This is the third in my annual posts about my ISA (tax-free) portfolio. I’ve written before about how there is an outside (~10%) chance of my ISA portfolio reaching $100m, if I live for another 40+ years. Yet, as of my last post a year ago, the total FvL ISA pot was worth ‘only’ £355k (~$500k, back then!). So how am I feeling about multiplying my ISA 200x?
My $100m assessment was based on a scenario analysis over the next 40+ years. Making various assumptions (no withdrawals, regulation changes, etc), if I maintain contributions at £20k x2 per year, and achieve an ‘Above Average Risk’ level of return (>9% per year average, quite a high level of volatility), then in about 10% of predicted outcomes my total pot would reach $100m.
There are a couple of simple mental tricks that help me get my head around this growth. First of all, contributing £20k x 2 per year is quite a lot of money; over 30 years this is £1.2m. To make it easier to think about the growth of this annually-topped-up portfolio, let’s simplistically assume it isn’t annual top ups, but instead is a lump sum of £600k ($750k) in year 14.
Secondly, remember the rule of 70. Assuming I average returns of 7% then my portfolio doubles in 70/7=10 years. At an average return of 10% it takes about 7 years to double. So if I start with $0.5m, and averaged 10% return, after 35 years I have doubled 5 times, and I’m at $16m. But if I add (see previous paragraph) $750k in year 14, this $750k then doubles three times; this adds a further $6m. The two together get me to $22m in 35 years. Now assume I last a further 14 years , which takes me to the average life expectancy for UK males of my age, and I double my combined $22m pot 2 more times. $88m. Not quite $100m, but not far off.
Before you say that 10% per year is unrealistic, I am citing everything here in nominal ‘money of the day’ figures. This is before allowing for inflation. Historic returns for a diversified portfolio can easily achieve 5% per year on top of inflation. This works out as 7-8% per year in nominal figures. 10% is high, I will accept, but not absurdly so. If you have significant fees then you can forget it, but if you hold low-cost passive trackers this is not that unusual.
In the meantime, there I was a year ago with £355k. At today’s exchange rate this is barely $450k. How have I fared since then?
In my professional life I’m a big believer in having clear objectives. I want these objectives to be SMART – i.e. measurable, timely, relevant and so forth. I first practised what I preach on my investing side last year, and found the exercise helpful but flawed. So I’ve been pondering what goals to work towards this year.
Last year’s goals: no longer useful
My three goals last year (debt reduction, sticking to my target asset allocation, income) reflected the major change I made to my portfolio in January 2016. I had taken on significant debt, which I wanted to know I could control. I had shrunk and restructured my portfolio, and wanted to know it could generate a certain level of income. And asset allocation is probably the single most important aspect of managing my (any?) portfolio so that needed to be in there too.
The key to my investment philosophy is having a target asset allocation. Ideally, this allocation hardly changes – perhaps a slight shift towards bonds and away from equities every year as the Grim Reaper approaches, but aside from that nothing significant. In practice, it’s time for a quick update to the allocation.
The main trigger for my allocation update, to coin Harold Wilson’s phrase, is: events, dear boy, events. The portfolio I let a private bank manage for me was restructured last year, and left me with significantly more US exposure and less UK exposure than before. And almost every asset class gained a lot last year, measured in pounds, so being levered proved to be a significant boon. While I could rebalance, I want to consider whether my target allocation is still right.
My old allocation had UK equities and US equities equally weighted. This left, when you factored in my bonds allocation, the UK at a target weight of 35%, and the US only slightly higher at 40%. And my old allocation had bonds:equity at 29%:71% – an equity-friendly mix, to be sure, but with a very significant minority of bonds.
Looking at my old allocation from current perspectives, I want to make some changes.