either way, you were effectively paying for insurance when you bought the product. The process of claiming compensation should not have been that bureaucratic (but it may or may not have been successful). You were told that the product was very low risk and it was not. That looks like misselling to me.

The Wikipedia entry for BlackRock says "Representatives Katie Porter and Jesús "Chuy" García proposed a U.S. House bill aiming to restrain BlackRock and other so-called shadow banks.[81]" I have to say that I am underwhelmed by that. BlackRock does not appear to have a banking licence, so I do not believe that it can reasonably be called a bank, shadow or otherwise. The Republicans have a great dislike of the collective voting and marketing power of the big index fund managers.

[gpadsa]

benefiting from transfer cashback.

DAK what is the taxation treatment of transfer cashback? E.g., current HL offer for transferring an account. https://www.hl.co.uk/features/cashback. I couldn't find anything on HL or HMRC websites

gpadsa