Like asking a chef what he has for his dinner or asking a mechanic what car she drives – maybe people feel it’s a little direct to ask investment advisers where they invest their money.
If you feel that way, don’t. I’m amazed we do not get asked this question more. I know a few colleagues feel the same way.
Therefore, in the spirit of transparency – I’ve had a go at answering it.
Now, before I get into the weeds – there are some over-arching principles that I like to keep in mind in managing my finances:
Admin is the enemy
I want to deal with as few financial institutions as possible. Keeping things neat and tidy not only saves hassle, but it also frees up time to spend on the day job. Increasing your earnings is going to move the needle way more than running around switching bank accounts to chase the best rate of interest, particularly when you are young.
For similar reasons, I will never own a buy to let. Never is a big five letter word, but I have an appalling track record with tradespeople and I’m not much cop at fixing leaky taps. Stocks only require me to push the button marked buy and go and work on my putting.
My main edge is behavioural
Can I claim to be the best stock picker in the world? No. But I can have a right good go at being the best behaved. Rather than constantly chopping and changing my portfolio – I prefer a set and forget approach. With maybe thirty (!) working years ahead of me, and, hopefully, another few decades in retirement I could be talking about a fifty-year investment horizon, all told. Why would I bet against hundreds of years of market history that tell me that if I can sit on my hands for that sort of timeframe, I will get an extraordinary outcome? Resisting the urge to tinker is easier said than done of course, particularly when you sit in front of a market terminal all day, but I have a little bit of a hack for that too…
Do not treat your home as an investment
I know a lot of people do, and that’s fine, but I personally view buying a home as consumption. I’m not experienced or clever enough to develop a property and flip it, nor identify an undervalued area and try to generate some outperformance by buying there. I buy based on what is right for me at the time, and to have somewhere nice to live. That’s it. If the price goes up, great – but if it has then it’s likely that the price of the next place I move to will have gone up as well, so it all comes out in the wash.
Control the controllables
Namely, my tax position. I have no issue at all paying tax, but I do try to make use of the various allowances that the government afford me to mitigate my tax position. As a working 34-year old income tax is the primary tax I need to be concerned with – and I look to reduce my liability primarily through pension contributions. More on that later.
OK – so bearing all this in mind. What does everything look like in practice?
I think of my assets (excluding the equity in my home) as being split across four sleeves – cash, stocks and shares ISA, pension and “specials”.
Cash
Cash is a mix of current account, savings account and short-term fixed income investments. The latter is a relatively new addition as of last autumn when bond yields blew out. I felt like I should be doing something in that environment and moving some of my cash savings into a short-term gilt felt pretty uncontroversial. The goal within the cash pot is not to generate mega returns, but to have a safe place to hold money that may be needed in the next twelve months.
When it comes to my savings account, I like a bit of friction. Having the best log-in and being able to easily move that savings cash around is not what I’m looking for. For you see dear reader, I am a spender – and making the process of accessing my savings a little bit more difficult, means that I at least stand a chance of keeping this pot for only the most necessary of expenses.
Stocks & Shares ISA and Pension
My stocks and shares ISA, and my pension, are fully invested in a well-diversified basket of global equities. Nothing fancy, buy and hold. I do not have the ISA money earmarked for anything at the minute, and I definitely know that I cannot touch my pension for a couple of decades. As a consequence, I want to be fully invested in the best companies in the world to maximise growth within these tax-advantaged accounts, rather than include bonds. I’m not a robot though, and I’m sure that when bear markets arrive, I will be worried – but I do not look at my pension value anywhere near as often as I do my ISA, and I think most others are the same. Therefore, I do think behaviourally that if there is a place to have an aggressive asset allocation it’s in your pension.
That’s not the only reason I prioritise my pension as a savings vehicle. Not only is the income tax relief on contributions really attractive but, given my propensity to buy new golf clubs, the inability to get my grubby mitts on this money for twenty years or so has its benefits too.
“Specials”
That just leaves us with “specials”. This is a catch all term I use for anything that does not fit into any of the above boxes – supporting friends who have started business, EIS investments etc. If these are zeroes, it would sting, but I’m not going to get carried out as a consequence. This pot amounts to no more than 10% of my investable assets (ex my home), and it also acts as a behavioural release valve.
Remember how I mentioned that one of the occupational hazards of this job is the compulsion to always feel the need to “do something”? When I’m tempted to try to market time, day trade individual stocks or do anything outside of my core competency I do it here. I recognise that I will sometimes be compelled to do these things, and if I can scratch that itch while leaving the sensibly invested main pots alone, then that’s a net positive in my opinion.
You know all this of course, but none of the above constitutes investment, or tax advice. Although there are some principles which you can hopefully apply to your own finances, everyone has subtly different requirements and no two plans are ever exactly the same. If you are in any doubt and would like some help – please do contact a financial or investment adviser. We would love to hear from you.
Have a great week.
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