My investment strategy, philosophy and goals.
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.
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
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.
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.
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!
- 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!
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?