My Investment Portfolio Warts and All

Two events have occurred in the past week that prompt this post:

1. My Defined Contribution Company Pension transfer to a Hargreaves Lansdown SIPP has now completed.  The timings ended up being that I sent all the paperwork to Hargreaves Lansdown on the 09 May ’15, received a confirmation letter that it was in progress on the 13 May, the cash landed in my new Hargreaves Lansdown SIPP on the 29 May, I bought all my new low expense investment products (which made this post a little redundant) on the 01 June and the £500 cash back offer landed in my account on the 05 June.  So all in about a month for it all to wash through.  Total Investment Portfolio expenses including SIPP wrapper charges now run to 0.28% per annum.
2. I received a Facebook message from a reader asking if I could do a post with “a really detailed breakdown of my portfolio starting with a rough pie chart with just equities, bond, gold, alternative investments, property etc and then a more detailed breakdown again perhaps an exploded pie chart of the main parts. For example share category American, European shares etc.”  When I read the message I realised that while I've talked ad infinitum about my portfolio over the years I've never given such a detailed breakdown including investment product percentages.

So without further ado here’s my investment portfolio warts and all.

The investment strategy (some might call it an Investment Policy Statement) on which my portfolio is based has now been in place almost since the beginning of my journey.  I first documented it in 2009 but I would suggest reading my 2012 strategy summary (as it included the addition of my High Yield Portfolio (HYP) for a portion of my UK Equities) in parallel to today’s post.  The strategy post will give you the “Why” behind my thinking while today’s post will give you the “What”.  It’s also important to note that nothing I do is original or clever.  It’s predominantly based on work by Tim Hale which is a book that I believe every UK investor should read with tweaks coming from the reading of the following books.

The Top Level Investment Portfolio

Click to enlarge, My Actual Low Charge Investment Portfolio

At a top level the portfolio contains local and International Equities, Commodities, Property, Bonds and Cash.

A Simple Low Expense, Low Tax Investment Portfolio for DIY Beginners

There are about as many investment strategies and investment options as there are investors. I also believe that many of these are offered because the people behind them have already worked out that it is in their favour to offer them but I am sometimes accused of being cynical. I don’t actually begrudge them for this as we all have to make a living in this increasingly complex world but I do have a problem with how some products and services are made to sound more complex than perhaps they should which the cynic in me again believes is being used to deter people from going DIY.

I think back to 2007 when I first realised that for the first 12 years of my life I had been working for everybody but myself. And if I didn't start taking responsibility for my own future quickly I was going to end up with little more than a State Pension (or some other form of welfare) that would be provided at an age chosen by the government of the time. I needed to start saving and investing without further delay.

I did what the mainstream world tells us all to do. I spoke with Financial Planners who I believe in hindsight were making what they were offering sound more complicated than it needed to be. I also read about what looked like complex investment products which would not only give me a fantastic return but would in some instances possibly even put man on the moon.  I'm possibly even guilty of it when I talk about my own low charge strategy and some of the other concepts we cover on this site. I think it’s a simple concept but thinking back to what I knew when I first started down this road it would have been nothing short of confusing. Of course the difference is that I don’t get wealthy at your expense. I'm not for a minute suggesting that there is anything illegal or misleading going on but I am glad that I went DIY as I believe that I would have had no better return plus I've saved on all the fees and expenses which are now part of my wealth which is compounding nicely.

Since going DIY I am happy with progress however one area I know I went wrong is during the first couple of years when I knew nothing and was trying to learn. This period of time definitely cost me and while I don’t regret it as it taught me what I know today, thinking back I really should have just used the KISS rule until I’d educated myself. So let’s do that today and try and build a simple portfolio and strategy which could maybe tide a DIY investing beginner over until they were ready for more complexity. When they are finally ready they probably won’t even have to sell but instead could just build upon what would then be a core holding and if they were never ready then they’d still likely do ok.

Australia, UK, US and the PIGS (Portugal, Italy, Greece and Spain) government 10 year bond yields – May 2010 update

I continue to monitor the 10 year government bond yields of three countries (Australia, United Kingdom and the United States) to try and understand when interest rates on savings and mortgages may start to rise with my datasets shown in today’s chart. In addition with all the excitement that is occurring with the PIGS I have decided to also dedicate a monthly chart to ‘Club Med’ (Portugal, Italy, Greece and Spain) also.

The PIGS or should that be the UPIGS

PIGS are an acronym for Portugal, Italy, Greece and Spain. Unlike the BRICS the PIGS have high government debt levels and high government deficits when compared to their GDP’s. Let me take a moment to explain debt and deficit because given that the UK is currently letting governments get away with saying ‘we will halve the deficit’ without really being challenged I don’t think most people understand the difference.

Are we back to blowing asset bubbles already?

Last week saw Alan Greenspan interviewed as part of the Financial Crisis Inquiry Commission. The Times reported that during this interview “Mr Greenspan denied his policies encouraged the type of risky lending that spurred the financial crisis. The long-time Fed Chairman - whose reputation has been deeply undermined by the crisis - denied low interest rates and loose regulation had encouraged lenders and borrowers to take ever greater risks."

Buying Gilts, Property, International Equities and UK Equities

As an employee of a company I have the option to contribute to a pension scheme. I have made the choice as part of my retirement investing strategy to contribute to the pension scheme as the company matches my contributions up to a limit, plus as I salary sacrifice into the pension, they also generously contribute the 12.8% employers national insurance that they would have otherwise paid to HMRC. I will complete a blog on pensions hopefully in the near future.

This is new money that enters every month and is currently the equivalent of about 0.5% of my total retirement investing assets. Another months worth of contribution has just been made. This is currently automated to occur each month and will be invested as follows:

- 4% to Index Linked Gilts. This adds up to be a very small contribution but I want to just keep nibbling a little.

- 60% to UK Commercial Property. A big contribution is made here as my desired low charge portfolio requires 10% asset allocation and my current low charge portfolio is only at 8.1%.

- 21% to International Equities. My desired low charge portfolio currently requires 13.3% asset allocation and my current low charge portfolio is only at 13.1%. This is the only input to International Equities that I am currently exploiting.

- 15% to UK Equities. This is one that requires a little explaining. My desired UK Equities is 18.6% and my current UK Equities is 18.6% so I am where I need to be. Where I am underweight heavily is Emerging Markets Equities by 2.3% and my total Equities exposure is also underweight by 2% at 54%. In an ideal world I would be buying Emerging Markets however my company based pension is inflexible (like a lot of company based schemes I would guess) and the lowest cost Emerging Markets Equity fund that I can buy has fees of 2%. Now I refuse to pay anyone 2% in fees and so the compromise I have made is to try and bolster my Equities allocation while acknowledging I am underweight Emerging Markets. Not ideal I know but fits with strategy to minimise fees.

As always DYOR.

Free Asset Allocator Website

I am running my entire retirement investing strategy including expected annual returns and projected retirement dates from an excel spreadsheet. Today though, I stumbled upon a nice little tool that looks to be written by Morningstar which provides a quick way of mixing up simple asset allocations to project expected returns. Additionally if you enter the portfolio value, annual investments, desired years to retirement or similar and your total financial goal it provides a probability of reaching the goal. Link here.

The website states “Asset Allocator helps you assess the likelihood of meeting your financial goals based on your current financial situation. If you find that you are not on track to meet your goals you can adjust certain criteria and immediately see the effect of your portfolio's growth potential.”

I entered my retirement investing strategy into the site which included a Portfolio Value which is currently at 40% of my Financial Goal. My Annual Investments were based on me investing around 60% of my gross annual earnings and I entered my time to retirement (Years) as 7 years. Asset Mix was entered as my Desired Low Charge Portfolio as I describe regularly on the site including here.

The Expected Return was provided as 8.99% with a 3 year standard deviation of 13.18. An Expected Return of 8.99% seems a little bullish for my tastes. Using my models I have a current expected annual return after inflation of 4.2%. The UK arithmetic mean of the retail prices index (RPI) since 1987 is 3.5%. Totally these would give an expected return of around 7.7% before inflation which is a variation of 1.29%.

What is also provided by the website is a Probability of [reaching my] Goal. In my case this was provided as 91%. I’ll take those odds...

As always DYOR.

Government Bond Yields are Rising

I monitor the government bond yields of three countries (Australia, United Kingdom and the United States) and they are all rising. My chart today shows the month end (except the last point which is the 08 January 2010) 10 year bond yields since 2007.

Why are they rising? Comparing Australia and the UK I think for different reasons.

As an outsider I think Australian bond yields are rising because the country is being run relatively prudently by the Reserve Bank of Australia and is raising interest rates as they are serious about keeping inflation at 2-3% over the cycle. The cash rate set by the RBA is now 3.75%. Savings account interest rates are also rising and without too much difficulty it is easy to find an instant access bank account paying 4.25%. So it makes sense for Bond yields to be rising to the 5.76% today.

I think United Kingdom bond (gilt) yields are rising for very different reasons:

Reason 1. I have shown previously that inflation is rising and it appears to me as though the Bank of England is going to hold interest rates at 0.5%, ignore their inflation target of 2% and start to let debts be inflated away which I discussed here. This seems to be reinforced by the Pension Fund of the Bank of England who have 88.2% of assets devoted to Index-linked gilts and other government guaranteed index-linked securities and 10.9% to fixed-interest gilts and other government guaranteed fixed-interest securities. This is up from 70.7% and 22.3% respectively in 2008. Buyers of government debt will however expect a real (after inflation) return on their investment and so if inflation rises then gilt yields must also rise.

Reason 2. The 2009 pre-budget report stated that UK government borrowing would be 12% of gross domestic product (GDP) in 2010/2011 and still a crazy 9.1% in 2011/2012. The Office for National Statistics reported on the 22 December that Q3 2009 GDP was £315.5 billion. Extrapolating this indicates that borrowing in 2010/2011 will be £150 billion and in 2011/2012 will still be £110 billion. To find buyers for all this debt (particularly if the Bank of England stops quantitative easing) you are going to have to attract them with increased yields.

Reason 3. The UK government are yet (and for that matter the Conservatives also) to explain how they are going to reduce the levels of borrowing. So far they have done nothing more than rearrange the deck chairs on the Titanic. If this continues the credit worthiness of the UK is going to be downgraded meaning yields will have to rise.

Reason 4. Those who already own government bonds and can see what’s happening will start to sell their holdings putting yet more gilts onto the market. This issue is real with the world’s biggest bond investor , Pimco, has started to sell off its holdings of gilts. More gilts coming to the market will mean gilt prices falling which will then mean rising gilt yields.
So what does this mean for my retirement investing strategy?

Firstly, if I owned gilts I’d be considering selling. As I’ve described previously I don’t own fixed interest gilts so I’m ok here. I do own index linked gilts but with inflation kicking off I’m comfortable with this.

Secondly, I’ll be watching house prices carefully. The interest rates on mortgages will have to rise as those wanting to borrow for a house will effectively be competing with the UK government for funds. I can’t see how house prices can continue to rise with increased borrowing costs and this could turn out to be the catalyst that brings on a reduction in house prices.

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