Review of Portfolio Structure

[Helinlouise]

Hi,

I have put together an initial strategy and would like some advice on if I am on the right tracks:

LARGE & MID 42% (Emerging 6%)
SMALL CAP 6%
REIT 9%
BONDS 6%
CASH (ISA) 19%
CASH 18%
TOTAL 100%

My rationale is as follows:

1) I have chosen HSBC All World Acc (75%) and Fidelity Index World P (25%). The 75/25 split means that I have 6% in emerging markets, not sure if this is enough.

2) Because I have no exposure to small cap I was thinking of buying a small cap fund, but also thinking 6% is not worth it. However, I am not sure have the stomach to put any more GBP into it when I am unsure of how risky it is? Also, are there any recommendations for a small cap fund?

3) I was looking to put around 9% into a REIT as a defensive strategy but looking at the results of a few REIT's (from Smarter Investing Book), I am not sure this is a good idea as the returns were poor?
Incidentally, I have £80k of Grainger Plc shares outside of the above that I was given, therefore would this act as a natural defensive asset and would I be better topping up my emerging and small cap to 10%?

4) Bonds - I am aware this is not very much percentage but do hold 19% in cash ISA's that do not mature until next year.

5) Cash ISA's - these mature next year and upon maturity I will rebalance my portfolio with the money from these.

6) I need to hold this much cash to live on and to pay the annual chunk off my mortgage which is due soon.

As always, thanks for any advice.

Helen

[GeoffF100]

HSBC All World by itself would be better for your equity holdings. As far as bonds are concerned, VAGS is a popular choice.

[Gerry557]

Apart from paying off a chunk of the mortgage what are you trying to achieve or what is the goal.

[Helinlouise]

Apart from paying off a chunk of the mortgage what are you trying to achieve or what is the goal.

10 year plan to grow my investments as much as I can for two reasons:

1) Pay off my mortgage, if I haven't already done so from income.

2) Grow portfolio to provide an early retirement income.

I am 46 years old.

[clissold345]

...
2) Because I have no exposure to small cap I was thinking of buying a small cap fund, ...
...

When you say "small cap" what size companies do you mean? Here's a quote that might help you answer:

"On the London Stock Exchange, the term ‘small cap’ refers to companies with a market capitalisation between £50m and £230m. This is vastly different from the United States, where stocks in this category have much larger market caps, ranging between $300m and $2bn."

[tjh290633]

3) I was looking to put around 9% into a REIT as a defensive strategy but looking at the results of a few REIT's (from Smarter Investing Book), I am not sure this is a good idea as the returns were poor?Helen

Which REITs have you looked at? They are far from a uniform body of investments. I have BLND, PHP and SGRO, which have little in common. They often react to market conditions in different ways. There are many others with different aspects, as no doubt you are aware. I don't think that you can tar the whole sector with the same brush.

TJH

[clissold345]

10 year plan to grow my investments as much as I can ...

As regards the all world tracker part of your portfolio you can hope for a ten year total return of about 142%, which is the total return of SWDA.

iShares Core MSCI World UCITS ETF (SWDA) has a ten year plus track record. You can look up the ten year total return on the ishares website. Ten year total return as of 31st May 2024 = 141.95%.

[torata]

...
2) Because I have no exposure to small cap I was thinking of buying a small cap fund, ...
...

Following what Clissold 345 has said above about relative sizes, I use
Vanguard Global Small-Cap Index Fund GBP IE00B3X1LS57
(I use the distributing fund, but there is accumulating)

https://www.morningstar.co.uk/uk/funds/snapshot/snapshot.aspx?id=F000005OPU
The 'Portfolio' tab on morning star gives a nice overview.

There are about 220 UK stocks in it, with what looks like quite a wide range in size, but in general I'd class as midcap for the UK, so separately I use an IT for exposure to UK small caps.

torata

[Gerry557]

Apart from paying off a chunk of the mortgage what are you trying to achieve or what is the goal.

10 year plan to grow my investments as much as I can for two reasons:

1) Pay off my mortgage, if I haven't already done so from income.

2) Grow portfolio to provide an early retirement income.

I am 46 years old.

What rate is the mortgage and what type is it? I assume you are limited with how much chunk you can pay off, often 10% With the amount of cash you have an offset mortgage might be a better and more flexible option. When is the next review.

The next question is how you feel about paying down the mortgage over investing. Isa allowance are use them or loose them so filling this and using the income to pay the mortgage is worth consideration. The lower the mortgage rate the better this option looks. Allow inflation to eat away your debt and grow your investments. Hopefully the income will grow over time whereas the mortgage is effectively flat.

On RIETs look at SREI. Decent yield, covered, low debt yields and has increased its dividend above pre covid levels. I hold several and this is one of the stronger ones.

If you go down the invest over mortgage it should leave you with a lump of tax free for your early retirement. Obviously the mortgage will need dealing with at some point but you could allow yourself more time. Watch out for a cliff edge on repayment though.

The other worry is what might happen with future government's on wealth taxes and or ISA allowances. I think flexibility is the key so if the metrics change so can you.

[Helinlouise]

When you say "small cap" what size companies do you mean? Here's a quote that might help you answer:

"On the London Stock Exchange, the term ‘small cap’ refers to companies with a market capitalisation between £50m and £230m. This is vastly different from the United States, where stocks in this category have much larger market caps, ranging between $300m and $2bn."

My theory was, my passive funds are tracking All World Indexes but for large and mid cap only, meaning I am missing out on tracking the small cap index e.g. MSCI World Small Cap Index?

Which REITs have you looked at? They are far from a uniform body of investments. I have BLND, PHP and SGRO, which have little in common. They often react to market conditions in different ways. There are many others with different aspects, as no doubt you are aware. I don't think that you can tar the whole sector with the same brush.


Only the ones in the Smarter Investing book as a starting point (HSBC FTSE EPRA Developed, IShares Developed, L&G Global), and was taken aback by the returns so wanted some advice on them. I will research more into REIT's before I comment further.

[Helinlouise]

What rate is the mortgage and what type is it? I assume you are limited with how much chunk you can pay off, often 10% With the amount of cash you have an offset mortgage might be a better and more flexible option. When is the next review.

The next question is how you feel about paying down the mortgage over investing. Isa allowance are use them or loose them so filling this and using the income to pay the mortgage is worth consideration. The lower the mortgage rate the better this option looks. Allow inflation to eat away your debt and grow your investments. Hopefully the income will grow over time whereas the mortgage is effectively flat.

On RIETs look at SREI. Decent yield, covered, low debt yields and has increased its dividend above pre covid levels. I hold several and this is one of the stronger ones.

If you go down the invest over mortgage it should leave you with a lump of tax free for your early retirement. Obviously the mortgage will need dealing with at some point but you could allow yourself more time. Watch out for a cliff edge on repayment though.

The other worry is what might happen with future government's on wealth taxes and or ISA allowances. I think flexibility is the key so if the metrics change so can you.

My mortgage is at 3.18% and has another 3 years to run before renewal. Each year I can pay down 10% and had been doing so. I was toying between investing the 10% or paying it off the mortgage. I suppose it's do I put heart over head!

My ISA for this year is full so my equity investments would be in a general account.

[clissold345]

...
My theory was, my passive funds are tracking All World Indexes but for large and mid cap only, meaning I am missing out on tracking the small cap index e.g. MSCI World Small Cap Index?
...

OK, I think you mean small cap = market cap $300m to $2bn. torata suggested a fund and I see that there's at least one world small cap etf (iShares MSCI World Small Cap UCITS ETF). No one knows if a small cap/mid cap tracker will do better than a large cap tracker over the next ten years.

[Helinlouise]

OK, I think you mean small cap = market cap $300m to $2bn. torata suggested a fund and I see that there's at least one world small cap etf (iShares MSCI World Small Cap UCITS ETF). No one knows if a small cap/mid cap tracker will do better than a large cap tracker over the next ten years

Agreed, I was just thinking to diversify my portfolio so I was across all 3 markets caps. Not sure if it means I need to keep more of an eye on it than I actually want to.

[kempiejon]

OK, I think you mean small cap = market cap $300m to $2bn. torata suggested a fund and I see that there's at least one world small cap etf (iShares MSCI World Small Cap UCITS ETF). No one knows if a small cap/mid cap tracker will do better than a large cap tracker over the next ten years

Agreed, I was just thinking to diversify my portfolio so I was across all 3 markets caps. Not sure if it means I need to keep more of an eye on it than I actually want to.

I don't know what the percentage of the global market is small cap but I'd guess it's pretty little. If you're picking a small cap fund how would you weight it in your portfolio compared to your global tracker? I have a portfolio that tries to be a global tracker with regional ETFs and an IT for UK smaller companies. But that's because I thought UK small cap had prospects and haven't got round to selling it.

[Helinlouise]

I am going off what is in The Smarter Investing Book and it says between 10-25% of the pure equity allocation with 20% feeling comfortable. Anything less than 10% makes little difference and more than 25% and the risk of short term performance of the broad market may make people bail out the strategy.

[clissold345]

According to the Bing chatbot US small caps are 2.5% of the US market ($1.28 trillion out of $50.8 trillion). (Note: The Bing chatbot isnt always reliable.) So if you copy the US market proportions in your equity portfolio, you'd buy roughly 2.5% all world small cap tracker and 97.5% all world large cap tracker? This isnt entirely correct because we're ignoring companies valued at less than $300 million.

[kempiejon]

I am going off what is in The Smarter Investing Book and it says between 10-25% of the pure equity allocation with 20% feeling comfortable. Anything less than 10% makes little difference and more than 25% and the risk of short term performance of the broad market may make people bail out the strategy.

US small caps are 2.5% of the US market ($1.28 trillion out of $50.8 trillion)

As clissold345 illustrates with US numbers and what I alluded to that means you are overweighting smaller caps.

[EthicsGradient]

I tried to examine the Russell 1000, 2000 and 3000 to get their figures on US market size. The 1000 is the largest roughly 1000 companies, the 2000 the next 2000, and the 3000 the combined set. This makes sense with the exact figures from 31st May of how many companies in each - 1004, 1928 and 2932.

https://research.ftserussell.com/Analyt ... anual=True
https://research.ftserussell.com/Analyt ... anual=True

But they give the "average" market caps as $831,971,000,000, $4,398,000,000 and $790,204,000,000 respectively. Which would mean the entire market caps are:
Russell 1000: 1004 * $831,971,000,000 = $835,298,884,000,000 (yes, $835 trillion)
Russell 2000: 1928 * $4,398,000,000 = $8,479,344,000,000 (a more believable $8.5 trillion)
Russell 3000: 2932 * $790,204,000,000 = $2,316,878,128,000,000 ($2,300 trillion??? That's nearly $7 million per inhabitant)

They also claim the Russell 1000 is 93% of the Russell 3000 by total market cap, and the Russell 3000 is the remaining 7%.

They also give median market caps: for Russell 1000 (ie about position 500) $14.136 billion, for Russell 3000 (ie about position 1500) $2.164 billion, and for Russell 2000 (ie about position 2000) $0.919 billion. At least these line up. But that also means that they weren't meaning "median" when they said average.So it must be the usual definition - the mean - that I used above.

Can anyone make any sense of those "average" figures? The 93:7 ratio is believable. But other sites give figures like "3,666 companies, total market cap $55 trillion". That would put an upper limit of about $3.8 trillion for 7% of nearly all of that $55 trillion, give the Russell 2000 an average of about $1.9 billion, and the Russell 1000 $50 billion. The Russell 3000 should have an average around $17 billion.

The Russell figures are produced by London Stock Exchange plc. Have I got a lot of basic maths wrong? Or have they? Is this some crazy definition of "average" that no-one else uses? The market cap figures are in "($-WTD)"? What does "WTD" mean here? "Weighted"? If so, what is a "weighted dollar"?

[JohnW]

How much in emerging markets? How much small cap? How much in REITS?
The portfoliovisualizer website allows you to backtest asset class allocation in the ‘tool’s menu. Make up a mix you’re interested in, and compare its performance with some simple alternative. Repeat the exercise over different time periods. Voila! You’ve now got a feel for what might happen in future if you choose those assets. Here’s my test for ’20% small cap’ vs ‘none’: https://www.portfoliovisualizer.com/bac ... uY8ofRbxEZ

What I commonly find is: it doesn’t make much difference; the difference goes in differing directions depending on the time period; the cost of some separate ‘sub-market’ funds like small cap eats up past benefits of returns. Hale’s book is terrific, but Ferri has perceptively pointed out that passive investors go through four stages in their education: born in darkness; get indexing enlightenment; overcomplicate everything; embrace simplicity.

[Gerry557]

What rate is the mortgage and what type is it? I assume you are limited with how much chunk you can pay off, often 10% With the amount of cash you have an offset mortgage might be a better and more flexible option. When is the next review.

The next question is how you feel about paying down the mortgage over investing. Isa allowance are use them or loose them so filling this and using the income to pay the mortgage is worth consideration. The lower the mortgage rate the better this option looks. Allow inflation to eat away your debt and grow your investments. Hopefully the income will grow over time whereas the mortgage is effectively flat.

On RIETs look at SREI. Decent yield, covered, low debt yields and has increased its dividend above pre covid levels. I hold several and this is one of the stronger ones.

If you go down the invest over mortgage it should leave you with a lump of tax free for your early retirement. Obviously the mortgage will need dealing with at some point but you could allow yourself more time. Watch out for a cliff edge on repayment though.

The other worry is what might happen with future government's on wealth taxes and or ISA allowances. I think flexibility is the key so if the metrics change so can you.

My mortgage is at 3.18% and has another 3 years to run before renewal. Each year I can pay down 10% and had been doing so. I was toying between investing the 10% or paying it off the mortgage. I suppose it's do I put heart over head!

My ISA for this year is full so my equity investments would be in a general account.

That's quite a low rate relatively so it might be worth considering investment rather that pay it off. Inflation would eat away at most of that. I assume you have used most of the thresholds for savings etc. Using a partners allowances might help too. I suppose you will have to account for the tax element but that might be mitigated if you can get income paying investments into the ISA even if it means swapping the none income out.

How that reflects on what investments you hold would then be open to discussion.