Boom Bust INvest Portfolio

Our long term financial freedom portfolios (pensions ISA's IRA's etc) are, by and large, invested in a mix of stocks and bonds. Despite volatility in these financial markets, they trend up over time. Since the Dot Com Crash at the turn of the century, in order to maintain that upwards trend, central banks have had to print vast oceans of cash and lower interest rates to 300 year lows in order to keep the show on the road. In my opinion therefore, volatility and risk has increased and it's against this backdrop that we all have to navigate our way to financial independence and retirement.

You can read about my investment strategy on the blog, but in short, when the outlook for equity markets are favourable and they are trending up over the medium to longer term (the boom phase) I then have the option of dialling up the riskier growth asset allocations.

When the outlook for equity markets have isn't positive and they are trending down over the medium to longer term (the bust phase) I dial down the growth assets and dial up the core and capital preservation assets.

Core-satellite Strategy

A standard investment approach, known as 'core-satellite' holds the bulk of a portfolio in a core global stocks (equities) fund and many of these funds are well known and can be selected by DIY investors. The 'satellites' can be based on all manner of different investment themes with different risk levels. These are an optional extra, even for more experienced investors.

RISK

The pyramid below colour codes the 5 main categories of asset/investment classes from the boring old grey safe 'Capital Preservation' assets to the red high risk 'High Growth' assets. That boring old Capital Preservation part of the portfolio is going help you maintain the capital you have spent your entire life building up so its a vital foundation to the overall portfolio.

Satellite: Capital Preservation (Low Risk): Typically Cash, Bonds and Gold are used to preserve capital when the going gets tough and markets correct or enter a full on 'bear market' downturn.
Core: Global (Medium Risk): Typically one or more globally diversified equites funds. (Actually, Most 'core' funds are a mix of these equites funds and bond funds. I have bonds above in the preservation category as their main purpose is preservation of capital. Strictly speaking, the Capital Preservation layer in the pyramid is really just the foundational safety layer of the Core portfolio).
Core: Income (Medium Risk): In the UK this is quite a "traditional" retirement equities strategy with big FTSE100 behemoths paying regulat dividends that tend to keep up and beat inflation. US investors also have a strong traditions of dividend paying stocks and funds that have proved popular and "done the job" for many investors and retirees. Low cost ETF trackers that track a particular 'index' of high yield equities stocks either globally or in a particular region or country can fit the bill. These funds are probably about the same in terms if risk (price volatility) as the Core funds above. The reason I have them as medium risk is that there are plenty of investors out there that may also diversify their Income portfolios with individual high dividend paying stocks or Infrastructure/REIT based funds or even peer to peer (P2P) assets (if we are talking about ISA's/IRA's) so it starts to get a bit more involved.
Satellite: Growth (Medium/High Risk): As mentioned above (and seen in the core-satellite image), Growth assets are market sectors, countries, regions, themes/factors that are strategically selected to provide a higher than average return. (See the image above on the right).
Satellite: High Growth (High Risk): Those with a higher risk tolerance might allocate a certain percentage of their portfolio to high growth/risk assets such as US tech funds, biotech funds, even riskier individual tech/growth stocks that 'may' result very high growth potential at some point in the future.

We start with the lowest risk investments... cash based, and end up at the other end with the high growth funds.

Capital Preservation

Cash

Cash is actually quite an important part of a portfolio. Not only is it the safest part of a portfolio, offering guaranteed protection against declining stock markets, but as markets decline you then have the option of deploying that cash into assets that are then effectively 'on sale'.

Depending on how much cash you are holding on to in your portfolio, you can simply sit on that cash and wait for the right time to deploy, or, you can buy a money market fund which will at least pay you interest interest rate which is likely to be higher than your broker pays for cash on account. The link below is for the Vanguard UK platform MM fund.

Vanguard Short Term Money Market Fund

Bonds

Now, for the most part, bonds protect portfolios against declining stock markets as they are not based on share prices but on the value of the bond loans issues by either governments or companies. Government bond such as US 'Treasuries' or UK 'Gilt's' are the safest form of bonds as they are virtually guaranteed to be repaid. Company (or corporate) bonds usually offer a higher return as they are perceived to be more risky. Bonds can also become a 'flight to safety' asset as investors 'rotate' out of declining equity markets.

In the same vein as the globally diversified equity funds given in the Core portfolio, a globally diversified 'Aggregate Bond fund' is the equivalent for global bonds. It is based on an index of globally available government and corporate bonds included in the index. These global bond funds in theory, give us the best risk to reward bond investment. The risk of bonds going sour in any one country, which is unlikely, is balanced out by investing in multiple countries and multiple types of bond securities.

Global Bond Index Fund (GBP Hedged)
Global Aggregate Bond ETF (VAGP: Inc / VAGS: Acc) (GBP Hedged)

If the rest of the world was coming to an end and you wanted to play at home only with the safety of the UK government and not diversify (probably a bad idea) then the Vanguard UK Bond fund is available (TER: 0.07%)

Vanguard vs iShares Global bond funds for UK investors: -

One of the biggest rivals in the UK to the Vanguard global aggregate fund in terms of ETF size is the...

iShares AGGU Aggregate Bond ETF

... which tracks the same aggregate bond Index as the Vanguard ETF. The main difference is that the Vanguard ETF is GBP Hedged whereas the iShares ETF is USD Hedged. This can make a diference. At the time of writing, in GBP terms, the Vanguard fund is up over 4% YoY, whereas the iShares ETF is down about 2% in GBP terms. The fees (OCF/TER) for both ETF's are just 0.1%.

Multi-Asset (Total Return) Funds

These funds specialise in capital preservation and endeavour to ensure a return is made regardless on the market environment. This is opposed to a standard diversified equities fund which at some stage is going to draw down a potentially significant percentage before re-surfacing. If you are approaching retirement for example that can be quite frightening to watch. These funds provide respite in declining stock markets. They invest in a mix of standard and specialist bonds, precious metals, commodities, REIT's etc to deliver consistent returns. The two funds below are investment trusts that are UK based market leaders in this specialised fund sector.

Gold

Gold has shown itselft in the past to be an asset to own to protect portfolios against declining stock markets, and/or severe downturns and crashes. In these scenarios, Gold becomes a 'flight to safety' asset as investors pile in to protect capital.

However, Gold also sells off in a market downturn in equities at the start of the downturn and usually ends up doing well coming out the other side, so when investing in Gold you really do need to know the asset class well and if that's not the case, steer clear! In the grand scheme of things for most investors, over the long term, Gold won't make that much of difference.

The easiest way to own Gold is through a Gold ETF/ETC. When I first started to own Gold in this way, I did so through the Wisdom Tree ETF (AMC charge 0.39% - link below), but then discovered the iShares ETF (SGLN) with a cheaper AMC charge (0.15%). (I used to subscribe to a stock picking service and both of these were recommended at some point by the very experienced City of London fund manager...)

iShares Physical Gold ETC (GBP) SGLN (TER: 0.12%)
WisdomTree Physical Gold (GBP) PHGP

Core (Global Equities)

Global Equity Funds

These funds invest predominantly in large companies (Large Caps) diversified across the world. These funds all track the same (or very similar) indexes of companies in the main 'developed' global stock markets, and so their return will be pretty much identical.

Over the longer-term the likelihood is that all of these funds will return a similar annual average growth rate of between 6 to 7% as a long-term average, with up to 9% per annum at the top end over say a 20 year period. (The usual caveat that past performance does not predict future performance applies of course).

The main points I look for are the cost of the fund (TER/OCF/AMC) which should be 0.2% or below ideally, and if the fund is 'income' (Inc) or accumulating (Acc). I look for accumulating funds to get the compounding effect. The other main factor is the 'Replication' method (how it copies the target Index of companies). If the ETF is synthetic or swap-based there might possibly be more risk, but some of these funds are as big as their standard replication counterparts (... the Invesco ETF for example). All the same, personally I tend to go for the standard physical ETF's.

DEVELOPED WORLD MARKETS ONLY

Invesco MSCI World UCITS ETF "MXWS" (TER: 0.19% / Synthetic Unfunded Swap ETF)
SPDR MSCI World UCITS ETF "SWLD" (Acc / TER: 0.12% / Physical ETF)
Large Caps and I believe possibly some Mid Caps in there, but if they are they will be the big Mid Caps.
Vanguard FTSE All-World ETF "VWRL": Inc / "VWRP": Acc / (TER: 0.22%)
Large caps and mid cap stocks in developed and emerging markets.
Vanguard FTSE All-World ETF "VHVG": Acc / (TER: 0.12%)
Large caps and mid cap stocks in developed and emerging markets. (Stirling denominated).
iShares Core MSCI World UCITS ETF USD "SWDA" (Acc / TER: 0.2%)
Note: ETF's can have a different ticker but they are the same underlying fund/ETF. SWDA also has ticker IWDA.
Fidelity MSCI World Index (Acc / TER: 0.12% )
(Stirling denominated).
HSBC MSCI World UCITS ETF USD "HMWO" (Inc / TER: 0.15%)
Note: HMWO is an an income fund. HSBC do also offer an Accumulating version but surprisingly, it's pretty small with only 20M AUM. Ticker is HMWS

ALL WORLD (ACWI) (INCLUDING EMERGING MARKETS - EM)

Emerging Markets can be touted as a long term growth prospect but over the past decade this sector has underperformed developed market funds listed above. EM's time might be coming but the numbers have been crunched on this subject and over time it should really make any material difference to returns so why bother with the additional risk/volatiltiy? I personally invest in the big developing market funds only. But, if you did want include EM stock indexes alng with the same developed market stocks, then an 'All Country World Index' (ACWI) fund/ETF is what you would buy.

The alternative is to own a developed market fund from the list above and then bolt on an EM Fund. You can always see what allocation the All World funds below have to EM and replicate that allocation as you see fit, but that's a lot of work for most retail investors. It does however give you the option of selling out of EM if the outlook for this sector deteriorates.

Vanguard Life Strategy 100
The Vanguard Life Strategy 100 fund is aimed at UK investors with a greater allocation to the UK.
SPDR MSCI ACWI IMI UCITS ETF

WHAT AM I INVESTED IN?

As stated above, I am not overly fussed about EM so the GBP Hedged Physical ETF from Vanguard (VHVG) above with a low TER on 0.12% will do the job for me.

The other fund I might consider diversifying into as it has outperformed the standard global equity funds is the Royal London Global Equity Select fund below.

Following my strategy to invest more in growth oriented stocks/themes in a risk on environment I might add the global small cap ETF WLDS below, but only after comparing it tp VHVG on a physical chart and seeing taking 'leadership' on the price ction in the chart. I would be looking out for macro factors such as the US 2yr yield to be trending down, along with inflation as small caps need these lower rates/inflation to thrive: -

iShares MSCI World Small Cap ETF (WLDS/WSML (...same ETF fund / TER: 0.35% / Acc)

UK ONLY

The UK funds below track the FTSE 100 Index in the UK. Two of these are also listed below as an 'income play' as the FTSE 100 is more income/dividend focussed than a broader more growthy stock market like the US S&P 500 Index.

GLOBAL EQUITY 'FACTOR' FUNDS

The following global equity funds are more specialised compared to the standard global Index Trackers above, and therefore have slightly higher charges, but, they have outperformed most, if not all of the funds above. I have called them factor funds as the fund providers are looking at factors like Quality and Income.

WisdomTree Global Quality Dividend Growth UCITS ETF USD Acc (Ticker GGRG)
Last time I looked, this fund was up about 65% over a few years whilst the best performing standard global equity ETF from HSBC was up 50%. (IWFQ is the iShares equivalent fund but it is 'sector neutral', unlike GGRG, so it may not diversify sufficiently from a standard global tracker to be worth the additional holding in a portfolio)

Wisdom Tree have a US Only Dividend Growth ETF with ticker DGRG

The best performing funds below have shown outperformance over standard global developed market trackers. in the past. Over the same time period, the Legal & General Global 100 Equity fund (see below) was up 92% whilst the Royal London fund was up 106%. The L&G fund invests on the top 100 companies globally (by Market Cap) that have truly globally diversified operations and asset allocation and therefore diversified revenue and profits. L&G Index 100 has done well of late (2023) but only because it is overweight IT (Apple and Microsoft are about 1/4 of the entire fund) and Healthcare sectors which have outperformed. If the markets switch to risk-off mode this fund would start to suffer along with the broad market.

The Royal London fund aims for long term Capital Growth by investing in a concentrated portfolio of stocks ranging from about 25 stocks to about 45 stocks from anywhere in the world that satisfy its innovative 'Corporate Lifecycle Strategy' which assesses return on productive capital and the stages of the corporate lifecycle. This has proved in recent years to be a winning strategy with cumulative 5 year performance at 106% as comparing favourably to the global developed market World Trackers above.

Fund Performance Comparison

The 5 Year Compound Annual Growth Rate (CAGR) is a key metric for fund selection. The underperformance below of UK Small Cap and the FTSE 100 sectors is notable. Global Small Cap sector in general is a risky sector to own these days. The big US NASDAQ index has outperformed but in a recession or financial crisis I would expect the NASDAQ to fall harder that standard global equity trackers and global quality trackers below.

Hedged vs Unhedged funds are another consideration. If the fund invests in US stocks for example, the dollar is generally stronger than Stirling so you will end up paying higher fees for hedged funds.
Synthetic vs Physical. Physical funds own the actual underlying stocks unlike synthetic funds. There may be some conter-party risk with synthetic funds, so although they may have some slightly higher returns due to tax not being taken from dividends, I personally want to re-risk as much as possible on the equities part of my portfolio, so I personally would still opt for physical funds/ETF's.
Click on the image below to link to Banker on Wheels for a deep dive into ETF selection...

CORE (Income)

'Income' funds focus on selecting companies that pay a dividend. These tend to be more established Large Caps as opposed to Small Caps and Growth stocks who tend not to pay a dividend to shareholders as they grow their business. Now, the investment bean counters have crunched the numbers and have come to the conclusion that standard globally diversified equity funds do, over the longer-term, yield a better total return that a purely income (dividend paying) focussed portfolio.

Income/Dividend re-investing that compounds returns is still widely practiced, particularly here in the UK and many people retire on this strategy, although as time goes by it seems to be viewed as more of a traditional strategy. This is still a hot topic of debate in investment circles and that debate will, no doubt, rage on.

My take on it is to view income/dividend investing (and re-investing) as another 'factor' similar to Value and Quality investing. An 'income' component in a portfolio can be more defensive than a 'growth' component so I see it as more of a 'risk-off' play. In a market downturn you will likely still be receiving dividends and if you are re-investing those dividends you will buying more of the same stock at a lower price if the Income stock is also heading down.

Income Funds

The Vanguard funds below are Index trackers or ETF's. The other main fund type here in the UK is Investment trusts. These provide a safety net when it comes to income as they have funds set aside so they can continue to pay income/dividends even if companies cut dividends in a downturn. ETF funds would only cut/reduce dividends based on the underlying companies that cut dividends when the going gets tough. It doesn't happen that often though. It's not a huge factor but something to consider more if you're approaching retirement and have an income based portfolio where you need to de-risk the dividend payments. Investment trusts have higher costs than the ETF's (for both holding and transacting) which can add up over time. It's hard to justify holding Investment Trusts these days so I haven't linked to any below, but you can find out more about them here.

GLOBAL EQUITY INCOME

The JP Morgan fund below was a recommendation, and it has outperformed in it's sector quite significantly, but it's OCF (ongoing charge) is 0.9%. (The fundcalibre.com site that links to the JP Morgan fund has selections of vetted funds and lots of great information on them.)

The graph below illustrates the JP Morgan Global Equity Income fund outperforming both the WisdomTree Global Quality Dividend fund (in blue) and the HSBC MSCI World tracker ETF (linked to above in the Global Equity Funds section)

UK ONLY

Individual Income Stocks

It is possible to build your own portfolio of income stocks and avoid the fund fees that the income funds above charge, but for the amount of effort required to save the 0.15% (average) fees charged by these funds it's not really worth it. You get the diversification and fund management (rebalancing etc) built into that fees so as far as I'm concerned it's a no brainer.

Property / Infrastructure / REITs

This asset class can include a number of different assets/investments. Many people in the UK and US rent out property (called 'buy to let' in the UK). This part of the portfolio could contain that or it could be a major property/infrastructure fund such the one linked to below

3i Infrastructure Plc (3IN)

Growth/Factor Funds & Stocks

Growth Funds

Now, when it comes to what I am calling 'Growth Funds' here for my Boom Bust Invest portfolio, it's actually a bit of a mixed bag in terms what I'm including in this asset class. In short, any asset class that has the potential to 'beat the market' in a particular time horizon.

So for example, 'factor' based funds investing in 'value' stocks (as I am invested in below in the AVI fund) or it could be a fund based on an investment theme such ESG (environment social governance) which has the potential to outperform over the medium to longer term.

Another example of a 'growth' fund is a 'small caps' fund, investing in smaller companies. The small cap investment trust, Edinburgh Worldwide Investment Trust Plc (EWI), is linked below and this is the fund in this particular market sector I am invested in.

The ESG and Small Cap funds are higher risk than the 'Factor' based funds (in this case 'Value' factor),and could arguably be included in the higher risk main category below. However, as they are well diversified across market sectors they are lower risk than high tech (and really high risk) funds in that section of this portfolio so I included them in this generic 'growth' category.

For comparison purposes I have also provided a link to a global small cap ETF - iShares MSCI World Small Cap UCITS ETF (WLDS). This is a 'synthetic' ETF which, to cut a long story short, means that US 'withholding' tax is not paid on US dividends so should provide a slightly higher return than their non-synthetic counterparts such as the HSBC fund below, but with a risk which is perceived as slightly higher that probably doesn't bear out in reality.

COMMODITIES & GROWTH

Commodities suck as Gold, Metals, and raw materials for food tend to do well when the wider economy is healthy, with Gold as the outlier in this asset class with the potential to provide growth in falling equity markets. The "Friends of Commodities" therefore also tend to do well when commodities are on the rise. These are the companies that get or transport them.

A play on this theme is to buy a general mining stock. These also tend to provide decent dividends so these are really growth and income plays... nice! The Blackrock World Mining Trust fund is one such fund I have invested in in the past with good results.

Individual Growth Stocks

As with picking individual stocks in the Income section of the portfolio, for 99.99% of investors this is simply not worth the time and effort. There are investors out there that may subscribe to share tips services and allocate some proportion of their overall portfolio to this category, so I have included it here but personally, it's not for me and wouldn't wish it on my worst enemy.

High Growth Funds & Stocks

A simple strategy to add 'high growth' to a diversified portfolio is to select a tech Index/ETF or maybe a tech investment trust (IT). This enables investors to add a diversified selection of high growth stocks in one (or two) funds. In the UK you can search for well-known tech investment trusts on the Association of Investment Companies website which tracks the performance of investment trusts in the UK. Alternatively, without so much as lifting a finger to research the merits of one tech fund over another, the Vanguard Information Technology Fund (linked to below) will provide a low-cost tech-focussed ETF, ready to go, 'off the shelf'.

An 'actively managed' alternative to the tech Vanguard Index/ETF is the Allianz Tech Trust (link below) which actively picks tech stocks to attempt to beat the Index funds and from the AIC website mentioned above, has a pretty good track record at doing that. Note, these funds are 'risk-on' only funds. As we have seen of late (2022) they sell off hard when the markets switch to risk off. What I aim to do is sell when I see the market switch to 'risk off' and just hold them otherwise.

The debate surrounding actively managed funds vs cheaper ETF tracker funds rages on in investments circles. The fact is that many 'active' funds simply don't beat their ETF/tracker rivals. A good test case is the biotech Trust below vs the its ETF counterparts. Given below are four links to ETF screening websites. The page you land on should list ETF's tracking the same Index that the actively managed Biotech Growth Trust is attempting to beat... the NASDAQ Biotechnology Index. You can select a few ETF's from these pages and see for yourself how they compare. You can also just click the Biotech Growth Trust link below, which will take you to the 'You Invest' page for the trust and shows the performance of the trust against the NASDAQ Biotechnology Index. As you can see over the last 10 years, for the most part, the Index beat the trust up to the Covid 2020 pandemic. Something then flipped the script and the trust massively out-performed. But, the trust peaked at the start of 2021 and has since collapsed seeing the Index out-perform. Some of these trusts just don't seem to pivot out of positions they should be...

The US tech Index is the NASDAQ 100, which is the largest 100 tech/growth companies in the US by market cap. An ETF that tracks this index is another option. Probably the most well known (and biggest) such ETF's has ticker code QQQ. Google it for details, or you can check my deeper dive into Growth portfolios on the growth deep dive page which contains further diversification into high growth sectors such as biotech (see the link below to the biotech fund I have a very small allocation to).

Page updated

Google Sites

Report abuse