Starting to invest in your Asset Allocation

Relatively recently I started ploughing money into a stocks and shares ISA, with the idea of getting some kind of asset holding outside my pension.  That way I can get my grubby wee paws on it before the Guv’norment lets me near my pension.

The idea being I can use this to bridge the gap between Financial Independence and when my pension becomes available.

So I set to work researching asset allocations, largely through the power of the internet and the superb book by Tim Hale.  While my sporadic research has been on-going my ISA contributions have been going solely into Vanguards 100% Equity Life Strategy fund and my pension contributions are largely in a Global Diversified managed fund.

My Asset Allocation
It will eventually be something like this;

80% in ‘equity’ allocated as follows;

  • Global Developed – 36%
  • Global Developed – Small Cap – 12%
  • Global Developed – Value – 12%
  • Emerging Market – 8%
  • Emerging Market Small Cap – 2%
  • Emerging Market – Value – 2%
  • Global Commercial Property – 8%

20% in cash and bonds as follows;

  • Inflation linked bonds (5 year max) – 8%
  • High Quality Corporate bonds – 8%
  • Cash – 4%

Current split between equity and cash/bonds
It is spookily on target (when looking ignoring my house equity).  Which is a little weird as it feels like my cash position is far too high when I look at the actual amounts, like some ballast pulling down the expected return.  So does that mean that I am infected with greed or I should lower my allocation to cash/bonds?  Who knows.

At what point does the above allocation become cost effective?
And finally onto the crux of what I have been turning over in my brain (mmmm brains).  It doesn’t make much sense for me to just blindly buy in line with my allocation each month, as it would be expensive and bull headed approach.

For example if we were looking at the equity allocations in my ISA only and assuming I bought into some fund each month for each part of the allocation, at a fee of £1.50 and a monthly contribution of £1,000;

The only one that jumps out as having reasonable dealing fees is the Global Developed for 0.3%, the rest are far too expensive.  As we all know, sweating the odd basis point here or there, really does add up in the long term.  I would ideally like the dealing costs to be below 0.5%, which would need contributions of £300 a month.

It strikes me that asset allocations, to this level of granularity, are for the more mature investor.  Either with a large single amount to invest or more to sling into the abyss each month.  With a pretty puny pot at the moment it looks like the best approach is to stick to one fund for now, which is currently the LS 100%, and this keeps dealing fees nice and low each month.  Keep it simple, right?  But the tendency to want to tweak and play with things is already starting.

I suppose I could look to alternate between the smaller allocations each month to keep fees at an acceptable level and then re-balance towards my allocation annually.  But without a mechanical strategy I will probably fall prey to laziness or trying to time the market.

Or purchase quarterly rather than monthly so benefit from a larger sum, but then I would lose out on the far cheaper regular investing fees of £1.50.  Trades would cost £4.95 or £9.95 depending on what the purchase is.  Call me a wizard, but 3 x £1.50 is still cheaper than £4.95.

I could delay purchases until it becomes as cheap, or cheaper, than the regular investing fees.  But then I am building up a hefty cash position over a few months and chucking it all into the market at once.

It would be interesting to how other people deal with this issue.  Any ideas?  Or I am worrying too much about the pennies?  It’s amazing how even the simple passive investing approach can blow your mind every now and then.

(On reflection the Vanguard FTSE All-World UCITS ETF might have been better as it is much more diversified that the LS 100% Equity offering, although it is not available as a regular investment option at A J Bell.)

Mr Z

22 thoughts on “Starting to invest in your Asset Allocation

  1. Retirement Investing Today

    Hi Mr Z

    I'm not sure of your age but I'd be interested to know why you've settled on an 80% allocation to equities? DYOR and all that but as a comparator I'm 42 and am currently nominally targeting 67% to "equities" which includes all my equities, gold and half of my commercial property. However with my mechanical valuation metric that target allocation is currently down to 60%. Have you heard of the Age in Bonds rule of thumb?

    I'm asking the question as like me you have a very high savings rate which means that you're intending to reach FI quickly which means that in my experience your biggest contributor to FI wealth building is going to be savings rather than compound interest. This scenario then makes me conscious of the Warren Buffet quote – "The first rule is not to lose. The second rule is not to forget the first rule."

    Also wondering if you're making your allocations to detailed at this early stage which is then going to hurt you cost wise – both purchase costs but also ongoing costs? As an example you're targeting 3 products for your EM's allocation with your small and value products likely to carry non-trivial annual expenses I would guess. I'm currently at 85% of the wealth for FI and I'm still only carrying simple EM trackers. Once I've transferred my employer pension that EM tracker will be nothing more than the Vanguard EM ETF with its OCF of 0.25%.

    Good luck with it.

    Cheers
    RIT

    Reply
  2. ermine

    Maybe accumulate in VGLS100 and rebalance into the All-World ETF once a year? I'm sort of assuming that you don't pay fees on funds other than the bid-offer spread. But on the platform I use (TD Direct) ETFs and shares are cheaper (£0) to hold annually than funds though they cost to buy and sell unlike funds.

    The individual funds look like over-complicating things

    Reply
  3. Mr Zombie

    Hello.

    To be honest, it is something I have been struggling with a bit recently!

    I'm 33, so the rule of thumb would put me on a similar allocation to you. Although I had read of an updated rule of thumb being 115 minus your age, which would leave me at 82% in stocks and 18% in bonds/cash.

    But the point you raise about the high savings rate is true – perhaps I am over exposing myself to equities as the main pillar of wealth building will be my savings rate.

    Yeah I am being too detailed on my allocations and the expense of it all alone is off putting. A world tracker (for large and mid caps), an emerging tracker and a small-cap is likely the more efficient route at this stage.

    Where I do struggle is having two distinct pots – my pension and my ISA (+cash). Let's say I can't access my pension for another 27 years unless I take a huge tax hit, then I am happy to leave it in 100% equities as it is for at least another 5 years. But my ISA could be used far sooner (I say could as who knows what will happen) and so I would like a much more risk averse weighting. As it stand, this is split 33% equity and 67% cash.

    Everywhere I have read about asset allocations always considers the portfolio as one, but it's tough not to view it as two separate portfolios and go from there.

    And on that it would feel better having a 70/30 or 60/40 split for the assets outside the pension.

    I'm going through the process at the moment of having a proper look at the various allocations, charges etc of the world and emerging trackers to choose an appropriate one for me.

    It's a marathon, right? 🙂

    Reply
  4. Retirement Investing Today

    If it helps I treat my pension and non-pension wealth as one portfolio. I also try and keep the "bond" to "equity" allocations roughly equal (a little more "bonds" outside the pension as I try and save for a home) within each but the detailed holdings at a level lower than "bonds"/"equities" can then vary widely as I try and minimise expenses. For example my work pension has high expenses but the expenses are pretty equal no matter what tracker type I hold. Therefore I can minimise expenses by for example holding EM's/Japan in the pension but then holding VUSA/VEUR outside.

    Reply
  5. Mr Zombie

    There is a 0.2% fee for holding funds on AJ Bell, but nothing for shares and ETFs. I was kind of using VGLS100 as a placeholder while I was figuring things out.

    The more I think about it, and having written it all down above, it certainly does feel that way. I have been mulling it over a bit and I think it was greed, trying to bring in some extra premium that I was worrying I would be missing out with just a world tracker.

    Thanks for the comment.

    Reply
  6. Retirement Investing Today

    I think you've hit the nail on the head there. Investing is simple. The financial industry want it to be complicated as that's how they make their fees from the punters. So if it seems simple you're probably on the right track.

    Reply
  7. weenie

    Hi Mr Z
    After reading the Tim Hale book, I too came up with my own 'asset allocation' but instead of ETFs, I've gone for tracker funds as they are free to buy/sell with HL. The one ETF I have (VHYL) is with AJ Bell, who allowed £1.50 trading before HL introduced their own regular payment plan at the same price but it suits me to have two accounts, I can start spreading my investments.

    I treat all my investments, pension/ISA/other as 'one portfolio' just to keep it simple.

    My current equity / bond & cash ratio is around 75/25, which I'm happy with, although I could go for 80/20 for the next couple of years. Risky I guess as according to the rule of thumb, I should have at least 45% (my age) in bonds/cash but I'm following a fairly aggressive investing strategy right now.

    As mentioned by M above, my largest single holding is actually with VLS80. At some point, when I'm done with tinkering about with Emerging Markets, Global properties etc, I'll simplify further by switching all those into the VLS80, or maybe VLS60.

    Reply
  8. Mr Zombie

    Hi,

    Thanks for the comment and a superb suggestion. I keep going round in circles, but that is the simplest and probably cheapest approach. My 'problem' with just the LS is the high home bias. Again, probably over analysing!

    Mr Z

    Reply
  9. Mr Zombie

    Hi Weenie,

    I would like to treat it as one portfolio, but given the potential difference in times to access of them I struggle with it!

    It's a balance between simplicity and wanting to have a bit of control of your allocations. Want to get settled early on, to avoid excessive costs later on or trading costs as I change my ideas (yet again! 🙂 )

    Thanks for you thoughts

    Mr Z

    Reply
  10. Martin @ Getting Fired

    KISS

    VLS80 is definitely the best option in this instance. Home bias is there, but you can then buy a different fund to mitigate this. Keep the dealing costs and %s as low as possible. Leave more for the gains and compounding.

    I've been going over the same scenario myself and you think to yourself. I must be missing something. You're not! Good work

    Reply
  11. Mr Zombie

    Hi Martin,

    Thanks for the comment.

    Yep – that seems pretty spot on. Worrying that I am missing something and so starting to over complicate things.

    Reply
  12. Theres Value

    In my SIPP, I went for the LS80 and then just added a few 'extras' to compensate. It still means that the vast majority of the pension is in the LS, but I get to fiddle about with the other stuff. You can't give up tinkering if you're anything like me 😉

    Cheers

    Reply
  13. Living Cheap In London

    I'm a bit older than you Mr Z, but like 'There's Value' also just hitting Vanguard Life Strategy 80 for my monthly ISA pot. My pension is a similar tracker fund with Aviva with v low annual charges. Currently I invest 55% into my pension and the rest goes in the ISA. Retirement will also have a generous top up from Mrs LCIL's defined workplace scheme, plus oddments of cash and Stock/Share ISA's that I am rolling over for liquidity at the moment: these are from my earlier years of saving before I got confident to go it alone with LS80.

    I'm not sweating the small stuff beyond that: life is too short! That bike doesn't ride itself, and beer needs brewing, bread needs baking etc. Surely as a Zombie your investing should be catatonic in approach too 😉

    Reply
  14. Charlie

    Am confused by the statement that VWRL "is not available as a regular investment option at A J Bell" because I have bought it that way in my ISA there during 2014. Are the different rules for SIPPs or has the regular investment status changed recently?

    Reply
  15. Mr Zombie

    Hi Charlie,

    It's still on the list of available investments but when I tried to buy into the option it showed up as not available. I'm not sure if things have changed and the information is out of data or it's something specific to my account. Hopefully will get something back from them soon.

    I do find the purchasing system a bit clunky. Does it show up as an option for yourself currently?

    Mr Z

    Reply
  16. Charlie

    Yeah that is needlessly tricky. The key for me was not to click the 'Search' button. If you enter the ticker as VWRL followed by an amount and frequency and press 'Add' the the instruction is set up and will confirm the full fund name.

    Hope that works for you. Thanks for blogging.

    Reply
  17. Tony @ Inequality Today

    I'm not a big fan of asset allocation. I prefer to just stick to what I know. For example, I know U.S. stocks, which is why I stick to investing in U.S. companies and avoid overseas assets. I only have an investment advantage in what I know.

    Reply
  18. Mr Zombie

    Hi Tony,

    I'm going down the approach of utter diversification across global markets. I'm sure that will include some stinkers and companies I don't understand. But as a starting point it will be cheap and low maintenance.

    Eventually I will have some part of my portfolio that is active as I won't be able to resist tinkering.

    On the US stocks – is it not over valued at the minute by historical standards? Would put me off buying, but also nothing to stop it marching upwards…?

    Mr Z

    Reply

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