Looking back almost 3 yrs to early 2013 when I started this blog, it is clear there has been quite a significant move. Back then I was focussed on a portfolio of individual higher yielding UK shares combined with a ‘basket’ of investment trusts to generate the natural income I required in retirement.
Today, the individual shares are much reduced, some of the investment trusts have been sold in both ISA and SIPP drawdown and they are replaced by Vanguard index funds and ETFs.
Some of the proceeds from my UK shares were recycled into Vanguards UK Equity Income fund - same church but different pew(s) with much more diversity.
My Asia focussed investment trusts were replaced with a lower cost - around 1.0% per year reduction - Vanguard Developed Asia ETF.
The balance of the proceeds have been redirected into Vanguard LifeStrategy 60 fund - 60% globally diverse equities and 40% bonds.
Why the Move to Index Funds?
This is not a sudden ‘light bulb’ conversion - I purchased my first Legal & General All Share index fund back in 1996 - almost 20 years ago. I seem to recall the charges were 0.50% p.a. which at that time was attractive because most of the funds I read about in my weekly Investors Chronicle were charging an average of 1.75%. Of course, charges have become much more competitive and 0.50% today would be regarded as expensive - 0.10% to 0.20% would be nearer the average.
I held that index fund in my PEP for many years - it was eventually transferred to my AJ Bell ISA.
My focus over the past 7 or 8 years - certainly since the dramatic events of 2008, has involved funding my decision to take early retirement from age 55 yrs. Therefore the plan has been to generate income from my investments so that I have the option not to need to pursue further paid employment.
I seem to always have had an ability to live within my means so, whilst my lifestyle remains modest - some would say frugal - this has been possible so far.
However, since starting my blog, I have been educating myself via other blogs as well as the many contributions to the comments section.
I realised at some point that I was severely limiting my investing options by restricting my chosen investments to those that provided an adequate natural yield - say 3% minimum. This had ruled out looking at the likes of Vanguard LifeStrategy funds with a natural yield of under 1.5% for example.
I am now free to consider far more options.
I have always tried to focus on low costs and, of course, there is no lower cost strategy than index funds. I have read much more on the theory underpinning index investing whilst researching material for my latest book ‘DIY Simple Investing’. This, combined with many articles on Monevator blog - especially those by Lars Kroijer has brought me full circle.
The final piece in the jigsaw was to open up the options of selling down capital i.e. develop a strategy to sell capital from funds which do not provide a sufficiently high income.
This is one aspect that I have probably not paid sufficient attention to in the past. Since reading Tim Hale’s ‘Smarter Investing’ it has brought home to me that I really need to bring more discipline to my process and try to eliminate some of those irrational decisions which are detrimental to better returns.
In the past, certainly overconfidence would have been part of the problem. A part of me playing the fund manager thinking I was better than others. I probably have done OK but no better than average most of the time.
Certainly another bad habit is constantly reviewing my portfolio and following the market - not good!
Now in my early 60s, I am hoping for another 20 years if I am lucky. I will receive my state pension at age 65 yrs which will certainly cover the basics of food and household bills so there will be a little less pressure on my investments.
My equity exposure in recent times has been around 60%. Tim Hale suggests 4% in equities for every year you are looking to invest. By this measure, I could possibly increase my equity allocation to 80% however more equities would mean greater volatility so I am happy to remain at 60% and gradually reduce this over the coming years.
Where I am up to now?
Well, the first thing to say is I accept there are no perfect strategies - what works for one investor possibly will not work out for another.
That said, obviously some strategies have more chance of a good outcome compared to others.
I am hoping equities will continue to provide a better return than bonds so I will continue to tilt in their favour for a while longer.
Individual shares have been interesting but they are volatile and I have not noticed any greater return to my portfolio for the additional risk so I will wind down the rest of my shares portfolio in the coming months and move the proceeds into collectives.
My managed investment trusts have provided mixed returns in recent years. Some have done very well - Nick Train’s Finsbury Income, smaller company specialist Aberforth, Bankers, City of London - others have struggled - Murray Income, Murray Intl. and Dunedin Income for example. Will the ones that have disappointed recover - will the ones that have done well stumble?
All the evidence suggests that most actively managed funds do not consistently beat the market over time - but some do!
I now accept that (mostly) markets are efficient. I also accept that investing is a zero sum game - for every winner there is a loser.
I know I can never achieve a perfect portfolio - for the time being, the emphasis will involve the continued movement towards a more simple strategy - globally diverse, low costs and an appropriate balance between equities/bonds.
I am continuing to believe in the concept of ‘good enough’.
Feel free to share any thoughts with others in the comments section below - how is your strategy evolving?