The old investment strategy was to hold regional investment funds in geographical areas that I thought would outperform over the mid to long term. I would then either invest new money into the funds that were under-performing or re-balance the portfolio periodically.
When I first started to track our investments just over a year ago, I thought the US stock market was way over valued. In fact, I thought the global stock market was overvalued, but the US in particular. I spread my money fairly equally between four regional investment funds. Avoiding the US equity market, I invested in the UK, Emerging, Japanese and European equity markets.
The UK and Emerging Markets funds were active funds whereas the Japanese and European funds were passive tracker funds. My research led me to believe that actively managed investment funds perform better in the UK and Emerging Markets. Normally, my default preference would be to use tracker funds, especially for long term investing where fund managers can go in and out of fashion.
My wife was invested in a UK smaller companies fund and a global multi-asset fund. I wasn’t actively managing my wife’s assets at the time, so there was no asset allocation strategy for those.
What was wrong with the old investment strategy?
Well, nothing really. Looking back at the asset allocation, I don’t think it would be a bad allocation to have right now. The US stock market is coming off the boil and European equities are coming back into favor. The Japanese market is arguably good value at the moment.
The problem I had with the old investment strategy was me. That’s right, I was the problem! I couldn’t stop fiddling with our investment allocation. If you look back through my Tracking our Asset Allocation & liabilities posts, you’ll see just how bad things got. Throughout the past year, I have been invested in too many different funds for too short a time period. The asset allocation doesn’t look anything like what it did at the start of 2016! I need a new strategy that can work long term.
So What’s The New Investment Strategy for 2017?
The whole holding regional investment funds thing just doesn’t work for me. That has to change. That’s why I have decided to stick to one low cost global tracker fund, which will form the core of the newly revamped portfolio. There are no regional asset allocation decisions to make. It’s simple. What can go wrong?
Over the past year, I automatically allocated monthly contributions to the cash fund. From now on, I will allocate new monthly contributions to the global tracker fund. By drip feeding the money into the stock market, there will be less of an instant hit if we do get a correction. It will take the guess work out of trying to time the market. As they say, “it’s time in the market, not timing the market”. By drip feeding my money into the stock market, I can also take advantage of pound cost averaging.
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Reducing my cash allocation
I know that by investing in a global tracker fund, nearly half the assets are in US equities. Because I feel that the stock market as a whole is expensive now, I am keeping a pot of money aside for when we have any pullbacks and corrections. That cash pot is currently around 30% of the overall investment portfolio. I have 20% of the portfolio allocated to the global tracker fund. The other 50% of the investment portfolio, which I will come onto in a moment, is invested in equities. Therefore, I am OK with the cash fund to global tracker fund ratio. At least on a temporary basis anyway.
Over time, the cash pot will get smaller in percentage terms which is ultimately what I want to achieve. I’m actually hoping for a stock market correction so I can get it invested into the stock market. I don’t like sitting on cash, it’s not earning anything. Given my investing time horizon is over 10 years, I am happy to be invested entirely in equities for the long term.
That’s the core fund sorted. Now onto the satellite investments.
I have 20% of the investment portfolio invested in my employers Share Incentive Plan (SIP). The shares I buy through my employers SIP are completely tax free to sell after 5 years, so as a higher rate tax payer, that makes sense for me. Even if the shares don’t appreciate in value, I still save 40% tax. The shares would have to go down a fair bit also for me to be financially worse off. Don’t get me wrong. I wouldn’t invest in my employers SIP scheme unless there were tax benefits to be had. At the same time, I strongly believe my employer will still be producing good profits and will have reasonable growth prospects way into the future.
The last 30% I have invested in a couple of high quality UK stocks. The UK based stocks are Burford Capital and Kainos Group. I will not go into my reasoning for investing in those specific companies in this article. I will cover them in my next Tracking our Asset Allocation & liabilities update. However, it is my intention going forwards to use my wife’s SIPP account to buy and invest long term into high quality growth stocks.
I know my asset allocation will be controversial
To most readers, the decision to use 30% of our portfolio and the whole of my wife’s money purchase pension to buy individual stocks will be controversial. I understand that. However, I have many years experience of trading and investing in the stock market. I believe that anyone willing to put in the time and effort, can make extraordinary profits from investing in quality stocks.
No new money will be going to buy individual stocks. In theory, because all new money is going into the SIP and global tracker fund, the allocation within the portfolio to individual stocks as a percentage ratio should decline. I don’t expect that to happen though. In fact, I am expecting the opposite. I believe the returns on the stocks will be much higher than all the other investments within the portfolio. However, time will tell!