Since last summer I started saving more and more and building up a nice cash holding. Reducing your out goings has felt like the biggest win and simplest win on the journey to financial independence. I have been slowly trimming out the excess, and I think I could get the savings rate even higher. But for the moment, what could be extra savings, is being plowed into the wedding.
Then a few months ago I opened up an ISA account with A J Bell to start building a position outside of my pension.
Shortly after that I got lost in the theory of it all and started to build an asset allocation based on a spreadsheet and reading books and websites, with little consideration for my reality.
You greedy fool
I thought I had figured out my asset allocation and so started looking at building it with various funds and ETFs but it soon became apparent that my split was far too detailed for my needs and was only going to incur additional costs and charges for a split that I didn’t really need.
Hopefully it’s highlighted that if you are mulling over something yourself it’s very easy to over complicate things, especially where they don’t need to be. I’m trying to be as transparent as possible through deciding to save and invest for Financial Independence, mistakes and all.
Thanks to everyone who commented, it’s been really helpful. Both RIT and Ermine raised points that highlighted the need to keep it simple. RIT also raised a point about my equity and bonds/cash split that has got me thinking and part of my difficulty is figuring out how to allow for the fact that the pension and the ISA side of things have very different potential time frames,
M from There’s Value and Weenie quite rightly pointed out that I could just invest in the Life Strategy 80% Equity fund and get the split between equity and bonds I was thinking about and it would be cheap/maintenance free.
Another comment, from Martin, also rings true. I was worrying that I was missing something and so started adding small allocations to various areas. Too small and too many, so in the end it was becoming expensive and ineffectual.
Yippee ki-yay asset allocation
So I have spent the last few days thinking. Sitting in the park at the crack of dawn thinking. The type of thinking that requires me to be stood on rooftops in the rain wearing my batman suit. Some deep thinking. And some rereading of Time Hale’s book.
Simplification is the way to go. It makes sense for me to consider my Pension and ISA/cash separately as they could be accessed over a decade a part.
I’m happy to leave my pension in the Global Fund that is available as part of my pension scheme for the moment, which is 100% in equities. It will be 25+ years until access is granted to this and so a risky allocation is the way to go for me. Like an undead Beatle, I will just let it be.
Outside of the Pension I am currently 33% in equity and 67% in cash. If all goes as planned then Financial Independence could be in a relatively short time frame and as RIT rightly pointed out, my contributions are probably going to have a bigger impact than investment growth. Being too risky with my allocation over a short time frame could just bring the pain, 100% in equities here seems a little too risky. My approach here will need to be a little less John McClane and a little more Ed MiliBond.
I view equity allocation as a volatile beast, one that is likely to be subject to at least one severe shock during my investing lifetime. So how would I feel about losing 50% of the value of my equity value? Probably not great. While I am still earning it would offer an opportunity to buy into the market while it is cheaper but ideally with 5+ years of investing ahead still time to recover. In this sense, trying to figure out my equity allocation is more about how much could I stand to lose rather that what gains might I be missing out on.
My main asset will be a world index tracker to capture the world equity gains, rather than try to beat (or lose to) the market. I will also allocate some to emerging markets and global small-caps (the even more angry and volatile sections of equity that may provide me some additional return in the long term). Hopefully these will provide an additional premium on return as compensation for the risk, but this isn’t guaranteed. And if you read around there is plenty of articles providing a case for or against these additional premiums. Hell, if you look hard enough you will find articles claiming that equity risk premium is a little bit sketchy, that the premium just isn’t worth the risk. There is a lot of noise out there. With that I’ll try to remain diversified while trying to search out some higher returns as conservatively as possible 🙂
In light of all of the above the new plan is;
70% – Equity (split 55% world tracker, 7.5% emerging markets and 7.5% global small cap tracker)
30% – Cash/Bonds
It is an equity heavy allocation but I think I am happy with the risk. (We’ll see when a market crash happens or in a few years time when I have more to lose).
As an aside
I was originally going to invest in the Vanguard FTSE All-World ETF as this was available for regular investing at £1.50 a month.
For whatever reason the Wizards of A J Bell don’t actually let you invest in that particular fund under the regular investment fees. They advertise it as being available then quash your hopes at the last moment. I have been emailing them to no avail. So in the mean time I started putting money into the Vanguard Lifestrategy 100% equity fund, VGLS100. I was so focused on everything else that I forgot that A J Bell charges an additional 0.2% per annum to hold funds. There’s another lesson in there, somewhere.
Ignore the noise, keep it simple and cheap.
The next step is choosing my trackers.