Getting Started…

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Although I didn’t have one myself, I think everyone should have a clear investment aim and strategy before putting money into the stock market. It doesn’t have to be complicated. If you are just starting out and have many years to invest then perhaps you just put your investing allowance each month into a world tracker. Instantly diversified and you’ll beat most investors over the long term, including professional fund managers.

Investment aim

The aim of my investment strategy is to build a buy-and-hold retirement income portfolio that delivers a natural yield of over 4% from a diverse group of globally focussed ETFs / Investment Trusts and where the dividend grows at above inflation.

This is to supplement my NHS final salary pension which I can access from January 2023. I’m not sure if I will retire then. If I do, then I have 31 months of work remaining. Yikes!

My Investment strategy

Beyond the typical ‘invest in a globally diversified low-cost passive tracker’, I’m looking for a little bit more fun and interest in my investing journey. The chances are slim that I will beat the ‘market average’. I understand that I probably won’t even attain the market average over time. However, I will try to match the market and therefore capital appreciation is important to me, but I also want that natural high dividend yield that I won’t get with simply going for a global low-cost tracker.

Here are my thoughts on my current strategy:

1. Asset Allocation

I intend to be 100% in equities. My DB pension will provide a large ‘bond-like’ element of my future pension income. I haven’t done the final calculations yet (future post perhaps) but I expect my pension will be in the region of 70-80% of my income in retirement. It’s index-linked and safe.

As I mentioned above, my approach to investing is not all about maximising return. I want to have some fun with this element of my retirement income and so I will invest in actively managed as well as passive investments. Not too much fun; I’m unlikely to invest in single stocks. I’m not a big risk-taker. For example, my investment into the Crypto bull run in 2017 was £200. I think I managed to bag a £30 profit before I snatched at the profit and ended my investing career in Crypto. Too volatile for my liking.

2. Diversification

My weapon of choice will be ‘collectives’ – pooled investments with a large degree of global diversification and investing across thousands of companies. In particular, this will be ETFs for the passive element, and Investment Trusts (ITs) for the active management part of my portfolio. I haven’t decided what the sensible split between these two should be, but it’s early days in terms of developing my income portfolio. I’ll probably aim to invest mostly in ITs this year due to the large drop in individual stock dividend payments. This is in the hope that IT’s will continue to pay a decent level of dividends this year due to their unique dividend reserves function.

I will initially aim for the following mix:

  • Global 35%
  • UK 20%
  • Emerging Markets 20%
  • Small-Cap 15%
  • Infrastructure/Renewables/REITs 10%

This will leave me underweight in terms of global exposure and particularly overweight in UK (higher dividends), Emerging Markets (for growth and income), and Small-cap (growth). Infrastructure, Renewables and REITS are all new areas for me as an investor. Apart from the odd individual stock investment (that usually turned out badly), I have only typically invested in low-cost passive trackers and not specifically covering these sectors (Although my emerging markets SEDY ETF contains 13% in real estate). I’m looking forward to digging into these areas in a bit more detail.

I am also fully signed up to the value-is-best school of thought and my portfolio will have a natural leaning towards value stocks with lower p/e ratios as it focuses on dividend income. Value as a factor has had a rough time during the last decade as growth stocks like Google, Microsoft, and Amazon have dominated. If you believe that history repeats and that the financial principle of ‘reversion-to-the-mean’ typically applies over a long enough timeframe, then value will at some point make a comeback. I’m patient.

I am particularly keen on investing in emerging markets. I might even go ‘country-specific’ with some of my investments (e.g. India, Russia, Vietnam) although that does entail a higher level of risk; not least because of the risk of political intervention within the financial markets in these countries. Corporate debt is also potentially a major risk in emerging markets, particularly as we enter a recession.

Emerging markets can provide surprisingly high dividend yields with companies at attractive valuations as this Morningstar article outlines. With the high potential for both growth and income, this is one sector that will form a key part of my portfolio. I do believe they will go through a very difficult period over the next few years and will fall harder than the developed world markets as recession bites at the end of Q2.

3. Cost

It is broadly acknowledged that costs are one of the key factors why most active funds underperform the market average. Costs can significantly impact on your investment returns. ETFs are mainly simple trackers of an index and therefore don’t require the level of research and fund management that active funds do. As a result, they are typically low cost. It is the Investment Trust element of my portfolio that I will need to watch in terms of costs.

Investment Trust costs vary widely. I won’t be incurring broker fees as I’m using Trading 212 and so the only costs will be ‘internal’ to the fund and I won’t actually see them being taken. There is always an ‘ongoing charge’ for each IT but some also include performance fees which can significantly bump up costs.

Sometimes the ongoing charge plus performance fee increases the total cost to well over 2%. Ouch. I’m looking to keep my overall IT costs to around 1% and lower on my overall portfolio when I include ETFs. Some IT costs will be higher, some lower. The excerpt below is from the excellent Association of Investment Companies website and shows the relatively modest charges for the Henderson Smaller Companies Trust (ticker: HSL)

Henderson Smaller Companies costs
From AIC Website: Henderson Smaller Companies Costs

The ongoing charge of 0.42% is low and any additional performance fee will be capped up to a total fee of 0.9%. For Trusts that incorporate performance fees, this is lower than most that I have seen.

Tactical

My income portfolio on Trading 212 has just started and is small. I’m not going to be overly concerned about asset mix during this initial first year. I will be adding a regular amount to the portfolio each month and I will mainly be looking to invest in well-performing and diversified fund choices at a reasonable value. It’s worth noting though, that despite the recent market drop, much of the stock market is still very pricey, historically speaking. Let’s hope that the 2020s are not like the naughties when growth was very low.

I feel obliged to repeat that none of this is financial advice, always DYOR

Best,

Bollinger

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