Investment Strategy Statement – Part 3 – Allocations (revisited April 2020)

So here’s the guts of my ISS.

When I first drafted it in late 2018 I painted in broad brush strokes with the optimism and ambition of the naive. This updated version is, I hope, more pragmatic.
Asset Allocation

As a novice investor with relatively little in the market my wealth can essentially be divided five ways:

  • Property equity
  • Cash
  • Alternative assets
  • NHS Pension
  • S&S investments (1)

The first four can be covered in short order:

Property equity

Tied up in my home. Dependent upon the local market, plus our own mortgage repayments schedule and renovation work. The largest portion of my current wealth, and continuing on it’s merry accumulating way whilst we work up to our forever home. I have no interest in BTL until that point is reached.

Cash

Current accounts, savings accounts and premium bonds. My emergency fund, plus any extra money saved for upcoming expensive purchases. Emergency fund of three months personal salary, plus three months held jointly. Holdings target high interest and liquidity, through usage of high interest current and savings accounts with FSCS cover.

Alternative assets

Miscellaneous other physical holdings; cars (including current classic projects), art and books. Not alternative investment assets like currency/ bitcoin, EIS or private equity (2). Just plain old shit I own because I like it, that happens to be worth something.

NHS Pension

Unfunded, with no option to trade-out, my NHS pension is entirely tied up in my working life and retirement date. Subject to the whim of the government and BMA, I don’t include it in most of my net worth calculations as it does not physically exist until I retire.

Stocks and shares investments

The more interesting bit. My timescale is long, my employment is (in theory) secure and my pension scheme is (supposedly) generous. All money going into my portfolio is that which I can afford to lose. My current lifestyle, while not extravagant, is comfortable and by limiting lifestyle inflation I hope to increasingly channel spare cash into investments. I’m happy to take a reasonable amount of risk on this basis.

In choosing my asset allocation split I’ve tried to read widely, including the usual Smarter Investing 3rd edn – Tim Hale, Monevator, etc (3, 4, 5). My holdings are split between a core 80% passive tracker portfolio and 20% active ‘satellite’. The ‘satellite’ includes stocks, funds, trusts, ETFs and some odd crowdfunding investments.

Allocations will be reviewed and re-balanced quarterly. At this stage I’m uninterested in commodities, currencies, and REITs or other property investments. The diversification benefit is not worth the added effort and complexity for my paltry portfolio. Bonds I may revisit in the future, but at this point accumulation with a long timescale is the name of the game.
Fund/Brokerage Allocation

I intend to allocate across ETF/ fund providers. Rules here are loose as I’m still in early stages, but the intention is that no provider will hold more than 34% of my holdings. To minimise risk I’ll also allocate across brokers, with the intention of simultaneously reducing TER and minimising tax burden (6).
World Allocation

Global allocation applies only to my market investments, not my overall wealth.

Testbed Active Portfolio

This section of my portfolio is largely UK-based, but not limited by global allocation targets. Some themes include EIS/ early stage investments, green investment trusts, tech and mining.

Core Passive Portfolio

It would be very simple to put all my money in a LifeStrategy 100 and be done with it, but as my wife will attest I like to make life difficult. As fits a diversified passive-focus portfolio the central core will mirror world markets, using all world tracker funds and ETFs (7).

I understand the broad investment logic behind investing in your own country, and holding trackers to your domestic market. The protection against inflation a home market affords (8). But much of my active investments, cash, property and other assets are in the UK. I’m already UK inflation vulnerable/protected before even looking at passive equities.

I’m therefore largely ex-UK in my passive section. But then how do you slice your pie? Contribution to Gross World Product? Global market capitalisation? If global cap whose data do you use?

Weighting

My goal is passive purist, using a blend from Bloomberg, Credit Suisse’s Yearbook, Star Capital and World Bank reported data covering all countries with contributions >0.01% (9, 10, 11, 12). Getting clear data for free as an amateur investor has proved to be tough. The ex-UK adjusted average forms the basis of my allocation, alongside a further CAPE-adjusted view.
In summary

My allocations are fairly standard, if slightly over-complicated by my own adherence to dogma. I’ll review this yearly with new world data to see what changes need to be made, and in five years for a full review of asset allocation split.

In Part 4 – Funds, Accounts and Rebalancing.

References:

  1. https://monevator.com/asset-classes/
  2. https://en.wikipedia.org/wiki/Alternative_investment
  3. https://amzn.to/2Sthjtv
  4. https://monevator.com/asset-allocation-construct/
  5. https://www.bogleheads.org/wiki/Asset_allocation
  6. https://www.bogleheads.org/wiki/Asset_allocation_in_multiple_accounts
  7. https://monevator.com/investing-for-beginners-the-global-stock-market/
  8. https://www.investopedia.com/articles/basics/10/protect-yourself-from-inflation.asp
  9. https://seekingalpha.com/article/4202768-u-s-percent-world-stock-market-cap-tops-40-percent
  10. https://www.credit-suisse.com/about-us-news/en/articles/news-and-expertise/esg-investing-a-trend-that-is-constantly-evolving-202002.html
  11. https://www.starcapital.de/en/research/stock-market-valuation/
  12. https://data.worldbank.org/indicator/
  13. https://monevator.com/world-stock-markets-data/

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