Personal Investment Policy

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In the same way a Statement of Wishes (SoW) is meant as a direction to executors of an estate (ie direction but not cast in stone), I rather have the same view for my Personal Investment Policy (PIP).

There are simply too many variables so I have general aims in mind that over time will be altered or further solidified. The ultimate aim is a document akin to a SoW that a third party could follow to administer the investments and deliver to the needs of myself and her Ladyship if/when we are unable to administer the investments ourselves.

Breakdown in appendices is there so all key information and thought is in one document

The aim is this document is reviewed at least annually, but maintained as a living working document

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Contents

    1. General Goals
    2. General Philosophy
    3. Funding Blocks & Streams
    4. Individual Philosophies
    5. Asset Allocation
    6. Rebalancing
    • Appendix A – General Calculations
      1. Required Expenses
      2. Exceptional Spend
      3. Total Funds Calculated
      4. Care Costs
    • Appendix B – General Notes
      1. Rebalancing
      2. Investment Types
      3. Specific Investment Vehicles 
    1.  
    • Appendix C – Change Log
    • Appendix D – Work to Do

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1 – General Goals

      1. A clear enough guide that can allow a third party to administer the estate to our wishes
      2. To lay down a clear structure of overall funding needs
      3. To separate out funding needs on specific items
      4. To make provision for Long Term Care
      5. To lay down a general asset allocation with the primary aim of a stable income and distributed risks
      6. To err on the side of caution in estimates by being pessimistic on returns and optimistic on expenditure

2 – General Philosophy

During Life

      • Make the assumption of life to the age of 85
      • Have a stronger preference to long term passive rather than active investments
      • Avoid higher cost actively managed arrangements – whatever is claimed, they can never deliver long term
      • Separate Total investments into streams (as detailed below)
      • Apply re-balancing periodically if appropriate taking into account the balance of costs vs gain in re-balancing
      • Aim to evolve the portfolio and running into simple structures so a 3rd party can run it (to cover for death or going do-la… Her Ladyship has no idea about investing !)
      • Aim for significantly greater funds held in ISA after the age of 75 to make IHT issues simpler (an initial assumption and may change with taxation laws)

Pre & Post Death (primarily for 3rd party administrator)

      • Ultimately consider ISA withdrawal and transfer to joint account on a terminal diagnosis to minimise IHT issues with survivor cash-flow and immediate need taking priority over long term total return. This should not be at all costs but providing adequate long term funding is in place the priority is  ease of personal fund access and not maximal value.
      • Ultimate post death taxation when both of us are gone is a secondary consideration to maximising personal fund access and use during life.
      • The intention is the majority of estate shall be distributed to charities, so if possible and of benefit prior to death configure assets for optimum tax liability to maximise charitable distribution. Minimising tax liability for personal bequests is not a primary consideration (Countries need tax and we are not adverse to the greater good)

Taxation Considerations

      • Minimise Personal Taxes
        • Utilise allowances (stated to emphasis the sums involved – currently Jan 2021):
          • Personal allowance = £12,500
          • Dividend Allowance = £2,000
          • Interest Allowance =  £1,000
          • Capital Gains Allowance = £12,300
      • Total allowances for us both allow a tax free income of over £55K (Jan 21). The aim will be to arrange finances to maximise tax free income. This may take some years to arrange in a balanced way.
      • If the full LTA has been used up in SIPP then a Drawdown event or direct withdrawal will incur a tax of 25% (into taxable Drawdown) or 55% (direct withdrawal). This is OK if appropriate subject to the long term aim of ease of fund access with maximal value not a priority.

3 – Funding Blocks and Streams

I have determined that our future income needs can essentially be blocked up in both time-frames and relative need and the requirements summated to allow blocking and different long terms strategies to be applied.

The Funds can be broken into 4 Blocks:

      • Block 1 – taking us to the point of personal care
        • Stream 1 – Mortgage costs (pay off or fund to Oct 2026 completion)
        • Stream 2 – Expected net living costs to age 67 (state Pension age)
        • Stream 3 – Expected net living costs from 68 to 75
        • Stream 4 – Expected net living costs from 76 to 85
      • Block 2 – Funds to cover Aviation Hobby to 2032
      • Block 3 – Funds to cover home support (from age 70)  and  long term care (from age 80)
      • Block 4 – to set up over the next 1-2 years: funds for long term exceptional items

 

4 – Individual Philosophies

Block 1

      • Aim for more lower cost general funds with a strong geographic and sector spread
      • Use a balance of Bonds, Fixed Interest instruments and a level of cash to ensure cash-flow needs are hedged and met
      • A small proportion of the fund (max 10%) can be targeted to higher risk investments

Block 2

      • Aim is to ensure funds are available to pay for the ‘hobby’. It is not a vital element that they garner a great investment return
      • Target Investments with low costs and take a low return over adding risk
      • Can use some Fixed Interest instruments (such as Crowd Funding vehicles) balancing breadth and risk –  max 20%
      • General Bonds to be avoided, but can consider broad lower risk higher yield bond funds (max 25%)
      • Liquidity is a key consideration and illiquid or reduced liquidity investments should be avoided

Block 3

      • Consider fees and costs as a key parameter – aim for low costs and fees over greater risk and possible subsequent return
      • Target Longer term solid growth and lower cost vehicles
      • Aim for re-investment and compounding
      • Can use some higher risk investment to leverage over the long term – max 20%
      • Consider market cycles to manage risks of correction – a lower but steady growth is more important

Block 4 (when established)

      • Liquidity and funds availability of at least 25% in a maximum of 6 weeks should be a prime consideration
      • Fees are not as importance as liquidity and access
      • Some risk can be taken on a maximum of 25% of the fund
      • At least 35% of the fund should be low risk (to allow for an unforeseen even to be paid for and time to re-charge the account if needed later on)

 

5 – Asset Allocation

This area is to develop and initially these allocations will be the longer term plan. Currently the investments are very centric in one area  (for a number of reasons that work for me) but over the next 1-2 years this will be unwound and monies allocated to the different streams

Short Term (next 24-36 months)

Equities
       Direct (shares)         80%        +/- 5%
       Trackers                   10%         +/- 5%
       General ETFs           10%         +/- 5%
Bonds                              10%         +/- 5%
Cash/Liquid                      5%         +/- 2%

A larger proportion in ‘Direct Shares’ is held  and individual opportunities invested in. It is here that the higher risk will be bounded.

Mid to Long Term

Equities
      Direct (shares)          15%         +5%/- 2%
      Trackers                     20%         +5%/- 2%
      General ETFs             30%         +10%/- 5%
Bonds                               30%         +2%/- 5%
Cash/Liquid                       5%         +3%/- 2%

 

6 – Rebalancing

Rebalancing should be done at sensible periods (not less than 6 months and not more than 2 years)  taking into account:

      • Market Conditions – gotta run with profits if there is a roll going
      • No absolutes – re-balance to an exact target % is not an aim if it makes more sense to maintain a difference
      • Consider market cycles and sector cycles
      • Consider the transaction costs of rebalancing
      • Consider the appropriateness of rebalance by reviewing the general market, momentums and changing investment landscape

The aim will be to rebalance either by natural changing of funds (ie selling down one to buy another as part of normal investment practice), or because there is an imperative to change the risk profile. The transaction costs matter more than the act of rebalancing if there is no immediate need to do so: – costs compound with a significant performance effect

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Appendix A –  General Calculations (as of : Jan 2021)

Required Expenses

      • Stream 1 – Mortgage: a fund of £55k (jan 21) sufficient to pay the mortgage and/or pay off entirely
      •  Stream 2 – Funding for expected living –  calculated as the net funds needed for expected outgoings (Excluding Mortgage & Aviation) after including guaranteed income. (This includes inflation, growth of spend and adjustments and is ‘actual cash’)
        • Expected  to the end of 2022 (age 67) is £256K
      •  Stream 3 – Expected from age 67 to age 75 is £102K Actual)
        • Using an average of 3.5% return a fund at the start of £73,000
      •  Stream 4 – Expected from age 76 to age 85 is £77K Actual)
        • Using an average of 3.5% return a fund at the start of £40,000
      • Stream 5 – Aviation – I have the aspiration to complete my licence and either buy or build a plane. Expected Operation and flight to be up to the age of 68 (so 10/11 years)
        • My estimate of costs is £178k (but with £40K credit back at the end from sale of plane)
      • Stream 6 – Long Term Care:
        • Fund estimates (detailed separately) are £550,000

Exceptional Spend

A level of exceptional spend over time will happen. This would include (for example), a new home heating boiler, major roof or house works, change of cars every few years, etc

Funding and items for the next 2 years (to 2023) are already identified and planned. Over the next 1-2 years create a separate fund allocation to cover long term exceptional items.

 

Total Funds Calculated

The total streams cumulatively come to £1,152,000 (£1.2m with around £50K for Exceptional items). In addition, there would be a credit expected of +£40K ending Aviation and +£565K for our house sale (taking very conservative future price estimates). These essentially give a large headroom of future needs.

Block 1 – £424K
Block 2 – £178K
Block 3 – £550K
Block 4 – £50k

I could confidently and realistically say that a minimum total fund of £1m today will cover all our expected needs and costs with little risk of running out of funds

 

Care Costs – General Narrative and breakdown

It is very probable that we will need some level of long term care and with no family of our own we need to plan to pay for it. There are 3 possible elements to consider and most probably phases:

        1. Some level of in-house local support for some years: 5 years with an increase in need
        2. A care home (albeit good one): 5 years for 1, 8 years for the other
        3. Medical Care based on long term illness, infirmity or mental deterioration: 3 years, but likely the state would pay at least half the cost due to medical need

Cost estimates (in today’s money 2021)

        1. £2500 rising 20% pa – from age 70:
        2. £65,000 each rising 5% pa
        3. Shared medical care will cost less than (2) so to give margin, just use (2)

Assuming a fund return of 3.5% pa the funds required to generate the expected need (detailed in personal Outgoing planner) are:

        1. £54,000 to cover in-house help costs – need calculated as £84K
        2. £0.5m to cover long term care costs (for both of us) – need calculated as £1.1m

 

Appendix B –  General Notes

Rebalancing

There are three schools of thought:

        1. Don’t rebalance – some evidence to point to rebalancing having limited impact of a diversified portfolio and indeed leading to a slightly higher risk of reduced outcome (presumably via transaction costs being compounded in_
        2. Threshold Rebalancing – on the boundaries of +/- look to rebalance
        3. Periodic Rebalance – a regular timeframe

Investment Types

        • Direct (shares) – Individual shares (or funds) held and traded.
        • Trackers – aiming for a spread of Trackers including UK, US and World. May also consider a small amount in specific sector funds
        • General ETF’s – Aim for a spread of UK, US, Emerging Market and World funds. Do not consider European ETF’s except to a very specific purpose or strategy (for example renewable infrastructure)
        • Bonds – Aim for more Global diversified bond funds: primarily seeing income. Can consider direct company or country bonds but for specify reason. In general they should be avoided
        • Cash/Liquid
          • Some cash to be held for ‘quick wins’ and market reaction
          • To include Crowd Funding Platforms but limit the size of funds outside of a tax free wrapper to just use up the annual taxable interest allowance
          • Consider market cycles to increase cash available when downswings are more likely

Specific Investment Vehicles

Notes on types to be added as I go along – really so all the thoughts and reasoning are in one place

Crowd Funding

A fairly mixed area with a wide view it is high risk. I have used Zopa, Funding Circle and Ratesetter very successfully for some years up to 2019 when I largely liquidated to fund some home things. I did have a difficult time getting some funds out of FC due to liquidity issues caused by market reaction.

The lesson is that as a bear/correction starts to look more likely, get out as both liquidity go down and defaults go up, but in a solid growing market with reducing unemployment they are a great vehicle.

Note that although they can be held in ISA, a more normal way is outside and this generates a taxable interest – so a good way to soak up the annual allowance

Strategy

        • Hold sufficient to ‘soak up’ the annual interest tax allowance

 

Specific Investment Vehicles I have used in the past

Hold a spread in at least 3 CF class platforms

          • Zopa – personal loans effectively, some risk now with a protection fund. OK liquidity in growth market
          • Ratesetter – no one has ever lost a penny – solid protection fund and a money-market type arrangement  of a floating 30-day investment. Excellent liquidity & Security
          • Funding Circle – Business Oriented but I feel has gone off the boil and moved more to funding Cash-Flow requests rather than ‘investment in asset’ arrangements – poor liquidity
          • House Crowd – not used yet, but look solid and with excellent local knowledge – very Illiquid ! – To be used for ‘fire & forget’ monies

 

Appendix C – Change Log

V1.0 – 25 Jan 2021   – Initial Draft

 

 

Appendix D – Work to do

    • The balance of Bonds, Equities and other types of investments needs some further thought and quantifying for all blocks of funds
    • Asset Allocation – need more thoughts on the spread and practicalities