From conversations with friends and relations I am increasingly convinced that most ordinary people find financial matters a bit challenging - to say the least!
Since the introduction of the Retail Distribution Review of 2013, advisers can no longer receive commission payments from the funds they recommend so they generally charge an agreed up-front fee to cover the initial work and recommendation. This could be anything from around £750 to £2,000. They may then charge a smaller ongoing fee to review the portfolio on a regular basis. For most people with relatively modest amounts to invest, these fees will not generally be considered affordable and/or cost effective.
I have recently been thinking that, for the vast majority of would-be investors, all they really need is a very simple, no-frills diy strategy which will provide a good chance of a decent outcome. One of the aims of writing my ebooks and also setting up this blog was to help ordinary people better understand personal finance - especially the world of investments.
I suggested the LS funds are probably a good choice for the younger investor building for the future. I also expressed some reservations as to whether they would be suitable for the investor of later years who may need more than the 1.4% yield. I am sure Vanguard could easily put together a higher yielding blended fund which would be more attractive to the income investor who is more comfortable drawing the natural income.
In the absence of such a fund, I thought it would be interesting to look at some alternatives.
So far as a one-stop solution is concerned, the main options appear to be the multi-asset and/or blended tracker funds both of which hold a mixture of equities, bonds and possibly property.
The Lower Cost Blended Trackers
Having ruled out the Vanguard LS for the time being, I have been looking around at other offerings in the market which work on a similar principle but deliver a more acceptable yield. The funds I have looked at are the Legal & General Multi-Index funds, BlackRock Consensus and HSBC World Index but the yields appears similar - maybe a shade higher - to Vanguard and the ongoing costs are higher so these also are equally ruled out.
The Multi-Asset Funds
Moving away from the index sector, I have also had a brief look at the actively managed multi-asset funds. These are a one stop option for investors who may want to adopt a more cautious approach, preserve capital and receive a steady income. I guess the popular choices for many fairly cautious income seekers would be the 20 - 60% equity sector funds.
The big reservation I have with these types of funds, as with the blended trackers, is that the fund manager has the freedom to increase or reduce exposure to various classes of asset according to how they see market conditions - the returns for investors will therefore depend upon whether the manager can make consistently good calls. I would say the chances of this are not going to be too high so personally, these funds would not be for me. Investors will never be sure what allocation of equities are held.
They also tend to charge higher fees - typical ongoing charges are around the 1.5% mark on average which would be too high for me although the yields of 3.0% - 4.0% are more in line with the natural yield that the income seeker will be looking for.
The Mix and Match
The next option would be to put together a diverse portfolio of investments - for example, a mix of investment trusts along the lines suggested in my book ‘DIY Income’. For those with a certain degree of financial know-how, this could be a good option, however most of my friends would probably struggle with this approach so, although it may well be lower cost, I don’t think it can be classed as simple.
A simpler option might be to put together a diy blend of low cost tracker funds. I will use Vanguard as an example as they have a fairly limited range of options comprising funds and ETFs. Say our investor wants to generate a reasonable income - maybe 3.5% yield from a fairly conservative allocation of 50% equities and 50% bonds/fixed interest.
The equities allocation could be limited to just two:
UK Equity Income Index fund with yield of ~3.9% and charges of 0.22%
All World High Dividend ETF with a yield of ~ 3.7% and charges of 0.29%
A combined average yield of around 3.8% and charges of 0.25%
The bonds allocation could be just 3 holdings - charges on each are 0.15%:
UK Long Duration Gilts Index fund yielding ~ 2.5%
Global Bond fund yielding ~ 1.7%
UK Inv. Grade Bond fund with a yield of ~ 3.3%
A combined average income yield of 2.5% and charges of 0.15%.
The total yield for the 'Vanguard Five' is therefore 3.15% - slightly below the target but I suspect there is the possibility of yield on global bonds increasing over time. The charges for the portfolio are fairly modest at around 0.20%. In addition there would be the usual platform fees - for example, with my broker AJ Bell Youinvest, an additional 0.20%. Even so, just a fraction of the managed fund option.
Of course, it would need some attention as there would be a need for rebalancing from time to time.
Why Chase Natural Yield?
I think it is clear from the above trawl that a strategy based on taking the natural yield from a portfolio may be a little more complex and therefore less attractive to the unsophisticated would-be income seeker. I am a reasonably experienced diy investor and it has taken some time and expertise to research the above options. Even then, I suspect there are still many angles I have not considered.
It seems to me that putting together a DIY income portfolio is not as simple and hassle-free as with the LifeStrategy approach. Of course, in the later stages of life such as retirement, investors may well have a little more time to research and implement a slightly more challenging strategy!
However, as was pointed out in a comment by Passive Investor in the previous post - "I never understand why some investors are a bit fixated on income. There is no mathematical difference between taking 3.5% from investments by selling units where necessary and choosing higher yielding investments".
Back to LifeStrategy!
So, having gone all around the houses, maybe the best solution would be to keep it simple and maintain the LS fund - possibly step down from LS80 to a lower level of equities exposure, for example LS40 or LS60 - or a combination of the two to give ’LS50’ - and then sell off the required value of units each year to provide the desired level of income.
If the fund is growing by an average of 6% per year, it should be feasible to sell 4% of the units for example without depleting the fund. Since the LS funds were launched in 2011, the average annual return for the LS60 has been ~9.3% p.a. however, the market returns have generally had a good run over recent years so over the longer term, I would expect this figure to revert back a little nearer to 6%.
In the past month or so I have been reviewing my income strategy. I may well think about adding one of the LS funds into the mix with a view to drawing some 'income' from the sale of units.
What do others think - am I being unduly pessimistic regarding the abilities of the great British public or are the vast majority of people at a disadvantage when it comes down to issues of personal finance and investments? Does it matter - or is this more or less how it’s always been? Leave a comment and let others know what you think.
(p.s. interesting article posted by WCS which sort of ties in to above on theme of simplicity)