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| SWDA Global Index Tracker ETF (5th August 2024 was a bad day- but the market recovered). |
So just stay in the market!
You know that everyone says you should never sell just because of market sentiment. Most stocks have dips and corrections, but whether it takes one week or two years to recover, they will go up again if you just hold.
Other people say it is better to hold a mixture of bonds and stocks (at least 40% bonds would be needed to have a smoothing effect), especially if you are drawing money out of that pot to pay your bills (retired or unemployed, etc.). A simple ETF mix would be:
However, bonds have a poor rate of return (sometimes lower than inflation and in the case of VGIT very little gain over 5 and 10 years!) - perhaps a better plan for some people would be to just ensure they have a diversified portfolio with no bonds. |
| 6 months: Bonds VAGP v Global Index v Gold |
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| 5 years: Bonds VAGP v Global Index v Gold |
It could be argued that gold is more stable and better performing than bonds over time?
Investment vehicles
In the UK we can make use of these main investment accounts:
- Savings accounts - taxable
- Stocks and Shares ISA accounts (S&S ISA in UK) - non-taxable
- Pensions (work pension) - tax advantages
- SIPPs (Personal pension in UK) - tax advantages
- General Investment accounts (GIA) - taxable
We can also think about dividing up our income into these 'pots'
- Monthly bills (food, energy, clothing, rent/mortgage, insurance, etc.)
- Holiday fund
- Emergency fund (to pay for 3 months of unemployment)
- Investment (money for long term investment)
In this article, I am only concerned with how to manage the investment pot which can hold cash, stocks, bonds and other funds.
If you don't have much spare cash at the end of the month, perhaps an ISA is your best solution as you will never exceed the 20K annual allowance limit and you can withdraw cash at any time. If you ensure you have a flexible ISA (such as with Trading 212) you can even put back that money within the tax year.
What type of investor are you?
Investing is a medium- to long-term (10+ years) activity. The safest strategy is to invest in large, well established stocks. Warren-Buffet says to just invest in the S&P500, and that is not bad advice for Americans, but for others who will be affected by the dollar exchange rate, this may not be the best advice. It may be more prudent to invest in an All-World ETF instead (70% gain over last 5 years) based in your local currency. At the least, these tend to outperform inflation and current savings interest rates.
However, in the last five years, Tech stocks have performed remarkably well (200% in 5 years, even allowing for the Covid pandemic).
Although a diversified portfolio will smooth out the volatility, the overall performance of your portfolio will suffer.
Most investors are not satisfied with investing in just one All-World ETF and will have a mixture of ETFs in their portfolio to increase the performance even more.
If you have a tax-free investment vehicle such as an ISA or pension/SIPP, you can sell any stock within that vehicle without incurring any tax. This allows you to sell any stock\ETF etc. within the tax-free vehicle and either hold it as cash, buy a bond or money market ETF or buy a different stock\ETF.
It always makes sense to maximise your tax-free accounts before investing in a GIA.
If you have a GIA on which you will pay tax on your gains, then selling will incur a tax penalty if there was an overall gain. On the other hand, if you buy a risky stock and you lose money, this loss can be deducted from any gains you make from other stocks in the GIA.
I use my ISA\Pension\SIPP and my GIA differently:
- ISA\Pension\SIPP: Long-term investment for stable ETFs. Core ETF=All World e.g. XDEV or SWDA. 40% S&P/Tech ETFs e.g. EQQQ or IITU or XLKQ. SGLN gold, etc.
- GIA: 'Trending ETFs' + 'volatile\risky' ETFs which have the potential to drop by 50% or even down to zero. e.g. Tech stocks, IITU, IUCM, XLKQ, EQQQ, etc. perhaps individual companies.
Every year I sell some stocks from my GIA to put into ISA. I can also add into my SIPP. If the market looks to be in a correction, I may temporarily sell some of my ISA ETFs and buy cash CSH2 or gold (SGLN) until the market starts to pick up again. I tend to just hold my GIA ETFs however as selling them will cause a taxable gain.
Dollar Cost Averaging (DCA) strategy
DCA is where you regularly invest in more stocks each week or month. So instead of saving up your spare income into a savings account and then occasionally buying more stock say once a year, you set up a direct debit for a fixed amount to be invested. Most investment platforms will allow you to do this free of charge so there is no transaction costs to pay and ETFs do not incur any Stamp Duty.
However, a good way to DCA is to regularly invest two DCA 'pots' - equal amounts to each:
- Cash Pot - e.g. £200 a month
- Stocks\ETFs Pot - e.g. £200 a month
If you have 'filled' your ISA allowance, you must use a GIA for these pots. I would not use this strategy for pensions.
The Cash Pot should earn interest. Trading 212 pay 5.2% currently on cash deposits. The alternative is to have a bond or money market ETF. e.g. CSH2 ETF gains over 5% a year currently and it is based on the intraday bank trading interest rate. Unlike a bond, the interest rate does not go up or down much as it depends on the current intra-bank interest rate.
Now, if there is large dip/correction in the market (say minus 10% or more), I can transfer £200 from the Cash Pot into the Investment pot (so it receives £400 that month instead of £200). If the market is still down the next month, I transfer another £200 to the investment pot. In this way I also take advantage of buying at the low price.
This method is probably not as good as DCA'ing all the £400 every month, but it feels better psychologically because you are buying at a lower price and your investment pot has gone up by an extra £200. You can always make the decision to buy more when prices are low because you have the spare 'cash' to do it.
Also, if you have a flexible ISA (e.g. Trading 212), you can take some cash or sell some ETFs and draw out money from the ISA for unforeseen emergencies and then put money back into the ISA before the end of the tax year.
Pensions
If you have one or more pensions, you should check their performance. Many pension companies enroll you into a default pension fund which contains a diversified 'fund of funds' which includes bonds. These are often very expensive in terms of charges and also very poor performers. Of course, your pension fund will usually be bigger each year because you and your employer (or government) is adding to the pot, but how much has that money gained in a year? Don't be surprised to learn it is only 2-4% (because at least 2% of the value of your pot goes into the pension companies pockets every year)!
Many investors agree that investing your pension in bonds up to the age of about 50 is not optimal (super safe, but awfully poor performance!) - many feel that the best strategy is to have 100% equity investment in your pre-retirement years (age 18-60).
Pension companies often have other schemes available (which they describe as 'risky' when they really mean volatile), but in fact could increase the value of your pension pot by many hundreds of thousands of pounds by the time you retire. Some pension companies allow you to self-manage your pension (if you press them hard and ask about it!). This is the same as a SIPP and it is not as scary as it seems. You could just buy a global index ETF such as SWDA or XDEQ and your pension would gain 10%-15% a year instead of 3% (five times better!). The downside for them is that the pension company can only charge you 1% of your pension pot total value every year instead of well over 2% in hidden costs! Of course, due to the wonders of compounding, your pension pot will be a LOT larger than 5 times what it would have been if you had just stuck with their suggested default pension scheme!
If any of your pension providers do not allow you to change from their default scheme and the performance of your current scheme is derisory (they usually are!), then simply start your own SIPP private pension, and each year you can request a transfer from your pension into your SIPP. In the UK they are not allowed to refuse. You can then manage your SIPP and choose ETFs which will perform much much better than those in your pension fund.
Before deciding to change your pension arrangements, if you are not sure what you are doing (there are many YouTube videos you can check out), you should seek advice from an independent financial advisor (don't ask a bank or pension company - get independent advice). It may cost £400 or so, but it will save you hundreds of thousands of £! This is particularly important 5 years or so before retirement age because your pension pot needs to be stable in case of a market recession.
NOTE: The above is not financial advice and I am not a financial advisor. I am just describing what I do and what others can do. Your financial circumstances and risk attitude may be different to mine.
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