Many people spend hours upon hours agonising over their investment portfolio – doing their research, tinkering to get the mix just right. So, it’s astonishing really to consider the gains you can make by holding just two cheap tracker funds.
This week our analyst Jon Miller went back to basics and looked at a good old-fashioned 60:40 portfolio – an investment mix of, as you might have guessed, 60% in global equities and 40% in global fixed income. It’s something that these days can be achieved by holding two cheap ETFs, and rebalanced just a handful of times each year. (We explain exactly how to put together such a portfolio in three steps here).
His imaginary portfolio has posted positive returns 96% of the time since 2009 when we look at rolling three-year periods, and is down just 3.5% year to date while UK equities have fallen 21% and global equities more than 8%.
It’s not just the resilience and simplicity of this portfolio that appeals to me, it’s also a fantastic way to remove temptation at times of turmoil. When we log in to our investment accounts at times like now and are greeted by a sea of red numbers, we feel compelled to do something: surely there is something here I should sell? I thought the same yesterday when I logged into my own account for the first time since the sell-off. But if there are only two things in the portfolio, so you’re unlikely to sell and leave yourself with just one.
Don't Book a Pension Holiday
Should you take a pension holiday? The answer for most people is very simply: no. Cutting your monthly outgoings down as much as possible is understandably a priority for many people at the moment, particularly those workers who are furloughed or worried about their jobs. But there are a number of reasons why stopping your pension contributions should be quite far down that list of outgoings to put on hold.
Firstly, consider the logistics. Dropping out of your pension scheme takes time and paperwork; you can’t just put the payments on hold in a workplace scheme, stopping contributions means entirely bailing out and then going through the lengthy process of rejoining again in the future – that’s if you ever bother to do so (which, let's be honest, you won't).
Secondly, this is the worst time to stop investing. If you made the decision to take money out of the market at the start of the year and managed to avoid the recent falls, hats off to you (and also, where did you get that crystal ball?). But if you didn’t, selling now means missing the bounce back. The FTSE 100 fell a staggering 33% between February 21 and March 23, a horrendous loss for any investor – but only if you hit the sell button. If you did, you’ve missed out the recovery rally – the market is up almost 20% from its nadir.
And finally, let's not forget the most wonderful thing about pensions that you will miss out on by taking a holiday: free money. Your employer's pension contributions are paid over and above your salary, they aren't taxable, and they're mandatory. Don't look that gift horse in the mouth if you can avoid it.
Cash Drags - Even in a Crisis
I’m in two minds about equity funds that hold significant amounts of cash. If I wanted my money wasting away in cash, earning no interest, I’d whack it in the bank. When I put my money in a fund, I expect the manager to invest it.
A few months back we did a deep dive into UK equity funds to check their cash holdings to see if it was having a negative effect on performance. For some, it was. Indeed, some of those funds were holding 10% or even 20% of their portfolio in cash.
I accept that when I hand my money over to a fund manager I am trusting him to make a judgement about where the best opportunities are, but if he thinks the best opportunities are in cash, maybe he shouldn’t take my money.
Arguably, it’s hard to maintain that stance given the recent sell-off, when many of the funds with the most cash on the books outperformed their peers. But these funds still weren’t immune to the crisis; they still posted double-digit losses. And I worry that the limited protection in the bad times just isn’t enough to justify effect of cash drag on the portfolio during the good.
