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.)