Monday, 9 July 2018

My Strategy is Evolving

As it is over 3 years since I last reviewed my investing strategy, I thought maybe time for an update on where I am going with it.

Looking back 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.

Fast forward to 2018 and the individual shares are all sold along with some of the investment trusts in both ISA and SIPP drawdown. They are replaced by a large portion of Vanguard index funds and a few more diversified ITs such as Scottish Mortgage, Mid Wynd, TR Property and Capital Gearing.

My circumstances have changed this year as I now receive my state pension. It will be £8,450 for the coming year and this is around £2,000 per year more than I had been expecting when I last reviewed my strategy in 2015 which has come as a pleasant surprise. It means I have less need for income from my investments - ISA and SIPP. This means I need to reassess my plans and make a few changes to my portfolio to reflect the new situation.

The Next Phase

My focus over the past 10 years has involved funding my decision to take early retirement from age 55 yrs. Therefore the plan had been to generate income from my investments to bridge the gap to state pension...and now that part of the journey is mission accomplished!

There now needs to be a plan for the next decade and beyond which takes account of my changed situation.

I follow a fairly simple lifestyle - it seems to me the easiest way to grow wealthier is learning to live with less, because living with less has a higher success rate than attempting to make a fortune, and fortunes tend to push aspirations and desires higher anyway. I am lucky in that I seem to always have had an ability to live within my means so, whilst my lifestyle remains modest - some would say frugal - this is more by design and choice. I accept most people would happily spend the additional money on more holidays, clothes, new car maybe and a host of other delights. However for someone who likes a simple life, spending money on these things would be a bit pointless. Plato said "The greatest wealth is to live content with little".

One book that had a big impact for me in the 1970s was Erich Fromm 'To Have or To Be' which I suspect is as relevant today as it was 40 years ago. I probably did not realise at the time but it no doubt shaped the way I look at life.

As generating income is no longer required, I am now free to consider more options. My basic income needs are now secure with the start of the state pension which will rise year on year to keep pace with inflation. The capital which has been used in my SIPP and ISA to generate the income needed to live on over the past 10 years is now released for other uses. I could think about a better house in a more expensive final move maybe... and also consider a combination of capital preservation and a return to some options for growth. Some themes I have in mind would be technology, biotech, new wave energy and AI/robotics.

Where I am up to now?

Now in my mid 60s, I am hoping for another 20 years if I am lucky. 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. Also, each person will be at a slightly different stage, different goals, varying timeframe etc. The can therefore be no 'one-size-fits-all'.

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. The UK income trusts have done the job required but global diversity is a better option. The resignations of the Brexit secretary followed by the Foreign Secretary today has thrown the whole process into turmoil and I suspect this will put further pressures on sterling for some time.

I was fascinated by the research highlighted in a recent post which suggested the higher returns from equities were generated by just a handful of individual stocks. Therefore to have a chance of generating this outperformance over bonds, I need a global index fund which should include the 1 in 20 companies which deliver or hold an actively managed fund which has a good chance of identifying and holding some of these big performers in its portfolio.

I will therefore continue working towards a core of global low cost multi-asset such as my Lifestrategy, HSBC Global Strategy etc. which will increase to around 60% of my portfolio (currently 40%) and then several satellite holdings of actively managed globally diverse funds such as Scottish Mortgage and Mid Wynd which can hopefully add a little extra return.
(click to enlarge)

My UK equity income trusts and other income holdings are no longer needed so I will be looking to replace them at some point. My managed investment trusts have provided mixed returns in recent years. Some have done very well - Nick Train’s Finsbury Growth & Income and smaller company specialist Aberforth for example, others are more 'steady Eddies' such as City of London - whilst others have struggled - for example Edinburgh which has now been sold.

All the evidence suggests that most actively managed funds do not consistently beat the market over time - but some do! For example Finsbury, Aberforth, Polar Capital Technology and Scottish Mortgage have outstanding records over the past decade despite taking a huge 50% hit to their share prices in the market turmoil of late 2008.

I know I can never achieve a perfect portfolio - 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. Ciao DIY,
    very nice post this one, since I started investing and reporting my endeavours online I was always curious about the strategies and decisions that other investors take. It seems that you have everything planned, also the switch to a world based fund, which I guess you are opting for in order to get more stability out of the investment.
    As to your reference to "moving", I am considering more and more to move to a place where the money I have is worth more than in my homeland. Right now it's just wishful thinking, I can't move from Italy for a series of reasons, but it's something that I do not want to "let go". I see people who retired here and apart from some odd cases most of the individuals I know don't really have a "grand" retirement at all.
    Anyhow nice post and thanks for sharing as usual!
    Ciao ciao

    1. Good to hear from you Stal.

      I don't know about having things has only really dawned on me in the past month or so that I can dispense with my income trusts!

      Interesting to hear you are considering a move away from Italy. How does you new wife feel about a possible move away? What would be your ideal destination? I saw a story recently where a deserted town in rural Italy was offering to pay outsiders to relocate sounded quite tempting, very peaceful.

      Everywhere is going crazy here with our team getting to the semi finals of the World Cup...No Brazil, Argentina, Germany...could go all the way like 1966!

  2. So you made it!! Congratulations!
    "As generating income is no longer required..."
    If you have got yourself in a situation where you are living ( I assume mortgage free) and can live happily ever after on the state pension, with a fair whack in the bank, then I guess you can live with complete security and serenity from now on.
    If I were you, I would spend some of the income from the investments. You have worked for it. Your money is now working hard for you. You owe it to the money to enjoy it!!
    Maybe set yourself a rule of treating yourself once a year or something, and spending no more than 50% of the dividend income, and then re-invest the rest.
    State Pension - Food, Electricity, etc
    50% Dividends/Income - Splurge on luxuries
    50% Dividends/Income - Re-invested.

    Even if you like to live a frugal life, surely you are desperate to see if a £200 bottle of wine during sunset on the Amalfi is all its cracked up to be?

    1. Thanks QT.

      Yep, mortgage free for 20 yrs and I no longer need to think about generating income from investments for living expenses as this is now secured by state pension.

      The image of relaxing on the Amalfi coast is a good one but as I do not hold a passport, I will have to be content with sunny Llandudno..maybe some nice fish n chips and a pint of warm beer!

    2. Brilliant! Did you start saving/investing before or after the mortgage was paid off? When you had a mortgage, if you had say £100 of "profit", where would you allocate each £1, paying down the debt or purchasing investments?

    3. I guess I have always been a saver. I started investing in the late 1980s, the mortgage was paid off in the late 1990s.

      As to invest or pay down mortgage, to some extent depends on the mortgage rates. If you have a 2% deal on the mortgage and can get an average of 6% return on investments, it makes no sense to pay down the mortgage.

  3. You are doing great - congrats on making it and getting your hands on that state pension. It's fascinating to see how things evolve as people as get older, and I wonder how I will start changing my portfolio then.

    1. Many thanks Ms ZiYou. I guess we all change our strategies as we get closer to the destination/goals and also as we gain more experience of what works for us and what doesn't.

      Good luck with your move towards early retirement.

  4. Thank you so much for your regular updates. As a relatively newcomer to the world of investing I always find your posts most helpful.

    I'm intrigued by your decision to hold several low cost mixed asset funds (Vanguard, HSBC etc) rather than just the one. What is the reasoning behind this? And why not just one eg the Vanguard LS fund?
    Do you think there's an advantage to holding a fund like Vanguard LS over, say, VWRL (FTSE All World ETF) together with a global bond tracker or ETF?

    1. Cheers sprong and really good to hear you are finding the blog helpful.

      Yes, I could easily get by with just the Lifestrategy 60 fund...this was the whole point of my book 'DIY Simple Investing' after all. It is slightly more expensive than holding the two funds you mention but then again it has the benefit of constant rebalancing so whatever feature means an investor can fire n forget is a bonus.

      As to HSBC global strategy..this was suggested by someone a year or so back and here is an article on a comparison

      The VLS 60 & 40 are my largest holdings but I thought I would add HSBC to see how it performed in real life so to speak.

      Good luck with you investing journey!

  5. Great post! Congrats on reaching SPA. I liked your ending: "good enough". There's a Swedish word for it: "lagom" a good word to live by.

    1. Thanks for introducing the Swedish equivalent YFG...less is more! I also like their concept of 'hygge' with its emphasis on embracing the simple pleasures in life.

  6. As mentioned in our Twitter convo, what a fantastic position to be in that you need to reduce your income yielding investments as you don't need the income! :-)

    Like you, I've binned EDIN and have now replaced this with FGT, which I've had my eye on for a while. However, I'm still trying to build up my income so will continue to add to those investments, although I will cut down the number of different ones I hold at some point.

    1. Thanks weenie, of course Edinburgh is bound to become a star performer over the coming year...

      You may have outlined your strategy for income investments previously, if so apologies but I was wondering why you have selected this option (rather than growth for example) as I am guessing you do not need the income as you have a salary from your job. Do you like the idea of building a growing dividend stream and do you believe it offers a superior return to say your global multi asset investments? Possibly a topic for a post?

      Good luck with your FGT, I hope it continues to deliver for us both. Although I will be slimming down my income investments I will probably retain this and Aberforth Smaller.

  7. Haha, well I'm not going to check on how Edinburgh does from now on - that's like checking lotto numbers but not actually buying a ticket!

    I guess my strategy does seem a little weird in that I don't need the income right now and should go for growth. However, as you have correctly pointed out, I like the idea of building a growing dividend stream, the returns are better than my passive investments, but also for piece of mind, I needed to prove to myself that such an income can be generated. What I didn't want to do was to go all in with growth, switch to income when I need it, only to find that the income is not enough for my purposes.

    I reinvest the income (along with any new capital) using the regular investment facility which costs me £1.50 or reinvest in funds which is free. If it was expensive to reinvest, I wouldn't be using this strategy.

    1. Thanks for that weenie...makes sense to trial a method before you need to use it for real to see if it would work ok. Also interested to see the returns from your income funds exceed your passives.

  8. Glad your plans are working out and good your sticking with HSBC Global strat. Thinking about your lifestyle philosophy (Plato said "The greatest wealth is to live content with little".), I've just borrowed from the library and started to read 'A guide to the good life' by William Braxton Irvine. This is about Stoic philosophy which is based on how to be content and live a good life.
    It seems to align with your thoughts and I'm finding it a fascinating book so far.

    1. Thanks Colin, I will look out for this book next time I am in my local library.

      Meantime I must try harder to become more content/stoical on whatever our politicians deliver (or not) on Brexit...I am sure they are all trying to do their best!

    2. Good reading as always. I like the way your strategy has evolved. I started off with get rich quicktrading, but was not able to trade quick enough to get in and out and was led by my heart rather than my head , then moved to quality investing but again not the right platform for me .Finally moved into funds and trusts and seem to have found my happy place. I can still trade them and monitor progress but they are less volatile and the range is wider then i could ever hope to have in a share portfolio. I have Scottish mortgage, Allianz trust, Japan speciist among the ten holdings , this has gradually been streamlined overtime. Ps i still have a small share holding just in the hope of the big one coming in !!

    3. Thanks Mark.

      I think for most investors, it probably does take some time to find the 'right' strategy...certainly this has been the case for me but in recent years I seem to be making some progress.

      Good to hear you seem to be settling on a strategy that feels comfortable for you and I wish you all the best with it.

  9. Congratulations on your achievements thus far must be very satisfying.
    I have a question however the answer maybe obvious or basic to the more savvy but I'm very new to investing so still quite green but absorbing what I can, anyway question is how to do invest in a Vanguard LS fund in one ISA and also invest in the HSBC fund in another it was my understanding that you can only have one S&S ISA per annum.
    Forgive me if missed something in your post that answered that, but I'm quite keen to do this but need to clarify how, if that makes sense.
    Best Regards

    1. Thanks Red5.

      So far as a S&S ISA is concerned, I have opened several ISAs with different platforms. For example, with AJ Bell Youinvest, you open your ISA and then you fund it directly from you linked bank account with up to £20,000 which is the max. you can contribute in any one tax year.

      When the funds are in your ISA account, you then decide which investments to purchase. You could use the whole amount to purchase Vanguard Lifestrategy or split the investment cash between VLS and HSBC Global Strategy funds or any other fund or ETF you wish to hold.

      Alternatively you can fund your ISA via monthly contributions and drip feed you money in gradually.

      From April 2019, you could continue with AJ Bell Youinvest as your ISA provider or go with another such as Halifax Share Dealing or Vanguard Investor.

      So, you can only have one S&S ISA in any single tax year but within the ISA you can hold as many investment funds as you want.

      I hope that is a bit clearer?? Here's an article from 2016

  10. Ah thanks that is much clearer, presumably you'd have to choose an independent broker such as AJ Bell not for example Vanguard itself as it would restrict you to buy Vanguard funds only.

  11. Correct. I opened an account with Vanguard last year but accept (for now) I can only hold Vanguard funds.

    You may be interested in this recent post on Monevator

  12. Thanks again Diy much obliged