I am frequently asked about my investment strategy or what my goals or plans are. On the surface, these questions appear to be asking the same thing. However, I think there are subtle differences between a strategy, goal and plan.
Google’s definition of strategy is;
“a plan of action designed to achieve a long-term or overall aim.”
Google’s definition of goal is;
“the object of a person’s ambition or effort; an aim or desired result.”
Google’s definition of plan is;
“a detailed proposal for doing or achieving something.”
It is interesting that the definition of strategy includes the word plan. My internal understanding is that one must have a plan to act in accordance with a strategy to achieve a goal.
In reverse order, my goal is to achieve financial freedom by the time I am fifty years old. My definition of financial freedom is not having to work to have money to survive and enjoy life.
My strategy is to invest in Income Generating Assets (IGAs) that provide passive income.
My plan is to improve my financial education and to continue to invest at least thirty-percent of my net income into investments, with a preferred level of fifty-percent (but I love to travel which eats into this!)
There are some key rules in my investment strategy. If I don’t understand an investment, I stay clear. There is a name for investing without understanding; gambling. With any gamble you may get lucky and win but eventually you will lose. In any transaction or investment there is always a winner and loser. If you don’t understand the investment, you are almost certainly the loser. For the most part, there also needs to be a stable track record of income from the investment. I expect a clear timetable of when I will receive the income and a decent expectation as to the level of that income. I also need clarity on how I can release the cash from the investment if needed. I am happy to tie my funds up, but I want to know how I can get at the cash if necessary. I expect the level of income to increase in line with the expected difficulty in releasing the cash invested. There is also the basic requirement that the company is on stable financial footing with good cash flow, in an sector that is also stable with potential for growth.
I’m not a fan of Independent Financial Advisors. I acknowledge there are many reputable and hard-working advisors out there guided by a strong moral compass who act in the best interests of their clients. However, my view is that if I was to engage the services of an IFA, I would want to understand our discussions. That would involve educating myself financially. So, if I’m going to educate myself financially I may as well just give myself the advice. We are in an age where information is readily available. I’ve said before and will repeat it now; there is no excuse for ignorance.
As part of my strategy to accumulate IGAs, my plan calls on me to improve my financial education. I monitor my investments closely, but recently I have started to wonder if I am looking at my investments in enough detail or through the correct lens.
I classify investments into four broad types; cash, bonds, equities and property. At present I focus my investments into bonds, equities and property. With interest rates so low there is little point in keeping much cash, as cash. I treat my bonds as cash. The bonds are easily converted back to cash within two weeks. Although they do not earn interest, they do offer the opportunity to win prizes on a monthly basis. In case you have not figured it out yet, I am talking about Premium Bonds. As interest rates rise, I will probably rethink this approach as it is sensible to maintain at least some liquidity. I believe that a person should, where possible, have enough liquid cash to cover basic living expenses for a minimum period of six months. I feel nervous when I do not have this safety net. Moving forward I will be increasing my liquidity temporarily, and I will explain why shortly.
The bulk of my investments are based in property and equities (shares) as these are great IGAs if you do the research and act accordingly. I do not invest in BTL directly, and you can click here for a previous article explaining why. Instead, I use crowdfunding platforms to invest in a range of properties. This reduces the amount of risk, hassle and expenses. It is a great example of Passive Income from an IGA.
Part of my strategy is to accumulate shares that pay a regular dividend. Capital growth is also important, but is largely secondary to income. Although I like to seek value where I can, I do not try to time the market. As the old saying goes, "it’s not timing the market but time in the market that counts." Countless articles have been published that demonstrate how the stock market outperforms standard savings accounts over the long-term. Some Google-fu will explore this in greater depth.
Although I have bought and sold shares in an attempt to “time the market” this has only ever been in special circumstances. The first is when I spotted an opportunity to buy shares in an emerging airline that was increasing its profile in the U.K. I did some research and was happy with what I discovered. I had a fifty-percent return on that trade. The second instance was just after the Brexit vote when the stock market dropped off the side of a cliff. It was always going to snap back to normality and many people made a lot of money off the back of the Brexit vote. All those people claiming the economy would tank in the event of a successful “leave” vote; I’m betting that many of them were hoovering up shares the morning after at a drastically reduced price as investors who lacked the experience and/or knowledge dropped their shares like hot potatoes. Like I said before, in any investment there is a winner and a loser.
I mentioned before that I am going to increase the proportion of my investments in cash or bonds in the coming months. I am expecting that on March 29th, 2019, the stock market will drop again as people panic sell their shares. I want to make sure I have enough cash to capitalise on these panic-sellers. Many people are worried about next year, but I’m actually excited. If the stock market does not crash, then I will have some spare cash to invest elsewhere. If the market does crash, it will be a buyers’ market and there will be bargains galore.
Today I have completed an analysis of how productive my investments are and, just because, I have put together a few pie charts.
A high level overview of how I invest.
A high level overview of how those assets generate income.
It's the first time for some months that I have looked at how my IGAs are generating income proportionally to how much is invested in that class. Equities seem to be punching above their weight where as property and bonds are underperforming. However, shares are volatile and the value of the investment fluctuates by the minute during trading hours. Property is generally more stable. Should a professional investor or fund manager look at this profile I imagine they would class it as "high-risk". However, I've spoken before about how I view investing in equities as low-risk. Refer to the articles in the Money section of Now We Live for more information.
Overview of which sectors I have invested in.
How each sector is providing income.
I almost did not include the airline in this, as I have only recently started purchasing shares in that company. I am investing in a budget airline that is a competitor to Ryanair, who can't seem to stop shooting themselves in the foot. I suspect that this competitor may start to steal some of Ryanair's market share. I'm not going overboard with this investment, but rather testing the water. It's a bit of a speculative investment but as long as it's not taking up a significant proportion of my resources I am happy to take the occasional punt if I think there is a reasonable chance of return.
I believe that immersing oneself in a subject allows for subconscious processing of information. This is part of what creates a "gut-feeling" or "intuition". My gut-feeling is that this investment will pay off. We will see over time.
In the fall out of the banking crash a decade ago, banking shares were undervalued in my opinion. I invested heavily in banking shares from 2011-2016 but then switched my focus to other areas, including property. It is interesting that banking seems to be punching above its weight for income, with the energy sector appearing to provide a stable return on the amount invested.
I appreciate this analysis is rather basic, but it has been an interesting exercise for me to look at my investments in this way.
How I have invested in different properties by region.
Overview of income from those regions.
Wales and the South Coast seem to be performing well. Yorkshire and Derbyshire are not generating enough income and I may look to scale back my investment in Derbyshire. However, I am reluctant to give up the Yorkshire investment. The property I am investing in is an apartment complex in an area that I believe will undergo significant development and regeneration in the coming months and years. I believe the value of the investment will increase and I will see significant capital growth. Now, this may seem antithetical to my overall strategy; passive income from IGAs, however much like with the airline stock I have a gut-feeling this will be a good investment over time.
I hope you have found this blog interesting. It was a rewarding experience for me writing it, as it forced me to think about my investments in a different way. It reminds me of the quote from Seneca, the Roman philosopher; "while we teach, we learn."
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