Low-cost funds ideas for SIPP and S&S ISA

[Mellmedusa]

Im relatively new to investing. I recently opend a SIPP with ii consolidation 4 pension pots to one and 'betting' all my money on the HSBC FTSE ALL-WORLD (Acc) (i know...😥). That's about £101K now, down from c. £106K when i completed the transfer. I am looking to continue investing for the next 13 yrs and all the research is pointing me to this direction - go for only low cost index fund with global diversification and high % of equity (in my case due to the long-term ride). Research also tell me not to worry when it deeps and keep investing consistently (DCA?).. so I continue to make regular contributions to my SIPP of £1K a month.

At about the same time I opened an ISA with T212. Put some of money in cash and 75% on the S&P 500 (i know 2...😭😭) What was £15K few weeks ago turn in to a big fat minus number, so I've decided not to look at the App for the next few months.

While I am not really panicking, I thing having only one fund in my SIPP and one in the S&S ISA (which are not dissimilar in nature) is a bit thin and not strategic, and that there must be a better portfolio options to consider. I started with these funds knowing that I will now take my time to research and understand better what options I can go for, but so far this has proved quite challenging. I can't quite get a clear answer as to what would be a complimentary investment to add to my current SIPP and S&S ISA funds. The other school of thought saying one fund is all you need! Never mind being boring, it doesn't feel right for me and not what I see most people are going for.

I was also considering working with IFA and met with a few in the last few days. The fees are crazy (1.5% plus initial higher fee) and undermines the whole concept of SIPP, which I liked the idea of. IFAs wants to move the pension to their platforms and there will be penalties for exit in the short terms of few years, so Im not sure I happy with this.

Considering I am not interested in individual stocks, can you advise on what else to invest in for an odd 13 yrs? Would be grateful if people could share their portfolio ideas and explain their strategy, if your have a similar timeframe as me🙏🙏

Avoid IFAs with exit fees of 'a few years' (St James Place?). The only times I've accepted a lock in period it's been 12 months, and in exchange for a joining bonus.

As for funds, when talking about this type of index tracker it doesn't really matter how many funds you have but how broad the holdings within the fund are. One global all cap tracker is more diverse than 10 US large cap tech trackers.

Having the all world fund, adding any other equity tracker is likely to lead to some duplication. For max. diversity you'd need a different type of investment entirely. Traditionally the first step would be adding some bonds, which are likely to reduce volatility.

@NoBinturongsHereMate you are bang on - yes, St James Place. Lock you for 6 yrs or you lose 6%....
So other than bonds are you saying I should just stick with one global tracker fund?
I looked at bonds funds but can't get my head around it and no idea how to pick!

Do t touch sjp.

is there a reason you wouldn’t open a vanguard account this tax year and aj bell after April??

I’m making great returns on both even with everything thats going on

There are reasons to have more than 1 tracker - if you want more weighting towards a particular sector or region. But not just for the sake of having multiples. A global all cap tracker is invested in the whole stockmarket worldwide, so it's really not 'thin'.

Bond funds and individual bonds have different benefits. The former do have some volatility, but are simpler. The latter have a certainty of return (if held to maturity) and some tax advantages - but do require a bit of maths and getting your head round the jargon, so maybe don't jump in just yet.

Avoid SJP
We have both a S&S ISA and a SIPP with Hargreaves Lansdown

is there a reason you wouldn’t open a vanguard account this tax year and aj bell after April??

Is there a reason why you would? Multiple platforms mean multiple fees, without particular benefit. And there's no tax year limitation on opening accounts.

Definitely stay away from SJP

Look at the vanguard global all cap (acc) rather than SP500 it's far more diversified. SP500 is America only which is usually a good call but there's so much volatility there rn as you've discovered . It will recover though so don't panic, you are doing the right thing not to check too much

Bonds- you can invest in a bond fund rather than buying individual specific bonds, they usually reduce volatility (unless Liz truss is in charge)

Oh yes there changed it this year didn’t they…
I use both as they offer different products so I get more of the market but no reason why you couldn’t use one.

@Mellmedusa I have done almost the same as you. Three pensions into 1 at ii just before the downturn plus some extra contributions before the end of the tax year and an intention to drip feed more over the next 2 years. However I have invested in more than 1 fund. I am not making any recommendations and my portfolio is new so not yet tested but these are the types of funds and the logic.

• A very volatile US fund which I thought was worth a punt as it had grown a lot over the last few years - more than others. As soon as the markets turned it went down very quickly and I ditched it after it lost 7% in one day - it continued to go down so I'm pleased I did and learnt a lot from this.
• An active global fund and an active UK fund. These are doing well (comparatively) although they do have higher fees. My logic here is that active funds might do better in a downturn as they are more able to react rather than a passive index fund which has to track a market.
• A Gold and precious metals fund - apparently do well in a downturn so this is a bit of a hedge, so far its been volatile but is up since I bought it
• A Japan equity index fund - when I checked the stats this looked undervalued although its done nothing yet this is one for the long term
• A passive global fund and a passive UK fund. To get some exposure to US but not too much and to see if they do better or worse than the active funds
• An Asian fund for a bit more diversification
• I have put the latest transfer in into money market funds with the intention of putting it into the US as and when I have the confidence that there is not going be a sustained drop. I know you are supposed to try to time the market but I would rather lose out on a small amount of growth by buying on the way up than continuing to loose by going back into US too soon.

I chose the funds by looking at Morningstar website which gives some good and analysis. They have a funds chooser which you can use to identify funds which they rate as Gold/Silver or Bronze. They are not all cheap funds but a mix which I am hoping will pay off in the long term.

Another good website is Trustnet - you can put your chosen funds into a virtual "portfolio" before you buy them and they look to see whether or not you are overexposed anywhere.

Firstly, don’t rush to invest

There is nothing wrong with holding 100% cash until you have a plan in place.

It is not at all unlikely for the funds you hold to continue to fall in value over the next year. Right now, a guy called Warren Buffet, who many think is the worlds smartest investor, has perhaps half his investments in cash or equivalent

Anyhow, to answer your question, I’d recommend reading Tim Hale’s book Smarter Investing. In this he explains something called asset allocation and how to build up a portfolio of funds covering different types of assets (e.g. equity - which you have, plus bonds, commodity, real estate, infrastructure etc … ). It’s nothing you can’t find elsewhere but it is a good start and he is easy to read.

If that sounds like too much effort then I would also suggest taking out a trial subscription to Investors Chronicle and searching for previous articles by Chris Dillow - I recall he was keen on holding a single all world equity fund plus cash, which sounds like something that appeals to you.

Also google Ray Dalio all weather portfolio.

I agree with PP don’t touch SJ Place with a barge pole !

You've really gone all in haven't you!

To be honest, most of us are not experts but from my knowledge there is good advice above.

I think your assumptions are reasonable but it's a tricky time to invest a large amount - like you say you haven't taken advantage of dollar cost averaging which does help smooth out the highs and lows.

I haven't invested as much as you, but i have had my S&S isa for about a decade now and it's seen a lot of turbulence. However because it's been a long term investment the current issues in the US are not causing me any problems really.

I think you'll be OK as long as you can hold your nerve. You've done the best your can with the knowledge you have. Try to avoid checking it is the best advice I can give. Don't overthink and don't panic if it drops.

I don’t think the platform is the issue. Interactive Investor have the same funds as the two you mentioned but at a lower cost to me (ii is particularly low over £100K).

I am asking about specific products / funds rather than which platform to buy them from.

A £5k drop on £106k is not a big fall at all. That fund is 100% equities, and in a market crash could drop your holdings by as much as 50% or more. Remember, it's not a loss until you crystalise it by cashing in.

My long term strategy is to invest regularly in a low cost global index fund like the one you have, ignore the noise (i.e. ups and downs) and keep invested.
The long term trend is of the global economy over the past 100+ years does tend upwards.

Your all world tracker is a perfectly good choice. It’s down a little due to timings but please don’t react hastily to that- that’s how you lose money. You have a long time line so just stop looking at it. One fund is absolutely fine when it’s a global tracker. pull back and look at what your fund has done over the last 5 years- that’s the kind of timeline to think about. Also think about drip feeding in future for pound cost averaging.

The additional S&P fund makes you very heavy in the US so that’s something to consider.

I really feel a little learning is a dangerous thing when it comes to investing. You either have to really know your stuff (to professional level), in which case you can build your own portfolio based on what you think markets are going to do- or accept that you don’t know much and go for funds which do it all for you- a global tracker for example or something like the Vanguard life strategy equity funds (do have a look at the global weighting of these though if you’re keen to stay v invested in US).

You don’t need an IFA.

I know you are supposed to try to time the market

This is exactly what you’re not supposed to do as an amateur investor!

Remember, it's not a loss until you crystalise it by cashing in.

This is worth writing out in very large letters and sticking above your screen.

That’s what I meant to say but the ‘not’ got lost somehow.

@Aikkothanks! That’s an encouraging note.
which fund did you invest in if you don’t mind sharing? And is this your only fund? How long are you planning to stay in for?

I have some in Vanguard Lifestrategy 100%, which has a fairly high weighting in the UK vs a global tracker like HSBC All World Index - which I will probably be transferring in to at some point.

I have no issue holding just a single fund as long as it's well diversified.
I am in for at least another 15-20 years before starting to think about de-risking a portion and drawing down.

I presume by your 13 year timeframe that this is the time until you retire and you would then be looking to draw down the investments and/or take an income from it?

The reason I ask is because I'm also in roughly your position and as well as growth stocks I am also buying income stocks. I'm happy to reinvest the dividends and benefit from compounding, but many quality dividend stocks, especially those on the London Stock Exchange, are historically cheap right now and pay good yields. Buying them at today's prices to establish an income stream seems a sensible move as I approach retirement age.

My big income stocks are Phoenix Group Holdings, M&G, Legal and General, and aberdeen group (formerly the much derided vowell-free abdn) which are all paying high single digit yields. To diversify out of financials I've also got positions in two renewable energy funds: Greencoat UK Wind and NextEnergy Solar Fund. I know you said you're not interested in invidivual companies, but it's worth thinking about something for income.

@Aikko thank you for this. Also interesting is what @InveterateWineDrinker said above.. I didn't really think in this direction but excited to get on with some research. when you said this:

"I'm happy to reinvest the dividends and benefit from compounding, but many quality dividend stocks, especially those on the London Stock Exchange, are historically cheap right now and pay good yields. Buying them at today's prices to establish an income stream seems a sensible move as I approach retirement age"

1 - How do you reinvest the dividend? Is there a stock option for Accumulation (Acc) like with my current HSBC fund or do you need to do this manually?

2 - What to research exactly and which websites do you use to find and compare these? I wonder if these are also available on the Interactive Investor platform.. I've not checked yet...

3 - How often do these stocks pay you an income, and do they beat a savings account or a cash ISA with a high interest rate? (I am getting 4.5% at the moment but can probably improve that slightly in the new tax year.)

Many thanks!

@Mellmedusa

I use the AJ Bell platform and there is a box in the dividends/income page which I can tick to reinvest dividends in the same company, which they then do automatically a couple of working days after dividends are received. They buy as many whole shares as possible and any remaining is kept as cash, not carried forward to the next time. The dealing charge for reinvestment is £1.50 so it's also a useful saving on the £5 or £3.50 they normally charge. Dividend reinvestment on AJ Bell is only available for UK listed shares.

I've never used ii but assume there is some similar facility within its platform.

Accumulation funds just add any dividends from the underlying assets to the overall value of the fund. There is no equivalent with individual shares.

In terms of which shares to pick for income investing I compare a lot of notes with friends, but have also found the Motley Fool UK website generally helpful for ideas. For detailed research into companies there will be a range of backward-looking data in the research tools on your platform, but you'd need to scour the web for more detailed forward analysis - again, Motley Fool UK is helpful here.

Different companies have different payout policies. The four financial services stocks I mentioned above generally pay out dividends twice a year; for example aberdeen group (which is coincidentally the owner of interactive investor) pays dividends in April or May, and again in September, while Phoenix has tended to be May and October in recent years. The two renewable energy trusts pay out quarterly, as does HSBC if you're interested in more regular payments.

In terms of whether they can beat a high interest bank account, the ones I've picked do by a long way, but that's the tradeoff for the risk that comes with it. The income from dividends is expressed as the 'dividend yield' and it varies with the price you pay for the share. Dividends are also never guaranteed - if the company hits a rough patch then it may suspend or even cancel dividends. But, as an example, if you bought Phoenix Group Holdings today the annual yield would be 9.08% and you'd get 8.34% buying aberdeen group. M&G would give you 8.95%. You can see that you're not going to get close to that from a risk-free bank account. The shares themselves might go up in value too, although they may also come down.

Also, if interest rates fall the appeal of these types of share increases so they are likely to rise in price. In my estimation that's a good reason for buying now too.

Hope this helps.

@InveterateWineDrinker yes it does. thank you for the this. I heard of the Motley Fool before.. I may revisit.

One thing i don't quite understand.. I checked these stocks for performance (Morningstar) over 1, 2, 5 and 10 years. The performance is not that impressive and fluctuate like a yo-yo. no clear trajectory up like the FTSE All-World for example, which at least visually gives a reassuring direction of travel. So how can these companies guarantee fix yield of such high %? Maybe I still don't get how it works...

You won’t see stocks focused on providing income grow at the same rate as lower yield growth stocks. The idea is that the dividends are paid out to investors who can then choose to either use the income to reinvest ie buy more investments so you own more of the original stock even if the price stays roughly the same, or alternatively you can invest in something else or spend the income.
if you choose to reinvest your value grows by owning more units of the stock which remains at a stable price (in theory).

@Mellmedusa

When you buy a share you become a part owner of a company. For some investors what they want is a share of the value of the business - even ones that don't (yet) make money but might in the future, while others are more interested in a share of its profits now.

Growth stocks, which rise in value, tend to be companies earlier in their lifecycle. They start out worth less because they are unproven, and as their products develop and people can see a market for it, and/or it looks like they might start making money, the value of the shares rise to reflect the value of increased future profit. Companies like this tend to reinvest most of their operating profits, if they make any, to grow the business, so won't have much to distribute to shareholders as dividends.

Dividend stocks tend to be mature companies operating in mature industries and will, by and large, be making steady and predictable profits. Because they won't have much scope to grow the share price won't rise as much, but they will be in a position to return some or all of their profit back to shareholders.

They can't guarantee future dividends because shit happens - the great financial crisis, Covid, Ukraine, or some other catastrophic event can affect anyone by surprise and force companies to stop paying dividends. That's what we mean by risk, and is why in good times the company will aim to pay more than you would get by putting your money in the Post Office, otherwise you might as well do that and they'd have no shareholders and no capital.

As for the price of some dividend stocks fluctuating like yo-yos that's just part of life. Individual companies are subject to the vagaries of the markets so, for example, if everyone who has S&P-500 or FTSE-100 tracker funds sold them all at the same time, then perfectly sound companies on those indices would tank too. Same happens in reverse. Then there are company-specific issues which move the share price up and down: accounting scandals, profit warnings if a company thinks it might not make as much money as it has previously indicated it would, if a new product fails to sell, or if the company has regulatory trouble.

Dividend payers are also at the mercy of interest rates: a 7% yield is great when you can only get 0.5% at the bank, less so when the bank will pay you 5.5% so the price of dividend shares reflects what investors accept as a risk premium. At the moment, after several years of high interest rates, the answer is not much which is why UK financials in particular are relatively cheap.