Phew! What a tiring year.
I’m writing this during a brief lull.
I think I’ve come to the conclusion that I’m really bad at being semi-retired. Oh well, time to scrap this site I suppose!
Or maybe not.
As you may remember, I’ve been stuck in to a long-term project and it’s taken up most of my non-freelancing time for the last year. I’ve managed to squeeze in a couple of nerdy Coursera courses too, but it’s been mainly programming and electronics around here for quite some time.
Of course, that’s not the same as having a full-time job, even if I have been working harder for myself than I ever could for somebody else.
The product I’ve been working on is nearing the production stage now and my business partner and I will be shooting a demo video this week. I’ll post a link to the product site once we’ve edited the video and then you’ll all be able to see how I’ve been productively spending/wasting my time during 2017.
Perhaps it will even make a little money 🙂
But, for now, let’s get back to the point.
For quite some time, I’ve been meaning to write a follow-up to How I save for retirement with a lumpy income which focusses more on my strategy as a private investor. This is a really important piece in the ‘keeping everything on my own terms’ puzzle.
The thing is, since the electronics project started to wind down a bit, I’ve been bouncing around yet another micro-business idea related to investing and I’d really like to know what you think.
So, I thought that I’d try and kill 2 birds with one stone…
Investing for freedom
Here’s the rub: if you want to control your own time now (by becoming self-employed), its likely that you’re also (for better or worse!) taking responsibility for how to keep the income flowing in retirement.
Things like auto-enrolment are not going to save you if you never have a job.
Also, the state pension is a nice idea, but with the pensionable age rising at a rate of knots, you’d be a crazy fool to be in my generation and not have some private provision in place.
The solution? Save hard and learn to invest.
As I’ve described in the past, I got really interested in investing when I discovered the Financial Independence, Retire Early (FIRE) community. Although I decided against eating beans and achieving a 75% savings rate for a few years to climb the mountain quickly, my wife and I are now working towards financial independence at a leisurely pace and I’m the one who has the responsibility of making sure we stay on track.
To achieve this, there is a task I perform on the 1st of every month – my monthly financial review.
However, today I’m going to focus on what happens to the surplus cash to make sure that one day we can stop working for money completely.
It’s all about the allocation
When I started investing, I knew nothing.
I thought an ISA was just a type of savings account from the Nationwide, pensions were inscrutable and financial advisers only had my best interests at heart. I was quickly schooled by Jim Collins, Monevator and Mr Money Mustache.
I became a private investor. I chose Vanguard index funds and cheap platforms. I decided to keep all of our portfolio accessible (in investment ISAs, rather than SIPPs) so that we could be free to make big choices in life.
Next, I discovered the volatility smoothing, free lunch getting world of asset allocation investing.
Now, it’s extremely easy to get sucked in to over-analysing exactly what makes a good asset allocation. When I got started, I spent a few months bouncing between different philosophies. In the end, I reached an intellectual stalemate.
I was definitely convinced by all of the arguments for passive investing in general:
- Markets in publicly-traded securities are (to a great extent) efficient
- I have no special knowledge
- I have neither the skill nor the inclination to try to get more knowledge to allow me to ‘beat the market’
- As a group, even professional fund managers do not outperform the market anyway
However, I was torn between two different approaches:
- The Lars Kroijer strategy: hold a single world equity tracker and then adjust the risk using bonds/cash
- The Permanent Portfolio (as recommended by Harry Browne): Hold 25% each of own country equities, own country long government bonds (gilts in the case of the UK), gold bullion and cash
Each of these approaches has a pretty good sales pitch (and I don’t want to get in to that debate here), but suffice it to say that the asset allocation I ended up with reflects my attempt to get the best of both strategies. [If you want to get sucked in to some over-analysis, check out PortfolioCharts!]
Drum roll please…
Our asset allocation is as follows:
- 80% Vanguard LifeStrategy 100% Equities (a very rough proxy for world equities)
- 10% Vanguard UK Long Gilt Index Fund
- 10% Gold Bullion (mostly held via BullionVault)
Although I’ve set some rebalancing trigger points (5% either side of each of the target allocations), in practice, our portfolio is small and so far I’ve only had to rebalance it with new contributions.
Sounds simple in principle. Let’s delve in to what it all means in practice.
1st of the month
Aside from a few legacy bits and pieces we have lying around, everything except the gold is held inside low-cost investment ISA wrappers. In addition to sticking to the target asset allocation above, I also try to keep the ownership of our assets divided as close to equally between my wife and me.
During a monthly financial review I complete the following tasks:
- Build an up-to-date balance sheet which includes all of our bank accounts, investments, credit cards and other liabilities (such as accrued tax liability)
- Work out how much cash is on the balance sheet
- Find out the current per-unit mid-market prices for each of the 3 investment portfolio constituents
- Calculate approximate depreciation of our fixed assets. For us this just includes cars. It probably seems over the top for a personal bookkeeping exercise but it is important. We buy a new car every 5 years or so (in cash) and so if I want to keep an accurate eye on our real costs, those large cash flows need to be spread out across the lifetime of the assets.
- Transfer our monthly spending figure for the last month from MoneyDashboard to a custom ‘FI Tracker’ tab in my review spreadsheet. I keep a 12 month trailing average and use that to
- decide how much cash to keep hold of and;
- analyse if our spending trends are changing (as this would require intervention)
- work out ‘how’ (as a percentage) financially independent we are assuming a 4% safe withdrawal rate
- Get the latest monthly RPI multiplier which allows me to assess our spending trends vs inflation and also (over many years) measure the real performance of the investment portfolio
Next, I have to perform the operations required to (as far as is practicable) bring our balance sheet back to the way it ‘should’ look, i.e. with big enough cash reserves and everything besides cash invested in the 80:10:10 ratio I described above.
This can be quite laborious.
Achieving some balance
For instance, let’s imagine that our portfolio looks something like this (before adding this month’s money):
- Our cash reserves contain £41,000. Expenditure for the previous 12 months was £37,000 so we’ll be keeping that amount of cash in reserve, as per the plan.
- The portfolio is worth £50,000
- I own 56% of our total assets, my wife owns 44%
- Price movements since the last contribution have left the portfolio composition as follows:
- Equities: £41,233 (82.466%)
- Gilts: £4, 821 (9.642%)
- Gold: £3, 946 (7.892%)
I want to get the spare £4k of cash into the portfolio whilst rebalancing the portfolio’s asset composition and evening out who owns what.
So here’s the maths:
New portfolio balance = £50,000 + £4,000 = £54,000.
New target asset composition:
- Equities: Target = 0.8 x £54,000 = £43,200
- Gilts: Target = 0.1 x £54,000 = £5,400
- Gilts: Target = 0.1 x £54,000 = £5,400
The required investment operations are therefore:
- Transfer £2546 of cash into ISA wrappers (split appropriately between Mr and Mrs)
- Buy £1967 worth of Vanguard LifeStrategy 100 in ISA wrappers
- Buy £579 worth of Vanguard UK Long Gilts Index in ISA wrappers
- Transfer £1454 of cash into BullionVault accounts (split appropriately between Mr and Mrs)
- Buy £1454 worth of gold bullion at BullionVault
The calculations for ‘who gets what’ (Mr vs Mrs) vary on a monthly basis due to the fact we have an unholy mixture of joint accounts, sole accounts and my limited company to complicate matters. Suffice it to say that it is an iterative process and can take a few guesses to get right 😉
Now, although the concepts here are pretty straightforward if you can do basic arithmetic, it turns out that performing a financial review where there is new money to invest (and then actually executing all of the trades) takes quite a long time.
In addition to the number of individual operations involved, the task is made more laborious due to the fact that many of the operations involve more than one step and the steps are separated in time by several days. For example, if I want to buy gold, I have to transfer money to BullionVault on day 1 and then log in to our BullionVault accounts on day 2 in order to execute the trades.
In addition to my very involved spreadsheet, I always end up with little tick lists to make sure I execute all of the individual steps correctly. I still get it wrong sometimes!
The crazy thing is, none of this is complicated – all the steps are completely rules-based.
I’ve been thinking about this a lot recently. And it led me to an idea…
Finally! The micro-business
You might have noticed that I’m something of an entrepreneurial zealot.
The world contains lots of problems. Some of them are problems which people will pay to solve. These problems are actually opportunities to
- Make the world less shit
- Earn some money
I have a feeling that my monthly review/rebalance headache might be one of those problems.
I’m pretty sure that if I could give somebody (that could be trusted, obviously!) some small amount of money every month to make the operations I perform during a monthly financial review just happen, like clockwork, according to my rules, then it would be a no-brainer.
Even taking a bite out of this problem would make things better. Maybe having a slick MoneyDashboard equivalent which kept track of the my portfolio’s value without me having to log in to brokers. Perhaps replacing the spreadsheets with a nice web app which allowed me to view the data in more intuitive ways. I don’t know exactly what the product would be, but one thing I am sure of is…
I might enjoy building it!
This is a really compelling engineering problem for me because it would scratch my own itch. I’ve tried to work hard at things I don’t care about in the past and can confirm that its a really tough slog (this is one of the reasons I really struggle with having a job and working on other people’s priorities!)
But an interesting problem that I’m solving for myself? That sounds like my kind of project.
The thing is, I could really do with your help.
Do you want it?
In summary: I’m interested in building a service (probably with a web interface) which solves some amount of my monthly financial review/portfolio rebalancing headache by automating as much of the process as is practical.
The thing is, if I sink the effort to solve this problem just for myself, then it’s probably going to take about 4 gazillion years for me to break even in terms of time spent.
On the other hand, if I can find a few hundred people who would also benefit from the solution (and would be willing to pay a very modest subscription fee), the proposition might start to become, shall we say, ‘entrepreneurially interesting’.
So, if this idea sounds compelling to you, I’d love to hear from you. You can either leave a comment below or email me with your thoughts.
Here are some of the things I’d love to find out:
- Do you have the same problem?
- What is the smallest version of the solution you ‘d find useful?
- Are you swamped by portfolio-related spreadsheets when all you want is a slick web app which pulls all of your data together?
- Would you ever trust a rebalancing robot? Would you trust a company with account passwords? Where would you draw the line?
- What would it take to make you trust a small company to get this right?
- What is your version of this problem and how much would you pay for a solution?
- Are you interested in collaborating on a project like this? Perhaps you’re a web developer. Maybe you have an audience who you think might be interested.
- Am I nuts for even entertaining this idea? Should I just admit defeat, stick to an off-the-shelf automatic asset allocation such as Vanguard LifeStrategy 60 and go and find the next electronics idea?
If a reasonable number of people are genuinely interested in this, I’d be glad to do some Skype chats or maybe even webinars to get to the bottom of what the UK personal finance community would collectively find useful.
Until next time.
Don’t be shy – let me have it with both barrels in the comments!