In our DIY Investor Diary series, we speak to interactive investor customers to find out how they invest in funds and investment trusts, what their goals and objectives are, current issues and concerns regarding their portfolio, and what they’ve learned along the way. The premise is to try and provide inspiration for other investors, and we would love to hear from more people who would like to be involved. We do not require those featured to be named. If you are interested, please email our collectives editor directly at: firstname.lastname@example.org
When it comes to fund investing, one of the most common questions is whether there’s an ideal number of funds for a portfolio to strike enough balance between risk and reward.
However, as is common with other investment-related questions, there’s no “magic number” that investors should be aiming for.
Although, there is a pitfall to avoid: buying too many funds or investment trusts. If you treat funds like sweets and have too many, you risk ending up doing damage through over-diversifying and unwittingly replicating the market. This is known as “diworsification”.
For example, if you own half a dozen or more UK funds, you could potentially end up owning hundreds of different companies. That makes it harder to beat the stock market because your portfolio ends up looking like it.
If you want to invest in hundreds of UK shares, this can be done much more cheaply through a passive fund – either an index tracker or exchange-traded fund (ETF).
Therefore, it is important to ensure that each fund is bringing something unique to the party in terms of how it invests and what it is investing in.
The individual profiled in this DIY Investor Diary article ensures that there are no obvious areas of overlap in his fund holdings. He and his wife have had a stocks and shares ISA for around 20 years, and during this time typically held half a dozen funds in each.
He said: “I invest in different regions to have diversification, but at the same time I want to avoid being over-diversified, which is why I don’t have a high number of funds. I don’t want to have funds owning the same stocks.
“It is also important to have a manageable number of funds in order to be able to concentrate on them at any one time.”
Longevity and consistency of performance are among the main qualities he looks for when sizing up funds.
He says: “I like to invest in fund managers who have been running money for a while and those that have a decent track record over three, five and 10 years. I don’t pay much attention to the one-year figure, as anyone can shoot the lights out over the short term.”
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However, for his self-invested personal pension (SIPP), just one fund is held: Vanguard LifeStrategy 100% Equity. This passive fund provides diversified exposure to global stock markets by investing in 10 index funds managed by Vanguard. It is considered a potential one-stop shop holding, or a core holding, due its approach.
One of the main reasons why our DIY Investor has opted for just one passive fund is “to keep things simple”.
“It is a very straightforward fund, so I don’t have to think about it much. If I had chosen an active fund or a couple of them, I would need to monitor their performance more closely. I want to enjoy my retirement and focus on that rather than chop and change fund holdings.”
While there are lower-risk options available in the LifeStrategy range, with the four other funds having lower equity content and the balance in bonds, our DIY investor is prepared to accept higher risks in pursuit of potentially greater rewards.
He prefers equities as shares are a growth asset, which is why he went for the 100% option as he doesn’t want exposure to bonds. While the income that bonds offer is more reliable than company dividends, the disadvantage is that as the income is fixed, it does not rise with inflation.
Our DIY investor says that while he is withdrawing from the SIPP, he still wants to see the money that’s remaining growing over time. In addition, he likes the Vanguard fund's home bias, which is a 25% weighting to UK equities.
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Having retired a couple of years ago, and now aged 57, both the ISA and the SIPP are being utilised ahead of himself and his wife accessing workplace pensions, which includes a final salary index-linked NHS pension.
He says: “Our occupational pensions are available in full in 2.5 and four years respectively. However, both could be taken immediately if needed. The SIPP withdrawals can reduce at that point if necessary or, more probably, reduce at age 67 when our full state pensions become available, to keep our respective incomes below the 40% tax thresholds. The SIPPs can then grow in the background as part of our inheritance tax planning.”
Our DIY Investor points out that due to having the workplace pensions and state pensions further down the line he is “happy to take on the risk” of having the SIPP invested in one passive fund and 100% in equities.
In addition, to the ISA, SIPP, and workplace pensions, three bank shares are held: Barclays (LSE:BARC), Lloyds Banking Group (LSE:LLOY) and NatWest (LSE:NWG). He views this separate pot as “fun money”, and notes that the “UK banking sector is one we are familiar with investing in.”
The couple also have Premium Bonds and cash savings that are kept below interest tax allowances.
He views the state pension as a “nice to have”, rather than as central to retirement planning. “We are deliberately not relying on the state pensions, regarding them in our overall planning as ‘nice to have’ rather than guaranteed,” he says.
Taking money out of the ISA is being prioritised, due to ISA money typically forming part of an individual’s estate for inheritance tax (IHT) purposes. A SIPP, however, does not form part of an estate for IHT purposes. If you die before age 75, the beneficiary pays no tax. For those who die after 75, beneficiaries will pay tax at their marginal rate on any income they receive.
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Our DIY Investor adds: “This is all money set aside for our retirement and we are making a point of enjoying it while we are still fairly young. Our children are all planning and investing towards their own retirements with our support and guidance, although they will get some kind of legacy of course (within overall IHT limits).
“We’re currently drawing slightly over the natural yield from the SIPPs in the knowledge that we have no mortgage or debts, with other savings and investments to fall back on if needed.”
His top tips for fellow investors, and in particular for those who are younger, is to “start as early as possible” to benefit from the wonder of compound interest. “Even if it is only £25 a month, it is worth doing. Also if you are younger, don’t go for cash, go for the stocks and shares ISA instead,” he says.
Another tip is to increase your monthly investments when a pay rise comes into effect to “help keep pace with inflation”.
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.
Please remember, investment value can go up or down and you could get back less than you invest. If you’re in any doubt about the suitability of a stocks & shares ISA, you should seek independent financial advice. The tax treatment of this product depends on your individual circumstances and may change in future. If you are uncertain about the tax treatment of the product you should contact HMRC or seek independent tax advice.
Important information – SIPPs are aimed at people happy to make their own investment decisions. Investment value can go up or down and you could get back less than you invest. You can normally only access the money from age 55 (57 from 2028). We recommend seeking advice from a suitably qualified financial adviser before making any decisions. Pension and tax rules depend on your circumstances and may change in future.