The Investment Products to Build a Portfolio should be Trivial : Time Suggests Otherwise

Once you’ve done plenty of your own research (which in my opinion must include a thorough read of Tim Hale's Smarter Investing: Simpler Decisions for Better Results), decided upon the different asset classes that will form your balanced investment portfolio and then decided on the percentage allocation to those different asset classes it’s time to select (and buy) the Investment Products that will give you that real world balanced portfolio.

The theory says that this should be trivial and achievable with only a small amount of products.  At an extreme it could be nothing more than a Vanguard LifeStrategy Equity Fund.  Having now been at this investing game for over 7 years I've personally found that in its infancy you will need more products than you really should and you’ll also not always be able to select the optimum products so will end up with compromise.  Then as time progresses you will end up with more and more stamps for your stamp collection.

There are many reasons for this but some might include spreading provider (whether wrapper and/or investment) risk, new products that give benefits over what you currently hold, inability to buy your preferred product in a particular account, tinkering because personal finance is a hobby and even as a result of some good old fashioned investing mistakes.

Let me demonstrate with my own investment portfolio.  These are the top level asset classes and allocations to each class I'm currently holding:

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Looks simple doesn’t it?  Now let’s look in detail at ALL of the investment products that make up my portfolio.

UK Equities:

• Vanguard FTSE UK All Share Index Unit Trust (Income).  This fund tracks the FTSE All Share Index, has a TER of 0.08% and a Stamp Duty Reserve Tax at initial purchase of 0.2%.  I'm happy with this fund however there is one small consideration that would make me 100% satisfied.  I'm with the ermine in that psychologically during retirement I would very much prefer to live only on dividends rather than having to also sell down capital.  In partial conflict with this the Vanguard fund pays dividends only once per year.  One idea to keep expenses low but increase dividend frequency would be to create a pseudo All Share Index.  85% of the FTSE All Share Index is the FTSE100 Index with the majority of the remainder being FTSE250.  By buying 75% Vanguard FTSE100 UCITS ETF (VUKE) and 25% Vanguard FTSE100 UCITS ETF (VMID) results in a TER of 0.09% but dividends paid quarterly instead of yearly.  At this time I won’t act on this as in retirement I’ll be keeping at least 12 months essential living expenses in cash so should be able to manage with annual dividends.
• My High Yield Portfolio (HYP) which continues to build nicely.  This portfolio has a TER of 0.0% (but it does have buy/sell dealing fees and 0.5% stamp duty on initial purchase) and as a believer of expenses matter that’s fine by me.
• I'm generally happy with what’s going on with the UK Equities portion of my portfolio.

Australian Equities

• Perpetual Wholesale Industrial Fund.  This is an Australian domiciled fund, is an active fund and has an annual management cost of 0.99%.  Given my current personal situation and investment knowledge everything about it is wrong.  I originally bought it as in the early days I was planning to work until early retirement in the UK but then retire to Australia.  It therefore seemed sensible to have the ‘home’ portion of my equities split evenly across the UK and Australia.  Plans have changed with Australia no longer featuring in the plan.  I also no longer believe in active fund management as I've now seen enough research to suggest I'm more likely to underperform the index over the very long term after considering expenses and manager performance with this approach.  I also now consider expenses of 0.99% per annum high.  So why not just sell?  Unfortunately this fund doesn't carry UK Distributor/Reporting Status so gains are considered earnings and not a capital gain meaning if I sold I’d get no CGT annual allowance and would be paying Higher Rate tax of 40% on any gain.  That’s a big haircut so instead I'm forced to minimise the damage by taking the dividends which I invest elsewhere as well as allowing the fund to become less significant as I continue to add new savings to the portfolio.  About the only thing partially sensible I did was to buy the Wholesale version of the fund.  The retail fund carries an old school entry fee of 4% and annual management costs of 1.98%.  Obscene...
• Vanguard Index Australian Shares Fund.  Again an Australian domiciled fund however by the time I’d made this purchase I was at least a tracker convert.  Management costs are pretty high for a tracker at 0.75% for the first $50,000, 0.5% for the next $50,000 and then 0.35% on any balance over $100,000.  Like the Perpetual Fund it also doesn't carry UK Distributor/Reporting Status so I'm stuck with it.
• So two funds when ideally I’d have zero.

Emerging Market Equities

• State Street Global Advisers (SSgA) Emerging Markets Equity Index.  Expenses are high at 0.87% and if I could choose I’d be owning Vanguard’s FTSE Emerging Markets UCITS ETF (VFEM) with a TER of 0.25%, Vanguard’s Emerging Markets Stock Index Fund with a TER of 0.27% or the iShares Core MSCI Emerging Markets IMI UCITS ETF (EMIM) with a TER of 0.25%.  So why don’t I own one of them?  This fund is held within my current company defined contribution pension.  So while the expenses are ridiculous it’s still worth it given company matches as well as my company contributing part of the employers NI that they save by my salary sacrificing.  When I eventually leave my current company this will be moved quick smart into a SIPP and I will be owning one of the three preferred.
• Aegon Emerging Markets Equity Tracker which is tracking the FTSE All World Emerging Index.  This is fund is held in an old employers defined contribution pension.  So why don’t I move this one to my YouInvest SIPP and buy either Vanguard or iShares?  This fund is also only attracting annual expenses of 0.25% so I’d gain nothing financially by moving but what I do gain is that I have reduced provider (YouInvest, Vanguard and iShares) risk.  So it’s staying for now.
• So two funds when the theory suggests I need only one.

International Equities.  Here I’m nominally chasing 40% allocation to the US, 40% to Europe and 20% to Japan.

• Perpetual Wholesale International Share Fund.  This is an Australian domiciled fund, is an active fund and has an annual management cost of 1.226%.  Another disaster that has all the same problems of the Perpetual Wholesale Industrial Fund mentioned above.
• Vanguard S&P500 UCITS ETF (VUSA).  This ETF tracks the S&P500 and has a TER of 0.07%.  It’s exactly what I’m looking for.  An alternative for provider risk minimisation could also be the iShares Core S&P500 UCITS ETF (CSPX) which also carries a TER of 0.07%.
• Vanguard Developed Europe UCITS ETF (VEUR).  This ETF tracks the FTSE Developed Europe Index and has a TER of 0.12%.  It wasn’t available at the time I bought my ETF but today I’d be buying the Vanguard Developed Europe ex UK UCITS ETF (VERX) also with a TER of 0.12%.  Why? My ETF carries 32.4% UK equities.  Buy the Vanguard FTSE UK All Share Index Unit Trust (Income) for the UK portion and VERX for Europe exposure and your expenses are down to 0.11% plus management of Europe allocations are a little easier as you don’t have to always net off the UK portion of the fund.  I won’t be changing though as the small expense saving and simplicity doesn't override the trading costs and buy/sell spreads I’d be exposed to.
• State Street Global Advisers (SSgA) Europe ex UK Equity Index.  Expenses are high at 0.6% and if I could choose I’d own the Vanguard European ETF mentioned above.  This is another one where I'm stuck with my employer’s expensive pension options.
• State Street Global Advisers (SSgA) Japan Equity Index.  Expenses are again high at 0.6% and if I could choose I’d own the Vanguard Japan UCITS ETF (VJPN) with a TER of 0.19%, the iShares Core MSCI Japan IMI UCITS ETF with a TER of 0.2% or the Vanguard Japan Stock Index Fund with a TER of 0.23%.  This is yet another one where I'm stuck with my employer’s expensive pension options.
• Five funds, of which I'm only happy with 1.5 of them, to meet international exposure which in theory should be able to be done with one.  As an aside when is a low cost international ETF with expenses of about 0.1% going to appear?

Commodities.  I paid the price of not understanding Contango or Backwardation in the early days.  Today I just stick with the Precious.

• ETFS Physical Gold.  It’s priced in Sterling and annual expenses are 0.39%.  Today I’d be buying the iShares Physical Gold ETC (SGLN) with a lower TER of 0.25%.  To get into it though I'm going to have trading costs, buy/sell spreads and because it’s priced in USD’s exchange rate haircut’s.  Benefit is marginal so I'm sitting tight for now.

Property

• Scottish Widows Property.  Expenses are high at 0.761%.  This is another expensive current employer pension option.  If I could choose I’d be grabbing the iShares UK Property UCITS ETF (IUKP) with its TER of 0.4%.
• iShares European Property Yield UCITS (IPRP). This ETF tracks the FTSE EPRA/NAREIT Developed Europe ex UK Dividend+ Index with its TER of 0.4%.  I'm happy with this one as I've found no real sensible alternative.

Bonds

• Vanguard U.K. Inflation-Linked Gilt Index Fund.  This fund tracks the Barclays UK Government Inflation-Linked Float Adjusted Bond Index and has a TER of 0.15%.  I'm happy with this one.  An alternative consideration would be to buy a ladder of these gilts directly but I need to do some more research here.
• State Street Global Advisers (SSgA) Index Linked Gilts Over 5 Years Index.  Ridiculous annual expenses of 0.6% but again they’re tied up in my current employer’s pension.  I’ll transfer to a SIPP and go direct or purchase the Vanguard option at the very first opportunity.
• NS&I Index Linked Savings Certificates.  Tax free and something I just wish would come back on sale so I could buy a lot more.  I’d certainly take them over the P2P and a large portion of my savings account mentioned below.

Cash

• A combination of a savings account and some Peer to Peer (P2P) lending with RateSetter.  I can find no better today.

It’s a portfolio of thorough breads and mongrels.  It’s also a portfolio that is no longer trivial to manage as it now has history.  It is however a portfolio that is seeing annual expenses that are manageable at 0.31% (I’d like less of course) and is enabling 69% of the portfolio to be tax efficiently invested.  When combined with the addition of new savings it’s also enabling this to occur:

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As always DYOR.