UK: Helping my Mum reinvest her assets. Baffled by bonds.

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doveman
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UK: Helping my Mum reinvest her assets. Baffled by bonds.

Post by doveman »

My Mum gave a broker £6,000 to invest in 1993, which has only grown to £23,000 since (in a stocks and shares ISA).

We don't know how they invested it for most of those 29 years but currently the majority, 69.23%, is in Fidelity Moneybuilder Div W Inc, which is 90.88% UK, 9.12% US.
https://www.fidelity.co.uk/factsheet-da ... owth-chart

The stock sector information on the Fidelity page differs somewhat from the information on Morningstar but the latter is easier to understand (for me at least) and it shows the biggest four sectors are Consumer Staples 25.70%, Financials 18.90%, Health Care 10.70%, Utilities 10.60%, with Technology just 5.30%. The OCF is 0.67%.
https://www.fidelity.co.uk/factsheet-da ... owth-chart

25.86% of the portfolio is in L&G MM Inc Trust I Inc, which is 33.41% Managed Funds (what's that?), 23.83% International Equities, 17.67% International Bonds, 14.06% UK Equities. The OCF is 1.17% (it was 1.79% when I checked it a few weeks ago).
https://www.hl.co.uk/funds/fund-discoun ... d-analysis

Then 4.87% is in L&G MM Grth Trust I Inc, which is 44.69% International Equities, 24.84% Managed Funds, 14.88% UK Equities, 5.18% International Bonds. The OCF is 1.27%.

Apart from being massively overinvested in the UK, the OCFs are very high (we don't even know what the broker is charging on top). We're going to transfer her funds (within the ISA wrapper, so she won't lose any tax benefits, or use up any annual allowance) to another broker and just use a 2-fund global index and bonds strategy going forward.

She's 77 now and she's not planning to spend this money anytime soon. She and my Dad both receive state pensions and he has a small private pension, so they're reasonably comfortable (they're quite frugal and don't go on expensive holidays or anything like that). Maybe in 10 years she'll want to do something with the money, like improve/adapt the house or treat herself to a cruise, but chances are it won't be touched until she either has to use it to pay for care or it's inherited by someone. However, in case she does need/want to spend some of it in 10 years we're planning to split it between a global all cap fund and a bond fund and rebalance annually, so that if the markets happen to be down when she needs some money she can take it from the bonds.

For the equities portion Vanguard FTSE Global All Cap Index Fund GBP Acc seems like the best option, with an OCF of 0.23% and it's domiciled in the UK, so it has £85,000 protection in case the broker goes bust.
https://www.morningstar.co.uk/uk/funds/ ... F00000XXVV

iWeb is probably the best broker for her, as there's just a one-off £100 fee. Vanguard charge 0.15%/year, so £30/year for a £20,000 portfolio, which would be at least £200 more than iWeb over a 10 year period, but even if Vanguard was cheaper it has a poor reputation for customer service and the interface is very dated. She probably won't be adding to her investments, so the only transaction each year will be the annual rebalancing (iWeb charge £5/trade, so £10/year to sell one fund and buy the other to rebalance) and she probably won't need any customer support but if she does, she doesn't want to be stuck on hold for 30 minutes in order to speak with someone.

The bit we're having trouble with is picking something for the bonds portion. Does she need short-term, intermediate, long, a bit of each? Government only, index-linked, corporate? UK only or global? There's a summary of the various options on this page starting under the heading "UK Government bonds – intermediate duration" which shows how much they cost but that doesn't really help me understand which will be most suitable for her situation. https://monevator.com/low-cost-index-trackers/

I checked and they're all available on iWeb except for these Global funds (which doesn't matter, as other options are available):
SPDR Bloomberg Barclays Global Aggregate Bond ETF (GLAB)
Smith & Williamson Global Inflation Linked Bond Fund X (IE00B7RG6563)
ASI Short Duration Global Inflation Linked Bond Fund (GB00BP25RB79)

What would you recommend for the bonds portion and how would you split the portfolio between equities/bonds? As she just wants to let it grow and doesn't need to take any income from it, would 70/30 be conservative enough to protect against the risk of the market being down in 10+ years when she might want to take some money out?
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galeno
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Re: UK: Helping my Mum reinvest her assets. Baffled by bonds.

Post by galeno »

Go 50/50.

For bonds use 100% AGGG. Your parents can spend the dividend and interest income.

12 month yield for the equities = 1.42%

12 month yield for the bonds = 1.12%

50/50 12 month yield = 1.27%.
KISS & STC.
Topic Author
doveman
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Re: UK: Helping my Mum reinvest her assets. Baffled by bonds.

Post by doveman »

She doesn't want/need to spend the income, hence why we're looking at Vanguard FTSE Global All Cap Index Fund GBP Accumulator for the equities portion.

Why 50/50? Someone suggested that 60/40 might be too conservative if my parents' pensions provide sufficient income for their day-to-day needs.

AGGG isn't available on iWeb but it doesn't seem ideal for a UK investor anyway, as the breakdown is 30.09% US, 13.22% Japan, Non-Classified 9.43%, China 7.31%, France 5.52% and UK only 5.05%. I thought with bonds (unlike with equities) we should have a home bias and it certainly seems peculiar to have a greater share assigned to China, which is a bit of a mess economically, than to the UK.
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galeno
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Re: UK: Helping my Mum reinvest her assets. Baffled by bonds.

Post by galeno »

If your mom does not wish to spend the dividend and interest income why go any less than 80% stock and 20% bonds? You could go 100% stocks.

The YTM of AGGG = 1.15%. Vanguard's pessimistic forecast for VWRD is a nominal CAGR = 3.9%. Add 2% if you're an optimist.
KISS & STC.
tubaleiter
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Re: UK: Helping my Mum reinvest her assets. Baffled by bonds.

Post by tubaleiter »

doveman wrote: Wed Dec 29, 2021 7:59 pm She doesn't want/need to spend the income, hence why we're looking at Vanguard FTSE Global All Cap Index Fund GBP Accumulator for the equities portion.

Why 50/50? Someone suggested that 60/40 might be too conservative if my parents' pensions provide sufficient income for their day-to-day needs.

AGGG isn't available on iWeb but it doesn't seem ideal for a UK investor anyway, as the breakdown is 30.09% US, 13.22% Japan, Non-Classified 9.43%, China 7.31%, France 5.52% and UK only 5.05%. I thought with bonds (unlike with equities) we should have a home bias and it certainly seems peculiar to have a greater share assigned to China, which is a bit of a mess economically, than to the UK.
First bit to figure out is the asset allocation - % equities vs % bonds. Then the bond fund.

It feels like you/your mum can't quite decide whether to be aggressive with the money, in the hopes of growing it significantly for spending 10+ years down the road (or inheritance), vs being conservative to make sure money is there if/when your mum decides she wants to spend it. I do think 50/50 is a good default for this situation. If the stock market goes down 50% but bonds are pretty flat, she's only down 25% overall - hopefully not so much that she loses sleep over it. But there's also good room for growth on the equity portion. Ultimately, stocks vs bonds is a risk decision, nobody can make it for you/your mum, and the best you can do is pick something where you don't lose sleep over it, or risk your relationship with your mum.

Once you pick the stock/bonds split, then you need to pick the bonds fund (I agree with your equities pick on Global All Cap - may be worth looking if an ETF is cheaper than the fund based on iWeb's fees, but would be invested in essentially the same underlying stocks - VWRA would be the closest, although technically it misses small cap, but the difference in returns is likely to be minimal and could go either way).

For bonds, intermediate gilts would be a nice, conservative option. Higher rates than short term, less interest risk than long term, no currency exchange rate risk. Yes, you could branch out into global bonds (probably GBP hedged), but it's up to you/your mum how much risk you want to add to the "safe" part of the portfolio, in exchange for pretty small differences in rates unless you get to the more sketchy end of the pool - fancy some Turkish bonds at 25% or so? Could also think about a portion of the bond holdings being index-linked to protect against unexpected future inflation.

If it was me (and it's not!) I would probably go 50% world all cap equity, 25% intermediate gilts, 25% index-linked intermediate gilts, rebalanced annually. Good balance of growth and stability, simple and easy to understand, and low cost. But there are other equally valid approaches, that's just my example! If your mum really doesn't need the money and wouldn't worry about market volatility, there's a perfectly good argument for 100% equities, too :)
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galeno
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Re: UK: Helping my Mum reinvest her assets. Baffled by bonds.

Post by galeno »

For the OP best bond allocations:

Intermediate glits / Index-linked glits
GBP-hedged world bonds
Unhedged world bonds

I prefer unhedged vs hedged because I just don't like "betting" on one currency. I will tolerate the higher volatility.

"If it was me (and it's not!) I would probably go 50% world all cap equity, 25% intermediate gilts, 25% index-linked intermediate gilts, rebalanced annually. Good balance of growth and stability, simple and easy to understand, and low cost. But there are other equally valid approaches, that's just my example! If your mum really doesn't need the money and wouldn't worry about market volatility, there's a perfectly good argument for 100% equities, too :)"
KISS & STC.
Topic Author
doveman
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Re: UK: Helping my Mum reinvest her assets. Baffled by bonds.

Post by doveman »

tubaleiter wrote: Thu Dec 30, 2021 2:21 am It feels like you/your mum can't quite decide whether to be aggressive with the money, in the hopes of growing it significantly for spending 10+ years down the road (or inheritance), vs being conservative to make sure money is there if/when your mum decides she wants to spend it. I do think 50/50 is a good default for this situation. If the stock market goes down 50% but bonds are pretty flat, she's only down 25% overall - hopefully not so much that she loses sleep over it. But there's also good room for growth on the equity portion. Ultimately, stocks vs bonds is a risk decision, nobody can make it for you/your mum, and the best you can do is pick something where you don't lose sleep over it, or risk your relationship with your mum.
Yeah, I need to discuss it with her again to double-check that she doesn't intend to touch it for 10+ years. With her portfolio currently about 80% equities, mostly UK, it's exposed to the risk of a market crash without much chance of benefiting from an uptick in markets outside of the UK, so even a global 70/30 split would be less risky but she's been trusting the broker until now and didn't choose the current funds herself. Now she's making the decision, she needs to be comfortable with her choice but knowing that it was badly invested already should help her not worry that she hasn't made the "perfect" choice.

If my Dad inherits the ISA from my Mum the tax wrapper remains intact but if anyone else inherits it, there will potentially be 40% inheritance tax to pay. So probably the best outcome is that she manages to grow it enough to pay for some care when she's older. I think care homes charge about £1,000/week, so £50,000 would only cover a year's care (at current rates, god knows how much they'll be charging in 10-15 years) but if she only needs some at-home care for a few hours a day that will be a lot cheaper.
Once you pick the stock/bonds split, then you need to pick the bonds fund (I agree with your equities pick on Global All Cap - may be worth looking if an ETF is cheaper than the fund based on iWeb's fees, but would be invested in essentially the same underlying stocks - VWRA would be the closest, although technically it misses small cap, but the difference in returns is likely to be minimal and could go either way).
I agree that it probably won't make much difference going with All Cap rather than All World but there's a potential benefit with the extra small and mid cap exposure (albeit with a corresponding cut in giant and large, so it's all a bit of a gamble as we don't know what's going to perform best over the next decade) and VWRA is domiciled in Ireland, so only has 20,000EUR protection vs £85,000 for UK domiciled funds like Vanguard FTSE Global All Cap Index Fund GBP Acc. The OCF is much the same, 0.22% for VWRA and 0.23% for FTSE Global All Cap.
For bonds, intermediate gilts would be a nice, conservative option. Higher rates than short term, less interest risk than long term, no currency exchange rate risk. Yes, you could branch out into global bonds (probably GBP hedged), but it's up to you/your mum how much risk you want to add to the "safe" part of the portfolio, in exchange for pretty small differences in rates unless you get to the more sketchy end of the pool - fancy some Turkish bonds at 25% or so? Could also think about a portion of the bond holdings being index-linked to protect against unexpected future inflation.

If it was me (and it's not!) I would probably go 50% world all cap equity, 25% intermediate gilts, 25% index-linked intermediate gilts, rebalanced annually. Good balance of growth and stability, simple and easy to understand, and low cost. But there are other equally valid approaches, that's just my example! If your mum really doesn't need the money and wouldn't worry about market volatility, there's a perfectly good argument for 100% equities, too :)
Thanks. That sounds like a sensible split if she wants to play it fairly safe. If she wants to take a bit more risk and she's quite sure she won't need to touch it in less than 10 years, then I guess she could increase the all cap equity portion to 70-80% and lower the two gilt portions accordingly, keeping them both equal, so 70/15/15 or 80/10/10. If she's more worried about inflation then I guess she could increase the weight of the index-linked gilts portion but as she doesn't have any particular knowledge that inflation is going to be a problem, it probably isn't sensible for her to do that.

I noticed with intermediate gilts there's always a significant percentage that matures between 15-30+ years, e.g. with GLTA about 45% falls into those bands, with VGOV it's about 52%, with GILI it's about 57%, whereas with short gilts they all mature within 5 years. So there's nothing specifically for a 10-15 year time frame but I don't suppose it really matters and there's not much we can do about it anyway.
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doveman
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Re: UK: Helping my Mum reinvest her assets. Baffled by bonds.

Post by doveman »

galeno wrote: Thu Dec 30, 2021 8:04 am For the OP best bond allocations:

Intermediate glits / Index-linked glits
GBP-hedged world bonds
Unhedged world bonds

I prefer unhedged vs hedged because I just don't like "betting" on one currency. I will tolerate the higher volatility.
I can see your point but it's difficult enough to find UK intermediate and index-linked gilts that are accumulative and domiciled in the UK. Even if I could find a decent unhedged global bond that met those criteria, the currency conversion risks and higher fees make it harder to weigh the pros and cons.

UK intermediate or index-linked have an OCF around 0.06-0.1% and GBP-hedged global bonds are also available for 0.1% but GBP-hedged global inflation-linked costs 0.25%+.

Of the funds listed on the monevator page, the only UK-domiciled accumulative intermediate gilt is:
iShares UK Gilts All Stocks Index Fund (GB00B83HGR24) Acc OCF 0.11% (UK)

and the only index-linked gilts that meet those criteria are:
iShares Index Linked Gilt Index Fund D (GB00B83RVT96) Acc OCF 0.11% (UK)
Vanguard UK Inflation Linked Gilt Index Fund (GB00B45Q9038) Acc OCF 0.12% (UK)

The cheaper funds in both categories with an OCF of 0.06-0.07% are either distributive or domiciled in Ireland (or both), or in Luxembourg (which probably has the same 20,000EUR protection as Ireland but I'm not sure about that).
Valuethinker
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Re: UK: Helping my Mum reinvest her assets. Baffled by bonds.

Post by Valuethinker »

doveman wrote: Thu Dec 30, 2021 6:17 pm
If my Dad inherits the ISA from my Mum the tax wrapper remains intact but if anyone else inherits it, there will potentially be 40% inheritance tax to pay. So probably the best outcome is that she manages to grow it enough to pay for some care when she's older. I think care homes charge about £1,000/week, so £50,000 would only cover a year's care (at current rates, god knows how much they'll be charging in 10-15 years) but if she only needs some at-home care for a few hours a day that will be a lot cheaper.
In the South West, Dorchester, a good care home is closer to £1250 pw (5200 or so pcm). Don't ask me how I know ;-).

And it will go up.

Most people, if they have an extended care home period (I am not sure, but I think the average stay is only about 18 months) then it is their house equity which finances it.

At home care can become "live in carer" but they still only work a specified number of hours per week. So it gets more expensive pretty quickly (and won't work for, eg, dementia, which requires specialised care).

Given current immigration restrictions, the care home sector is in an absolute mess. I would expect to see faster than inflation rises in costs for the foreseeable future. There is little labour-saving from new technology, and the sector badly underpays its staff. And as the age structure of the population shifts, there will just be fewer younger people willing to do that kind of work (unless it pays a lot better).

I would take your Mum's ISA, dump it in a global equity fund (index) or ETF and be done with it.

Bonds? You say they have pensions to cover their basic costs of living. So I would not bother. Even though I generally suggest minimum 20% in bonds.

For the 20% in bonds you basically want a global govt bond fund, sterling hedged. Or global investment grade, sterling hedged. I have posted a number of times regarding the odd characteristics of the gilt index (very long duration) which is why I suggest that over a gilt index fund. But it won't make a huge amount of difference (so long as you are sterling hedged, and investment grade credit only).
Ldnr
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Re: UK: Helping my Mum reinvest her assets. Baffled by bonds.

Post by Ldnr »

A vanguard global bond fund is the usual solution for bonds allocation.

Can I suggest you look at the 60/40 vanguard lifestrategy range?
These one fund lifestrategy solutions may be “good enough” and allow you to set and forget with no further tinkering for the next few years.

Good on you for getting rid of the expensive current funds!
There’s no panacea in investing - John Bogle
Valuethinker
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Re: UK: Helping my Mum reinvest her assets. Baffled by bonds.

Post by Valuethinker »

Ldnr wrote: Tue Jan 04, 2022 5:12 pm A vanguard global bond fund is the usual solution for bonds allocation.

Can I suggest you look at the 60/40 vanguard lifestrategy range?
These one fund lifestrategy solutions may be “good enough” and allow you to set and forget with no further tinkering for the next few years.

Good on you for getting rid of the expensive current funds!
I think this is good advice.

And avoids some of the complexity in the answer I gave.
jw50
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Re: UK: Helping my Mum reinvest her assets. Baffled by bonds.

Post by jw50 »

I also support 60/40 life strategy as a good enough option.

Check platform charge. Vanguard own platform (vanguard.co.uk) charge 0.15%/year which will be among the lowest.
Valuethinker
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Re: UK: Helping my Mum reinvest her assets. Baffled by bonds.

Post by Valuethinker »

jw50 wrote: Wed Jan 05, 2022 5:21 am I also support 60/40 life strategy as a good enough option.

Check platform charge. Vanguard own platform (vanguard.co.uk) charge 0.15%/year which will be among the lowest.
That's an annoying (additional) charge that Vanguard levies.

Nonetheless I have switched my spouse's ISA into Vanguard with precisely that fund.

Keep It Simple, Simply. One might say. She leaves investing to me, and she handles the less important decisions like: where we live, what we do on weekends, where and when we go on holiday etc. :sharebeer
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doveman
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Re: UK: Helping my Mum reinvest her assets. Baffled by bonds.

Post by doveman »

Valuethinker wrote: Tue Jan 04, 2022 8:24 am In the South West, Dorchester, a good care home is closer to £1250 pw (5200 or so pcm). Don't ask me how I know ;-).

And it will go up.
Wow, it's worse than I thought. We're in the Greater London/Surrey area, so it's probably even more expensive around here. My Nan didn't need any care as such, but she got a bit too unsteady to stay in her council flat by herself, so she spent the last 5 years of her life in sheltered housing in East London and even without care fees I'm sure that would have cost her over £1,000/week in rent and other fees if she owned her home or any assets, but luckily she didn't so it was covered by the council.
Most people, if they have an extended care home period (I am not sure, but I think the average stay is only about 18 months) then it is their house equity which finances it.

At home care can become "live in carer" but they still only work a specified number of hours per week. So it gets more expensive pretty quickly (and won't work for, eg, dementia, which requires specialised care).

Given current immigration restrictions, the care home sector is in an absolute mess. I would expect to see faster than inflation rises in costs for the foreseeable future. There is little labour-saving from new technology, and the sector badly underpays its staff. And as the age structure of the population shifts, there will just be fewer younger people willing to do that kind of work (unless it pays a lot better).
Yeah, even a year or two in a care home can take a large chunk out of the house equity. Unfortunately my parents are in complete denial and think that they'll never need any care. I can understand that they find it distressing to think about, as they have two disabled children who they won't be able to provide for if their house equity is used to pay for their care, but they'll find it even more distressing if they don't seek advice now and end up in a care home watching their house equity disappearing to pay for some rich care home owner's new Mercedes and yacht, because as you say the staff doing the actual work are badly underpaid, so they're not getting much of the money.

I recall reading an article about how some people take their elderly relatives to somewhere like Thailand, where the care staff are relatively well paid and the culture respects elderly people, so they treat their patients really nice, like they're family. I think that's where I'd like to go if I ever need care and can afford to move there and pay for it.
I would take your Mum's ISA, dump it in a global equity fund (index) or ETF and be done with it.

Bonds? You say they have pensions to cover their basic costs of living. So I would not bother. Even though I generally suggest minimum 20% in bonds.

For the 20% in bonds you basically want a global govt bond fund, sterling hedged. Or global investment grade, sterling hedged. I have posted a number of times regarding the odd characteristics of the gilt index (very long duration) which is why I suggest that over a gilt index fund. But it won't make a huge amount of difference (so long as you are sterling hedged, and investment grade credit only).
I'm certainly considering 100% global equities as an option to discuss with her, if she's certain she doesn't need the money for anything in the next 10 years or so, but she may feel more comfortable with the 20% bonds option, to provide a bit of a hedge. What's the difference between "the gilt index" and "a gilt index fund"?

I would prefer to use a global GBP-hedged accumulative bond fund but I haven't been able to find any that are domiciled in the UK. These three are all domiciled in Ireland, where the protection is only 20,000EUR vs £85,000 for UK domiciled funds and apparently Vanguard Irish domiciled funds and ETFs are not even covered by the Irish scheme, so there's no protection for them at all. This may be true of the iShares one too for all I know (which is distributive anyway), so the only safe option is to stick with UK domiciled funds, which seems to rule out any global bonds. https://monevator.com/investor-compensation-scheme/

Vanguard Global Aggregate Bond Hedged Acc ETF (VAGS) OCF 0.1% - effective duration 7.69 years
https://www.morningstar.co.uk/uk/etf/sn ... entType=FE

Vanguard Global Bond Index Fund GBP Hedged Acc OCF 0.15% - effective duration 7.69 years
https://www.morningstar.co.uk/uk/funds/ ... 3VEC&tab=3

iShares Global Government Bond UCITS ETF (IGLH) Dist OCF 0.25 - effective duration 8.82 years
https://www.morningstar.co.uk/uk/etf/sn ... entType=FE
Topic Author
doveman
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Re: UK: Helping my Mum reinvest her assets. Baffled by bonds.

Post by doveman »

Ldnr wrote: Tue Jan 04, 2022 5:12 pm A vanguard global bond fund is the usual solution for bonds allocation.

Can I suggest you look at the 60/40 vanguard lifestrategy range?
These one fund lifestrategy solutions may be “good enough” and allow you to set and forget with no further tinkering for the next few years.

Good on you for getting rid of the expensive current funds!
Thanks. I have looked at the Vanguard lifestrategy but I'm not keen on them because the equities portion is about 20% UK, which is about 4 times what the market cap is. I think it's better to just follow the market rather than gambling on the UK outperforming the US, which I don't think there's any reason to believe is likely to happen.

I think annual rebalancing is simple enough for my Mum (perhaps with a bit of assistance from my Dad or myself) but if she decides in a few years that even that is too much hassle, we can always move to something like the LS fund then.
Valuethinker
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Re: UK: Helping my Mum reinvest her assets. Baffled by bonds.

Post by Valuethinker »

doveman wrote: Wed Jan 05, 2022 9:39 am

Yeah, even a year or two in a care home can take a large chunk out of the house equity. Unfortunately my parents are in complete denial and think that they'll never need any care. I can understand that they find it distressing to think about, as they have two disabled children who they won't be able to provide for if their house equity is used to pay for their care, but they'll find it even more distressing if they don't seek advice now and end up in a care home watching their house equity disappearing to pay for some rich care home owner's new Mercedes and yacht, because as you say the staff doing the actual work are badly underpaid, so they're not getting much of the money.
That's a huge flag to me that they need professional advice. I have the name of a (not cheap) London tax accountant if you PM me. But someone who understands care finance law (which is in any case changing with the new legislation proposed by the government and the £86k). How best to look after their children in a way that does not imperil their children's access to state benefits.

It may be they need to set up a Trust. The personal finance sections of the FT (perhaps the Times and the Telgraph?) have Saturday piece where people write in asking questions like this.

Certainly they will need advice re Wills.

I'm certainly considering 100% global equities as an option to discuss with her, if she's certain she doesn't need the money for anything in the next 10 years or so, but she may feel more comfortable with the 20% bonds option, to provide a bit of a hedge. What's the difference between "the gilt index" and "a gilt index fund"?
I was unclear. The choice is a Global Govt Bond index fund vs a Gilt Index fund. Index is simply the 3rd party created target benchmark against which they track (hence "tracker funds" in UK speak, Americans call it "passive management").

The advantage of the global govt bond index fund is simply that it is less sensitive to interest rate changes (lower duration).

The "protection" of which you speak? Do you mean the broker indemnity fund (whose initials I never remember)? No fund is protected as to value. You need a bank account for that (UK bank accounts, total per individual per institution, are £85k guaranteed, Eurozone it is EUR 100k). The value of a bond fund goes up and down with markets - there is no guarantee.

If you mean against fraud, then if you use a reputable broker (like Fidelity or Vanguard) you should be fine. The funds are held in a nominee account with your name attached to your holding. So if the broker goes bust, the assets are simply transferred to another broker. You should suffer no loss.
I would prefer to use a global GBP-hedged accumulative bond fund but I haven't been able to find any that are domiciled in the UK. These three are all domiciled in Ireland, where the protection is only 20,000EUR vs £85,000 for UK domiciled funds and apparently Vanguard Irish domiciled funds and ETFs are not even covered by the Irish scheme, so there's no protection for them at all. This may be true of the iShares one too for all I know (which is distributive anyway), so the only safe option is to stick with UK domiciled funds, which seems to rule out any global bonds. https://monevator.com/investor-compensation-scheme/

Vanguard Global Aggregate Bond Hedged Acc ETF (VAGS) OCF 0.1% - effective duration 7.69 years
https://www.morningstar.co.uk/uk/etf/sn ... entType=FE

Vanguard Global Bond Index Fund GBP Hedged Acc OCF 0.15% - effective duration 7.69 years
https://www.morningstar.co.uk/uk/funds/ ... 3VEC&tab=3

iShares Global Government Bond UCITS ETF (IGLH) Dist OCF 0.25 - effective duration 8.82 years
https://www.morningstar.co.uk/uk/etf/sn ... entType=FE
I don't see any reason, for a UK taxpayer, to prefer a UK domiciled fund over an Irish one. At least I am not aware of any advantage. The Vanguard ones can be held in a Vanguard ISA.

Seriously consider the 60-40 fund. Lower long run returns, but when markets hit the fan (look at the drop of markets in March 2020 to remember just how rough a ride they can give you) it will be much more stable.
Valuethinker
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Re: UK: Helping my Mum reinvest her assets. Baffled by bonds.

Post by Valuethinker »

doveman wrote: Wed Jan 05, 2022 10:40 am
Ldnr wrote: Tue Jan 04, 2022 5:12 pm A vanguard global bond fund is the usual solution for bonds allocation.

Can I suggest you look at the 60/40 vanguard lifestrategy range?
These one fund lifestrategy solutions may be “good enough” and allow you to set and forget with no further tinkering for the next few years.

Good on you for getting rid of the expensive current funds!
Thanks. I have looked at the Vanguard lifestrategy but I'm not keen on them because the equities portion is about 20% UK, which is about 4 times what the market cap is. I think it's better to just follow the market rather than gambling on the UK outperforming the US, which I don't think there's any reason to believe is likely to happen.

I think annual rebalancing is simple enough for my Mum (perhaps with a bit of assistance from my Dad or myself) but if she decides in a few years that even that is too much hassle, we can always move to something like the LS fund then.
It's not the 4x which matters. It is the 20%. As long as the UK tracks the world index, enough, it won't matter much. the UK has underperformed the US market enough in recent years that it would have mattered, but who knows if that will continue?
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doveman
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Re: UK: Helping my Mum reinvest her assets. Baffled by bonds.

Post by doveman »

jw50 wrote: Wed Jan 05, 2022 5:21 am I also support 60/40 life strategy as a good enough option.

Check platform charge. Vanguard own platform (vanguard.co.uk) charge 0.15%/year which will be among the lowest.
Iweb actually works out a lot cheaper, as they just charge a flat £100 fee, whereas Vanguard would cost about £30/year, so an extra £200 over 10 years.

I'm not sure the Vanguard funds are going to be suitable either, especially if they're domiciled in Ireland, which seems to be the case with their global bond funds. For the equities fund, these are all domiciled in the UK:

Vanguard FTSE Global All Cap Index Fund GBP Acc - OCF 0.23% - 7,116 holdings
https://www.morningstar.co.uk/uk/funds/ ... XXVV&tab=3

Vanguard FTSE Developed World ex-U.K. Equity Index Fund GBP Inc - OCF 0.14% - 2,094 holdings
https://www.morningstar.co.uk/uk/funds/ ... 3YD4&tab=3

Fidelity Index World Fund P GBP Income - OCF 0.12% - 1,559 holdings
https://www.morningstar.co.uk/uk/funds/ ... TX59&tab=3

We'll probably go with the Global All Cap, even though the OCF is almost double the other options, to have more exposure to small and mid-cap, as large and giant are arguably overvalued at the moment, but obviously no-one knows what's going to happen so either way it's a bit of a gamble. With the Vanguard ex-UK, we'd need a separate UK fund, so I probably wouldn't recommend that as it would make rebalancing more complicated.
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doveman
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Re: UK: Helping my Mum reinvest her assets. Baffled by bonds.

Post by doveman »

Valuethinker wrote: Wed Jan 05, 2022 10:41 am That's a huge flag to me that they need professional advice. I have the name of a (not cheap) London tax accountant if you PM me. But someone who understands care finance law (which is in any case changing with the new legislation proposed by the government and the £86k). How best to look after their children in a way that does not imperil their children's access to state benefits.

It may be they need to set up a Trust. The personal finance sections of the FT (perhaps the Times and the Telgraph?) have Saturday piece where people write in asking questions like this.

Certainly they will need advice re Wills.
Although they're pensions are sufficient to live on, they're fairly cash-poor and what savings my Dad has they'll probably need to spend fixing up the house, so I doubt they could afford a London tax accountant, even if I could persuade them to take this seriously and seek advice but I will PM you for the details thanks, and suggest that they at least call to get an idea of the cost. I did my own lasting power of attorney for health and finance about 6 years ago when I needed a minor operation, just in case, and I've been nagging them to do theirs ever since, even if they only name each other, and they started on them but just keep dithering and putting it off. Even after our friend's Mum had a stroke a couple of years ago and her family had a terrible time with the hospital because she hadn't made a LPA, my parent's still haven't done theirs. It does my head in!
I was unclear. The choice is a Global Govt Bond index fund vs a Gilt Index fund. Index is simply the 3rd party created target benchmark against which they track (hence "tracker funds" in UK speak, Americans call it "passive management").

The advantage of the global govt bond index fund is simply that it is less sensitive to interest rate changes (lower duration).
Ah, so you mean a global bond like this:
Vanguard Global Aggregate Hedged Acc ETF (VAGS) OCF 0.1%

compared to a UK gilts like this?
iShares UK Gilts All Stocks Index Fund (GB00B83HGR24) Acc OCF 0.11%
The "protection" of which you speak? Do you mean the broker indemnity fund (whose initials I never remember)? No fund is protected as to value. You need a bank account for that (UK bank accounts, total per individual per institution, are £85k guaranteed, Eurozone it is EUR 100k). The value of a bond fund goes up and down with markets - there is no guarantee.

If you mean against fraud, then if you use a reputable broker (like Fidelity or Vanguard) you should be fine. The funds are held in a nominee account with your name attached to your holding. So if the broker goes bust, the assets are simply transferred to another broker. You should suffer no loss.
Yeah, it's the FSCS £85,000 protection against loss due to fraud or the broker going bust, as discussed on that monevator page, that I was referring to. I agree the risk is very low but I still wouldn't feel comfortable advising my Mum to invest her money in a fund which is domiciled in Ireland and has no protection, when there are decent UK domiciled funds she can invest in that have £85,000 protection, in case the worst happens.
Seriously consider the 60-40 fund. Lower long run returns, but when markets hit the fan (look at the drop of markets in March 2020 to remember just how rough a ride they can give you) it will be much more stable.
Unfortunately the life strategy funds are domiciled in Ireland but we can easily create a 60/40 portfolio manually using UK domiciled funds if that's the best option, and probably for a lower total OCF.
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doveman
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Re: UK: Helping my Mum reinvest her assets. Baffled by bonds.

Post by doveman »

I'm wondering now whether it's the best time to be moving away from mostly UK investments to a global tracker, as I've seen reports that Financial and Energy are doing well at the moment, whilst other sectors stagnate or drop, and the UK has quite a lot of banking stocks (not so much energy).

Looking at my Mum's main fund, the Fidelity Moneybuilder Div W Inc, on Morningstar which is a bit easier to understand in some respects than the Fidelity page, https://www.morningstar.co.uk/uk/funds/ ... NQBB&tab=5 , it returned 20.66% in 2019 and 17.64% in 2021, although it dropped -12.60% in 2020 and the 3 years annualised at 7.02% and the 5 years at 3.42% aren't great when compared to the FTSE All Cap, https://www.morningstar.co.uk/uk/funds/ ... XXVS&tab=1, which is 15.38% and 10.78% respectively. It had similar gains to the Fidelity fund in 2019 and 2021 but it returned a gain of 12.50% in 2020, so in comparison the Fidelity fund lost about 25% that year.

It's 91.66% UK and 8.34% North America and the sector exposure is:
Basic Materials 5.68
Consumer Cyclical 2.70
Financial Services 17.08
Real Estate 1.20
Communication Services 5.03
Energy 8.63
Industrials 2.46
Technology 7.58
Consumer Defensive 27.56
Healthcare 10.73
Utilities 11.36

Even if it makes sense to stay invested mostly in the UK at the moment, that can be done for a lower OCF than the Fidelity fund's 0.67%.

For example, for UK large cap there's HSBC FTSE All Share Index Fund Institutional (OCF 0.02%)
https://www.morningstar.co.uk/uk/funds/ ... V987&tab=1
and for UK mid and small cap there's Amundi Prime UK Mid & Small Cap ETF (OCF 0.05%) https://www.morningstar.co.uk/uk/etf/sn ... entType=FE

However, perhaps a global fund (or at least US+UK, maybe Europe too) that's focused on financial and energy stocks would be a better option for now, and then reviewing in 6 months to see where the market is going?

Maybe I'm overthinking this but, I'm worried that this could be a bad time to move to a global index that's 60% US, 42% Giant cap and 31% Large cap, with most of the top 10 holdings being US tech stocks, which are generally regarded as overvalued, when a lot of institutional money is moving away from tech and growth into value.
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BrooklynInvest
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Re: UK: Helping my Mum reinvest her assets. Baffled by bonds.

Post by BrooklynInvest »

Had similar issue with my mum.

Vanguard's Conservative Allocation Fund... I may have butchered the name a bit there. She's very concerned about losses. While she could financially tolerate a more aggressive AA for this money - earmarked for the grandson but y'know - her wishes prevail. Some volatility given bond market but does what it's supposed to at a good ER.
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doveman
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Re: UK: Helping my Mum reinvest her assets. Baffled by bonds.

Post by doveman »

BrooklynInvest wrote: Tue Jan 11, 2022 8:28 am Had similar issue with my mum.

Vanguard's Conservative Allocation Fund... I may have butchered the name a bit there. She's very concerned about losses. While she could financially tolerate a more aggressive AA for this money - earmarked for the grandson but y'know - her wishes prevail. Some volatility given bond market but does what it's supposed to at a good ER.
Is this the one you meant? https://investmentcentre.moneymanagemen ... tive-index

It seems to be an Australian fund, at least I couldn't find a UK version of it but maybe the Target Retirement Fund is the UK version.

I don't think my Mum's particularly concerned about losses, as the current funds she holds expose her to a lot of risk. So long term she may be happy with 70-100% global all cap equities but I need to discuss with her what level of risk she's comfortable with going forward. It's just for the short term, like the next 6 months, that I'm wondering whether it would be better to invest in UK or banking+energy stocks, until we have a better idea what's happening with the economy and the markets.

Long term, for bonds we may have to risk going with a Irish-domiciled fund like iShares Core Global Aggregate Bond UCITS ETF GBP Hedged (Dist) | AGBP https://www.morningstar.co.uk/uk/etf/sn ... entType=FE if we want a global fund, as there doesn't seem to be any UK domiciled ones, and also get a UK-domiciled index-linked gilts fund to provide some hedge against inflation as I guess there's less need for that to be global as we only care about UK inflation, and a global inflation-linked bonds hedged to GBP costs 2.5-3.5x the UK fund.

I'm not sure now is a great time to be buying bonds either. I don't really know much about how bonds work but I read that the bonds to come later this year will pay a higher yield than the existing ones, which will reduce the value of the existing ones and the ETFs that hold them, so it would be better to wait six months to buy a bond ETF that holds the new bonds and pays twice the yield. Is that true?

I know the US has inflation-linked i-bonds which pay about 7% at the moment and presumably this will follow the inflation rate as it changes, but do the UK inflation-linked gilts do the same?

Lyxor Core UK Government Inflation-Linked Bond (DR) UCITS ETF - Dist-GBP (GILI) was up 10.93% in 2020, even though inflation was below 1% for most of that year
https://www.morningstar.co.uk/uk/etf/sn ... entType=FE

whilst iShares Index Linked Gilt Index Fund (UK) D Acc was up 12.82% in 2020 and beat the Lyxor ETF by about 2% in 2014 and 2016 too, but the 3 and 5 year annualised returns are about the same for both funds, which seems a bit strange.
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Re: UK: Helping my Mum reinvest her assets. Baffled by bonds.

Post by BrooklynInvest »

doveman wrote: Tue Jan 11, 2022 11:34 am
BrooklynInvest wrote: Tue Jan 11, 2022 8:28 am Had similar issue with my mum.

Vanguard's Conservative Allocation Fund... I may have butchered the name a bit there. She's very concerned about losses. While she could financially tolerate a more aggressive AA for this money - earmarked for the grandson but y'know - her wishes prevail. Some volatility given bond market but does what it's supposed to at a good ER.
Is this the one you meant? https://investmentcentre.moneymanagemen ... tive-index

It seems to be an Australian fund, at least I couldn't find a UK version of it but maybe the Target Retirement Fund is the UK version.

I don't think my Mum's particularly concerned about losses, as the current funds she holds expose her to a lot of risk. So long term she may be happy with 70-100% global all cap equities but I need to discuss with her what level of risk she's comfortable with going forward. It's just for the short term, like the next 6 months, that I'm wondering whether it would be better to invest in UK or banking+energy stocks, until we have a better idea what's happening with the economy and the markets.

Long term, for bonds we may have to risk going with a Irish-domiciled fund like iShares Core Global Aggregate Bond UCITS ETF GBP Hedged (Dist) | AGBP https://www.morningstar.co.uk/uk/etf/sn ... entType=FE if we want a global fund, as there doesn't seem to be any UK domiciled ones, and also get a UK-domiciled index-linked gilts fund to provide some hedge against inflation as I guess there's less need for that to be global as we only care about UK inflation, and a global inflation-linked bonds hedged to GBP costs 2.5-3.5x the UK fund.

I'm not sure now is a great time to be buying bonds either. I don't really know much about how bonds work but I read that the bonds to come later this year will pay a higher yield than the existing ones, which will reduce the value of the existing ones and the ETFs that hold them, so it would be better to wait six months to buy a bond ETF that holds the new bonds and pays twice the yield. Is that true?

I know the US has inflation-linked i-bonds which pay about 7% at the moment and presumably this will follow the inflation rate as it changes, but do the UK inflation-linked gilts do the same?

Lyxor Core UK Government Inflation-Linked Bond (DR) UCITS ETF - Dist-GBP (GILI) was up 10.93% in 2020, even though inflation was below 1% for most of that year
https://www.morningstar.co.uk/uk/etf/sn ... entType=FE

whilst iShares Index Linked Gilt Index Fund (UK) D Acc was up 12.82% in 2020 and beat the Lyxor ETF by about 2% in 2014 and 2016 too, but the 3 and 5 year annualised returns are about the same for both funds, which seems a bit strange.
LifeStrategy 20% Equity Fund I believe OP. The simplest solution for a risk averse investor. Yeah there's rate risk of course so it's all relative. Good luck with mum!
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doveman
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Re: UK: Helping my Mum reinvest her assets. Baffled by bonds.

Post by doveman »

BrooklynInvest wrote: Tue Jan 11, 2022 1:53 pm LifeStrategy 20% Equity Fund I believe OP. The simplest solution for a risk averse investor. Yeah there's rate risk of course so it's all relative. Good luck with mum!
She's not really risk averse. She doesn't have any plans for this money, so she's looking to grow it as much as possible so she can either use it to pay for care if that becomes necessary in 10-15 years, or pass it on to her children. That's not to say she wants to YOLO it all on Tesla and Hydrocarbon!

Having looked into index-linked gilts a bit, I'm even more confused about them but it's clear that it's not as simple as "these will protect you against inflation", like the US i-bonds, which guarantee to pay 7%.

She's opened her account with iWeb now and sold the funds with Aegon and bought cash with the money (that was a bit confusing, buying cash with money, but that's how they do it, you have to sell the funds then buy cash with the money that's freed up), but they say it can take 5-7 days to process, so once that's done she can ask them to transfer the cash from the Aegon ISA to the iWeb ISA (Aegon don't charge any fee for that at least).

Whilst I try and get to grips with bonds, and work out whether now is a good time to even buy intermediate UK gilts or a global bond fund, I'll probably suggest that she invests the equities allocation (probably 70-80%) in either a global all-cap fund like Vanguard FTSE Global All Cap Index Fund GBP Acc https://www.morningstar.co.uk/uk/funds/ ... F00000XXVV or maybe a World ex-UK fund like Vanguard FTSE Developed World ex-U.K. Equity Index Fund GBP Acc https://www.morningstar.co.uk/uk/funds/ ... 3YD3&tab=5 (which has outperformed the All cap and has a lower OCF) and then maybe use the 5% that would normally be allocated to the UK to invest in a sector fund with better potential returns than the UK as a whole, like oil or banking, or small value (if I can find any funds like these with reasonable OCF).

Of course, she could invest that 5% in specific stocks but it would probably be better if we can find a sector fund, rather than having to pick individual companies (which will also complicate the annual rebalancing).

An All Cap ex-UK would be ideal, as then she'd have the 5-6% Small Cap and Emerging exposure without having to buy separate funds for those.

As things are a bit unsettled at the moment, with rate hikes expected in the US in March but no certainty about how severe they're going to be, I think it might be sensible for her to DCA into the equities funds, maybe 1/4 of the allocation each month rather than sticking it all in now. It could go either way of course, but there's a reasonable chance that the hikes will be higher than expected and the market will drop again in response.
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Re: UK: Helping my Mum reinvest her assets. Baffled by bonds.

Post by Valuethinker »

doveman wrote: Wed Jan 26, 2022 4:20 pm
BrooklynInvest wrote: Tue Jan 11, 2022 1:53 pm LifeStrategy 20% Equity Fund I believe OP. The simplest solution for a risk averse investor. Yeah there's rate risk of course so it's all relative. Good luck with mum!
She's not really risk averse. She doesn't have any plans for this money, so she's looking to grow it as much as possible so she can either use it to pay for care if that becomes necessary in 10-15 years, or pass it on to her children. That's not to say she wants to YOLO it all on Tesla and Hydrocarbon!

Having looked into index-linked gilts a bit, I'm even more confused about them but it's clear that it's not as simple as "these will protect you against inflation", like the US i-bonds, which guarantee to pay 7%.
Index-linked National Savings certificates are pretty much ibonds. "Guarantee to pay 7%"? No. they are guaranteed to pay inflation?

Index linked gilts are more volatile. The analogy is to US TIPS bonds.

I think what she needs is a Vanguard 60-40 fund. That will save her having to rebalance. It's what I put my spouse's inheritance into -- mixture of that and 40: 60, to average out at 50:50.
She's opened her account with iWeb now and sold the funds with Aegon and bought cash with the money (that was a bit confusing, buying cash with money, but that's how they do it, you have to sell the funds then buy cash with the money that's freed up), but they say it can take 5-7 days to process, so once that's done she can ask them to transfer the cash from the Aegon ISA to the iWeb ISA (Aegon don't charge any fee for that at least).

Whilst I try and get to grips with bonds, and work out whether now is a good time to even buy intermediate UK gilts or a global bond fund, I'll probably suggest that she invests the equities allocation (probably 70-80%) in either a global all-cap fund like Vanguard FTSE Global All Cap Index Fund GBP Acc https://www.morningstar.co.uk/uk/funds/ ... F00000XXVV or maybe a World ex-UK fund like Vanguard FTSE Developed World ex-U.K. Equity Index Fund GBP Acc https://www.morningstar.co.uk/uk/funds/ ... 3YD3&tab=5 (which has outperformed the All cap and has a lower OCF) and then maybe use the 5% that would normally be allocated to the UK to invest in a sector fund with better potential returns than the UK as a whole, like oil or banking, or small value (if I can find any funds like these with reasonable OCF).
I wouldn't do an ex UK fund if I could do a global fund (which will be around 6% UK)? Honestly it does not matter to me whether Shell is listed on Amsterdam (soon it won't be) or London (they are ending the dual listing structure). It's part of the world index so I want to own it.
Of course, she could invest that 5% in specific stocks but it would probably be better if we can find a sector fund, rather than having to pick individual companies (which will also complicate the annual rebalancing).

An All Cap ex-UK would be ideal, as then she'd have the 5-6% Small Cap and Emerging exposure without having to buy separate funds for those.
Vanguard does this, I believe.

I wouldn't bother with a sector fund for only 5%-- it will have the square root of nothing impact on final portfolio value. The big call is bonds v equities, and "the rest is noise".
As things are a bit unsettled at the moment, with rate hikes expected in the US in March but no certainty about how severe they're going to be, I think it might be sensible for her to DCA into the equities funds, maybe 1/4 of the allocation each month rather than sticking it all in now. It could go either way of course, but there's a reasonable chance that the hikes will be higher than expected and the market will drop again in response.
You can't time markets. It's better to buy on a red day, and sell on a green day, though.
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Re: UK: Helping my Mum reinvest her assets. Baffled by bonds.

Post by hariseldon »

Reading this thread with interest , it does appear to be a lot of fine detail for a modest investment.

There is no reason for a UK investor to avoid Irish based ETFs, they are fine and very tax efficient and the most common choice for a UK investor.

Regarding the broker look at Halifax Share Dealing as well as iWeb, they are effectively the same company but different charging structures.

If you are going to hold a global tracker then take a look at HSBC FTSE All World Class Accumulation OEIC, its very low cost at .13% low tracking error and an accumulation fund avoids the issue of reinvesting dividends both cost and the admin.

For bonds, ETFs that spring to mind are VAGS.L Vanguard Global Aggregate accumulating bond hedged to sterling at .1%pa and if inflation concerns you then ITPS.L accumulating $ US Treasury Inflation protected securities from iShares, again an ETF , also at .1% both are freely available for UK investors.

The simplest approach is probably a LifeStrategy fund….. the Uk bias has been neutral for the last 12 months…. It does rebalance daily as well, its a set and forget investment if accumulation units are held.
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Re: UK: Helping my Mum reinvest her assets. Baffled by bonds.

Post by seajay »

Valuethinker wrote: Wed Jan 05, 2022 10:41 amI have the name of a (not cheap) London tax accountant if you PM me. But someone who understands care finance law (which is in any case changing with the new legislation proposed by the government and the £86k). How best to look after their children in a way that does not imperil their children's access to state benefits.

It may be they need to set up a Trust. The personal finance sections of the FT (perhaps the Times and the Telgraph?) have Saturday piece where people write in asking questions like this.

Certainly they will need advice re Wills.
https://www.gov.uk/government/publicati ... er-details

My reading is that upon reaching the £86K cap the local authority become liable for agreeing what care is needed and funding of such, excepting £200/week that still needs to be paid for accommodation services, and any 'top ups'
additional payments for a preferred choice of accommodation or care arrangement ... [that] will not count towards the cap and will still be payable by the person once the cap has been reached.
I very much suspect that when it comes to the realities of local authorities care arrangements and funding it may be a case of a cardboard box under some distant/remote bridge/minimal care ... type LA get-out. As such many will still IMO opt to continue to self-fund themselves/their-parent(s) for the sake of 'better quality/comfort' rather than see their loved one moved into a distant, dark, urine soaked carpet type communal room environment.

As such I'd suggest thinking twice before going to the expense/bother of setting up trusts and/or other means to potentially minimise assets/care-payments, as that likely would backfire along with leading to further costs/taxes/complexities during probate.

Post October 2023 when the £86K new arrangement kicks in I can visualise the "local authority care home scandals" media headlines that will follow. Much if not all of the new NI (tax) increases that start in April are destined for the NHS, not social care nor local authorities.

RE: care costs ... and around my way (Surrey) and you're looking at around £87K/year for a care home placement for someone with dementia. At-home/live-in care is around £25/hour weekdays, double that rate at weekends and for some cases they'll say that two are needed at times to facilitate care i.e. it can be cheaper to pay the £87K/year for a care-home placement rather than trying to arrange/fund care at home. The carers themselves are more likely to be on minimum wage. Average duration I believe is around 4 to 5 years of care. Often the first to-go is cared for at home by their partner, sale of home covers the longer surviving partners care-home funding. Of the order £350K to £440K average expense, that can be discounted by state pension and care allowance (and any occupational pension(s)), say maybe £20K/year, so £270K to £340K type guideline figure.
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Re: UK: Helping my Mum reinvest her assets. Baffled by bonds.

Post by seajay »

Valuethinker wrote: Thu Jan 27, 2022 2:52 am
doveman wrote: Wed Jan 26, 2022 4:20 pm Having looked into index-linked gilts a bit, I'm even more confused about them but it's clear that it's not as simple as "these will protect you against inflation", like the US i-bonds, which guarantee to pay 7%.
Index-linked National Savings certificates are pretty much ibonds. "Guarantee to pay 7%"? No. they are guaranteed to pay inflation?

Index linked gilts are more volatile. The analogy is to US TIPS bonds.
UK index linked gilts are priced to a negative real yield, so whilst the bonds rise with inflation when you pay above par and discount that capital loss when the bond matures you end up with a less than inflation rate total return. Unfortunately fixedincomeinvestor.co.uk web site has ceased so can't point to the exact recent degree of lagging inflation, but around -1.5%/year IIRC last time I recently glanced. National savings index linked aren't available to new investors, only existing investors being permitted to roll their maturing bonds.
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doveman
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Re: UK: Helping my Mum reinvest her assets. Baffled by bonds.

Post by doveman »

Valuethinker wrote: Thu Jan 27, 2022 2:52 am Index-linked National Savings certificates are pretty much ibonds. "Guarantee to pay 7%"? No. they are guaranteed to pay inflation?

Index linked gilts are more volatile. The analogy is to US TIPS bonds.
This is the article I read about index-linked gilts https://www.investorschronicle.co.uk/fu ... ked-bonds/

The main points I took from it are that the real yields from index-linked gilts don't always match inflation; they only really work if you're lucky and buy them at a good time, when they're fairly priced (which will probably be long before anyone's expecting inflation) and only if inflation increases but interest rates don't, as the latter leads to a fall in the capital value of bonds, and they have a long duration (avg. 23 years) which causes their capital value to decrease even more when interest rates increase.

It does suggest at the end that a global bond fund can mitigate some of these risks, because US Tips tend to offer shorter duration and better yield. Reviewing this thread, I see that you did suggest a global bond fund previously which I forgot about, sorry. We also discussed how 100% equities might be fine as my parents' living costs are covered by their pensions, but I'll probably suggest a 20-30% hedge of some sort, whether that's bonds or something else. For now she'll probably just put 30% in a global all cap fund, keeping the rest in cash, and then increase that to 70-80% over the next couple of months, just in case there's a further crash after the Fed's announcement in March.
I wouldn't do an ex UK fund if I could do a global fund (which will be around 6% UK)? Honestly it does not matter to me whether Shell is listed on Amsterdam (soon it won't be) or London (they are ending the dual listing structure). It's part of the world index so I want to own it.

I wouldn't bother with a sector fund for only 5%-- it will have the square root of nothing impact on final portfolio value. The big call is bonds v equities, and "the rest is noise".
Yeah, I guess it's not worth the hassle and maybe the UK as a whole will perform better in future, although I'm sceptical.
You can't time markets. It's better to buy on a red day, and sell on a green day, though.
I think we just missed a red day but maybe a better one will come along in the next month or two. A lot of people seem to believe that the years of 10% CAGR are over for now and we might only see returns of 5%/year for the next few years, so I don't think we're likely to see much increase between now and the March rate hike, but there's a significant risk of a further large correction or crash depending on what the Fed decides to do (and what Russia does), so the potential upsides of waiting/DCA'ing to buy in at a lower price seem to outweigh the potential downsides of missing out on maybe 1% gains.
Topic Author
doveman
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Re: UK: Helping my Mum reinvest her assets. Baffled by bonds.

Post by doveman »

hariseldon wrote: Fri Jan 28, 2022 7:42 am Reading this thread with interest , it does appear to be a lot of fine detail for a modest investment.
I'm probably overthinking it but I need to be sure that I can explain to my Mum why I'm suggesting that she invests in a global all cap, and some bonds. The equities bit is quite simple to explain, but the bonds are more complicated and I don't really understand them enough yet to be able to say they're a good thing to buy at the moment.
There is no reason for a UK investor to avoid Irish based ETFs, they are fine and very tax efficient and the most common choice for a UK investor.
It was this article that put me off Irish domiciled funds, as it explains that they're probably not covered by either the UK or the Irish compensation schemes https://monevator.com/investor-compensation-scheme/ but I've been told there's nothing to worry about, because any money invested in either an ETF or mutual fund will be ring-fenced, so even if the fund manager (e.g. Vanguard, not the broker that the fund is brought through, in this case iWeb) goes bust the money will be safe. I think there's still a risk if the fund manager breaks the rules and steals the client's money, as there's no cover if that happens, but maybe the risk of that happening is so small it's not worth worrying about. Mind you, you'd think your money was safe in a bank but people are still advised to make sure they split anything over £85,000 to another bank to ensure that it's covered.

Anyway, there's a few UK domiciled world or all cap funds to choose from, so there's not really any reason to buy an Irish domiciled one but most of the bond funds seem to be domiciled in Ireland, so we probably can't avoid that.
Regarding the broker look at Halifax Share Dealing as well as iWeb, they are effectively the same company but different charging structures.

If you are going to hold a global tracker then take a look at HSBC FTSE All World Class Accumulation OEIC, its very low cost at .13% low tracking error and an accumulation fund avoids the issue of reinvesting dividends both cost and the admin.
She's signed up with iWeb now, which is OK but it can be difficult to find funds on there because they use strange abbreviations for them. Even on Morningstar putting in "HSBC FTSE All World Class Accumulation OEIC" didn't find anything and I had to just enter "HSBC FTSE" to find it. These look like what you are referring to but what's the difference between Accumulation C and Accumulation S?
https://www.morningstar.co.uk/uk/funds/ ... F00000TXY8
https://www.morningstar.co.uk/uk/funds/ ... F00000ZISB

Once I've found them on Morningstar, I can use the ISIN number to search for them on iWeb, although they only have the C one:
https://www.markets.iweb-sharedealing.c ... 00BMJJJF91

I'm leaning more towards the Vanguard All Cap Acc though, to provide some exposure to small cap (4.84%) and a bit more mid cap (19.09% vs 16.14%), with about 6% and 4% less reliance on giant and large respectively, as the market seems to be swinging away from growth towards value and there's a reasonable chance that small cap will outperform in the next decade (although I expect some of the megacaps like MSFT, AMZN and AAPL will keep doing well). It's a bit more expensive at 0.23% vs 0.13% but on £20,000 that's only an extra £20/year.
https://www.morningstar.co.uk/uk/funds/ ... XXVV&tab=3
For bonds, ETFs that spring to mind are VAGS.L Vanguard Global Aggregate accumulating bond hedged to sterling at .1%pa and if inflation concerns you then ITPS.L accumulating $ US Treasury Inflation protected securities from iShares, again an ETF , also at .1% both are freely available for UK investors.
I couldn't find VAGS.L on Morningstar. I found this Vanguard Global Bond Index Fund GBP Hedged Acc which a 0.16% fee.
https://www.morningstar.co.uk/uk/funds/ ... 3VEC&tab=1

which is on iWeb here:
https://www.markets.iweb-sharedealing.c ... 00B50W2R13

I couldn't find ITPS.L either. The only iShares Tips fund I could find that is hedged to GBP was this Dist one:
ITPG (OCF 0.12%, 3 years annualised returns 6.57%)
https://www.morningstar.co.uk/uk/etf/sn ... entType=FE

which is on iWeb here:
https://www.markets.iweb-sharedealing.c ... VH859/OUD8
The simplest approach is probably a LifeStrategy fund….. the Uk bias has been neutral for the last 12 months…. It does rebalance daily as well, its a set and forget investment if accumulation units are held.
What do you mean when you say the UK bias has been neutral? The 60/40 fund has about 21.5% UK, when the real market cap is only about 5%, so it seems heavily biased and performance is rather mediocre, with a 3 years annualised returns of 8.77%, vs 13.59% for the Vanguard All Cap, 14.13% for the HSBC FTSE World and 19.73% for the S&P 500 (VUSA).

I agree it's the simplest option but my Mum can manage rebalancing once a year. I'm sure I can knock up a spreadsheet so she can just enter the current figures and it will tell her how much she needs to buy and sell to rebalance and my Dad and I can help her if necessary.
Topic Author
doveman
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Re: UK: Helping my Mum reinvest her assets. Baffled by bonds.

Post by doveman »

seajay wrote: Fri Jan 28, 2022 10:14 am My reading is that upon reaching the £86K cap the local authority become liable for agreeing what care is needed and funding of such, excepting £200/week that still needs to be paid for accommodation services, and any 'top ups'
additional payments for a preferred choice of accommodation or care arrangement ... [that] will not count towards the cap and will still be payable by the person once the cap has been reached.
I very much suspect that when it comes to the realities of local authorities care arrangements and funding it may be a case of a cardboard box under some distant/remote bridge/minimal care ... type LA get-out. As such many will still IMO opt to continue to self-fund themselves/their-parent(s) for the sake of 'better quality/comfort' rather than see their loved one moved into a distant, dark, urine soaked carpet type communal room environment.
Yeah, the reference to "top ups" sounds like it will be like that. I thought a lot of care homes, even ones used by local authorities, charged silly money, like £1,000/week, for non-care related costs like accommodation and food, and a lot of stuff that you'd think of as care, like washing a disabled person who can't wash themselves, is not classed as care.

My Nan never needed any care but she had to go into sheltered housing for a few years when she got a bit too unsteady to be safe in her own council flat. She didn't own anything, so she didn't have to pay but she lived in East London so I imagine the costs would have been very high just for the accommodation and service fees.
RE: care costs ... and around my way (Surrey) and you're looking at around £87K/year for a care home placement for someone with dementia. At-home/live-in care is around £25/hour weekdays, double that rate at weekends and for some cases they'll say that two are needed at times to facilitate care i.e. it can be cheaper to pay the £87K/year for a care-home placement rather than trying to arrange/fund care at home. The carers themselves are more likely to be on minimum wage. Average duration I believe is around 4 to 5 years of care. Often the first to-go is cared for at home by their partner, sale of home covers the longer surviving partners care-home funding. Of the order £350K to £440K average expense, that can be discounted by state pension and care allowance (and any occupational pension(s)), say maybe £20K/year, so £270K to £340K type guideline figure.
Yeah, the costs of care are crazy and the carers get paid peanuts. I'd rather pay the carers directly myself, as they're going to provide better care if they're being paid a decent wage. For now I'm trying to encourage my parents to spend some money fixing up their house, so they'll find it easier to manage when they're older and make it less likely that they'll need to move into a care home. They've got a poorly built extension with a leaky roof, with a freezing cold toilet/shower room, which they had built next to the kitchen when we moved in about 40 years ago, and the kitchen is tiny and my Mum's always complaining about it. They really need to demolish the utility room and extend the kitchen to make that space warm and secure, which will make the whole downstairs warmer and cut their heating costs, and then build a warm, well insulated wet room/toilet in the rear half of the garage, leaving space in the corner of the kitchen for one of those hydraulic lifts in case they can't manage the stairs when they're older. I'm hoping they might be able to get an interest-only re-mortgage to do this work, as the loan would only be about 1/10th of what the property is worth so even if house prices crashed there's no risk of the bank not getting its money back when the house is eventually sold, and it'll be collecting more interest in the meantime than it would if the capital was being repaid.

They'd probably need to go on holiday, or rent somewhere to stay, whilst the majority of the work is being done, as they couldn't really live there whilst the kitchen and downstairs toilet are out of action.

Moving isn't really an option for them, as they're the primary carers for my disabled sister so they can't move to a cheaper area and if they downsized from their 3-bed semi to a 2-bed new build in the same area it would probably cost about the same and they'd only get a tiny garden and they both enjoy gardening. Besides, they've got loads of clutter and they're each using one of the spare bedrooms as an office/computer space, so I can't see them moving to a 2-bed, at least not any time soon.
Topic Author
doveman
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Re: UK: Helping my Mum reinvest her assets. Baffled by bonds.

Post by doveman »

Well it seems my Mum will have to wait to reinvest her money, as iWeb's site says she has to fill in a transfer form and print it and post it to them, and it could take up to 12 weeks to transfer the funds! Presumably they have to send the form to Aegon as proof that she's authorised the transfer.
RedMan1919
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Re: UK: Helping my Mum reinvest her assets. Baffled by bonds.

Post by RedMan1919 »

UK investor here - the suggestion of LifeStrategy 60 seems sensible to me as a balanced middle of the road investment - or if she wants less risk than that then step down to 40 - I don't think anyone could lay any blame on you for picking the LifeStrategy fund that matches the right risk profile for her - if I get asked for any recommendations then LifeStrategy is the one I feel most comfortable recommending

Personally my portfolio is in two different Vanguard products - the FTSE Global All Cap index fund for equities and for bonds they're in the Global Credit Bond Fund which is an active bond fund - with bonds for some reason I get more peace of mind with them being actively managed - this fund is pretty low cost and leans more towards corporate bonds but does have some government too, duration is currently just over 7 years
Topic Author
doveman
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Re: UK: Helping my Mum reinvest her assets. Baffled by bonds.

Post by doveman »

RedMan1919 wrote: Wed Feb 09, 2022 6:06 am UK investor here - the suggestion of LifeStrategy 60 seems sensible to me as a balanced middle of the road investment - or if she wants less risk than that then step down to 40 - I don't think anyone could lay any blame on you for picking the LifeStrategy fund that matches the right risk profile for her - if I get asked for any recommendations then LifeStrategy is the one I feel most comfortable recommending

Personally my portfolio is in two different Vanguard products - the FTSE Global All Cap index fund for equities and for bonds they're in the Global Credit Bond Fund which is an active bond fund - with bonds for some reason I get more peace of mind with them being actively managed - this fund is pretty low cost and leans more towards corporate bonds but does have some government too, duration is currently just over 7 years
Thanks but I'm not keen on LifeStrategy because it heavily overweights the UK. I still don't really understand bonds and that article I linked to before regarding index-linked gilts https://www.investorschronicle.co.uk/fu ... ked-bonds/ makes them sound like a bad idea (unless the market conditions happen to be ideal for buying them, which I don't think they are currently), and US TIPS are a better option. I understood that government bonds were a better option than corporate ones, but as I say I don't really understand them yet.

With the massive increase in energy prices for the next few years, my parents will probably need to invest to generate some income, whether that's dividends, or 8% from staking USDC, or 20% from staking UST. The UST 20% may only be available for another year and is a bit more risky than the 8% from staking USDC, or GUSD, with Gemini. so my Mum could put £5000 in USDC or GUSD to generate £400/year and £2000 in UST to generate another £400/year, and that £800/year will help a lot with the energy bills.

That's probably not an alternative to bonds, as the point of bonds is to hedge in case equities crash and if that happens, maybe Gemini would drop the interest rates it pays overnight, although they don't seem to have been affected by the recent stock market corrections. It's just hard to see a good reason to invest in bonds which may only be paying 2% when inflation is 7%, and it's possible to earn 8% with fairly low risk.

Until I understand bonds enough to recommend what to buy, I'm suggesting that my Mum just focuses on investing the equities portion for now, maybe 60-70% of her funds, and either keeps the other 30-40% in cash in the ISA, or invests some or all of that in staking stablecoins.

I'm thinking that it might be a good idea to split the equities portion between the Global All Cap to get a broad market exposure, including value and emerging markets, and BRK.B which I think is effectively like investing in an active fund, managed by people with a proven track record, without the fees normally associated with an active fund. That has a decent potential to generate better returns than the Global All Cap, as they identify good companies to invest in early on, and I think they have a sizeable investment in energy (oil, shale, etc.) and industrials, which are likely to do quite well in the short to mid term at least, because of the sanctions on Russia. I'm not sure if BRK.B mainly invests in US companies though. If it does, it might be sensible to invest the other part of the equities portion in an ex-US global fund. I know BRK.B owns a lot of Apple, so maybe BRK.B plus an ex-US global, plus a few growth stocks with decent prospects like Microsoft, Nvidia and Intel would be a good portfolio? I'm not sure what percentage of the 60-70% equities portion it would be sensible to invest in BRK.B though. Would 50% be too much? Would it be better to split it as 60% global fund, 30% BRK.B and 10% individual growth stocks?

Maybe a percentage in dividend stocks would be a good idea to generate some income, but I don't know if there's a decent passive dividend fund and how much returns we can realistically expect to generate that way, but probably not as much as the 8% we can earn by staking USDC or GUSD.

I looked at my parents income with them and my Dad gets a full pension of around £800/month, whilst my Mum only gets about £300/month, but combined they're just over the limit to qualify for pension credit, which would then entitle them to other stuff like a free TV licence, Council Tax reduction, NHS dentai treatment and Warm Home Discount.

It turns out my Dad also has some money to invest, which has just been sitting in his savings account earning nothing. I'm not sure exactly how much but it's more than my Mum, so maybe £50,000. They need to keep some of that aside to do some work on the house (although I suggested they look into getting an interest-only mortgage for that, so they can invest all his savings which should generate a higher % return than the mortgage %) but I've helped him to open an iWeb account and he can transfer £20,000 into an ISA before April, and the rest after, and he'll probably invest in the same funds/stocks as my Mum, once I've worked out what the best options are.
Valuethinker
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Re: UK: Helping my Mum reinvest her assets. Baffled by bonds.

Post by Valuethinker »

doveman wrote: Fri Mar 11, 2022 5:23 pm
RedMan1919 wrote: Wed Feb 09, 2022 6:06 am UK investor here - the suggestion of LifeStrategy 60 seems sensible to me as a balanced middle of the road investment - or if she wants less risk than that then step down to 40 - I don't think anyone could lay any blame on you for picking the LifeStrategy fund that matches the right risk profile for her - if I get asked for any recommendations then LifeStrategy is the one I feel most comfortable recommending

Personally my portfolio is in two different Vanguard products - the FTSE Global All Cap index fund for equities and for bonds they're in the Global Credit Bond Fund which is an active bond fund - with bonds for some reason I get more peace of mind with them being actively managed - this fund is pretty low cost and leans more towards corporate bonds but does have some government too, duration is currently just over 7 years
Thanks but I'm not keen on LifeStrategy because it heavily overweights the UK. I still don't really understand bonds and that article I linked to before regarding index-linked gilts https://www.investorschronicle.co.uk/fu ... ked-bonds/ makes them sound like a bad idea (unless the market conditions happen to be ideal for buying them, which I don't think they are currently), and US TIPS are a better option. I understood that government bonds were a better option than corporate ones, but as I say I don't really understand them yet.

With the massive increase in energy prices for the next few years, my parents will probably need to invest to generate some income, whether that's dividends, or 8% from staking USDC, or 20% from staking UST. The UST 20% may only be available for another year and is a bit more risky than the 8% from staking USDC, or GUSD, with Gemini. so my Mum could put £5000 in USDC or GUSD to generate £400/year and £2000 in UST to generate another £400/year, and that £800/year will help a lot with the energy bills.
These are bets in crypto. They should not be viewed as legitimate investments in any sense of the word. It's just gambling. In fact, in gambling you have a chance of winning - but the house always wins overall. Here, it's Ponzi Scheme - someone up the chain will get out, when you go in.

You shouldn't try to pay your utility bills with gambling.
That's probably not an alternative to bonds, as the point of bonds is to hedge in case equities crash and if that happens, maybe Gemini would drop the interest rates it pays overnight, although they don't seem to have been affected by the recent stock market corrections. It's just hard to see a good reason to invest in bonds which may only be paying 2% when inflation is 7%, and it's possible to earn 8% with fairly low risk.
It is not possible to earn 8% in current markets "with fairly low risk". Any investment that "earns" 8% is a high risk investment. Doesn't matter how that risk is buried - it is there.
Until I understand bonds enough to recommend what to buy, I'm suggesting that my Mum just focuses on investing the equities portion for now, maybe 60-70% of her funds, and either keeps the other 30-40% in cash in the ISA, or invests some or all of that in staking stablecoins.
We are prohibited from discussing crypto on these forums.

There's been a lot of ink spilled on this thread, and others, about bonds. I recommend also Lars Krojer's book & Monevator blog. And Larry Swedroe's books, and Annette Thau's book (from a US perspective).
I'm thinking that it might be a good idea to split the equities portion between the Global All Cap to get a broad market exposure, including value and emerging markets, and BRK.B which I think is effectively like investing in an active fund, managed by people with a proven track record, without the fees normally associated with an active fund.
Did you know that 40% of BRK.B's value is accounted for by its holding in Apple? It's actually a tech play.
That has a decent potential to generate better returns than the Global All Cap, as they identify good companies to invest in early on, and I think they have a sizeable investment in energy (oil, shale, etc.) and industrials, which are likely to do quite well in the short to mid term at least, because of the sanctions on Russia. I'm not sure if BRK.B mainly invests in US companies though. If it does, it might be sensible to invest the other part of the equities portion in an ex-US global fund. I know BRK.B owns a lot of Apple, so maybe BRK.B plus an ex-US global, plus a few growth stocks with decent prospects like Microsoft, Nvidia and Intel would be a good portfolio? I'm not sure what percentage of the 60-70% equities portion it would be sensible to invest in BRK.B though. Would 50% be too much? Would it be better to split it as 60% global fund, 30% BRK.B and 10% individual growth stocks?
As many of us have said many times, it is not worth trying to pick winners. I'd put 100% in a global equity tracking fund.

Facebook was a Growth stock, until recently. Some people now see it as a cheap value stock.
Maybe a percentage in dividend stocks would be a good idea to generate some income, but I don't know if there's a decent passive dividend fund and how much returns we can realistically expect to generate that way, but probably not as much as the 8% we can earn by staking USDC or GUSD.
There is just no reasonable way to compare those 2 "yields". There are plenty of dividend income funds around - as long as you are aware that dividends get *cut* as they did during the 2020 Covid crisis.

It's sad to see someone get taken to the cleaners by the hucksters - but you are a responsible adult, able to do you own homework & inform yourself of the risks (the FCA and SEC warnings are always a good read, though). Your parents, on the other hand...

Why don't you invest your own money in these opportunities, and give your parents the income they earn? Then if it goes wrong, you haven't lost them anything.
I looked at my parents income with them and my Dad gets a full pension of around £800/month, whilst my Mum only gets about £300/month, but combined they're just over the limit to qualify for pension credit, which would then entitle them to other stuff like a free TV licence, Council Tax reduction, NHS dentai treatment and Warm Home Discount.

It turns out my Dad also has some money to invest, which has just been sitting in his savings account earning nothing. I'm not sure exactly how much but it's more than my Mum, so maybe £50,000. They need to keep some of that aside to do some work on the house (although I suggested they look into getting an interest-only mortgage for that, so they can invest all his savings which should generate a higher % return than the mortgage %) but I've helped him to open an iWeb account and he can transfer £20,000 into an ISA before April, and the rest after, and he'll probably invest in the same funds/stocks as my Mum, once I've worked out what the best options are.
I doubt your parents at their age would get a mortgage? My lender would not extend past 65.

I think they should keep back the cash for higher heating bills (and other cost of living increases) for at least 2 years (maybe 3-5). If there's anything left over, then they can invest it.

I would go for a Lifestrategy - mix 60/40 and 40/60. Equity risk, but not overwhelming.
Topic Author
doveman
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Re: UK: Helping my Mum reinvest her assets. Baffled by bonds.

Post by doveman »

Sorry I didn't realise that we weren't allowed to discuss crypto here. I did read the rules before signing up but I have problems with my memory, so I apologise for forgetting.

I checked the rules and I see it says "Discussions of investment strategies based on securities or physical assets that have no underlying value" and not permitted but does that apply to stablecoins like GUSD that are backed 1:1 by USD, as surely they do have underlying value? I just noticed that Gemini Earn is only available in the US, Hong Kong and Singapore though, so earning 8% with GUSD isn't an option here anyway.

I'll try and get my head round bonds and look at the resources you mentioned and my parents can invest some of their funds in a global all cap in the meantime.

I was aware that BRK.B had a considerable holding in Apple, although I didn't know it was as high as 40%. That's sort of why I asked about using an ex-US fund if buying BRK.B as well, as I understand that the US market is being held up by a few large tech stocks like Apple and Amazon. It's a bit confusing though, as people are talking about tech stocks dropping 30-50% but the S&P 500 is only down about 6% since six months ago or 12.35% YTD, so it doesn't feel like the corrections are reflected in the price of the fund. The Fidelity Global All Cap is down 4.24% in six months or 8.56% YTD, which feels like less than the global market has actually decreased but I don't really know, it's just an impression I've got from the media that it's gone down more than that.

I don't know why a bank wouldn't lend £50,000 against an asset worth many times that just because the borrower is over 65. They earn interest and there's no risk of the loan not being repaid. You might be right though, banks can be strange.
JimBeam
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Re: UK: Helping my Mum reinvest her assets. Baffled by bonds.

Post by JimBeam »

Valuethinker wrote: Sat Mar 12, 2022 10:03 amI would go for a Lifestrategy - mix 60/40 and 40/60. Equity risk, but not overwhelming.
I don't like Lifestrategy, because if market is taking a hit and you'd like to withdraw some money, you can't just sell bonds. You have to sell both bonds and stocks.
Valuethinker
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Re: UK: Helping my Mum reinvest her assets. Baffled by bonds.

Post by Valuethinker »

doveman wrote: Sat Mar 12, 2022 3:32 pm Sorry I didn't realise that we weren't allowed to discuss crypto here. I did read the rules before signing up but I have problems with my memory, so I apologise for forgetting.
I apologise for being overly aggressive. A couple of things in this thread are now more clear to me -- where you keep looping back to the same points, not really absorbing what we have been saying.
I checked the rules and I see it says "Discussions of investment strategies based on securities or physical assets that have no underlying value" and not permitted but does that apply to stablecoins like GUSD that are backed 1:1 by USD, as surely they do have underlying value? I just noticed that Gemini Earn is only available in the US, Hong Kong and Singapore though, so earning 8% with GUSD isn't an option here anyway.
I'd have to tell you what is wrong with "stablecoins". We cannot discuss crypto here. The rules are unambiguous about that but you can always ask the moderators, directly.

The fundamental principle remains. If an "investment" is paying 8% then it is a very risky investment, indeed. Bonds are yielding 1-2% right now and that's as good a safe return as is on offer (other than some bank Notice Accounts).

The kinds of questions you are asking, and what you say about your memory, makes me think you do not understand these "investments" ie coins. Not surprisingly, because they don't actually make sense. But someone might try to trick you.

Mark my words. We are at the beginning of a period of elevated financial stress, associated with the disruptions around the situation in Ukraine and the most far-reaching sanctions imposed on a country since 1945 (except arguably those on Iran). Financial stress is like the tide going out. When the tide goes out, we are going to find that some things have rotted and stink pretty bad -- a lot of "bleeding edge" investments.
I'll try and get my head round bonds and look at the resources you mentioned and my parents can invest some of their funds in a global all cap in the meantime.
A sterling hedged global bond fund (investment grade) is what they want. Vanguard has one. OR just buy the target fund (80:20, 60: 40 or whatever). The higher UK equity percentages won't make a huge difference to the final performance.

You don't need to "understand" bonds in any greater detail than that. If we were in the USA I'd tell you to buy Vanguard Total Bond Management fund and be done with it. The above is the closest equivalent for a UK investor. The only real alternative is to have one of the various high interest rate accounts from a bank (staying within the £85k per person per financial institution limit).

(there's a problem with buying the UK govt bond (gilt) fund, which is why I don't necessarily recommend it. But it will serve - just be a little more volatile and gets hit harder if interest rates go up).

The hunt for yield (which is what you are proposing with your crypto stuff, above) is one of the most common ways for investors to inadvertently take risk & lose money. One of the founders of this board, Taylor Larrimore (who has been investing in stocks since the 1950s, I believe) has a pretty good warning about reaching for yield.
I was aware that BRK.B had a considerable holding in Apple, although I didn't know it was as high as 40%. That's sort of why I asked about using an ex-US fund if buying BRK.B as well, as I understand that the US market is being held up by a few large tech stocks like Apple and Amazon.
To be precise, if you take the Apple share price and multiply it by the BH holding, you get a number which was 25-40% of the current market value of BH. One way of arguing that is that you are getting the rest of BH on the cheap.

But... did you know that BH is classified as an insurance company? Without looking it up, what are its other main areas of activity?
It's a bit confusing though, as people are talking about tech stocks dropping 30-50% but the S&P 500 is only down about 6% since six months ago or 12.35% YTD, so it doesn't feel like the corrections are reflected in the price of the fund.
Various NASDAQ indices have dropped more than the S&P 500. A look at the performance of the ARK funds (Cathie Wood was the leading "disruptive" tech investor of the last 3-4 years) is instructive.
The Fidelity Global All Cap is down 4.24% in six months or 8.56% YTD, which feels like less than the global market has actually decreased but I don't really know, it's just an impression I've got from the media that it's gone down more than that.
Meta (Facebook) has halved. Apple & Microsoft have done pretty well. I wonder though if semiconductor shortages are going to hit Apple (half the world's Neon comes from 2 factories in Ukraine, and Neon is used in semiconductor manufacture).
I don't know why a bank wouldn't lend £50,000 against an asset worth many times that just because the borrower is over 65. They earn interest and there's no risk of the loan not being repaid. You might be right though, banks can be strange.
FCA requires that no one be lent money without a reasonable prospect of it being repaid. Repossession - seizing the house - does not count as a means of repayment. If you have a mortgage, you have to show evidence that you can repay it. Things have tightened up a lot since 2008 crash.

There *are* reverse mortgages. Run down the housing equity. There has been a misselling scandal, and many Financial Advisers won't recommend them for clients for that reason. There are Financial Advisers who will advise on them, and I suggest you contact one if that's the way it is going. But find out how the FA gets paid. You do not want an FA who gets paid a commission for recommending one of these.

Your parents are better to *spend money* to pay bills. Not to have you try to "juice" their returns. Because that's a gamble, and you could have the position where the gamble went wrong -- they lost money -- AND they still have those bills.
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doveman
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Re: UK: Helping my Mum reinvest her assets. Baffled by bonds.

Post by doveman »

JimBeam wrote: Sun Mar 13, 2022 9:57 am I don't like Lifestrategy, because if market is taking a hit and you'd like to withdraw some money, you can't just sell bonds. You have to sell both bonds and stocks.
Thanks for pointing this out. I hadn't thought about that. As I understood it, the whole point of investing in bonds is precisely so that if you need to withdraw some money when the market and your equities are down, the bonds should be up, but with Lifestrategy you have to sell both equities and bonds to withdraw anything.

I don't like Lifestrategy anyway, as it doesn't make much sense to me if you're going with a strategy of investing in a fund that tracks the market, rather than trying to guess which sector or country is going to do best, to then invest in a fund which overweights the UK by 4x. I don't have any reason to think the UK is going to do better than the US to justify overweighting it. I think Australia has outperformed the rest of the world for 100 years, so it would make more sense to overweight that country, if you wanted to deviate from the market weighting.
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doveman
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Re: UK: Helping my Mum reinvest her assets. Baffled by bonds.

Post by doveman »

Valuethinker wrote: Sun Mar 13, 2022 1:55 pm I apologise for being overly aggressive. A couple of things in this thread are now more clear to me -- where you keep looping back to the same points, not really absorbing what we have been saying.
It's OK, I didn't think you were being aggressive.
Mark my words. We are at the beginning of a period of elevated financial stress, associated with the disruptions around the situation in Ukraine and the most far-reaching sanctions imposed on a country since 1945 (except arguably those on Iran). Financial stress is like the tide going out. When the tide goes out, we are going to find that some things have rotted and stink pretty bad -- a lot of "bleeding edge" investments.
I fear that's true, and it's why my parents are hesitant to invest at the moment, as they (and I) think everything could still drop a lot more, maybe 40%, and whilst that won't matter for someone in their 20's who can wait 30-40 years in the certainty that by then the market will be up considerably, my parents have a much shorter timeframe, so they have to be more cautious.

Things have also changed recently, with energy bills possibly doubling or tripling. That's why we're looking at earning some income via dividends, which will probably be more important to my parents than maximising the growth of their portfolio. Their council tax has also just gone up a lot and they lost their free TV licence recently, so their outgoings are increasing much more than their pensions (I think the government recently broke the triple-lock on pensions, but I'm not sure).

Maybe in a year or two, the energy and shopping costs will come down a bit and my parents will want to refocus on growth instead of income but for now they really need some income to offset these increased bills.

I looked into dividend stocks and Vanguard High Dividend Yield ETF pays 3.24%.

The highest yield I found amongst well-established companies was:
Imperial Brands 9.11%
British American Tobacco 7.08%
Vodaphone 6.33%
Moneysupermarket 5.72%
IBM 5.09%
Glaxo SmithKline 4.97%
Unilever 4.56%
Exxon 4.47%
Legget 4.54%

some established companies paying 2-3.5%:
Chevron 3.51%
NWF 3.35%
Intel 3.08%
Pfizer 2.94%
Coca Cola 2.93%
PepsiCo 2.64%
Johnson & Johnson 2.43%
Starbucks 2.19%
Honeywell 2.01%

banks and real estate:
Lloyds 5.65%
Reality Income 4.43%
HSBC 3.76%
Barclays 3.52%
JP Morgan 2.85%

some more risky oil/mining/shipping companies with higher yields, which are volatile:
ZIM Integrated Shipping 22.43%
Knit Offshore Partners 13.63%
Rio Tinto 10.48%
Gulf Keystone Petroleum 8.11%

Ignoring the last group, there's still a fair few options that are paying more than the 1-2% we'd get with bonds, and the shares could potentially go up in value too, whilst the bonds will devalue.
A sterling hedged global bond fund (investment grade) is what they want. Vanguard has one. OR just buy the target fund (80:20, 60: 40 or whatever). The higher UK equity percentages won't make a huge difference to the final performance.

You don't need to "understand" bonds in any greater detail than that. If we were in the USA I'd tell you to buy Vanguard Total Bond Management fund and be done with it. The above is the closest equivalent for a UK investor. The only real alternative is to have one of the various high interest rate accounts from a bank (staying within the £85k per person per financial institution limit).

(there's a problem with buying the UK govt bond (gilt) fund, which is why I don't necessarily recommend it. But it will serve - just be a little more volatile and gets hit harder if interest rates go up).
I really do need to understand bonds before I can recommend that my parents invest in them. I can't recommend something if I can't explain why its a good thing to invest in. As you say, not all bonds are equal and the UK gilts, which would generally be considered the best type of bonds, aren't ideal, and that article I linked to explains why index-linked gilts are a bad investment unless specific circumstances exist to make them worth buying and the US govt bonds are much better. As I understand it, bonds devalue because new ones that pay higher yields become available, so you're stuck with a bond that doesn't pay great yields and if you want to sell it and buy the new higher-yielding bonds, you have to sell them for less than you bought them. You don't have to do that yourself with a bond fund but I guess the managers of the fund are still having to do that.
To be precise, if you take the Apple share price and multiply it by the BH holding, you get a number which was 25-40% of the current market value of BH. One way of arguing that is that you are getting the rest of BH on the cheap.

But... did you know that BH is classified as an insurance company? Without looking it up, what are its other main areas of activity?
I think that as a share of BH's total market cap, the Apple holding is about 20%. I understand it does hold a lot of insurance related companies but I think it also invests in industrial companies and it looks for value companies to invest in early at a good price, which aren't available for the public to buy.
FCA requires that no one be lent money without a reasonable prospect of it being repaid. Repossession - seizing the house - does not count as a means of repayment. If you have a mortgage, you have to show evidence that you can repay it. Things have tightened up a lot since 2008 crash.
Of course you have to be able to afford the repayments each month, but if an elderly person owns a house and has a guaranteed pension income and they take out an interest-only remortgage for say 10% of the value of the house, it is definitely going to get repaid when they die in 10-20 years and the bank earns the interest every month until then, in fact earning more than if it was a repayment mortgage where the loan was being paid off thus decreasing the interest payments. There's much less risk of default compared to giving a 90-95% LTV mortgage to a 20-year old couple, who could split up, or lose their income due to sickness or unemployment, forcing them to sell urgently at a loss to repay the mortgage, or leaving the bank with no option but to repossess.
There *are* reverse mortgages. Run down the housing equity. There has been a misselling scandal, and many Financial Advisers won't recommend them for clients for that reason. There are Financial Advisers who will advise on them, and I suggest you contact one if that's the way it is going. But find out how the FA gets paid. You do not want an FA who gets paid a commission for recommending one of these.
Equity release is daylight robbery of elderly people and I wouldn't recommend it to anyone.
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Re: UK: Helping my Mum reinvest her assets. Baffled by bonds.

Post by Forester »

You could use the iShares World minimum volatility MVOL ETF for the equity and the iShares short term UK Gilt ETF IGLS. I dislike index-linked gilts due to occasional news stories about the inflation measure being tinkered with. With short term bonds you're already removing much of the inflation risk anyway.
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Valuethinker
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Re: UK: Helping my Mum reinvest her assets. Baffled by bonds.

Post by Valuethinker »

doveman wrote: Sat Mar 19, 2022 8:41 pm
Valuethinker wrote: Sun Mar 13, 2022 1:55 pm I apologise for being overly aggressive. A couple of things in this thread are now more clear to me -- where you keep looping back to the same points, not really absorbing what we have been saying.
It's OK, I didn't think you were being aggressive.
Mark my words. We are at the beginning of a period of elevated financial stress, associated with the disruptions around the situation in Ukraine and the most far-reaching sanctions imposed on a country since 1945 (except arguably those on Iran). Financial stress is like the tide going out. When the tide goes out, we are going to find that some things have rotted and stink pretty bad -- a lot of "bleeding edge" investments.
I fear that's true, and it's why my parents are hesitant to invest at the moment, as they (and I) think everything could still drop a lot more, maybe 40%, and whilst that won't matter for someone in their 20's who can wait 30-40 years in the certainty that by then the market will be up considerably, my parents have a much shorter timeframe, so they have to be more cautious.

Things have also changed recently, with energy bills possibly doubling or tripling. That's why we're looking at earning some income via dividends, which will probably be more important to my parents than maximising the growth of their portfolio. Their council tax has also just gone up a lot and they lost their free TV licence recently, so their outgoings are increasing much more than their pensions (I think the government recently broke the triple-lock on pensions, but I'm not sure).

Maybe in a year or two, the energy and shopping costs will come down a bit and my parents will want to refocus on growth instead of income but for now they really need some income to offset these increased bills.

I looked into dividend stocks and Vanguard High Dividend Yield ETF pays 3.24%.

The highest yield I found amongst well-established companies was:
Imperial Brands 9.11%
British American Tobacco 7.08%
Vodaphone 6.33%
Moneysupermarket 5.72%
IBM 5.09%
Glaxo SmithKline 4.97%
Unilever 4.56%
Exxon 4.47%
Legget 4.54%

some established companies paying 2-3.5%:
Chevron 3.51%
NWF 3.35%
Intel 3.08%
Pfizer 2.94%
Coca Cola 2.93%
PepsiCo 2.64%
Johnson & Johnson 2.43%
Starbucks 2.19%
Honeywell 2.01%

banks and real estate:
Lloyds 5.65%
Reality Income 4.43%
HSBC 3.76%
Barclays 3.52%
JP Morgan 2.85%

some more risky oil/mining/shipping companies with higher yields, which are volatile:
ZIM Integrated Shipping 22.43%
Knit Offshore Partners 13.63%
Rio Tinto 10.48%
Gulf Keystone Petroleum 8.11%

Ignoring the last group, there's still a fair few options that are paying more than the 1-2% we'd get with bonds, and the shares could potentially go up in value too, whilst the bonds will devalue.
A sterling hedged global bond fund (investment grade) is what they want. Vanguard has one. OR just buy the target fund (80:20, 60: 40 or whatever). The higher UK equity percentages won't make a huge difference to the final performance.

You don't need to "understand" bonds in any greater detail than that. If we were in the USA I'd tell you to buy Vanguard Total Bond Management fund and be done with it. The above is the closest equivalent for a UK investor. The only real alternative is to have one of the various high interest rate accounts from a bank (staying within the £85k per person per financial institution limit).

(there's a problem with buying the UK govt bond (gilt) fund, which is why I don't necessarily recommend it. But it will serve - just be a little more volatile and gets hit harder if interest rates go up).
I really do need to understand bonds before I can recommend that my parents invest in them. I can't recommend something if I can't explain why its a good thing to invest in. As you say, not all bonds are equal and the UK gilts, which would generally be considered the best type of bonds, aren't ideal, and that article I linked to explains why index-linked gilts are a bad investment unless specific circumstances exist to make them worth buying and the US govt bonds are much better. As I understand it, bonds devalue because new ones that pay higher yields become available, so you're stuck with a bond that doesn't pay great yields and if you want to sell it and buy the new higher-yielding bonds, you have to sell them for less than you bought them. You don't have to do that yourself with a bond fund but I guess the managers of the fund are still having to do that.
To be precise, if you take the Apple share price and multiply it by the BH holding, you get a number which was 25-40% of the current market value of BH. One way of arguing that is that you are getting the rest of BH on the cheap.

But... did you know that BH is classified as an insurance company? Without looking it up, what are its other main areas of activity?
I think that as a share of BH's total market cap, the Apple holding is about 20%. I understand it does hold a lot of insurance related companies but I think it also invests in industrial companies and it looks for value companies to invest in early at a good price, which aren't available for the public to buy.
FCA requires that no one be lent money without a reasonable prospect of it being repaid. Repossession - seizing the house - does not count as a means of repayment. If you have a mortgage, you have to show evidence that you can repay it. Things have tightened up a lot since 2008 crash.
Of course you have to be able to afford the repayments each month, but if an elderly person owns a house and has a guaranteed pension income and they take out an interest-only remortgage for say 10% of the value of the house, it is definitely going to get repaid when they die in 10-20 years and the bank earns the interest every month until then, in fact earning more than if it was a repayment mortgage where the loan was being paid off thus decreasing the interest payments. There's much less risk of default compared to giving a 90-95% LTV mortgage to a 20-year old couple, who could split up, or lose their income due to sickness or unemployment, forcing them to sell urgently at a loss to repay the mortgage, or leaving the bank with no option but to repossess.
There *are* reverse mortgages. Run down the housing equity. There has been a misselling scandal, and many Financial Advisers won't recommend them for clients for that reason. There are Financial Advisers who will advise on them, and I suggest you contact one if that's the way it is going. But find out how the FA gets paid. You do not want an FA who gets paid a commission for recommending one of these.
Equity release is daylight robbery of elderly people and I wouldn't recommend it to anyone.
I think that it's better to spend capital than to "reach" for higher yields which take on a lot more risk.

This I should note is absolute Boglehead orthodoxy. Own the market, minimizing diversifiable risk, and treat capital and income as interchangeable. Focus on total return.

(tax can complicate this picture slightly).

Nothing is free in this game. If you get a higher yield you will also have higher risk. After all, Berkshire Hathaway does not even pay a dividend.

A dividend income fund may be a solution however it means taking on greater volatility.
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Posts: 49037
Joined: Fri May 11, 2007 11:07 am

Re: UK: Helping my Mum reinvest her assets. Baffled by bonds.

Post by Valuethinker »

Forester wrote: Sun Mar 20, 2022 12:09 pm You could use the iShares World minimum volatility MVOL ETF for the equity and the iShares short term UK Gilt ETF IGLS. I dislike index-linked gilts due to occasional news stories about the inflation measure being tinkered with. With short term bonds you're already removing much of the inflation risk anyway.
Minimum volatility also includes things like a lot of consumers staples stocks. There are periods when these get hammered.

I wouldn't count on low volatility to deliver low portfolio volatility.

Index-linked gilts one should not get worried about inflation indices. RPI is converging with CPI (in 2030). The bond market took that announcement with a very big yawn. The negative real yields on ILGs are what has put me off buying them. Also the very long duration of the ILG index (so greater interest rate risk - real interest rates, not nominal).

ST bonds do not remove inflation risk, unfortunately. Interest rates are so far below current inflation that the investor is taking on full inflation risk. The problem with ST bonds in the long run, remains - that due to the shape of the yield curve one is consistently getting a lower return than with longer term bonds.

ST bonds reduce interest rate risk. That they do.

(Note I used to argue more along your lines. But we have enough data now to disprove the thesis).
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Re: UK: Helping my Mum reinvest her assets. Baffled by bonds.

Post by Valuethinker »

doveman wrote: Sat Mar 19, 2022 8:41 pm
Valuethinker wrote: Sun Mar 13, 2022 1:55 pm
FCA requires that no one be lent money without a reasonable prospect of it being repaid. Repossession - seizing the house - does not count as a means of repayment. If you have a mortgage, you have to show evidence that you can repay it. Things have tightened up a lot since 2008 crash.
Of course you have to be able to afford the repayments each month, but if an elderly person owns a house and has a guaranteed pension income and they take out an interest-only remortgage for say 10% of the value of the house, it is definitely going to get repaid when they die in 10-20 years and the bank earns the interest every month until then, in fact earning more than if it was a repayment mortgage where the loan was being paid off thus decreasing the interest payments. There's much less risk of default compared to giving a 90-95% LTV mortgage to a 20-year old couple, who could split up, or lose their income due to sickness or unemployment, forcing them to sell urgently at a loss to repay the mortgage, or leaving the bank with no option but to repossess.
There *are* reverse mortgages. Run down the housing equity. There has been a misselling scandal, and many Financial Advisers won't recommend them for clients for that reason. There are Financial Advisers who will advise on them, and I suggest you contact one if that's the way it is going. But find out how the FA gets paid. You do not want an FA who gets paid a commission for recommending one of these.
Equity release is daylight robbery of elderly people and I wouldn't recommend it to anyone.
Note that what you are proposing is an equity release mortgage, in effect.
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doveman
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Joined: Tue Dec 28, 2021 8:26 am

Re: UK: Helping my Mum reinvest her assets. Baffled by bonds.

Post by doveman »

Valuethinker wrote: Mon Mar 21, 2022 6:30 am Note that what you are proposing is an equity release mortgage, in effect.
No, with equity release you don't make any payments so the interest is added to the loan and compounds until you die, whereas with an interest-only mortgage you'd be paying the interest each month, so you'd only owe the same amount that you borrowed when you die.
Valuethinker
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Re: UK: Helping my Mum reinvest her assets. Baffled by bonds.

Post by Valuethinker »

doveman wrote: Tue Mar 22, 2022 7:28 pm
Valuethinker wrote: Mon Mar 21, 2022 6:30 am Note that what you are proposing is an equity release mortgage, in effect.
No, with equity release you don't make any payments so the interest is added to the loan and compounds until you die, whereas with an interest-only mortgage you'd be paying the interest each month, so you'd only owe the same amount that you borrowed when you die.
I take the point. I think I was zooming out - it's a way of tapping housing equity, either way.

My colleagues say 72 seems to be the age limit for mortgages now (was 65 last time I mortgaged).
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