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.
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.
Source: 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).
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.
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.
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.
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.
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.