Finally – My financial plan

got-a-planIt’s taken me a while  – almost a year to the day since I ordered and first read ‘Money Master the Game’ from Amazon.

I’ve met a whole bunch of IFAs, read a whole load of books, followed tons of blogs (see further reading).

I’ve been really hesitant to pull the pin and actually take action on my plan – because it seemed like a big, irreversible decision.

But, this morning, I’ve sent off the paperwork to Alliance Trust to start making payments into my pension (SIPP) account.

The long and short of it is that I decided to invest in 100% equities via a global equities index fund.  Now, this will seem pretty crazy to you, no doubt – but here’s my rationale ..

I’m assuming that you’re already convinced about index funds compared to active investing.  If so, the question is ‘which index fund to choose?’  Tim Hale’s book ‘Smarter Investing’ lays down some useful guidelines:

  • Tracking error should be below 2%
  • Full replication, not synthetic or derivative based
  • Total Expense Ratio below  0.4% for global equities
  • Size of the fund should be in excess of £100M
  • Fund should have been around longer than 5 years
  • Fund turnover should be below 5% per annum

In each of these cases, the Fidelity Index World scores well:

  • Tracking error is around 2% (it varies)
  • Physical / full replication
  • Total Expense Ratio is 0.12%
  • Size of the fund is £875M
  • Has been running for over 5 years
  • Fund turnover is almost zero

I plumped for a global index fund to benefit from diversification across all of the developed world’s stock markets.  There’s a line of argument that says that this exposes me to currency risk – which is true – but it seems to me there’s even greater risk of limiting myself to a UK tracker – just 10% of the world’s stocks.

So why 100% equities?  Why no bonds in there at all? It’s because I own a (mortgage free) property which generates a rental income – and as an asset class, that’s a lot like bonds.

So, the property and its rental income fall directly in my security bucket and I’ve squirrelled away some of that income in a deposit account so I can use the cash in an emergency.

I’m also contributing to a S&S ISA – buying the same index fund.  Both the ISA and the pension are using the Alliance Trust platform – because it’s cheap and it (mostly) works online OK.

I met a lot of IFAs, but none convinced me they could add significant value to this process.  Sure, they could help me design a more diversified portfolio, they could help me back-test their recommendations against my plan and see which one would win, but they have exactly the same knowledge about the future as I do – none.

There’s no way of telling if my plan will out-perform theirs in the future – or vice versa.  We can make assumptions based on past performance, but that didn’t help most of us see the whole 2007/2008 fandango on the horizon.

Any IFA will have more knowledge and experience than me – but their crystal ball is as useless as  mine.  None of them said my plan was crazy – just maybe a little unrefined.

On the upside, it’s a plan I understand, one I can stick to and manage myself.  It’s not a perfect plan – but it’s mine. And, more importantly, as of today, it’s the best kind of plan – one that I’ve put in to action.

Because my investments are 100% equities, I need to be fairly certain that I’ve got a long enough timeline to smooth out the volatility that will undoubtedly happen.  I’m not planning on touching the ISA or SIPP for at least 10 years – hopefully more like 20.

But, if this plan all goes wonky, here’s my plan B.

Leave the pension and ISA alone for as long as humanly possible and use my cash buffer as slowly as possible.

It’s not rocket science – but the biggest threat to the future value of my pension pot isn’t making poor investment choices or the volatility of the stock market – it’s having to sell shares when they’re low because I need the cash.

Hence the importance of having a cash buffer.  Hell, if push comes to shove, I’ll work in my local supermarket to eek out the cash a bit longer – hopefully long enough for equities to bounce back and for my pension pot to regain some value.

Clearly I can’t know what the future will bring, can’t know how pension rules will change, can’t tell what the state of my health will be, how long I’ll live, what will happen to property, bonds, equities, etc etc etc.

But doing nothing would also be a mistake.

Making basic choices now which afford me some flexibility in the future is about as good a it gets.  So, when I get to 70, 80 or 90 years old I’ll be able to say “I did what I could do” rather than “If only I had ..”.