As the saying goes, “no plan survives contact with the enemy”. So I wanted to see how my investing strategy is holding up, nearly two years after I first put in writing.
Chopping and changing
Back in November 2018, I said:
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).
We’ve certainly veered between crisis and overexcitement these last two years.
The last quarter of 2018 saw global markets fall some 15% but that was pretty mild compared to what happened in February and March of this year.
I doubt you need to be reminded but global markets (measured in plucky little pounds) fell 26% in just three weeks.
As we know now, they recovered over the next four months and recently set new all-time highs.
Building it up …
For a couple of decades, I’ve been building up an equity portfolio, mostly in ISAs, that’s capable of funding my living expenses.
I was also putting money into a pension as my employer matched my contributions up to a certain percentage. It’s rude to turn down free money!
You could say I was following the Financial Independence Retire Early (FIRE) philosophy, albeit in a very unstructured way.
I had no number I was aiming for.
Neither did I have a set retirement date.
For me, it was about saving as much as I could for retirement, as regularly as I could, without making any drastic changes to my lifestyle.
… then taking the plunge
I left my main job two years ago and now I am working part-time doing some contract work, baby-sitting (or parenting as my wife insists I should call it), and side projects like this blog.
The part-time income covers most of my expenses and I’m using some dividends to cover the rest.
When I turn 55, I should be eligible to take some of my pension as tax-free cash.
I should also be able to withdraw further cash from my pension each year after that using a drawdown scheme.
My plan is to reinvest most of this pension cash back into ISAs, so it will still be able to grow tax-efficiently but I’ll be able to access it more easily than I would inside a pension.
I should start to get a State Pension sometime between my 67th and 68th birthday. It’s just over £9,000 a year at the moment, assuming you qualify for the full amount. That will be a nice little boost but certainly nowhere near enough to live on.
Of course, changes to the rules governing tax and pensions could affect all of these plans.
I don’t have any fixed-income investments, although I do have some cash set aside as an emergency fund, so I don’t rebalance between bonds and equities on any regular basis.
As a result, my overall portfolio is probably more aggressive positioned than would suit most people. That might change when I cease work entirely, whenever that is.
So that’s the lay of the land.
Here’s are the ten guidelines from my original strategy plus some comments about how closely I’ve managed to stick to them:
1. Invest little and often
I used to make fixed monthly contributions into my pensions and then invest additional amounts in ISAs.
Working part-time has meant my income has reduced, of course, and I no longer have spare capital to invest on a regular basis.
Should my income/expenditure situation change for some reason, then I may be able to invest spare money in future.
But for now, guideline #1 is effectively on ice.
2. Never spend capital
As I built up my retirement pot, I tried to make sure that money only ever went into my portfolio.
I largely stuck to that, saving up for larger expenses in advance rather than selling investments to fund them.
My part-time work is more variable than my salary used to be. And, as 2020 has demonstrated, dividends aren’t as stable from year to year as many of us thought they would be.
As it happens, despite widespread dividends cuts this year, my portfolio’s income hasn’t really changed that much as the vast majority of investment trusts have at least held their payouts. But that’s no guarantee they won’t take a hit in future times of crisis.
In other words, I need to be prepared for my income to fluctuate a lot more than it did in the past.
With two fairly young kids, our expenditure is probably going to rise more than the rate of inflation for the next decade or so. And there are wildcards like healthcare costs and elderly relatives to consider.
That means my expenditure could be pretty lumpy, too.
I’m still hoping to avoid dipping into my capital while I am working part-time, but I may need to be flexible if events conspire against me!
3. Reinvest dividends
I used to reinvest all my dividends, in order to get the full magic of compounding, but that’s no longer the case.
I’m looking to reinvest dividends within my ISA where possible (so my tax-protected investments can grow more quickly) and spend those dividends from my non-ISA holdings first.
It’s pretty rare that I reinvest my dividends back into the trusts and funds that paid them out. I usually collect them up and then reinvest them en masse every quarter or so.
Guideline #3 remains (mostly) intact for now.
4. Don’t try to time the market
The rest of my strategy, from #4 to #10, isn’t really affected by shifting to part-time work.
Since I started investing, I’ve stuck with the idea that no one knows what the market is going to do next on a consistent basis, no matter how obvious a crash might seem to them in advance and how smug they sound afterwards.
Markets generally rise over time, so I think being fully invested at all times is the percentage play.
It will hurt at times, though. It stung earlier this year and it felt like I’d lost a limb during the financial crisis.
But I stuck to the plan and stayed invested both times and I’m very pleased I did.
If I had sold out, it probably would have been after markets had already fallen a great deal.
If I had then bought back in, it would have been after markets had already recovered most of their losses and were trading a lot higher than when I sold.
So I leave market timing to others. I try not to get too cute guessing where we are in the economic cycle, what the charts might be saying, or whether global markets are too cheap or too expensive.
I don’t plan to ever move a large chunk of my portfolio to cash because I think a crash is just around the corner.
A few times in the past, I’ve considered using a hedging strategy to limit my losses. But I’m well out of my comfort zone with stuff like this and I’m not convinced I can make it work.
5. Use a few providers
Short and sweet this one.
I use a few brokers as the FSCS only covers investments up to the value of £85,000 per provider.
I tend to stick to the larger brokers, as I believe they should be less risky, but if one did go under I wouldn’t lose everything.
This costs a little more and adds a little inconvenience, but I think it’s better to be safe than sorry.
6. Use tax shelters
Most of my investments are in ISAs and pensions and I would expect that to continue.
As I’m living off some of my dividends, I’m likely to sell the non-ISA investments that I have and recycling this cash into my ISA each tax year. It may be that I buy back much the same thing as I sold, but I suspect I’ll use this opportunity to tweak my positions a bit.
After I’m 55, I expect to gradually shift my money out of pensions and into ISAs.
The annual subscription allowance for ISAs is currently £20,000 but I guess there’s now a higher possibility than there was a couple of years ago that this might be reduced or an overall cap is introduced. That could mean I need to change course a little but I’m not planning to pre-empt anything on this front.
7. Go global but add some specialist areas
For a few years now, I’ve been favouring global trusts and funds rather than those that mostly invest in the UK.
It’s been a good decision as US markets have soared while the UK has hardly done anything, held back by poorly performing energy shares and banks.
I prefer investment trusts to open-ended funds where possible, as their closed-end nature, ability to borrow, and independent board of directors, seems to give them a little advantage.
I invested in a global equity ETF tracker from Vanguard several years ago and I’ve held onto that.
All told, I reckon about two-thirds of my portfolio is in global trusts, funds and that ETF.
The remainder of my money is divided into four separate sleeves of roughly equal amounts: technology, healthcare, UK small-caps, and renewables/infrastructure.
There was no specific thinking behind the size of my global holdings and the specialist areas. The two-thirds/one-third split was what the situation was when I started thinking about my portfolio this way and it seemed about right.
I’m not wedded to it, though, and I plan to let most of my positions ride so I would expect it to change over time.
With healthcare, small-caps and renewables/infrastructure, I’ve split the money over a few different trusts in each area.
My technology exposure comes solely from HgCapital Trust, which is strictly speaking a private equity trust that specialises in technology. Indeed, I called this section private equity up until the point I ditched Princess Private Equity a few months ago and introduced healthcare as a new specialist area.
With technology, healthcare, and UK small-caps I’m looking for a little extra performance than I might get from my global trusts and funds.
Renewables/infrastructure is my sole income concession right now and hopefully, they add a little stability to my overall portfolio value. This is still a young asset class, though, so I’m keeping my exposure fairly muted for the time being.
I’m hoping that, by focusing in on a few areas like this, I can build up more and more knowledge about these sectors and the trusts within them. I might chop and change between some trusts as I get a better understanding of how they differ.
I also use these specialist areas when I’m considering buying a new holding. I’m much more likely to buy something that fits neatly into my existing portfolio.
8. Position sizing
Right now, I have 18 separate investments in my portfolio, with one on the way in the form of the Buffettology Smaller Companies IPO.
My position sizes vary from around 2% to the mid-teens, so there’s quite a range.
My larger positions tend to be global trusts and funds while the smaller ones are in the more specialist areas.
When I buy a new trust, I tend to buy a small stake to start with so that I can test the waters, before building it up over a couple of years, often using the dividends paid out by other holdings.
Each position needs to be a meaningful amount as I don’t want dozens of different holdings to follow. I generally try not to have more than 20 holdings.
At the other end, I don’t have a hard maximum limit. I’ve had around 20% in single funds in the past and may well do again depending on what else I hold.
With all these things, I’m generally trying to think about things at the whole portfolio level these days, rather than focusing in on single positions.
9. Sell only rarely
I’ve sold three trusts after holding them for just a couple of years recently. However, I’d say my average holding period tends to be several years.
Going into an investment, I’m usually looking to hold for 10 years or more, so I don’t tend to try and exploit short-term situations and then skedaddle.
I reckon my portfolio turnover — total sales divided by average portfolio value — will work out about 5% over both 2019 and 2020. It was lower in 2019 and will be higher in 2020.
I don’t use things like stop losses or charting to trigger sell decisions.
Writing this blog has definitely exposed to me to a lot more new investment ideas than I would have considered otherwise. I think it’s marginally increased my level of trading but I like the way it forces me to examine my investments in more detail.
10. Measuring performance
I’ve been following the active versus passive debate for over twenty years now.
For the vast majority of people, I reckon a global equity tracker makes the most sense. It’s certainly the simplest option.
However, I do believe it is possible to beat global indices over the long run although it’s certainly no easy task. You need to enjoy the investing process and be prepared to put in the legwork.
I tick both those boxes but that’s still no guarantee of success.
I measure my performance to see how I’m doing against the default alternative of a global tracker fund. As I enjoy investing, I think I’d be happy to take a more active approach even if I slightly underperformed the market.
There’s a bit of slack in my financial plans, so underperforming a little shouldn’t materially affect my retirement plans.
But, of course, I’d still like to do better than the market to make the effort worthwhile.
I’ve got what I deem a stretch target of beating global indices by two to three percentage points a year over the long term. Anything that level or above, given I am pretty well-diversified with around twenty trusts and funds, I would consider an excellent result.
To date, since I started measuring my returns properly, I’m about one percentage point a year ahead. Not bad, but room for improvement.
On the flip side, I’m conscious that I don’t really need to take on lots of extra risk, and the extra volatility that would probably entail, in order to fund my retirement plans.
Of course, a few more percentage points a year would be nice and I know many folks have performed a lot better than I have in 2020. But I need a set of investments I’m comfortable holding onto when times get tough.
I’d say that I’ve largely stuck to my plan these past two years.
I’ve kept investing where I could, not flip-flopped in and out of cash as the market wobbled, and kept my portfolio turnover pretty low.
The hardest thing has probably been resisting the temptation to add a whole raft of new trusts to my portfolio in a scattergun fashion. Perhaps I should split out “go global” and “specialist areas for growth” into separate guidelines, as I’m covering a lot of ground here with a single guideline.
Finally, one thing I should incorporate formally is prioritising sustainable investments. I have done this a little by cutting out trusts that invest heavily in resources (which was part of my decision to ditch City Of London Investment Trust last year). But a little more structure to my thinking here would be useful.
Please note that I may own some of the investments mentioned above -- you can see my current holdings on my portfolio page. Nothing on this website should be regarded as a buy or sell recommendation as I'm just a random person writing a blog in his spare time and I am not authorised to give financial advice. Always do your own research and seek financial advice if necessary!
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