The way I invest has changed a fair bit over the years. I’ve tried a few different variations – some have worked out well while others have taught me valuable lessons. If I was to sum up the foundation of my current strategy I would go for ‘simplicity’ and ‘inactivity’.
However, one thing I’ve never done is write down my high-level plan so that I can refer to it later in times of overexcitement or crisis (either mine or the market’s). So here goes…
My investment aim
For a little while now, I have been aiming to build an equity portfolio that generates an income large enough to cover my living expenses. I think I’m pretty much there now, as I’ve been lucky enough to be a reasonably high earner over the years, although I’m continuing to do some part-time work.
While I still have some spare cash to invest, a few areas of my strategy are in a state of flux at the moment, as I’m shifting my focus from building up my portfolio to essentially living off it.
For the next several years, I’d still like to grow both my income and my capital, so I am still willing to take a fair amount of risk when it comes to my investment choices. But I have sold down a few holdings recently and replaced them with more income-focused alternatives.
As things stand, I’m not aiming to run down my portfolio over time by taking a little capital out each year, or sell up entirely and move into lower-risk investments like bonds and savings at some later stage. However, I do keep a cash balance available to fund any unexpected expenses.
When I turn 55, I should be able to access the money in my SIPP if I need to (assuming the same pension rules still apply).
And I am expecting to get a full-ish state pension at age 67-68 (again assuming the goalposts aren’t moved significantly).
In other words, I have back-up options should my investment plans not run as smoothly as I hope!
I’ve distilled my strategy into 10 elements:
1. Invest little and often
In other words, I try to invest when I have spare money. I have less of it now that I am not working full-time but I’m still following the same principle.
If your investing horizon is decades long, then I believe that the longer your money is invested, the better it should do. Look at any long-term chart of the stock market and you should find it goes up and to the right, albeit wiggling around a lot in the process. It’s a thing of beauty. What’s more, its wealth-generation properties are available to pretty much everyone these days.
I also like the discipline regular investing instils on your personal finances. It gives me a major incentive to spend less than I earn each month.
2. Never spend capital
Throughout my investing career I’ve tried to stick with the principle that what gets invested, stays invested.
That’s easier said than done of course! Sometimes I have needed to withdraw cash to meet larger expenses. But I’m pretty sure I’ve been a net investor each year.
I expect this to be a lot trickier now I am not working full-time, but it’s still part of my plan. I’ve also kept it in here as I think it’s been important in building up my portfolio in the past.
3. Reinvest dividends
It’s best to reinvest any dividends you receive so that your wealth can compound at a faster rate.
Research such as the Barclays Equity Gilt Study has shown that the total return from the UK stock market has been split roughly in half between share price gains (4.5% a year since 1899) and reinvested dividends (the other 4.6% a year).
I used to reinvest all my dividends but now I am using some of the income from my portfolio for living expenses. Broadly speaking, I’m looking to reinvest dividends within my ISA (so that this tax-protected sum can grow more quickly) and spend those dividends from my non-ISA investments.
4. Don’t try to time the market
Admittedly, there’s a lot of overlap with my first point here. But I think it’s worth a section of its own.
A lot of investing commentary is dedicated to predicting what the market might do next. Partly this is driven by the media looking for soundbites. Partly it’s because people want to avoid investing only to see the market fall shortly afterwards.
However, I have never come across anyone who can reliably predict market movements with any consistency. Jumping in and out the market will cost you a lot in charges, as you pay on the way out and on the way back in again. Numerous studies, most famously those by Barber and Odean, have found that the most active traders tend to be the worst performers.
5. Use a few providers
As my portfolio has got larger over time I have spread it across a few different share dealing providers.
This is mostly for security reasons, as the FSCS only covers investments up to the value of £50,000 per provider. I tend to stick to the larger brokers, but if one did go under I wouldn’t lose everything. This approach increases my investing costs, but only very marginally.
6. Use tax shelters
There are quite a few generous tax shelters around for investors. Of course, you could argue that the money we invest has already been taxed once, and usually quite heavily, so that’s the way it should be.
I always try and use my full ISA allowance each year. Now that it’s increased to £20,000, that’s become much more of a challenge. But, as ISA allowances were lower in the past, a sizeable chunk of my portfolio is held in ordinary dealing accounts. On occasion, I have taken some profits on some investments outside of my ISAs, making use of my annual Capital Gains Tax allowance, and recycled the cash into my ISA.
I’ve also invested in a venture capital trust, but never really felt comfortable with the idea of having any significant percentage of my portfolio in this type of investment. They have high charges and the rules governing them seem to change every year. Investing purely for a tax benefit often leads to poor decision making as you concentrate on the potential tax saving rather than the investment itself.
Some of my investments are in a SIPP, as previous employers matched my pension contributions up to a certain level so I made full use of that perk. But I am not putting any more money into it at the moment.
7. Go global but add some specialist areas
I have some property investments (residential and commercial) and some cash. That means I’m happy to go all equities when it comes to my portfolio. I don’t have any fixed-income investments right now although that’s something I am looking at addressing to broaden my asset allocation.
Investmtent trusts are my main weapon of choice, as there’s decent evidence that their performance tends to be a little better than other types of fund.
But I do have mainstream funds like Fundsmith Equity and Lindsell Train Global where there wasn’t an investment trust alternative (until recently with Smithson), or there was but it seemed a little too expensive (the massive premium on Lindsell Train Investment Trust). I also have a global equity tracker from Vanguard.
A lot of my money is in global funds rather than UK-specific ones, such as RIT Capital Partners and Caledonia. The UK is a large market but is a bit focused on banks, oils and mining companies for my liking.
I also have funds focused on three specialist areas: small caps, renewables/infrastructure and private equity. Here I’m targetting areas that I like that global funds don’t tend to cover, adding a little diversification and a little more income.
As a rule, I tend to avoid country- and region-specific funds these days. I don’t think I have any special insight in judging which markets offer better value.
8. Position sizing
Right now I have 1 ETF, 1 VCT, 2 funds and 13 investment trusts. My position sizes vary quite a bit, though. Currently, my largest is 15% and my smallest 1%.
I try not to go over 15% where possible, but am happy to let something continue growing above that level. Normally, I find it’s only temporary, as any new money I invest goes into other holdings.
Generally, I try not to go smaller than 3% with an individual position, but I tend to build towards that level over time (which is why I have a 1% in there right now). I like to get to know a fund a little first, before deciding whether to make it a full portfolio member.
Each position needs to be meaningful. I don’t want the extra work that monitoring dozens of different holdings would entail. I don’t have a set maximum number of holdings, but I would be surprised if I went above 20.
9. Selling only rarely
Selling is often regarded as the hardest part of investing. Although, by using investment trusts, I guess I am basically outsourcing my underlying sell decisions.
When it comes to individual funds, I tend to hold for several years and I don’t use any specific selling triggers like stop losses. I usually find that I’m selling because I want more of a certain type of fund than because of poor performance. Therefore, I’m generally tweaking my holdings to alter my relative position sizes.
I have cut a few funds loose because they didn’t seem to be pulling their weight. They normally spend a year or two on the naughty step before being booted for good.
10. Measuring performance
There’s a lot of evidence that most investors should just choose passive investments like a global equity ETF as so few active managers beat the market over the long term.
Despite being a proponent of investment trusts, which are pretty much all actively managed, I tend to agree. Indeed, I help some family members with their investments and pretty much always suggest the passive route as the way to go. And I do hold that Vanguard ETF.
I do, however, think outperforming is possible. But only if you have both the inclination and time to get your hands dirty doing some research.
Despite the hours I put in, there is a decent chance that I would be better off as a passive investor, too. So I measure my performance to see how I’m doing. Should I underperform over an extended period, then I’ll need to decide whether I should go 100% tracker.
Note that I may own some of the investments mentioned in this article. You can see my current holdings on my portfolio page. Nothing in this article should be regarded as a buy or sell recommendation as this site is not authorised to give financial advice and I'm just a person writing a blog. Always do your own research!
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