The problem with target date funds
Target date funds are basically a mix of bond and equity investments which ‘automatically’ move to be more skewed towards bonds (safer) and away from equities (more volatile) as retirement age gets closer.
The chapter is pretty self-explanatory about why that mightn’t be such a good idea in practice.
I wouldn’t have bothered writing this post at all were it not to mention Vanguard’s LifeStrategy funds.
Basically, they’re a range of funds with low operating costs and different mixes of bonds and equities to suit your mood for risk and stage of retirement. They come in two flavours: accumulation (dividends are reinvested) and income (dividends are paid out).
If you’ve read chapter 5.1 of the book: ‘The All-Seasons Strategy’ courtesy of Ray Dalio, Vanguard’s LifeStrategy funds look very similar in terms of asset allocation. Soooo convenient!
Even though I haven’t been posting here for a few weeks, I have been researching this stuff almost non stop.
I’ve set up an online account with Alliance Trust (a trading platform) and this allows me to buy (or sell) Vanguard LifeStrategy funds directly – low costs and no IFA required.
I chose Alliance Trust because it ranked well as a low cost platform – but it’s a dog to use. It’s workable but quite frustrating. It’s possible that it’ll get less annoying over time – but it’s not too difficult to switch platforms later if it gets too bad. On the plus side – their email and telephone support have been good.
My broad plan is to put the maximum amount possible into a stocks and shares ISA each year (currently £20K pa) and put away as much as I can into a SIPP.
The Vanguard LifeStrategy funds can be held either inside an ISA or a SIPP – or indeed not wrapped up at all. The difference lies in how and when tax is paid.
With an ISA, I’m investing money I’ve already paid tax on. With a SIPP, the money is effectively invested before I pay income tax on it.
With an ISA, when I eventually cash it in and spend it, the money will be tax free. With the SIPP, some of it can be tax-free, but most will be taxed as income at whatever tax rate I’ll be paying at that time.
As an employee, I could save a maximum of £50K (2014/2015) or £40K per annum (2015 onwards) pa towards a SIPP tax free. Also, if I haven’t maxed out my last three years of tax-free contributions, I can overpay this year to catch up.
As a director of a small UK company, it’s even better. My company can make unlimited contributions to my pension tax-free. This makes lots of sense if you can do it. Without this unlimited contribution via my company, I could (in theory) run out of tax-free investment allowance (£20K in an ISA and £40K in a SIPP) and would need to invest any further amount without any tax-efficiency – which is also possible via Alliance Trust.
However, the unlimited company contribution to a personal SIPP means this should never become an issue (assuming there’s enough cash there in the first place)!
Socially Responsible Investment
I was pretty much set on the above investment course when, while listening to a podcast by the director of the Origins Movie, Pedram Shojai reminded me that increasingly in the western world, we vote with our ‘dollars’.
With increasingly ineffective, broken, corrupt and powerless political systems, we vote directly for what we want to see in the world by the things we buy – including the companies we invest in.
I’ve tried really hard to ignore this because it’s really inconvenient. However, passive investing via an index fund (like the Vanguard LifeStrategy series) means investing indiscriminately in all the companies in that index: firearms, petrochemicals, tobacco, pharmaceuticals, big agriculture, big food.
For better or worse, I have quite strong opinions about many of the companies that are included in most index funds – and it doesn’t sit well with me choosing to invest in my own pension by investing in companies whose ethics and actions I disagree with.
Searching for Socially Responsible Investments reveals a much much smaller choice of funds, higher fees and some questionable definitions of Socially Responsible.
So, this is one reason, that I’ve ground to a bit of a halt – and with the 2014 ISA deadline looming in April too. I might buy Vanguard LifeStrategy until I can find something more in line with my conscience – but I’d prefer not to.
All the stuff I’ve read online pretty much says that Socially Responsible / Ethical investing and passive investing are mutually exclusive. I haven’t come across anything yet that demonstrates otherwise – how about you?