Living in Uk & circa 6 or 7 years from hopefully early retirement.(Fingers crossed).
Due to drops in savings rates , The wife & I are Looking at transferring our cash ISAs from past 5 years into S&S ISA (all world ETFs)…Currently we have no stocks and shares ISAs.
If someone is looking to take an income off these in later life are you better off with going with the dividend version ETFs from now or stick with accumulating for the 6 or 7 years due to the compound interest benefits?
Not sure if moving to an income ETF or similar in 6 years would be counter intuitive with all associated fees.
Also considering Invesco for one of us and Vanguard for the other ?
Any thoughts or views from others would be appreciated.
Personally, I’d probably opt for the dividend option. Financially it doesn’t make a huge amount of difference, but it sounds like this all might be relatively new to you, and the benefit of this is that it will allow you to see the dividend payments more clearly and understand what the “income” look like while the value of the pot changes. Then, as you become more confident you might compare and contrast higher and lower dividend options to see how things might work away from the single global ETF option. Also, you can set up your account to just automatically reinvest the dividends as they come in so it’ll quickly return into the pot, should you wish.
But - to be clear - it’s more personal preference than a right/wrong thing.
The choice of fund isn’t likely to make a huge difference here. The fee for the Invesco fund is slightly cheaper and it seems to have a slightly bigger allocation towards emerging markets, but the performance has been almost identical:
hi thackers, invesco and/or vanguard are both a good choice but imo vanguard are not the cheapest and the dividend plan is a great idea.
an all world etf sounds a great plan but remember there are different types of all world, imo you could invest into several of them, acwi, ftse, solactive etc.
just etf and invest engines ‘investments’ tab is a perfect place to learn and choose.
If you might need some of the money in 7 years time, 100% equities could be a bit risky. I use a combination of a world tracker, global bond index and short term gilts. This combo has beaten the likes of vanguard lifestrategy and HSBC global funds over 1, 3 and 5 yrs. IE makes it easy to invest in your chosen proportions and rebalance too.
This combination would have beaten vanguard lifestrategy 60 and HSBC global balanced over the past 5 years.
Bonds have had a rocky few years, but usually mitigate the volatility of equities. I added IGLT to reduce the overall duration of my bond allocation (shorter duration = lower returns, but less interest rate sensitivity) and increase the proportion of govt bonds - generally higher quality and move differently to equities.
There are lots more knowledgeable people than me, but I like to keep things simple.
Have you come across Pensioncraft? If not, and you feel like you could do with a little hel understanding portfolio allocation and age (or risk generally) you might find some of his videos on asset allocation useful. Here’s a recent one: https://www.youtube.com/watch?v=74xWcwY8KMM&t=461s
@Newbie is entirely right that it might be something to think about when deciding whether a 100% allocation to equity is right across the entirety of the money you’re thinking of putting into the market. The same would be true about, for instance, lump sum or pound-cost averaging your money into the market. But these things depend on a range of factors that are personal and difficult to unpack, including your own emotional response to volatility as you lead into retirement.
I agree @sjdimelow , Pension craft is really helpful. I find the Monevator articles really good. They have an excellent article about judging your attitude to risk to decide asset allocation. I’ll post it below if I can find the link.
Great video and ive subscribed to the pension craft channel.
Definitely alot of food for thought.
The only thing that has me slightly confused is with the Lifestrategy portfolio is the chunk that goes in bonds. Haven’t fixed savings rate performed better and possibly a better option for that percentage of your investment spit…I.e instead of life strategy 60 invest 60% of savings in a global growth ETF and put the other 40% in 4-5% savings account ?
The global index tracker and cash savings mix would have performed better in recent years due to the higher interest rates for savings. Indications are that this is unlikely to be the case going forward as interest rates go down. Some people are more comfortable using cash as their diversifier though. You could look at CSH2 which follows roughly interest rates if you wanted to keep everything on an investment platform.
Yes, VAGS has gone down over 5 years, but that’s not necessarily what will continue to happen. It’s hard not to look at past returns and assume that’s how things will continue. Reading the great resources out there to learn about investing and then sticking with your level of risk tolerance would be my advice.
Fixed rate cash accounts can perform better sometimes, though with bond funds it is possible to (a) tap into the price variation as well as the coupon/interest payment (so eg if the price of the fund rises you benefit alongside the coupon payment); and (b) get access to higher yielding instruments like emerging market debt and corporate debt (if you look through the IE options you’ll see the yields go as high as at least 8%+). There’s perhaps also possibly a little bit of additional flexibility if using eg short-term government bond ETF, since with a fixed term bond the money is committed and locked up and with the ETF you can buy and sell more freely (that said, as interest rates change this is reflected more quickly in the short-term fund).
Worth also adding that part of the benefit of the bond is that it softens the volatility of the portfolio. In other words, it’s performance is not necessarily entirely relevant if what it does is ensure you feel comfortable maintaining your investment plan in trickier market conditions. It can also give you a little buffer should something happen and you want to be able to deploy some additional money quickly.
It’s perfectly possible to mix and match, though. So, across an investment portfolio you could have eg a 5 year bond that will gives you some security and then allocate a proportion into a SIPP that is primarily or entirely invested in equity. How you do this would likely depend on whether the money is all within a pension account already, or some is sitting outside.
As a final point; while there are lots of options available, it’s perfectly possible to look for a simple solution that strikes the right balance without worrying about the more granular details or about the more optimal performance over the timeframe you think you’ll be invested.
Best is a subjective thing depending on the investor, but an idea might be to think about what you want to get from the bond element of the portfolio once you’ve had a think about the allocation you want to go for and if that will come solely from the IE account or whether you’ll include non-IE account as part of your thinking (so eg a fixed ISA/bond with a bank).
The simplest option would be to go for a global aggregate type solution as suggested above, but variations would include splitting the allocation so that a chunk was in a “main” fund and then some were targetting specific types of bonds, whether short or long term or higher yielding.
If you wanted to get a feel for things while you get used to the way the market moves and learn a little more about how you feel about this then an option might be to go with a short-term fund like ERNS or QUID or JGST (search these tickers). Short duration makes them less volatile and so its a cash-like equivalent which will pay interest monthly or semi-annually, and then once you decide what to do they’re easy to allocate away from if you no longer need them. There are also accumulating versions if you prefer to set and forget (so the interest payments just absorb into the fund and gets reflected in the value).
The IE’s platform’s autoinvest and pie features are useful as you work out your allocation, and as the payments come in they will automatically get reinvested (perhaps once a certain threshold has been met).
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