I caught up with a very successful friend of mine this week. She sold a big chunk in her business a year ago, clearing >£10m of cash. She has been meaning to decide what to do with the funds but has been too busy / fearful / etc to decide. So the money has been sitting in cash in her bank account. But she told me today that she’d decided to go with a Swiss Bank and use them to open an offshore bond, putting £5m into it.
I sighed, rolled my eyes, and generally acted in a not-very-empathetic manner. Then I asked her to consider taking £1m of her £5m, doing a simple Do-It-Yourself approach instead, and comparing the difference over a few years. She asked me to drop her an email with some details. So today I sent her an email, which I reproduce below. Please note that this is not financial advice, just encouragement.
Any comments/improvements would be very welcome. For reference, Jane lives and works in the UK, has several kids, and has a husband who works in the public sector. Jane has a net worth of at least £20m.
As promised here is what I would encourage (note – not advise) you to consider as you deploy your funds.
Most importantly, make use of your annual ISA allowance. Between you and your hubbie you can top up your ISA with about £30k this year (until 4/4/17!) and £40k next tax year. You can, between you, get £70k deployed by the end of next week. If you open your account with iii.co.uk you could use iii to buy two ETFs (index funds, tradeable in real-time) as listed below. Once the account is open and funded this would take about 2 minutes to do.
Secondly, you could try a ‘DIY/low fee’ approach for some of your funds and compare/contrast over the years with the high fee approach. For instance rather than putting £5m into a high-fee place consider making this £4m only with £1m being used for the DIY/low-fee approach.
A simple and effective option for a DIY/low-fee approach would be to split between diversified liquid reputable ETFs (index funds, basically) covering both equities and bonds. A cautious balance would be 50:50. A more long-term, but riskier, balance would be 75:25. For reference many experts would say you should have your age, as a percentage, in bonds. So a 30 year old might have 70:30 equities:bonds, a 60 year old would have 40:60. This is because bonds are less volatile and thus the chance of a calamitous drop are lower; as you near retirement you value certainty more. I am pretty equities-friendly and I run at about 75:25 but given your lack of confidence you might decide that 50:50 would be a better starting point.
Vanguard and iShares (Blackrock) are the two largest providers. For equities I would recommend a global mix, and would myself pick ticker VWRL (Vanguard World Equities). For bonds most people would recommend a UK resident taking UK bonds, possibly even government bonds. Personally I consider government bonds are very expensive right now so I would be tempted to go for corporate ones. The iShares UK Corporate Bonds ETF (ticker SLXX) is a solid choice.
Some draft wording for your Swiss bank is below.
If you go ahead with this then I will buy you lunch/similar in 2020 if you promise to pull out your comparative performance between your bankers’ recommendation and the DIY/low-fee approach I’ve mentioned here.
Best wishes, etc
DRAFT NOTE TO SWISS BANK
To: Cordelius, Private Banker, Swiss Bank, London
Thank you for your advice regarding my investment strategy.
You suggested I move £5m into an offshore bond. I agree to use an offshore bond but want to invest only 80% of the sum we talked about, i.e. £4m.
For the remaining 20%, i.e. £1m, I want to deploy it at the same time but using a different approach. I believe you can help me to do this. What I am looking for is:
– an execution-only brokerage account. One that will allow me to trade in equities, bonds and funds across the major exchanges – particularly in the UK and the USA (LSE, NYSE and NASDAQ). Given your firm’s reputation I imagine this is straightforward.
– to put £1m into this brokerage account.
– to use this £1m to buy two holdings, as follows:
1. Vanguard Funds PLC VANGUARD FTSE ALL-WORLD UCITS ETF (LSE:VWRL, http://www.iii.co.uk/research/LSE:VWRL). This is the Vanguard ETF covering the FTSE All-World Equities index, with charges of 0.25% p.a..
2. Ishares PLC ISHARES CRE £ CORP BD UCITS ETF GBP DIST (LSE:SLXX, http://www.iii.co.uk/research/LSE:SLXX). This is the iShares UK Corporate Bond ETF, with charges of 0.20%.
– to have the two holding of equal in size, i.e. £500k of VWRL and £500k of SLXX.
– I want dividends/interest payments to accumulate in the account. At this stage I plan to reinvest them every year, but will look to do so in a way that keeps my split between VWRL and SLXX at my initial split, i.e. 50:50. So I’d prefer not to have automatic dividend reinvestment (e.g. ‘DRIP’, a Dividend Re Investment Plan) turned on.
– ideally I would look to spread my initial purchase over time (so-called “time cost averaging”), to reduce the risk that I buy £1m of stuff just before the market drops. For instance ideally I would buy these positions in five equal portions every month for five months. I.e. £100k of VWRL and £100k of SLXX every month, for five months. Can you help with this?
I can confirm that I am not looking for advice on this execution-only account and so will not be happy paying any form of discretionary/advisory service fee for it. On this basis I would be grateful if you could confirm the annual account fee and the one-off trading fees for buying these two holdings.
Many thanks for your assistance in this matter.