Asset Allocation 2: Allocate Harder

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.

Lesson learnt
Ignore the noise, keep it simple and cheap.

The next step is choosing my trackers.

Mr Z

11 thoughts on “Asset Allocation 2: Allocate Harder

  1. Retirement Investing Today

    Hi Mr Z

    Did you consider adding a bit of Commercial Property and/or Commodities into the mix for further diversification? Maybe 10% property with 5% coming from 'equities' and 5% from 'bonds/cash'. Then maybe 5% in physical gold coming from 'equities'.

    DYOR etc etc


  2. Mr Zombie


    Yeah, as it grows I will add commercial property. On the basis that the extra diversification will be worth the extra costs that property funds seem to attract.

    Probably the same with commodities, but I am a bit unsure as I understand the market (even!) less. Part of me says add some now while bonds/equities are potentially over valued (?) and commodities look cheaper than they have been. This is based on no 'research', but just what it looks like. Def an area for further research for myself 🙂

    Mr Z

  3. Anonymous

    Mr zombie, you definitely can invest in the VWRL through regular investment with Youinvest. I think I know the problem you have – the regular investment tool is glitchy and often throws you out. There is a knack to it, I can't remember exactly what you have to do, but the easiest way to sort it out is to phone them and they'll talk you through it.

  4. Anonymous

    Actually if you explain the problems you had they might even reinvest your funds into the ETF and help you avoid the fund charge. Once when I invested in the dollar version of VWRL instead of the pound version they just sorted the conversion for me.

  5. ermine

    > at least one severe shock during my investing lifetime

    Blimey, you're a young fellow, you're going to see a lot more than that! for me – 1987, 1997, 2001, 2008. I hope you will live a lot longer than ten years from now, which means you will probably experience some interesting times

  6. weenie

    Hi Mr Z
    Anonymous is right, you can invest in VWRL and the regular investment tool for AJBell isn't the best one around.

    I phoned them up about this issue a while ago and was advised to key in the 'Sedol' number of the ETF you want to invest in, which you will find from

    So you key in this number in the regular investment box. It looks like it hasn't worked as it doesn't bring up any details, but key in the amount you want to invest,save/add and it should pull the correct details through.

  7. Dividend Drive

    Sounds like a plan to me, Mr Z.

    It is one area I have not yet been able to make a final decision on. Currently, my two main asset classes (like you) are cash and equities. However, recently equity overtook cash. I have some capital in other areas like Zopa. But not much.

    Bonds and gold seem to be a commonly accepted addition but–like you–I see bonds as overpriced currently and set for a fall once interest rates rise (obviously). In the meantime I am happy to wait to see what happens post-interest rate rise.

    Gold is very confusing. It is clearly well off its highs but I am unsure if it is quite fair value yet. I feel I should get some exposure to it somewhere!

    Because of my particular investing focus–dividend stocks–I think I am more comfortable than you with regards to my equity allocation. But you can't really know until a crisis hits the economy again. I am therefore trying to allocate my assets so that when one does hit I will be able to gauge which is best suited to my taste!

    It is definitely a hard question. But I agree, if you're not careful it can get very, very complex!

  8. Mr Zombie

    Thanks both!

    Having similar issues with an emerging market tracker and a small cap tracker.

    I had tried using the SEDOL but nothing came up.

    But this works! 🙂

    Thanks again,

    Mr Z

  9. Mr Zombie

    Hi DD,

    Yeah, I can go round in circles with it, and if I looked at it tomorrow I would tweak it slightly again!

    It does seem 'inevitable' with bonds that they will come down at some point. But then they were supposed to be overvalued a couple of years ago and yet still went up!

    I think my bond&cash allocation will be all cash for the moment, until something with a better return stands out. Zopa working out for you?

    Mr Z

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