My Investment Strategy Statement

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My investment strategy, philosophy and goals.


 

Inspired by The Fire Shrink’s detailed series, as well as those by FireVLondon, Weenie and others, I wanted to set out my own investment strategy.

The Bogleheads describe an Investment Policy Statement (IPS) as follows:

A statement that defines general investment goals and objectives. It describes the strategies that will be used to meet these objectives and contains specific information on subjects such as asset allocation, risk tolerance and liquidity requirements.

An IPS is useful for any investor to have as it should, in theory, provide a foundation for any future investment decisions to be made. It should enable you to ignore the emotional side of investing and not panic-sell during downturns or go all in on a hunch.

 

Goals

First of all, I think it’s important to have goals when saving money. Saving money with no purpose can only carry you so far. Without any goals, you may well reach a sum of £10-30K and then start to lose focus. Furthermore, certain methods of saving are only suitable for certain goals. For example, if you’re saving to buy a new house in two years, then you are going to want immediate access to that money – investing it all in equities, which may very well decrease drastically in value in a short time period, is not a good idea.

I did cover some financial goals briefly in a previous post, but I will repeat them here.

My reasons for saving money right now are as follows:

  • Maintain an emergency fund
  • Save for a house
  • Save and invest enough money for retirement

 

Investment Philosophy

My investment philosophy has been guided by a number of people far more experienced in the world of investing than I:

 

  • Time in the market, not timing the market” – Warren Buffet
    I aim to hold for the long term – in any given year, markets may well drop. The last quarter of 2018 is proof of that. However, markets can just as easily bounce back (January 2019) and, in the very long term, are expected to trend upwards (e.g. after the 2008 financial crash). So, the plan is to hold everything through thick and thin for at least the next 20 years.

 

  • Passive > Active investing
    If I took one thing away from reading Tim Hale’s Smarter Investing, it was that, on average, investing in an index tracker will outperform an active investor. The difference in performance, funnily enough, is usually the difference in fees! This means that I will go for a cheap, predominantly passive portfolio. I may eventually allow myself a small percentage (<5%) to try my own hand at active investing. However this will be for fun rather than any serious attempt to beat the market.

 

  • Diversify
    And if I took one thing away from Lars Kroijer’s Investing Demystified, it was that the average investor should assume that they can’t outperform the market, and so should invest in a global index tracker. As an aside, Lars also covered this in a post on Monevator, and in a Youtube series (5 parts, about 25 minutes to watch it all). I will therefore diversify, investing in the global market and not restricting myself to one country or to one sector.

 

  • Make use of tax advantaged accounts
    In the UK we have access to two tax efficient options – ISAs (individual savings accounts) and pensions. I will make the most of them and ensure that they are filled before I invest elsewhere.

 

Putting it into practice

Referring back to the original goals, this is what I am currently doing to achieve them:

 

Maintain an emergency fund

An emergency fund is important to cover any surprise expenses, accidents or a sudden job loss. It has to be easily accessible and very low risk. With that in mind, I will make sure to keep a minimum of six months expenses in high interest current accounts and savings accounts. I did some research into this previously, but I will also keep an eye on MoneySavingExpert and the UK Personal Finance subreddit for future offers.

Conveniently, the UK government has introduced a Personal Savings Allowance. This means that a basic rate tax payer can earn £1,000 in interest tax free, whilst a higher rate tax payer can earn £500 in interest tax free.

 

Save for a house

I have read that the best mortgage deals are typically when you have approximately a 15-20% deposit. As I don’t expect my future house to cost more than £200,000, £30,000 sounds like an appropriate bench mark to aim for. Saving into the Lifetime ISA means that every year I can pay in £4,000, which the government will top up by £1,000. Once I have saved up this deposit, and I’ve found a place to settle down, I will look to buy and then obviously pay off the mortgage with the aim of being mortgage free by the time I choose to retire.

 

Save and invest enough money for retirement

At a minimum, I would like to save £450,000 by the time I choose to retire. This is excluding the final worth of my potential future house.

I came to this value using the 25x expenses rule (more info here, here and here). I spent around £18,000 in 2018. £18,000 multiplied by 25 is £450,000.

In some ways, this could be considered an overestimate of what I might need when I retire. Firstly, around £7,000 of that £18,000 was spent on rent. I am planning to own my house outright by the time I retire, which would eliminate that expense. Secondly, I currently cover the vast majority of expenses (bills, holiday, groceries, etc) for both myself and my girlfriend whilst she completes her PhD. Once she finishes that and starts working full time, my own expenses should decrease as we start to split the costs more evenly. Regardless, I think £450,000 is a good amount to aim for. There’s no guarantee what the future will bring, so having an extra cushion just in case is certainly not a bad thing.

I’m currently investing in a Vanguard Stocks and Shares ISA, which charges a percentage fee every quarter. This is ideal for relatively small holdings, but eventually a fixed fee broker becomes more attractive and cheaper. I’ll aim to switch to a fixed fee platform once the fund reaches a value greater than ~£45,000, which is when the fixed fee becomes cheaper than the percentage fee, according to the Monevator broker comparison table.

I’m also contributing to my employer’s pension scheme. I’m considering this separate to my goal to save £450,000. Likewise, I’m currently not taking the state pension into account. I’m almost 40 years away from being able to claim it, and who knows what it will consist of then! Considering the current worries about the state pension, I think there is a pretty good chance that it will either be watered down or become means-tested. If it still exists in any form that I can access, then I’ll consider it a bonus!

Allocations

  • Asset Allocation
    As described above, my investment timescale is at least 20 years. As a result, all of my retirement savings are currently invested in equities. My house fund and emergency fund are both held in cash. This means my current asset allocation is approximately 50% equities and 50% cash. The long-term aim is to have approximately 60% equities, 30% house, 5% cash and 5% “other.” For example, I currently have a tiny percentage invested in peer-to-peer loans via Ratesetter, just to experiment and see how they are.

 

  • World Allocation
    Rather than come up with my own allocation, I’m taking the advice of Lars Kroijer, mentioned above, and simply investing in a global index tracker. This means that Vanguard will do all of the global allocation and re-balancing without any input from me, which suits me just fine. Keep it simple!

 

Thoughts?

I’ll revisit this and reevaluate every so often, as my situation changes. In the mean time, I’d welcome any thoughts or comments. Have I missed anything obvious? Is anything unclear?

And how about yourself, readers? Have you written yourself an Investment Strategy Statement? How are you choosing to invest for your future?

11 Responses

  1. Thanks for sharing this Dr Fire. Really interesting. Despite being in a different phase of life to you, I’m very similar in lots of ways.

    One big difference for me is that I have bonds in the mix with equities. Specifically I hold most of my ISAs in the Vanguard 80:20 or 60:40 funds. My logic is to have a hedge in the mix against big falls (and I take an equity growth hit as a result). As I get closer to retirement I’m planning to get closer to a 50:50 Stocks:Bonds mix.

    Another thing is that I’m current overweight in locked-up house equity which was a deliberate choice. However the goal now is to add in more stocks and bonds over the next few years. Hopefully I’ll get more balanced in a few years!

    • Thanks for reading Caveman.

      You raise a valid point, I haven’t really mentioned bonds in all of this. I’m happy to keep my retirement savings in 100% equities for now, given how long I intend to invest for. Having said that, I will certainly start to make more use of bonds as I get closer to retirement and start to think more about maintaining my wealth, rather than trying to grow it. I’ll probably strive for a 60:40 equities:bond mix. That’s a long time away yet though, so things can (and probably will!) change.

      As I mentioned to you before, having a house with no mortgage is a great thing! If I do buy a house in the next few years, I’m sure I will look into overpaying the mortgage in order to clear it asap. There’s something satisfying about the idea of being completely debt-free, and of owning your own home, even if you could make more money by investing in the stock market instead.

  2. Hi Dr FIRE
    Thanks for the shout out and thanks for sharing!

    Sounds like a good plan you have there so wish you all the best with it.

    I’m likely to still be renting or have a mortgage when I retire so that’s been factored into my numbers. My FIRE is unlikely to be of the ‘fat’ variety as a result!

    Interesting that Caveman mentions bonds, I barely have any, but I guess I will switch to some more as I get closer to my goal. I’m not sure I’d go 50/50 though, that seems a tad too cautious for me.

    I do have some investments in both VLS60% and VLS80% but small amounts compared to some other investments right now.

    I need to review my investments and my plan to be honest, it’s been a couple of years now since I last looked at it properly!

    • Hi Weenie. No problem, and thank you for commenting!

      Thanks for that. I think it’s a decent enough plan, now I just have to stick with it over the next 20 or so years! To be honest, I think my retirement is also unlikely to be anything like a “Fat” FIRE. I’m just aiming to have a similar level of disposable income as I do now. Nothing crazy or extravagant, but enough to live comfortably and to go on the occasional overseas holiday!

      I’m planning to have paid off my mortgage by the time I retire but, considering that I don’t even own a house yet, that is some very long-term thinking! I’ll have to reevaluate in another 5-10 years, depending on how life pans out.

      I agree that 50:50 might be too cautious, but then, I’ve never actually experienced a market crash. I’ve read that novice investors like myself often overestimate their risk tolerance, so I guess time will tell!

      The majority of my investments are in the Vanguard Global All-Cap fund. I was torn between that and the VLS100, but didn’t quite like the over-exposure to the UK. Having said that, I still have some in the VLS100, mostly born out of a sense of fear of missing out. Logically, it’s ridiculous, as I believe they both have a lot of overlap, but I couldn’t help myself.

      Sounds like it might be time for a review then. Looking forward to reading the post about it!

  3. Such a well organised plan! The more I read and learn about investing in The UK and its possibilities the more it fascinates me. I am also investing through Vanguard ISA and hold a 50/50 stock/bond, it sounds very conservative as I’m only 33, but my situation is different.

    £450.000 seems a lot of money today, but bear in mind inflation. Although, with the extra £450k from your pension it should be fine, roughly said.

    Keep up the good planning/goals. There’s a lot to learn from here, which is exactly what I love to follow 😉

    • Hi Tony,

      The UK certainly does have a lot of tax-efficient ways to save and invest money! It’s just a shame that not many people either know about it, or have the spare money to take advantage of it.

      You are right that £450,000 is a lot in today’s money, but inflation will erode that with time. Don’t worry though, I have factored that into my calculations, somewhat! I generally assume that my stocks and shares ISA will return an average of 3% per year above inflation, for example. It’s a number that I will come back to and re-evaluate with time. For now though, it’s a good figure to aim for that looks vaguely achievable!

      I think it’s currently very unlikely that I will have £450K in my pension, but we shall see. That’s another reason why this is all variable. I think it’s likely that I will eventually look to stop contributing so much to my ISA and maybe start to contribute more to a SIPP. The extra 25% bonus from the government in that instance should compound greatly over time, leaving me with more money than if I contributed the same amount to my ISA. But, I’m currently prioritising contributing to my ISA due to the greater flexibility and easier access.

      Thank you for the kind words! I’ve been enjoying your blog too. Glad to have you on board 🙂

  4. Thanks Dr Fire for this great insight!

    I must say, I do also need to specifically write down my investment goals to correspond to my FIRE related goals. So far, being in my 20’s still, I’m taking a weighting towards equities over bonds currently. My risk tolerance is a little more ‘outgoing’ currently as I’ve recently only just started FIRE (July 2018 was when I began to save). Currently my ISA is predominantly in the FTSE Global All Cap Index Fund Accumulation – a relatively well balance, world-wide portfolio (equities) based on economic size of world wide countries.

    In regards to the mortgage / house buying, I used a mortgage broker for the house I’m in now (forever home) – they sourced me an absolutely fantastic deal with Santander (1.45% – Fixed 2 Years) – with the political instability / economic uncertainty, I don’t see interest rates rising soon.

    • Thanks for commenting Jase!

      Writing down your goals and objectives is a useful exercise. As I said in the post, there’s no point saving without something to aim for.

      I’ve also invested in the Vanguard FTSE Global All-Cap. Seemed to be the easiest way to invest in a global index tracker, which ticks my boxes. And, like you, I’ve invested entirely in stocks, and haven’t allocated anything into bonds, as I’m investing with a 20 year time line.

      That sounds like a good deal for a mortgage. I haven’t done much research myself into this area, as I’m probably still several years away from buying.

  5. Great article and interesting comments above. Like your plan. My strategy is similar – cash ISA, global index fund in investment ISA, workplace pension. Agree once you get a place to pay off the mortgage first. Overweight in cash with market going down last year. Difficult to plow savings in the market when so volatile! Great your thinking of these things early.

    • Thanks for commenting Adam. I agree, it can be difficult to hold your nerve and invest during these volatile times. You just have to trust in the data showing that, long term, stocks give better returns than most other things, and dive in!

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