Money

My lazy way and tax efficient way to invest

So, in order to pursue my dreams of early retirement and financial independence, I invest my money. I’m a lazy investor. Therefore I invest in index trackers, according to my chosen asset allocation. You can make investing as easy or as complex as you like, I much prefer the simple approach.

Funds and Platforms

Things start to seem complicated when you realise you need a platform or broker to invest your money. (You could also have a financial advisor, but I would not advocate you can go down that road, unless you have trouble articulating your risk tolerance and like higher fees).

There are many options out there to invest, all with different fees and charging structures. Some are better value for regular investors, some are better for ISA’s, some suit smaller portfolios, some have better customer service, some have better apps and so on. The main thing is to choose a platform that suits you personally.  Without a doubt the best guide to UK brokers is here at monevator. They update it regularly and everything, so I am not going to attempt to reinvent the wheel. As mentioned above, I’m in favour of index funds. I use ETF’s (Exchange Traded Funds) now, the best value one for each asset class offered by my broker.

Asset Allocation

Which brings us on to asset allocations, and the concept of asset class. These can be broad classes, like stocks or bonds, or can be used to further subdivide such as UK stocks, UK large cap stocks. Each of these classes can perform independently, or their performance could be correlated through complex relationships.  The graphic below gives a cool overview of the last 14 years performance.

 

Novel Investor Asset Class Returns TableSource: Novel Investor

The main takeaway should be that cash is consistently never king; and that the asset class with the largest volatility, Emerging Markets, has the highest average return. My personal asset allocation divides up into the specific divisions I care about and want to manage my exposure between.

  • 38% – US Stocks
  • 22% – Emerging Markets Stocks
  • 18% – UK Stocks
  • 7% – Euro Stocks
  • 5% – Asia Stocks
  • 5% – Property
  • 2.5% – Gold
  • 2.5% – Bonds

This is classed as an adventurous portfolio, with a high level of market risk. I’m comfortable with high volatility and high risks, and have deliberately made these decisions. My choices reflect my viewpoints, I’m heavy in tech stock, bullish on emerging markets (especially China) and a bit concerned about brexit or a Corbyn government.

Overall I believe there is no right or wrong way to do your asset allocation, you have to find one that you are comfortable with that meets your risk tolerance.

Who wants to pay more tax?

Not me, so I invest as tax efficiently as possible. My full £40k pension allowance is used each and every year. Each month I invest into ETF’s in my SIPP, into whichever asset class is furthest away from my asset allocation target. After maxing my SIPP, I fill my £20k ISA limit with ETF’s again. Once my ISA is full, any funds go into my taxable account, using ETF’s again. See a pattern? I try and keep things as simple as possible. (If you are wondering why I have so much to invest, my previous posts on earning six figures and my high savings rate explain all).

Other investments

Most of my money is in the market. I’ve got some funds in P2P lending that I am running down. Personally I feel the rates are too low nowadays. Given P2P is not exactly transparent on who you are lending to, the reward is no longer worth the risk to invest.

Personally I don’t keep a savings account or an emergency fund, just a current account, which pays a small amount of interest – 1.5%. Sometimes I have a large float in my current account, especially when it’s time to pay Hector (the tax inspector aka HMRC – apparently this reference dates me, but those ads were cool). I rarely run near the wire, or even check my current account often. I have a high disposable income that I can direct away from investments one month if I get an emergency. Again, I go for the simple and lazy approach here.

As for other investments, I occasionally debate doing buy-to-let, but I’m kind of morally opposed and the government has well and truly removed any tax advantages for this type of investment. I’ve also looked into the EIS or VCT options available. I’m not quite convinced and the charges seem really, really high on them. If there was no tax incentive they would be a no go, but that tax relief makes them seem like a possibility.

Currency Risk

I’m based in the UK based. My income is denominated in pounds sterling, and I keep my investments in pounds sterling. This means when I invest outside the country I am subject to currency risk. i.e. what one pound sterling buys today, may differ from tomorrow. This will be seen as a increase or decrease in the sterling value of my assets as the exchange rates flutter away. This scares me sometimes, especially with the large swings we have seen due to brexit. Growing up, I always thought the pound was a very stable currency. My opinion is changing lately, as I realise how the pound is easily impacted by market forces. Also I need to always remember that I plan to spend time outside the country, so my non-UK investments are a good hedge against the pound devaluing.

Automate

As with most things in life, automation is the key when I invest. I automate as much of this as possible each month, so this mostly happens without any conscious effort. Every month I enjoy updating my spreadsheet, when I check all my balances, make sure they are as expected and see how the plan is working for me.

Longer Term

I think in a year or so I’ll have enough money in my SIPP (you can’t get this money out until 55, or likely 58 for me), so then I’ll stop contributions and change my approach. I’ll likely to leave money in my company for a year or so, then wind up the company when I FIRE and access my funds then.

When FIRE’d

The plan is to have enough cash for 2 years expenses when I retire. Then I will fill my ISA each year from my taxable investment. I will also take out living expenses and try to use my capital gains allowance each year. Then once my taxable account has run out, I’ve got my ISA to live off until I can get into my SIPP. That’s the plan, it may all change as time goes on, but I think it’s a good strawman.

10 comments on “My lazy way and tax efficient way to invest

  1. Nice job of having a diversify portfolio. I have bad experience with the return on the p2p platform I’m using too. I’m starting to withdraw my money out slowly whenever the note gets paid off. Seem like a lot of note is being late and the return is not worth it.

    1. Hi Jay, sorry to hear you’ve had P2P losses, I’ve not had any yet, but I do have some of the dodgy loans that the platform had to underwrite themselves. I’m thinking index funds are a much better bet long term.

    1. Hi Caroline, yes it’s strange how ETF’s are one of the few things that seem location agnostic. For me, my choice was influenced by reading lots of articles and seeing that the long term costs were significantly lower. I pay a £1.50 transaction fee rather than a 0.4% annual charge to hold them.

  2. I haven’t thought about investing in a SIPP. I pay into a really good work based pension but then everything else is going into an ISA. I like that I can have this money whenever I want without having to wait until I’m in my late 50’s but you’ve made me think again! When will you know that you have enough in your SIPP and stop contributing (without going into the figures if you don’t want to!)? Apologies if this is somewhere else on your blog, I’m only just getting into it and you may find yourself bombarded with questions from me now!

    1. Questions are always good, the more the merrier in my opinion.

      I think the structure of the tax system is why a SIPP/pension is so good for me; I can defer my personal tax, and save corporation tax, so a win-win.

      I’ve made a geeky spreadsheet with lots of models, and decided the number I want my pension to be at when I can get it in my 50’s. I’ve made some assumptions, played with them, looked around the community to see if they are reasonable and finally got comfortable with them. Then I just modelled it backwards, to see when I’d have enough to grow to that number. My number is £320k, I think if I get to that at 40, it’ll be all good by the time I need it.

      The bit that is more tricky, is not running out of non-pension money…..and that is ultimately a bit of a guessing game from me, with some reasonable assumptions. And at the end of the day, I’m sure I could go back to work if I needed to.

        1. If you have a low cost pension, you’d be better just contributing more to it, rather than opening a seperate SIPP.

          Initially I found it really difficult to work out how much I’d need at life stages. Mainly as I could not imagine my future, give life 5 years ago was so different. But I persevered, and got more comfortable with the ambiguity.

          1. I’ve thought about that and my work pension does offer the option of Additional Voluntary Contributions but they wouldn’t be matched by my employer and it’s a defined contribution scheme as opposed to the main defined benefit scheme. The information on it is pretty vague in terms of where they would be investing my money and that made me nervous too! Having said that, I’ve been looking at getting the provider in to the office to talk to all staff about the options so that will give me an opportunity to ask more questions before I make a decision.

            I agree it’s difficult to think with any certainty about where I’ll be in 5 years given that my life has drastically changed just in the last 1-2 years. But I guess that’s another reason to get to financial independence because whatever life throws at you, having a significant money cushion gives you options and therefore freedom.

          2. Yes, that sounds very mysterious that they aren’t open about where the AVC’s would be invested and what choices (if any) you would have over the investments. I think complex schemes like this really put people off savings, and make the financial industry look overly complex. That’s great you have persevered and have succeeded in getting the provider in to answer questions – well done. Although you wouldn’t get additional employer contributions, you would save tax and possibly national insurance if your employer offers a salary sacrifice scheme.

            As for where we will be all be in 5 years, I don’t think many of us can say with great certainty, but I believe that’s ok. I’m off the opinion you make a plan, work towards the plan and alter it along the way. And financial freedom will alway give us the most options….well unless the zombies arrive first!

What do you think?