The countdown has begun.
What do we want? Financial independence.
When do we want it? Now. (But, failing that, in 10 years or 3652 days).
Below is the how.
Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth.
– John C. Bogle
Allocate assets to three main sub-portfolios:
- Emergency Fund.
- The Freedom Fund. This will finance my life between 2025 and the year when I’m allowed to get my mitts on my pension.
- Pension, which I will be able to access in 20-odd years. Probably later.
Three months’ salary in cash.
Maintain overall 60% stock + 20% fixed income + 10% property + 10% gold allocation to accommodate both short-term and long-term requirements. Assets should be diversified across major asset classes including domestic equity, international equity, conventional bonds of short to intermediate term, and index linked bonds.
Divided between a SIPP of my choice and the Employer’s Scheme.
Funds and accounts.
Use low cost funds and ETFs – index trackers preferably – which do not overlap and provide maximum diversification across asset classes. Try to assume only market risk as far as possible. Try to shelter tax-inefficient investments in tax-advantaged accounts to reduce tax drag.
The target Freedom Fund portfolio allocation is set out below.
|Asset class||Vehicle||Asset allocation|
|Property||Funds or ETFs||10%|
Invest SIPP in low cost tracker funds or ETFs. Equity % allocation will be (120 – [my age]).
Automate future contributions wherever possible.
No market timing.
Rebalance annually using Larry Swedroe’s 5/25 rule. Asset classes with a target allocation of 20% or more: rebalance when it moves by 5% versus the entire portfolio. Asset classes with a target allocation below 20%: rebalance when they drift by 25% in proportion to their target allocation.
Exact sub-allocations between ISA / trading accounts are not as important as maintaining the overall asset allocation – no need to make things complex in order to meet sub-allocation targets.