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/

Investment Strategy Statement – Part 2 – Goals

This post was initially written in November 2018. This is the latest iteration as of April 2020.

When I first started writing this blog I set out a very brief goal:

Financial independence for myself and MrsFireShrink.

But beyond that, the aim is to save a sufficient amount to create a self-sustaining portfolio. The dream goal being to create a portfolio sufficient to support my family in the future and continue to grow (1).

Which is all a bit wishy-washy. As time and this blog has gone on I’ve developed a clearer idea of where I want to get to. I enjoyed indeedably’s goals post, and so I’ve emulated that here (2). So here’s the current goals list with steps already taken and timescale for target/ dream/ fail. (Last updated Jan 2021).

  • Complete medical degree. Achieve Royal College Membership. Become a consultant (2028).
  • Find a girl. Get married. Have kids (2028). Have good kids.
  • Publish a paper (2018). Get a fellowship (2019). Get another fellowship (2019). Get a Phd. Get a lectureship. Make Prof.
  • Get a job. Get a job I enjoy. Get a job which doesn’t feel like work (2020). Be in a position to retire in 20 years (2038).
  • Have an emergency fund of three months income (2019). Save £1000/month (2020 2021). Have a net worth of £100k.
  • Own a home. Have £100k in equity (2023). Start overpaying mortgage (2023). Have 180k in equity (2028). Buy our dream home in 10 years (2028). Own a self-sustaining estate.
  • Learn to drive. Own a car. Own a six-cylinder car. Own an eight-cylinder car (2028).
  • Race in a motorsport. Win a race (no timescale).
  • Start a martial art. Start gradeing. Get to sho dan (no timescale).
  • Learn to ride a motor bike.
  • Learn to fly a plane.
  • Do 50 press-ups. Do a pull-up (again) (2019/20 2021). Get back to 17 stone (2019/20). Do a hand-stand press-up (again). Do a ring muscle-up.
  • Re-learn languages I once knew. Become fluent in one of them. Learn a fourth language (no timescale).

The Numbers

Most of the maths in this section is rough and dirty. I’m not going to make complex predictions or models. Life itself is too unpredictable (even if the money isn’t), and past predictions have demonstrated the fallacy of trying to predict the future.

  • Be in a position to retire in 15 years (2033).

In the past I have conservatively estimated I will need around £24k a year to maintain our current lifestyle if I didn’t work. Looking back at figures for 2019, my expenses plus half the household running costs comes to £23.5k, excluding mortgage and credit card payments. Good consistency, and also fits nicely with what the fun Standard Life calculator reckons for our current lifestyle (~£23,000) (3).

Plugging that into a simple interest calculator suggests I need to have around £700,000 saved to be able to withdraw £24,500/year at a reasonable 3.5% interest rate with no erosion of capital. This presumes the savings will be tax-sheltered, and does not account for inflation. As inflation works on both denominator and numerator it’s not worth calculating here, but I will recalculate as I go. I’ve selected 3.5% as a conservative blend of cash interest rates (currently ~1%) and the average annual return of the FTSE All-Share over the last 100 years (+7.0%) (4). It’s also conveniently the mythical Perpetual Withdrawal Rate (5, 6).

You say: “Why are you not interested in drawdown? You’d get to retirement a lot quicker.”

The figure above would replace my current salary (7). My NHS pension kicks in from age 68 onwards and would provide career-averaged salary revalued by inflation. If I bridged to 68 with ISAs, say for 15 years, suddenly my required capital savings halves. But that requires capital drawdown, and would also reduce my NHS pension unless I paid for an early retirement buyback. I expect the NHS pension to be the subject of future Government cash raids, and would prefer redundancy in my financial system. For that same reason I haven’t included the State Pension. I also think drawdown is highly personal, and relates among other things to your optimism for your life expectancy, number of dependants and general approach to lifestyle. In future years as my pot grows I may change this attitude and run models, but right now it’s all about accumulation.

  • Save £1000/month (2020). Save £1500/month (2025). Have a net worth of £100k.

Stepping stones on the route to the previous bullet point. Plugging that £700,000 into Money Advice Service’s savings calculator suggests I need to be saving £1835/month at 5% interest to achieve retirement by 2038 (8, 9). Long term readers may notice I’ve pushed the date out, and it’s now a bit more realistic. The amount I’m saving is incrementally increasing, but still a way off required sum. I suspect I’ll miss this target barring spectacular stock returns.

  • Have £100k in equity (2023). Start overpaying mortgage (2023). Have 180k in equity (2028). Buy our dream home in 10 years (2028).

Currently our dream homes cost around £500k. Difficult to say what that will be in 10 years time. Historically the yearly trend has been c2.9% (10). More recently it’s closer to 2%, comparable to the OECD 2.0% long-range inflation forecasts (11, 12). Inflating the £500k at 2% brings us to £610k in 2028. Our feet are on the ladder, which mean we also benefit from that inflation to an extent.

When this was first written in late 2018 we had around £67k in equity. I hoped to reach £100k by 2023. We’re now (Q1 2020) at around £85k, thanks to moderate house price growth and a remortgage knocking down our interest rate. Overpaying our mortgage once we have a decent joint emergency fund will also help. I’ve added a new target constituting a 30% deposit on a potential dream home in 2028.

Summary:

  • Save £1000/month (2020)
  • Be worth £100k (2022)
  • Start overpaying mortgage (2023)
  • Have £100k in equity (2023)
  • Be in a position to retire in 20 years (2038)

In part 3 I cover my asset allocation.

Take care,

The Shrink

References:

  1. https://thefireshrink.wordpress.com/about-me/
  2. https://indeedably.com/i-will/
  3. https://www.standardlife.co.uk/c1/guides-and-calculators/retirement-how-much-may-i-need.page
  4. http://stockmarketalmanac.co.uk/2016/12/100-years-of-the-ftse-all-share-index-since-1917/
  5. https://portfoliocharts.com/2016/12/09/perpetual-withdrawal-rates-are-the-runway-to-a-long-retirement/
  6. https://monevator.com/what-is-a-sustainable-withdrawal-rate-for-a-world-portfolio/ 
  7. http://monevator.com/try-saving-enough-to-replace-your-salary/
  8. https://www.moneyadviceservice.org.uk/en/tools/savings-calculator/
  9. http://candidmoney.com/calculators/investment-target-calculator
  10. http://monevator.com/historical-uk-house-prices/
  11. https://www.bbc.co.uk/news/business-44736472
  12. https://knoema.com/rwbagv/uk-inflation-forecast-2018-2020-and-up-to-2060-data-and-charts

How I calculate my net worth

Prompted by some comments, I’ve decided to lay out the sums I use to calculate my net worth each month along with a copy of my Beast Budget spreadsheet. Some bloggers will notice elements stolen from their own spreadsheets – it’s very much a mutant offspring!

My spreadsheet actually calculates two different net worth values; a current net worth and a month end value. The month end value is the sum I report. It’s a pretty theoretical figure really, a sort of “if I had to liquidate everything now back to the banks where would I stand”.

Example dash

The first page of my spreadsheet is the Dashboard. The net worth figure shown here is the sum of all assets and liabilities on the day viewed (using the TODAY function of excel plus lookup tables). The buttons on this page hyperlink to the net worth tracking page and the summary assets and liabilities pages.

Net Worth Example

The net worth tracking page (‘NW Track’) gives a heads-up of every account and it’s change over the year. Beige boxes need to be filled by hand, whilst grey boxes autopopulate. The first table tracks the month to-date value in each account using a mixture of links and lookup functions. It will then calculate your net worth as:

Net worth = (property value – outstanding mortgage) + (all savings accounts) + (all investments) + (all bank accounts) + (pension cashout value) – (student loan) – (all credit cards) – (all other loans/ debts)

For my own net worth I halve my property value and outstanding mortgage, as it’s jointly owned between us. The table will also calculate your net worth without your equity or student loan.

Savings rate example

Table two tracks absolute net worth increases, percentage increases and savings rate (derived from table three). Enter your previous net worth in the equation for January to show the increase.

Savings percentage example

Table three calculates your savings percentage. It will calculate your take home income vs expenses amount using the figures for your primary bank account. The savings percentage calculation is (total saved) divided by (your take home income + your pension contributions). Table four is a countdown to FI calculator which I pinched from another FIRE blogger. TFS I think? It’s adapted to work with the rest of my spreadsheet.

Countdown example

The third page/ sheet is the Assets dashboard. This summarises the state of all your accounts on that day. Where pages exist for the accounts they’ll autopopulate, otherwise have a play about. The Liabilities dashboard does the same thing for accounts holding debts later on.

Assets example

Liabilities example

The following two pages are sample bank accounts. Your primary bank account should be the one your wages go into (although the NW calculator will pull income data from all of them). I think this was originally an excel template which I’ve modified. Enter your expenses and income as they come in.

Bank account example

The savings account page and credit card pages are very simple running totals that you manually input information to. Remember to make all credit card purchases negative. I added a graph to the credit card page because I like pretty pictures. Following the savings account is the investment page, which at the moment is really simple. I’m working on a separate investment workbook that includes live pricing, which I use to update this.

Credit card example

Mortgage example

The last few pages are very similar. Both the student loan and mortgage calculator consist of a summary page and an amortisation page. Enter the values in the first five grey boxes of the inputs section on the summary page and it will do the rest, producing monthly figures and an amortisation table. I’m most proud of the mortgage amortisation (as an excel novice). If you overpay one month, enter the new figure for the appropriate months payment in the amortisation schedule page and it will automatically recalculate all future payments and duration. You can get the student loans calculator to work out how much you pay monthly based on the sum below for Plan 1, or alter it for Plan 2. I tend to just put the payment values in by hand on the amortisation for my student loan, because they change so much and don’t fit a standard loan pattern.

Student loan monthly payment = ((yearly salary /12) – (Plan threshold)) * 0.09

Where (Plan threshold) is for Plan 1 £1,577 and for Plan 2 is £2,143. The percentage increases to 15% (0.15) if you also had a Postgraduate loan.

The link to the google sheets version is here:

Make a copy and save if you want. It’s pretty fugly in Google Sheets as I run it in Excel.
So there you have it, I look forward to constructive criticism.

Cheers for reading,

The Shrink

Investment Strategy Statement – Part 4 – Accounts, Funds, Taxes & Rebalancing

Wrapping up my ISS with the mechanical stuff.
Taxes

Exploit tax-free allowances where possible

MrsShrink and I are both UK resident fully compliant UK taxpayers. 2018/19 I have been on the cusp of higher rate tax, and will need to review once I get my year end P60 for the three (actually sort of four) jobs I’ve been on PAYE (1). From 2019/20 onward it looks like I’ll be in the higher rate 40% bracket.

I plan to exploit four tax-sheltering methods:

1. Interest from cash savings and emergency funds will stay within my Personal Savings Allowance

This latest weapon in the public’s tax armory allows for £1,000 tax-free savings for basic rate tax payers and £500 for higher rate (2, 3). Interest from our high interest current accounts holding our cash emergency fund will aim to be held within this limit.

2. Filling up ISA allowances

Once our emergency fund is topped off we will contribute to ISAs (4, 5). In the short term all my stock market purchases will fit within the £20k/year wrapper (6). MrsShrink is likely to use Cash ISAs (7). We will utilise the Marriage Allowance if such circumstances arise (8).

We are considering using LISAs as well, but their benefit appears limited to the government bonus (9). We’re not first time buyers, so such an account would be for the long-haul and intended to supplement our income post-60. They’re a complex product and I’m not sure I’m happy with the lack of flexibility, so this will be another area to think about in the future (10).

tax efficiency

3. Pensions Contributions

I will maximise my tax relief on my pension contributions. I’m in the enviable position of having pensions held in two of the most generous funds left in the country; the NHS Pension Scheme and the Universities Superannuation Scheme. Both are sort of defined benefit schemes. The NHS Pension Scheme functions as a career average revalued earnings (CARE) scheme (11). The USS is a hybrid defined benefit and contribution scheme, where DB is paid on salaries up to £57,216.50 and DC over that figure (12, 13). I will detail both schemes in separate future posts. I shouldn’t really have both (this has happened due to some HR oddness) and so I need to sit down and unpick. The complexities of my professional life mean that I am likely to be bouncing between services for the foreseeable future, so this will remain a headache.

The secondary headache in this is that both pensions may be hard up against the lifetime allowance cap (14, 15). As a defined benefit scheme my NHS pension is multiplied by 20 and added to any lump sum to give a capital value (16). Many of my senior colleagues have been hit with substantial (five-figure) unexpected tax bills since the reduction in the lifetime allowance. It’s therefore not clear to me yet if making further contributions will be tax effective, or which pension scheme will be the most advantageous for a potential early retirement (17, 18, 19, 20). A matter for future reading.

4. Other investment structures

Longer term areas of interest:

  • Venture Capital Trusts
  • Enterprise Investment Schemes
  • Seed Enterprise Investment Schemes (21, 22)
  • Premium Bonds (I dared to speak thy name!) (23, 24)
  • Property (25, 26, 27, 28)

Accounts and Funds

Split holdings across multiple providers and platforms to reduce risk

We will use the bank account savings website (or similar if superseded) to maximise returns on liquid cash holdings (29). This will be split across multiple accounts to remain within the FCSC £85,000 limit (30). Tax-free accounts will be the preferred method for holding passive equities, bonds and stock.

Assets will be allocated across investment accounts to reduce costs, provide further security and reduce platform risk (31, 32). Initially I will aim to keep investments within the £50,000 FCSC protection limit (33). As stated in my ISS part 3, I intend to allocate ETFs across fund holders to meet allocation targets. No provider will hold more than 25% of my holdings after year five (to give me time to actually build the damn thing up!).
Rebalancing

Rebalance quarterly using Swedroe’s 5/25 through purchases

A basic tenant of my investment plan is to sell rarely, if ever. My stock purchases are for the long haul. Therefore I aim to check and buy back to allocation each quarter through purchases (34, 35). Boundaries for this are set using Larry Swedroe’s 5/25 rule; 5% absolute or 25% relative percentage variance (36). If this implicates selling I will wait until year end to optimise Capital Gains Tax. Allocations will be balanced annually against global markets plus my own weighting. On the active naughty step portfolio investments are free to do their own thing but will be re-evaluated against the overall portfolio yearly at the 10% stocks, 10% active target.

I’ll revisit this and update periodically, but for now that about wraps it up.

Take care,

The Shrink

References:

  1. https://www.gov.uk/income-tax-rates
  2. https://www.gov.uk/apply-tax-free-interest-on-savings
  3. https://www.moneysavingexpert.com/savings/personal-savings-allowance/
  4. https://www.gov.uk/individual-savings-accounts
  5. https://www.moneyadviceservice.org.uk/en/articles/isas-and-other-tax-efficient-ways-to-save-or-invest
  6. https://www.fool.co.uk/investing-basics/isas-and-investment-funds/stocks-and-shares-isas/
  7. https://www.fool.co.uk/investing-basics/isas-and-investment-funds/isa-basics/
  8. https://www.gov.uk/marriage-allowance
  9. https://www.fool.co.uk/investing-basics/isas-and-investment-funds/lifetime-isas/
  10. https://youngfiguy.com/why-the-lifetime-isa-is-not-a-simple-to-understand-product/
  11. https://www.moneywise.co.uk/managing-your-pension/pensions/the-lowdown-nhs-pensions
  12. https://www.imperial.ac.uk/human-resources/working-at-imperial/pension-schemes/uss—universities-superannuation-scheme/changes/pension-schemes-explained/
  13. https://www.uss.co.uk/members/members-home/the-uss-scheme
  14. https://www.gov.uk/tax-on-your-private-pension/lifetime-allowance
  15. https://www.pensionsadvisoryservice.org.uk/about-pensions/saving-into-a-pension/pensions-and-tax/the-lifetime-allowance
  16. https://www.bma.org.uk/advice/employment/pensions/lifetime-allowance
  17. http://www.legalandmedical.co.uk/3-reasons-to-have-a-pension-pot-that-is-over-the-allowed-limit/
  18. https://chasedeveremedical.co.uk/2018/02/22/beware-the-lifetime-allowance-charge/
  19. https://www.telegraph.co.uk/money/special-reports/should-i-retire-at-55-because-of-my-125m-nhs-pension/
  20. https://www.uss.co.uk/members/members-home/retirement-articles/2018/the-easy-way-to-keep-track-of-your-annual-and-lifetime-allowances
  21. https://www.moneyobserver.com/how-to-invest/how-to-invest-tax-efficiently-beginners-guide
  22. https://www.fool.co.uk/investing-basics/how-shares-are-taxed-2/tax-efficient-investing/
  23. https://www.moneysavingexpert.com/savings/premium-bonds/
  24. https://www.nsandi.com/premium-bonds
  25. https://www.moneyadviceservice.org.uk/en/articles/tax-and-property-investment
  26. https://www.out-law.com/topics/tax/property-tax-/tax-treatment-of-reits/
  27. https://www.investorschronicle.co.uk/tax/2017/08/31/how-farmland-is-taxed/
  28. https://www.whatinvestment.co.uk/how-to-invest-in-forestry-2134293/
  29. https://www.bankaccountsavings.co.uk/calculator
  30. https://www.fscs.org.uk/what-we-cover/
  31. https://www.bogleheads.org/wiki/Asset_allocation_in_multiple_accounts
  32. https://www.thisismoney.co.uk/money/experts/article-2553851/How-I-know-DIY-investing-platform-safe.html
  33. https://www.fscs.org.uk/what-we-cover/investments/
  34. https://www.investopedia.com/articles/stocks/11/rebalancing-strategies.asp
  35. https://www.bogleheads.org/wiki/Rebalancing
  36. https://awealthofcommonsense.com/2014/03/larry-swedroe-525-rebalancing-rule/

Investment Strategy Statement – Part 3 – Allocation

So here’s the guts of my ISS, which may or may not ruffle feathers.

Asset Allocation

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 in my portfolio 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 (1, 2, 3). There’s an argument that given my timeline is 15+ years I could go wholly into equities, however I’m going to try and include my whole net worth in the picture.

Allocation will initially be set at 70% equities, 15% cash, 10% alternative or exotic assets, 5% property (4, 5, 6). Equities are split between a core 80% passive tracker portfolio and a testbed active portfolio (10% active funds, 10% stocks) aimed for growth. Allocations will be reviewed and re-balanced quarterly. Re-balancing will be covered in Part 4. Cash holdings will target high interest and liquidity, through usage of high interest current and savings accounts with FSCS cover. Alternative and exotic assets will be covered separately. Property is currently equity in our own home, but will encompass owned property plus REITs.

Fund/Brokerage Allocation

I intend to allocate across ETF/ fund providers. Rules here are loose, but the intention is that no provider will hold more than 25% of my holdings. To minimise risk I’ll also allocate across brokers, with the intention of simultaneously reducing TER and minimising tax burden (7).

World Allocation

It would be very simple to put all my money in a LifeStrategy 100 and be done with it, but I’m a contrarian at heart. As fits a diversified passive-focus portfolio the central core of my global equity allocation will mirror world markets, using all world tracker funds and ETFs (8). Beyond this statement and with caveats for other sections of my portfolio I diverge from the norm.

Testbed Active Portfolio

This section of my portfolio is largely UK-based, and a mixture of 10% stocks and 10% active funds I find interesting. Themes here are disruptive companies, and early investing and venture capital, counterbalanced with commodities. I will explain more about this in a separate post.

Core Passive Portfolio

My global allocation aligns to two main beliefs:

  1. Broadly match global market capitalisation (so far so normal)
  2. Global market capitalisation reflects top-heavy population demographics (… que?)

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 (9, 10). I too feel the deep rooted psychological reasons for supporting UK industry.

But much of my active testbed, cash, property and other assets are in the UK. I’m already 40-50% UK inflation vulnerable/protected before even looking at passive equities. I’m therefore ex-UK in my passive section. The sensible answer would be an Ex-UK All-World Tracker. But then how do you slice your pie? Contribution to Gross World Product? Global market capitalisation? If global cap whose data do you use?

My figures are a blend of the above taken from a seeking alpha blogpost, the PWC yearly report plus the Credit Suisse Yearbook (11, 12, 13, 14). Factoring in ex-UK active investments with the passive core I aim to hold:

  • 40% US
  • 35% Emerging Markets
  • 15% Developed Ex-US/ Ex-Euro
  • 10% Euro

Standard All-World trackers hold heavily in the US, which I consider to be over-valued for a number of reasons I won’t go into here. China ranks second in PWC and third in Bloomberg Global Market Caps, with India closing the gap (11, 12) . I aim to capture these as part of a quite aggressive 35% emerging market weighting (15, 16). Emerging markets appeal for a number of reasons, but one I really favour is young demographics. This is also the reasoning behind my 15% targeting Developed Ex-US and Ex-Euro markets. Here, like Firevlondon, I’m looking at English-language Commonwealth nations with expat potential, favouring Australia and Canada (17). These markets also have a sector mix which balances the tech and service heavy US/ Eurozone.

In summary

Despite all my waffling, it’s probably a fairly stock allocation profile. 40-odd percent in the UK, 20-30% in the US, with the rest scattered about the developed and emerging markets. I’ll review this yearly with new world data to see what changes need to be made.

In Part 4 – Funds, Accounts and Rebalancing.

References:

  1. https://amzn.to/2Sthjtv
  2. https://monevator.com/asset-allocation-construct/
  3. https://www.bogleheads.org/wiki/Asset_allocation
  4. https://monevator.com/asset-classes/
  5. https://youngfiguy.com/how-i-invest-my-money/
  6. https://en.wikipedia.org/wiki/Alternative_investment
  7. https://www.bogleheads.org/wiki/Asset_allocation_in_multiple_accounts
  8. https://monevator.com/investing-for-beginners-the-global-stock-market/
  9. https://www.investopedia.com/articles/basics/10/protect-yourself-from-inflation.asp
  10. https://youngfiguy.com/how-i-invest-my-money/
  11. https://seekingalpha.com/article/4202768-u-s-percent-world-stock-market-cap-tops-40-percent
  12. https://www.pwc.com/gx/en/audit-services/assets/pdf/global-top-100-companies-2017-final.pdf
  13. https://monevator.com/world-stock-markets-data/
  14. https://indeedably.com/home-market-bias/
  15. https://monevator.com/emerging-markets-index-fund/
  16. https://www.investopedia.com/terms/e/emergingmarketeconomy.asp
  17. https://firevlondon.com/2015/06/17/my-ips-2-of-5-asset-allocation/

Investment Strategy Statement – Part 2 – Goals

When I first started writing this blog I set out a very brief goal:

Financial independence for myself and MrsFireShrink.

But beyond that, the aim is to save a sufficient amount to create a self-sustaining portfolio. The dream goal being to create a portfolio sufficient to support my family in the future and continue to grow (1).

Which is all a bit wishy-washy. Over the course of the year I’ve realised that I need to firm up my yearly goals, and also articulate more clearly my long term dream. This was put into sharp focus by a few recent blog posts, including indeedably’s goals, strategy and tactics (2). Elsewhere in life I’m fairly SMART in my goals, with monthly and yearly targets.

“Sound tactics bring victory” – Shaxx

So here’s the current goals list with steps already taken and timescale for target/ dream (a-la indeedably) (3). (Last updated Jan 2020).

  • Complete medical degree. Achieve Royal College Membership. Become a consultant (2028).
  • Find a girl. Get married. Have kids (2028). Have good kids.
  • Publish a paper (2018). Get a fellowship (2019). Get another fellowship (2019). Get a Phd. Get a lectureship. Make Prof.
  • Get a job. Get a job I enjoy. Get a job which doesn’t feel like work (2020). Be in a position to retire in 15 years (2033).
  • Have an emergency fund of three months income (2019). Save £1000/month (2020). Have a net worth of £100k.
  • Own a home. Have £100k in equity (2023). Own our dream home in 10 years (2028). Own a self-sustaining estate.
  • Learn to drive. Own a car. Own a six-cylinder car. Own an eight-cylinder car (2028).
  • Race in a motorsport. Win a race (no timescale).
  • Start a martial art. Start gradeing. Get to sho dan (no timescale).
  • Learn to ride a motor bike.
  • Learn to fly a plane.
  • Do 50 press-ups. Do a pull-up (again) (2019 2020). Get back to 16 stone (2019 2020). Do a hand-stand press-up (again). Do a ring muscle-up.
  • Re-learn languages I once knew. Become fluent in one of them. Learn a fourth language (no timescale).  

The numbers

Most of the maths in this section is rough and dirty. I’m not going to make complex predictions or models. Life itself is too unpredictable (even if the money isn’t), and some recent health concerns have demonstrated the fallacy of trying to predict the future. I’ll review my household expenses more formally in a couple of years, and may come back and model timescales then.

  • Be in a position to retire in 15 years (2033).

A review of the 10 months I’ve tracked so far shows my personal yearly expenditure (minus credit card payments and one-offs for this year) to be around £10k. To this I’ll add £2.5k to cover lifestyle inflation. Our joint account also goes through around £10k a year in running costs for the house, groceries, energy etc. I conservatively therefore need around £22.5k a year to maintain our current lifestyle if I didn’t work. This fits nicely with what the fun Standard Life calculator reckons for our current lifestyle (~£23,000) (4).

Plugging that into a simple interest calculator suggests I need to have around £650,000 saved to be able to withdraw £22,752/year at a reasonable 3.5% interest rate with no erosion of capital. This presumes the savings will be tax-sheltered. This seems pretty unachievable from a standing start, but I love a moonshot (5). I’ve selected 3.5% as a conservative blend of cash interest rates (currently 1.5%) and the average annual return of the FTSE All-Share over the last 100 years (+7.0%) (6). It’s also conveniently the mythical Perpetual Withdrawal Rate (7, 8).

You say: “Why are you not interested in drawdown? You’d get to retirement a lot quicker.”

This seems to be a fundamental schism in the investing/ FI community. I think it’s highly personal, and relates among other things to your optimism for your life expectancy, number of dependents and general approach to lifestyle. The figure above would replace my current salary (9). I have a pipe dream goal relating to my families history and future inheritance, and therefore I’ve no interest in drawdown.

  • Have an emergency fund of three months income (2019). Save £1000/month (2020). Have a net worth of £100k.

These are all stepping stones on the route to the previous bullet point. Plugging that £650,000 into Money Advice Service’s savings calculator suggests I need to be saving £2300/month at 6% interest to achieve retirement by 2033 (10, 11). Yikes. 110% of my current take home. Thankfully my income should ramp up in the next few years, and while I’m quite a way from £2300/month now, it’s probable that I will reach that in the next 10 years. Just in time to miss my target.

  • Have £100k in equity (2023). Own our dream home in 10 years (2028). Own a self-sustaining estate.

Currently our dream homes cost around £500k. Difficult to say what that will be in 10 years time. Historically the yearly trend has been c2.9% (12). More recently it’s closer to 2%, comparable to the OECD 2.0% long-range inflation forecasts (13, 14). Inflating the £500k at 2% brings us to £610k in 2028. Our feet are on the ladder, which mean we also benefit from that inflation to an extent.

We envisage another move in 5 years time, and I’m not averse to value-adding property renovation. I’m therefore aiming for some stepping stones to a solid deposit for the move to a dream home in 10 years.

Summary:

  • Have an emergency fund of three months income (2019)
  • Save £1000/month (2020)
  • Be worth £100k (2022)
  • Have £100k in equity (2023)
  • Be in a position to retire in 15 years (2033)

In the next post I’ll cover my asset allocation.

Take care,

The Shrink

References:

  1. https://thefireshrink.wordpress.com/about-me/
  2. https://indeedably.com/goals-strategy-and-tactics/
  3. https://indeedably.com/i-will/
  4. https://www.standardlife.co.uk/c1/guides-and-calculators/retirement-how-much-may-i-need.page
  5. https://singularityhub.com/2016/11/15/this-is-how-to-invent-radical-solutions-to-huge-problems/#sm.000003z7yn60ncsavol2a9f74o5he
  6. http://stockmarketalmanac.co.uk/2016/12/100-years-of-the-ftse-all-share-index-since-1917/
  7. https://youngfiguy.com/safe-withdrawal-rate/
  8. https://portfoliocharts.com/2016/12/09/perpetual-withdrawal-rates-are-the-runway-to-a-long-retirement/
  9. http://monevator.com/try-saving-enough-to-replace-your-salary/
  10. https://www.moneyadviceservice.org.uk/en/tools/savings-calculator/
  11. http://candidmoney.com/calculators/investment-target-calculator
  12. http://monevator.com/historical-uk-house-prices/
  13. https://www.bbc.co.uk/news/business-44736472
  14. https://knoema.com/rwbagv/uk-inflation-forecast-2018-2020-and-up-to-2060-data-and-charts

 

Investment Strategy Statement – Part 1- Investment Philosophy

Inspired by Firevlondon, Weenie et al and as advised in Smarter Investing, over the course of a few posts I’ll aim to set out my Investment Strategy (1, 2, 3). To an extent I am concerned about the face validity of such a series, as my current investment experience runs to a Fidelity fund up to 2007 and cash savings. I aim to have a strategy in place for commencement of my portfolio, rather than changing my portfolio to fit a later strategy; “if you don’t know where you are going, you’ll end up someplace else”. As recommended by the textbooks and others I’ll be starting with my investment philosophy, and the rest of my statement will be set out in line with that suggested on Bogleheads (4).

Core philosophy:

“Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth” – John C. Bogle

Tenet 1: Diversification

Diversification, as wide as possible, as advised by Modern portfolio theory etc (5, 6, 7). Holdings will be diversified across global markets, ultimately in multiple accounts held with multiple companies. Property, cash accounts and tangible assets (cars, art, books) will further diversify my portfolio.

Tenet 2: Passive-focus

I will accept market returns, and will not change funds based on timing. I won’t rehash the evidence that passive investing is a superior strategy for long term returns (1, 8, 9). I lack the time and luck to ‘beat the market’ with active selection of stocks. In the past I held an active investment which did rather well in the run up to 2008, when I sold pre-crash by sheer blind luck. As my investment timeframe is 20+ years I am not interested in short term gains, so passive will work fine.

N.B. The exception to this rule is where active funds offer access to investments (i.e. unlisted companies) I’m targeting for growth in an experimental corner of my portfolio which I’ll go into in more detail at a later date.

Tenet 3: Reduce costs, taxes and fees

Maximise the % growth by minimising the amount I’m paying out for it. Minimise tax expenses through the use of ISAs and tax-free savings (10, 11).  I’ll use calculators like Monevator’s to select the cheapest platform available for my portfolio mix. (12) I’ll track expenses across all my investment and produce expense ratios.

Tenet 4: Grow and hold

My investment timescale is long, and my ultimate goal is not to use my portfolio for drawdown (discussed in Part 2 – Investment Goals) (13). I continue to earn and am in a (relatively) secure job. Therefore the aim is to accumulate diversified holdings for the long term. Preference for Acc funds and reinvestment. Preference for growth over dividends, for expansion and (in the experimental corner) for disruptive companies. Preference for physical assets, avoiding derivatives, synthetic or other complex financial products; I am beginning to understand these, and while I comprehend the theory I don’t feel comfortable with the additional counterparty risk (14, 15). Physical assets are to be a theme throughout my portfolio.

Tenet 5: Stick to allocation

As fits a diversified passive-focus portfolio my global allocation will mirror world markets, using all world tracker funds and ETFs (16). I’ll review world market data yearly, and set re-balancing targets based on global market cap weightings as the market  moves (16, 17). Since my timescale is long, my employment is (in theory) secure and my pension scheme is (supposedly) generous, I’m happy to take a reasonable amount of risk for my portfolio. Allocation will initially be set at 70% equities, 15% cash, 10% alternative assets, 5% property (18, 19) . Equities are split between a core 80% passive tracker portfolio and a testbed active portfolio (10% active funds, 10% stocks) aimed for growth. Allocations will be reviewed and re-balanced quarterly. Re-balancing will be through purchasing with new income where possible.

In summary:

  • Tenet 1: Diversification across world markets, and through multiple asset classes, held with multiple companies
  • Tenet 2: Predominantly passive focus to portfolio
  • Tenet 3: Reduce fees and maximise tax efficiency through use of ISAs and tax-free savings accounts
  • Tenet 4: Hold and grow investments through re-accumulation and compound investing in simpler financial products
  • Tenet 5: Monitor mix of investments against target allocation quarterly, investing to rebalance

In the next post in this series I cover my goals.

The Shrink

References

  1. Smarter Investing 3rd edn – Tim Hale
  2. https://firevlondon.com/my-investment-policy-statement
  3. http://quietlysaving.co.uk/2017/06/08/investment-strategy-updated/
  4. https://www.bogleheads.org/wiki/Investment_policy_statement
  5. https://seekingalpha.com/article/151352-portfolio-diversification-and-risk-the-basics-of-beta
  6. https://en.wikipedia.org/wiki/Modern_portfolio_theory
  7. https://youngfiguy.com/asset-allocation-and-the-uk-efficient-frontier/
  8. http://monevator.com/category/investing/passive-investing-investing/
  9. http://monevator.com/why-a-total-world-equity-index-tracker-is-the-only-index-fund-you-need/
  10. https://www.gov.uk/apply-tax-free-interest-on-savings
  11. https://youngfiguy.com/pensions-isas-the-basics/
  12. https://www.gov.uk/marriage-allowance
  13. http://monevator.com/commit-to-investing-strategy-for-the-long-term/
  14. http://monevator.com/types-of-investing-risks/
  15. http://www.morningstar.co.uk/uk/news/108970/understanding-the-risks-of-different-etf-structures.aspx/
  16. http://monevator.com/investing-for-beginners-the-global-stock-market/
  17. http://monevator.com/world-stock-markets-data/
  18. https://en.wikipedia.org/wiki/Alternative_investment
  19. https://youngfiguy.com/how-i-invest-my-money/