By elmads

Table of Contents

1. INTRODUCTION
2. VANGUARD PORTFOLIO
   • PORTFOLIO WEIGHTING BY FUNDS
   • SIPP & ISA PORTFOLIOS
     • SIPP BREAKDOWN
   • HISTORICAL RETURNS
   • INFLATION ADJUSTED RETURNS
3. SUMMARY

INTRODUCTION

“Investing money supplements our savings, as saving money alone will most of the time not be enough to achieve our financial goals”

-Myself

Planning and constructing our financial goals are important before we start investing our hard-earned money. This gives us clarity for our investment time horizon, the capital we need to invest per month and/or yearly, and the comfortability of our investment strategy which is purely based on our personality and lifestyle.

I maybe a value investor, but I still have a portion of my overall portfolio into doing the cost-averaging strategy. Meaning, I invest a portion of my salary consistently on a specific low cost index mutual fund on a regular basis, regardless of the price point of the asset. I couldn’t care less if it’ll be overvalued, fairly valued or undervalued, I’ll just keep on buying it religiously.

Even though I am an active value investor, I still invest in mutual funds employing cost-averaging method because the money I put in here is for a specific financial goal for my family. By the end of 2022, I project and calculated that I’ll be able to hit that goal. And if it does, then I will stop adding money on it so that I’ll be able fully focus my resources into my value investing portfolios (Col Financial and Freetrade broker accounts). But before then, I’ll still be continuing to add capital on this portfolio.

VANGUARD PORTFOLIO

“Vanguard is an investment platform with 30 million investors worldwide. It has over 75 funds to choose from, pooling money from lots of investors and using it to buy hundreds of different shares and bonds.

There are two ways to invest with Vanguard: you can choose a ready-made portfolio or you can build your own portfolio (think ready-made meal versus cooking it up yourself). In February 2020, Vanguard launched a self-invested personal pension (SIPP) in the UK, heralding this as a low-cost option.” – Taken from their webpage

I chose vanguard for my mutual fund investment provider because they have been one of the top investment funds in the world, handling from multi-millions to multi-billions of dollars of investors’ money for decades. They also revolutionized the fee structures in the investment funds world, by pressuring their competitors to decrease their management fund fees to almost equal levels or lower to Vanguards’. Why? well because Vanguard is the first investment fund provider who started it back in the day, where they only took roughly less than 1% on fees, whereas their competitors had fees around 1-5%.

To give you an insight on how significant fees can impact our investment returns, see the photograph below.

As you can see above, the higher the annual percentage fees, the larger we will be paying for it in terms of the monetary amount of our invested capital. This is the reason why finding a low cost index mutual fund is important. I have discussed this further in my blogs titled “Mutual Funds” and “Active & Passive Funds”.

My Portfolio Weighting by Funds

I am invested in specifically 3 mutual index funds under the Vanguard Group, Namely:

• Vanguard US Equity Index Fund – Accumulation
• Vanguard FTSE U.K. All Share Index Unit Trust – “A” GBP Accumulation Units
• Emerging Markets Stock Index Fund – Accumulation.

I’ll explain my reasoning why I choose these 3 funds.

1. Passive Index Fund – I prefer investing in a passive fund that tracks a specific index. This is because index funds have lower fees, due to lesser buying and selling transaction frequency made by the fund manager within this kind of fund.
2. “Accumulation” Fund – This just means that the dividends we will receive from the fund will be automatically reinvested back on the same fund. A great way for long-term compounding and for investors who would not need the dividend cash anytime soon to sustain their lifestyle. It’s like direct debit, setting it your dividend income to be reinvested automatically back in the fund.

1.) Vanguard US Equity Index Fund – Accumulation – This fund mirrors the S&P 500 index. The money I invest in this vanguard fund will be distributed and be invested by this specific funds’ fund manager into the top 500 companies in the United States of America.

The US has the largest equity markets worldwide, consisting of 38.5% of the $105.8 trillion in global equity market capitalization, or $40.7 trillion as per The Securities Industry and Financial Markets Association (SIFMA), a United States industry trade group representing securities firms, banks, and asset management companies. Investing in the US equities is a no brainer investment for non-American investors who want to invest in global markets.

Also, the US is the largest economy to date, and is expected to continue to grow and still have great influence in the worldwide trade. This is an offensive index fund play in this portfolio.

2.) Vanguard FTSE U.K. All Share Index Unit Trust – “A” GBP Accumulation Units – The 5^th largest country in terms of GDP as of 2021. The UK has been sitting at the royal table of global power for centuries already. A country where massive innovations were made, notably during the industrial revolution. UK’s financial services is the second largest worldwide, same as their aerospace industry. 80% of their GDP comes from the service sector, the only downside is that they’re a bit lagging behind in terms of the global technology push, most especially when compared to the robust tech growth and innovation of the USA and China.

Moreover, the current uncertainty in terms of economic growth due to Brexit is still weighing down the foreign capital in flows. The unpredictability between the possible impacts, either advantageous or not, are still the major concerns for international investors, because this changes could hamper growth of the companies operating in the local British lands. This uncertainty is one of the reasons why the UK markets have traded at almost fair valued levels for a couple of years now. Also, there are no heavy big technological companies in this country, unlike the GAMMA stocks (Google, Apple, Microsoft, Meta, Amazon) of the USA, and the BATX stocks (Baidu, Alibaba, Tencent and Xiaomi) of China.

Nonetheless, a country composing of industrial companies, which is considered by some investors as dinosaur companies, still have an advantage in my portfolio because of its valuations. This is my capital safe zone index play in this portfolio.

3.) Emerging Markets Stock Index Fund – Accumulation – As defined by The Balance, “Emerging markets are nations that are investing in more productive capacity. They are moving away from their traditional economies that have relied on agriculture and the export of raw materials. Leaders of developing countries want to create a better quality of life for their people. They are rapidly industrializing and adopting a free market or mixed economy.”

Countries within this group have economies that can change rapidly and have volatile currency exchanges, but with promising and fast economic growth. Valuations of the Emerging Markets have always been in the fairly valued territory for a long time already due to the uncertainties and volatility of its market economy. Still, opportunities of massive growth can be found in this space. An opportunity as a long-term index fund growth play.

Below are the countries where the Vanguard Emerging Market fund is currently invested.

• My Worries: You’ll never go wrong with investing in the US equity markets, and their companies. Their growth, business operations and balance sheets’ well being are always one of the best worldwide. However, my main concern here is their general valuations. The US markets us currently sitting at high valuations most especially when compared to other countries. This could cause a trip for its markets and even fall of a cliff. The only question is when?

• My Plan: No one knows when a recession or a drop will happen, that’s why I’ll still be investing religiously on these 3 funds, regardless of the price point, up until I reach my specific investment goal. My next action will be portfolio rebalancing within this year, I plan to increase my Emerging Market weighting to around low 30% and decrease my US equity holdings to the high 30%, while still maintaining my UK holding in the same percentage range. My weightings by then will be approximately 30% for each fund.

SIPP & ISA Breakdown

1.) Individual Savings Account (ISA) – A non-taxable investment account in the UK where all dividend gains and capital gains inside the said account will not be taxed at all, including the money that you’ll be withdrawing from this account. I’ve discussed this in detail in my blog titled “UK’s Tax Exempted Individual Savings Account”.

2.) On the other hand, Self Invested Personal Pension (SIPP) -is also a non-taxable investment account like ISA. The difference is, with SIPP the government will always add 25% of you’re deposited capital into your account. For instance, if you invest £500 today in a SIPP, after a few weeks the government will contribute 25% of that £500, which is £125. This will then give you a total of £625 to be invested.

Note: Some employers will be able to contribute into your SIPP, but not all employers do this (Try to ask your employer if they are able to). This massive upside of returns for a SIPP due to government contributions is phenomenal, but it is not without a catch. You’ll only be able to withdraw and use the money in a SIPP once you reach retirement age.

I both have ISA and SIPP accounts on Vanguard. ISA for a specific investment goal which I’ll be able to attain hopefully this year, and SIPP for my very long-term investment goal of retirement, with the added capital boost from the government. Below is the percentage breakdown of my funds under ISA and SIPP.

SIPP Breakdown

My ISA investment is straightforward like any other investment, the basic factors of return are based form the invested capital, dividend gains/losses then capital gains/losses. Whereas, SIPP is different, because there’s an additional factor that comes into the play for its returns, the invested capital, dividend gains/losses, capital gains then the tax relief from the government. Below is the breakdown of my 2021 return for my SIPP.

The photo above is the percentage breakdown of my SIPP overall amount of money gained for fiscal year 2021.

• The Capital Gains (Yellow bar) consists 7.10% of the total
• The Tax Relief from the Government (Green bar) consists 16.40% of the total
• The Capital I’ve Invested (Blue bar) consists 76.50% of the total.

In terms of the Capital invested plus the tax relief. My total SIPP 2021 return is 7.10%, but when we look at it based only on the capital I had invested, then comparing it to the tax relief plus the capital gains. My actual SIPP fiscal year 2021 return is now 31%. That’s how great SIPPs are due to the 25% government additional capital boost.

HISTORICAL RETURNS

I initially opened an ISA Vanguard account back in 2019, only recently in December of 202,0 did I take action and opened a Vanguard SIPP account.

The Average Annual Rate of Return is the average annual amount of cash flow generated over the lifetime of an investment. My aim has always been more than 10% per year over a long period of time. If I’ll be able to do it successfully, then I’ll be doubling the capital I will be investing every 7 years.

I compared my vanguard performance to FTSE All World index, which for me is a fair comparison because, basically my Vanguard portfolio consists also of worldwide equity markets. The US, UK and Emerging Markets (which has like more than 20 developing countries in it).

What happens if I’ve invested 100,000 on Vanguard FTSE All-World ETF instead of my current 3 holdings? See the photograph below.

My returns would have been better if I just invested in the FTSE All World of Vanguard, instead of doing the 3 fund portfolio of mine. But, why did I actually not do that instead? to be frank, it would a lot easier for me to just invest in FTSE All World because I’ll be focusing my money in just one fund, religiously investing on it and not needing to think of doing a portfolio rebalancing anymore.

My answer to you lies in the portfolio weightings of The FTSE All World Index. But, before I show you its holdings, we need to know what this fund invests in first. As per its fund overview page. “Vanguard FTSE All World ETF measures the market performance of large- and mid-capitalisation stocks of companies located around the world. It includes approximately 3,900 holdings in nearly 50 countries, including both developed and emerging markets. Covers more than 95% of the global investable market capitalisation.”

See fund information on the link provided: FTSE All-World UCITS ETF (vanguardinvestor.co.uk)

The holdings of FTSE All World Index are as follows;

As depicted from the photographs above, we can see that 60% of the capital that the funds invests goes to the US equity markets. That’s, in my own opinion, a significant overweight in one country. And, just like what I’ve said a while ago regarding the US equity markets, they’re surely one of the best country to invest in, but at the moment the stock price in their market is too far away from valuations of their underlying companies.

Don’t get me wrong, I’m not saying that the stock price will fall now, or tomorrow, or after a week or a month, or a year because no one knows, and it might not even fall at all as well. There are 4 things that can happen with the relationship of value and price, and here are the 4.

• The US company earnings can keep up of what is expected in todays’ market prices, which means that the prices today are justified in terms of their forecasted earnings. Value and Price goes up together.

OR

• Prices will just stay flat, stagnant in this current level and moving forward, while waiting for the company earnings to follow through. Prices stay flat, while value will eventually be able to reach Prices.

OR

• Prices will go back down and face the reality of the logical valuations of the companies in the US. Prices fall to Value levels.

OR

• It’ll just continue to go higher, while the disparity between price and value will just keep on getting larger. Prices go higher and faster, while Value goes higher too, but not as fast as the appreciation of Prices.

I don’t know, and I will never ever know what will happen in the future. But, what I do know and can control is how I will be able to manage my risk based on my own research and understanding. I am not comfortable with investing in FTSE All World because of the 60% weighting on the US markets, that’s why I prefer my 3 fund portfolio.

I still have the US fund which is a growth offensive play, the UK Fund for defensive value play and the Emerging Markets Fund for the undervalued growth opportunity play. The ability for me to decrease my US holdings and transfer it to either UK or Emerging Markets is more than enough for me to be comfortable with my mutual fund investment portfolio.

If ever a downturn happens, and if the US gets the hardest beating due to its sky high valuations, then my index fund portfolio wouldn’t (hopefully) be hit that hard enough because I only hold roughly 40% US exposure in my portfolio. Unlike, when I’m invested with the FTSE All World, which has 60% of the funds capital in the US equities. Basically, this is what you call diversification, which I also have discussed deeper in my blog titled “Diversification”.

INFLATION ADJUSTED RETURNS

One of the reasons why we need to invest is to supersede inflation, because inflation is the hidden thief of our hard earned money. The above photograph is the real returns of my Vanguard portfolio and the FTSE All World Index when inflation is factored in.

Overall I have a 3 tiered goals for my returns;

1.) Minimum 10% on my returns, better 15%, best is more than 20%

2.) Beating the average index returns over a long period of time.

3.) A consistent beat on inflation.

Nonetheless, if things goes well this year for this fund and if it hits my calculated and projected amount of money goal. Then, I’ll stop adding money in my Vanguard ISA account and take it out to finance my family’s intermediate financial goals. I’ll still be adding money on my SIPP though, because that’s for my retirement account, then the rest of my future capital will go to my beloved value investing portfolios.

To sum it up

Index investing is the best investing strategy for people who doesn’t want to learn about the investment world in a deeper level, and also just wants their money to work for them. We don’t need a high IQ or a lot of money to invest, what we need is a good enough basic understanding about it, (20% Knowledge) and the right mindset (80% Behaviour).

No one can ever take what we have learned and will be learning, both in our minds and in our hearts.

I hope you’ve learned something out of this and enjoyed reading it. Next week I’ll be posting my Freetrade portfolio performance. It is a value investing strategy portfolio that focuses on global equities.

Let’s go INVEST!!!!woot woot!!

Knowledge is my Sword and Patience is my Shield,

elmads

This blog is for informational purposes only and not a Financial Recommendation. Not all information will be accurate. Consult an independent financial professional before making any major financial decisions.