I am grateful for LivingaFI for prompting me to write down my own Investment Policy Statement (IPS). My IPS is below. I’ll set out the thinking behind it in more detail in separate blog posts (starting here).
- Diversify. In as many ways as possible.
- Minimise fees and taxes. Tax-efficiency regarding the investment owner and account, not regarding the actual holding.
- Have a strong preference for liquidity, and low fees. I.e. bias against structured notes, P/E funds, etc.
- Presume that passive investments are usually better than active investments.
- Monitor progress against a target allocation; incrementally invest to rebalance underweight components; buying is much better than selling.
- Strive minimum complexity, notwithstanding the imperative to diversify.
- Diversified against geographies bearing in mind both estimated long term time allocation and the country’s share of global public markets.
- Diversified against equities, fixed income, and cash. Bias towards equities and against cash.
- Diversified across providers, both of accounts and of ETFs/funds.
Funds and accounts
- Exploit Mrs FvL’s taxable allowances.
- Maximise use of tax-free ISAs for both Mr FvL and Mrs FvL.
- Moderate use of pensions for both Mr FvL and Mrs FvL, such that ideally one of us brushes the maximum asset cap and the other misses it by a bit.
- Tax-free accounts to be the preferred accounts for holding both bonds and high-yield investments; taxable accounts are preferred for holding equities and low-yielding investments.
- Partial use of offshore insurance bonds to provide flexibility, at the expense of fees
- Financial advisers used only for complex planning or access to particular financial products, never for fund/stock selection.
- Rebalance when there is surplus cash and circumstances are propitious. A drift from target allocation is too high if it is 2% of total funds or 20% of the ideal allocation, whichever is smaller (e.g. for USA fixed income: target 5%, acceptable range is +/-20% i.e. 4.0-6.0%; for USA equities: target 20%, range is +/- 2% i.e. 18-22%).
- In principle, work to reduce the number of underlying holdings. Actual holdings should be split across multiple owners and accounts.
- Jan 22. Updated to remove preference for income and rising income. And to highlight the importance of avoiding complexity. And to get Mrs FvL’s name right!
- Dec 21. Updated to reflect hike in leverage used to buy the Coastal Folly.
- Mar 21. Since reducing my complexity, I now have fewer holdings that distribute cash in EUR. I’ve tilted the debt target by moving 1% from EUR to USD.
- June 20. Slight reduction in UK equities exposure (23% to 20%), moved into Intl equities (19% to 20%), Intl Fixed Income (3% to 4%) and US Equities (45% to 46%).
- July 19. Tiny reduction in leverage (from 13% to 12%), with a matching drop in UK equities exposure (from 24% to 23%).
- April 19. Reducing the fixed income and leverage target slightly; Equity tweaked down to 93% but FI down from 22 to 20, and leverage down from -17 to -13.
- July 2018. Sale of two large assets has resulted in a change. UK equities down from 33% to 25%. Cash/(loan) target down from -25% to -17%; EUR are currently cheapest to borrow (1.2%) and USD is becoming expensive (>3%) so my loan is now spread accordingly. International equities up to 20%, Oz equities up to 5%. UK fixed income down to 9% and US fixed income down to 8%.
- October 2017. Net margin down by 10%, all by a USD change; I am now targeting my net loan to be only 25% of my portfolio (down from 35%). Equities and fixed income long positions reduced slightly (fixed income down more).
- January 2017. U.K. Equity down weighted, U.K. Loan reduced, USA equity increased, USA loan reduced, USA and U.K. Fixed income reduced. Broadly this reduces home bias in line with the November accidental / involuntary shift that occurred when I rationalised my private banking portfolio. It also reflected reduced leverage due to significant equity gains in 2016, coupled with the fact that one of my margin loan accounts is GBP-only. More details here.
- July 2016. UK Fixed income downweighted, US loan target reduced; slight shift towards equity along with a slight reduction in leverage.
- January 2016. Major rethink, caused by the Dream Home purchase and the portfolio loan used to buy it. Shift towards lower risk, less UK-facing mix; UK downweighted (in case of Brexit), fixed income upweighted (for stability). Geographic mix moved to: UK 40/USA 35/Intl 20/Aus 5, Equity 100, Fixed Income 50, Cash -50.
- April 2015. USA upweighted, UK downweighted (in frustration at paucity of attractive investments in UK). Geographic split UK 55/USA 25/Intl 14/Aus 6. Asset split 80/15/5. Round numbers; fixed income jitters.
- Early 2014. Australia mildly upweighted (reasons forgotten). Geographic split UK 60/USA 20/Intl 14/Aus 6. Asset split 79/15/6. Fixed income jitters.
- Late 2012. Original allocation. Geographic split UK 60/US 20/Intl 15/Aus 5; asset split 77/19/4.
Any comments or suggestions very welcome.