Monday 2 November 2015

How My Strategy is Evolving

As the year unfolds, I feel like I have made a little progress with my change of investing emphasis.

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!

Time Horizon

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?


  1. Really interesting to see the changes in your investing path to date. I was only thinking of this very thing about half an hour ago. My path has changed a lot too, I also started out with some actively managed funds and some high yield stocks. Now I have mostly indices in my SIPP, some in my NISA but all new acquisitions are dividend growth stocks or highish yield cornserstone stocks like National Grid, RDSB, and the like.

    I wonder how your strategy will continue to change in the future, if at all?


    M from There's Value

    1. As you say M, it will be interesting to see how things progress from here. At present I am bridging the gap to state pension and at that point I will probably need to reevaluate. Also, there is a house move still to negotiate which may have some bearing so not all plain sailing.

      Good luck with your investing decisions and, as always, thanks for dropping by.

  2. As always an interesting take on investing. I have promised that I will not take up the debate of Active over Passive so will not comment on that, as the article focuses on primarily on drawing down capital, the balance between Equities and bonds, the target return and the need to hold cash as a buffer.

    The interesting facts for me is the 8% return on average (which is my target return given the current market conditions), the need to maintain a cash buffer (which I already do) and the natural return of the fund using capital withdrawal. I have always been averse to using the process of capital withdrawal as if the timing is wrong as demonstrated by many back-testing approaches it results in a irreversible loss of capital that is never made back; secondly I still fail to see why one would invest in bonds if you are investing on the forever basis as we don't know how long we will live and when we die we can hand over our portfolio to our next of kin on the same basis.

    So I would be interested in any comments that address the issue of:

    How much cash balance to hold and how to hold it?

    The balance between Equities and bonds?

    How much percentage to hold in Bonds, if any?

    Any research on withdrawing capital versus dividends and the likely time to make up the withdrawal of capital when the markets go wrong?



    1. Gareth,

      You raise some interesting points.

      I think my own position in relation to the questions you pose are evident so I will leave it to others to offer opinions based upon their own portfolios. I am guessing there is no perfect solutions and each investor will have their personal preference depending on age, attitude to risk/volatility etc.

      Just picking up on your target return of 8% - would this be from holding mainly equities and is this a nominal or real return figure after adjusting for inflation?

      As always, thanks for your thoughtful contributions.

    2. diy

      Thanks for your response, just picked up on it as I have been tied up most of the day on one of those extra earners I like to pick up when they come along work-wise which help top up the income from time to time.

      Yes your position is clear but not necessarily always the thinking behind it. I agree that there are different strategies for different people and we have certainly had some interesting exchanges on that.

      I was interested in the combination of the questions I posed as they tend to inter-relate when using a capital withdrawal strategy.

      Back-testing on withdrawing capital has shown that if you withdraw at the wrong time you will lose capital that can not be made up; so using a cash buffer is a logical way to go. So I was interested to hear about the amount of cash buffer/Equities/Bond percentage people held to prevent the capital depletion; secondly I still do not get bonds despite their recent track record (decades/not months of success, when all the research points to Equities outperforming Bonds over the long term and Dividends being the key to the out performance).

      As to your question about target return - Oh I wish I could say it is a 8% return after inflation. I think that would put me into a very good position, but no it is including inflation. According to the data I have the usual market return is around 7.5-8% over history including inflation and if I can match or slightly better that then all is well and good; and yes it all totally from holding equities across the different sectors both across the UK and the world, although my ex uk have not performed that well in the last couple of years and to paraphrase Terry Smith " I hear paople talking of selecting different regions etc., but not about selecting good companies, which to me translates to selecting good performing shares/funds)

    3. Gareth,

      Thanks for the clarification.

      On the question why bonds - for me it is simple down to volatility, I am much more comfortable with the idea of smoothing out the ups and downs of the market with my 40% bonds and fixed interest. Harry Markowitz talks about owning some assets which are zigging whilst others are zagging so a balanced portfolio will not zig and zag so much whilst overall returns are not overly compromised.

      For me its a question of whatever it takes to stay the course with a mix of assets which offers the prospect of a decent return for the risk I want to take.

      Charlie Ellis ‘Winning the Loser’s Game’
      “The hardest work in investing is not intellectual, its emotional. Being rational in an emotional environment is not easy. The hardest work is not figuring out the best investment policy; its sustaining a long term focus at market highs or market lows and remaining committed to a sound investment policy. Its hard especially when Mr Market always tries to trick you into making changes“.

      On my cash buffer, I have decided for the time being (early days) to hold 2 yrs equivalent income on the basis that it is a rare occurence for the markets to fall over 3 consecutive years. Dipping into the cash when markets are down means I do not need to sell capital at the 'wrong time'. Whether 2 yrs will be sufficient time will tell but I also have the natural income from my other investment trusts and ETFs.

      Good luck with your investing process and target of 8%.

  3. Hi DIY
    I've tweaked my own investment strategy slightly since I started investing (by investing in individual shares and investment trusts), but it's still predominantly in index trackers and soon in ETFs.

    Income producing investments are likely to feature more in my portfolio as I need to factor them into my amended plan but I'll not deviate too much from my original plan.

    1. Good going weenie, sounds like you have a good strategy and look forward to see how it develops longer term.

      Thanks for dropping by.

      ps thanks for organising the 'monkey challenge'!

  4. I've never understood the 2 year cash buffer argument. I understand the worry about pound cost ravaging, but if on balance you expect equity to rise faster than cash you should commit to it. Sure, 2 years in 5 you might be burning it faster than cash, but 3 out of 5 you'd be reaping benefits.

    The bigger reason for a cash buffer is to avoid capital gains on forced sales, but all good investors should be using bed-and-breakfast techniques to keep the gains under control as they rebalance.

    1. John,

      Most of my investments are now covered by isa or sipp so I am hoping capital gains liability will not arise.

      The 2 yrs buffer is my personal choice to open up the options of investing in lower yielding investments but as I often suggest, there are many ways up the mountain!

      Good luck with your own strategy.

    2. Hi John B

      Most of the backtesting methodologies have shown that if you sell down your capital at the wrong time then you don't make it back, So it has nothing to do with capital gains but more to do with how you draw income out of your portfolio. So one of the alternative methods is to keep a cash buffer to prevent the need to sell capital at the wrong time; secondly for those who use the Natural income methodology, this enables them to cover shortfalls in dividends when the markets work against them.

      But as the saying goes you pays your money and takes your choice on the way to go

  5. I'm currently avoiding Vanguard LifeStrategy funds for a couple of reasons, one of which you mention, the natural yield is low, and also the charging structure of my SIPP provider favours ETFs. Otherwise they are great.
    Currently I hold a majority of index tracking ETFs, and a few yield/dividend oriented ones. I tend to target a minimum of 3% yield. I hold a couple of investment trusts, but no individual shares.
    While still several years from retirement, I just feel I want set things up now so I have the option of just drawing on dividends/natural income without selling down units/capital.
    Even with that method of drawdown I think a minimum of 3 years cash buffer is not a bad idea. In fact if you can get the same or more interest on your cash than gilts/bonds provide then I think there is no issue in holding a lot more cash. The trouble is it is virtually impossible to do so inside a pension wrapper.

    1. SP,

      Thanks for droppping by.

      Its good to try out a strategy for income before you need to rely upon it.

      The interest on my cash deposits is currently 1.5% which is probably not far off some gilt yields.

      Good luck for the future with your ETFs and ITs.