Disclaimer: I'm not a financial adviser and this is NOT a financial advice (might not even be right). So don't consider it as a financial advise for any of your financial decisions.
This is Part 4 of this serie. For Part 1, go here: http://zombieprojects.weebly.com/blog/non-speculative-portfolio-part-1-introduction-and-objective.
There are a number of aspects to take into consideration when implementing your portfolio:
1. The first and most obvious is the instrument's cost. Within this category, you need to look for the ones mentioned below (and any other you might find):
- Annual cost: several fantasy names like TER, ongoing costs and other stuff fit in here
- Buying and selling cost (also consider the difference in buying and selling price when looking at corporate bonds)
- Charges for dividends re-investment (I haven't seen these but they were mentioned in Graham's book)
- Platform costs, i.e. costs related to using the online platform (normally quite high). It doesn't seems to be a way around when buying mutual funds within a NISA. It might be possible to avoid these costs by buying ETFs (which might be absent of platform costs and seems that they don't pay stamp duty in the UK). These costs are at least a 0.25% extra.
2. Minimum monthly investment per instrument:
Normally, you can't invest less than 50 pounds a month which will be your investment unit. This is quite important when diversifying. For example, if your smaller fund allocation is a 10% of your portfolio, then your annual investment can't be smaller than 6k pounds a year. More about this in the next section.
3. Taxes:
In the UK it seems to be a good option to buy a NISA to avoid taxes. However, as mentioned before, this will come with a platform cost.
4. Location of the fund provider:
In the UK you're covered up to 85k if your fund provider goes bust. Th is is quite an important aspect for me as all the time, effort and money could go to waste because of some rogue manager trying to pull a fast one. That's the only risk I'm not willing to take and to be able to be covered, your provider must be based in the UK. It's possible to find this info and it's worth checking because all the providers based in some other country like Luxembourg would not be protected.
Stock-based mutual funds implementation:
Most of the time, it will be difficult (or expensive) to find the perfect mutual fund. If we think about how much you need to invest in order to get the diversification defined before, it's possible to deduce the equation:
minimum monthly investment * 100 (%) / percentage of minimum investment (%) * 12 = minimum total investment per year.
This is quite important when it comes to the implementation. For example, if you want to allocate a 10% to Japanese shares (within the 50% shares) means that your smallest group would be 5%. Therefore, you would need 12k pounds per year minimum.
(50 * 100 / 5) * 12 = 12000
Perhaps it's possible to simplify the portfolio a bit (at least initially) in order to reduce the minimum annual investment.
Bonds-based mutual funds implementation:
One of the most difficult groups to find is the risky government bonds. So far, I've found one instrument and it has had a far from good performance. So I'm going to leave this one for later. You shouldn't increase your allocation of corporate bonds to much more than 10% so I'm going to leave that one out too, just to kick start the portfolio. I will allocate the whole bond 50% to non-risky government bonds (in this case UK Govt bonds). In future stages, I will add corporate bonds and then risky government bonds. This time difference will help with the allocation.
There's one more think to consider here and it's to go for inflation-linked or normal government bonds. If you think that the inflation has been understated then you should end up better with inflation-linked. As I see it, it's difficult to predict so I'm going to go for 50-50 normal-inflation linked bonds. My logic is that being the inflation at record low, it can only go up but then while I wait for that, I want to get at least some income from the investment so the normal bonds should give me that. I'll just try to find the mutual fund with the shortest life-span bonds I can for the non-inflation linked ones.
This is Part 4 of this serie. For Part 1, go here: http://zombieprojects.weebly.com/blog/non-speculative-portfolio-part-1-introduction-and-objective.
There are a number of aspects to take into consideration when implementing your portfolio:
1. The first and most obvious is the instrument's cost. Within this category, you need to look for the ones mentioned below (and any other you might find):
- Annual cost: several fantasy names like TER, ongoing costs and other stuff fit in here
- Buying and selling cost (also consider the difference in buying and selling price when looking at corporate bonds)
- Charges for dividends re-investment (I haven't seen these but they were mentioned in Graham's book)
- Platform costs, i.e. costs related to using the online platform (normally quite high). It doesn't seems to be a way around when buying mutual funds within a NISA. It might be possible to avoid these costs by buying ETFs (which might be absent of platform costs and seems that they don't pay stamp duty in the UK). These costs are at least a 0.25% extra.
2. Minimum monthly investment per instrument:
Normally, you can't invest less than 50 pounds a month which will be your investment unit. This is quite important when diversifying. For example, if your smaller fund allocation is a 10% of your portfolio, then your annual investment can't be smaller than 6k pounds a year. More about this in the next section.
3. Taxes:
In the UK it seems to be a good option to buy a NISA to avoid taxes. However, as mentioned before, this will come with a platform cost.
4. Location of the fund provider:
In the UK you're covered up to 85k if your fund provider goes bust. Th is is quite an important aspect for me as all the time, effort and money could go to waste because of some rogue manager trying to pull a fast one. That's the only risk I'm not willing to take and to be able to be covered, your provider must be based in the UK. It's possible to find this info and it's worth checking because all the providers based in some other country like Luxembourg would not be protected.
Stock-based mutual funds implementation:
Most of the time, it will be difficult (or expensive) to find the perfect mutual fund. If we think about how much you need to invest in order to get the diversification defined before, it's possible to deduce the equation:
minimum monthly investment * 100 (%) / percentage of minimum investment (%) * 12 = minimum total investment per year.
This is quite important when it comes to the implementation. For example, if you want to allocate a 10% to Japanese shares (within the 50% shares) means that your smallest group would be 5%. Therefore, you would need 12k pounds per year minimum.
(50 * 100 / 5) * 12 = 12000
Perhaps it's possible to simplify the portfolio a bit (at least initially) in order to reduce the minimum annual investment.
Bonds-based mutual funds implementation:
One of the most difficult groups to find is the risky government bonds. So far, I've found one instrument and it has had a far from good performance. So I'm going to leave this one for later. You shouldn't increase your allocation of corporate bonds to much more than 10% so I'm going to leave that one out too, just to kick start the portfolio. I will allocate the whole bond 50% to non-risky government bonds (in this case UK Govt bonds). In future stages, I will add corporate bonds and then risky government bonds. This time difference will help with the allocation.
There's one more think to consider here and it's to go for inflation-linked or normal government bonds. If you think that the inflation has been understated then you should end up better with inflation-linked. As I see it, it's difficult to predict so I'm going to go for 50-50 normal-inflation linked bonds. My logic is that being the inflation at record low, it can only go up but then while I wait for that, I want to get at least some income from the investment so the normal bonds should give me that. I'll just try to find the mutual fund with the shortest life-span bonds I can for the non-inflation linked ones.