Our Investment Strategy

The definition of financial independence is broadly having enough sufficient personal wealth to live, without really having to work to provide for basic necessities. For people that are financially independent, their assets generate income that is higher than their expenses.

To achieve the milestone of having enough assets that generate annual living expenses, we need an investment strategy to guide us there (and a sprinkling of luck wouldn’t go amiss either).

Our investment strategy at the moment isn’t fully developed. We have done what we can whilst still living in America and so we’ll update and enhance our strategy over the coming few years on our return to the UK.

Investing in the Stock Market

This post, like our investment strategy and like our current spending habits can be summed up in word: simple. We do not like over complication in our lives. Our main strategy at the moment is investing in the stock market, holding our money in low-fee exchange traded funds (ETFs).

The ETFs we have are index trackers; they track a quoted index (with the index being a number that reflects the value of all of the shares in that market). An index tracker means that you have a reference point to both tell you what the fund is trying to replicate and ensure that it is replicating it accurately.

The ETFs we hold

 

We diversify by having a UK ETF (iShares ETF) which tracks the FTSE100 index, a MSCI World Index ETF and the Vanguard Emerging Markets ETF which tracks the MSCI Emerging Markets index.

For our current set-up, the only fees attached to our funds are £12.50 every time we make a trade. All of our ETFs pay us dividends; one fund automatically reinvests these whilst the other two pay out. We’re currently not reinvesting the dividends in those two funds at the moment; not simply to avoid the £12.50 fee but because we’re not actively putting our savings in these funds at the moment. We’re currently piling all our current savings into our easy access saver for a house deposit and associated moving costs and UK relocation costs. The ETFs are ticking over in the background but it doesn’t make sense to us to pay £12.50 for say, £50 of dividends every quarter. We’ll save them up or if the market tanks, we’ll funnel some of our easy access savings into the ETFs and throw the dividends in then too. When we return from the UK, it is likely we may not keep our current set up but for now, it works.

We follow the J. L. Collins wealth accumulation phase idea, which is investment in 100% stocks, assuming that will give us the best return over the long-run so long as we don’t sell when the market tanks and continue to use dollar (pound) cost averaging etc. This strategy will change once we move beyond the wealth accumulation phase.

Why ETF’s?

My (very) limited knowledge of  the stock market in my late teens, early to mid 20s was of holding shares in individual stocks. You might hold shares in your favourite companies for example or shares in companies that you think/predict will do well over the long term.

Here’s our little rundown of why we will not hold stocks in individual companies and why we are DIY’ing our investments:

  • Most actively managed funds can’t beat the indices, so why pay a fund manager’s fee when you can put it in an ETF and let it sit there
  • It’s very hard to pick market out-performers over the long term.
  • Individual stock picking is messy and hard work. You have to research, purchase, track and sell each stock in your portfolio.
  • There’s too much exposure with individual stocks. Think BP’s Deepwater Horizon oil spill in 2010, Tesco’s accounting fraud in 2014, Volkswagen’s emissions scandal exposed in 2015; all incidents that saw the company’s stocks plunge. Too much can go wrong with one individual company. Spread your risk.

I still wouldn’t call myself an expert but I do understand more about investing now, thanks to Mr. LLC. I now realise that trying to grow wealth and get consistent returns over the very long term from individual stocks is difficult and fraught with more stress than you need in life. Also, listen to your elders. Warren Buffett, the most successful investor of all time, had this to say on investment strategy in 2013,

The goal of the non-professional should not be to pick winners – neither he nor his “helpers” can do that – but should rather be to own a cross-section of businesses that in aggregate are bound to do well.”  (Warren Buffett, Berkshire Hathaway Letters, 2013).

If the world’s best investor does not stock pick, then that’s good enough reason for us not to either.

 

**this is just our approach to investing, it’s not financial advice. What works for us, might not work for you.**

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