My IPS, 4 of 5: Target allocations

This is the fourth of five posts laying out my Investment Policy Statement in detail. This post examines my target allocation.


In post two I already explained how my allocation splits my investment portfolio by geography (UK:US:Oz:Other) and by asset class (equity: fixed income: cash).

My geographic breakdown roughly follows the ‘matching principle’, under which I want my portfolio to mirror the countries I spend my life in. I live and work in the UK. I spend about two months of each year abroad on holidays, roughly one third in Oz, one third in the rest of the EU, and one third further afield (definitely including the USA). I can imagine spending more time in either the EU (France? Spain? Italy?) or in Oz.

I modify my geographic breakdown based on where the best stock markets for me are. This brings the USA up a lot. The USA not only accounts for about a third of global markets, but I trust its regulations more than most others’. Also it has well over half the world’s interesting tech stock capitalisation; I quite like tech stocks, and if they paid dividends i’d like them even more. One final factor is that I find the fixed income ETFs and high yield equities available in the USA far more interesting and varied than those I can find elsewhere. Until recently I could find a UK-tradeable Australian fixed income ETF at all, for instance. So the UK gets 55pc, the USA gets 25pc of my portfolio, Australia gets 6pc. Non-english speaking markets get ‘the rest’. I am definitely light on the European and Asian markets and should probably reduce my UK weight; 50pc weighting would be easy enough. But for now I have not done this.

I am pretty aggressive in my appetite for risk, and fortunate enough to be high enough net worth that I hope I could cope with quite a drop in net worth. So equities get a high weighting. Right now this is 80pc.

This leaves two obvious questions:
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My IPS, 3 of 5: Funds and accounts

Death and taxes are the only certainties, right? Not entirely. In the world of investment portfolios in the UK, neither death nor taxes are what they once seemed.

Mrs FIRE and I are both UK resident, UK domiciled fully compliant UK taxpayers. The rest of this post is probably only of interest to similarly UK-based people.

My gross income puts me in the top tax bracket (45pc), and if my earnings were all from salary I would pay an actual tax rate of about 45pc. In fact my actual tax rate paid in recent years is closer to 30pc, and Mrs FIRE even pays less than this. Paying 30pc tax is pretty reasonable to me, so you won’t hear me griping about how the government (that same government which still spends almost £100bn more than it raises, every year) should be cutting taxes. How come as a high earner I pay only 30pc tax?

I avail myself of four key tax structures:
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My IPS, 2 of 5: Asset Allocation

This post is the second in a series explaining in some depth my Investment Policy Statement (IPS). This IPS is my north star, my lodestone – what I can use to explain to myself, or Mrs FIRE, or a financial adviser, or you dear reader, how I am trying to organise my investments – so that panic, greed, forgetfulness or ignorance don’t influence my decisions for me. Part 1 explained my Philosophy.  The key word was diversification.

This blog post, Part 2, tackles Asset Allocation – a critical thing to decide for any portfolio. I allocate across ETF/fund providers.  In principle this means that if I want to hold an exposure to FTSE-100, then I’ll do it through both a Vanguard ETF (VUKE) and through an iShares one (ISF).  And maybe a DB one or an HSBC one or a SPDR one. My allocation rule here is not a firm one but is loosely that I don’t want my biggest holding (VUKE) to exceed more than 10% of my investment portfolio. My biggest exposures here are as follows:

Fund/ETF provider % of investment portfolio
iShares (owned by Blackrock)  15%
Vanguard  11%
Fidelity 4%
Other (Artemis, AlCentra, Blackrock, DB X-Tracker, GS, HSBC, Hermes, Investec, Jupiter, Kames, Majedie, M&G, Newton, Polar Capital, Schroder, Standard Life) 14%
Total funds/ETF holdings 46%

I also allocate across brokers.  Those VUKE shares are held in multiple places.  And so are my PRU shares.  And my NXT shares.  Why?  Obviously if something happens to NXT then that affects all my holdings in it.  But if there is some accidental or fraudulent co-mingling of nominee funds at broker 1, which contains some of my NXT portion, then I’m going to be affected.  So it’s better to spread the holdings across brokers (see figure).

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