What do I do with my own money?

As a follow up to my last blog post, I am sometimes asked what assets I hold, and my plans for the future.  So here goes.  2 months ago, I was 80% in equity markets and 20% in government bonds.  Now I am 90% in equity bond and 10% in government bonds.  I don’t own any property and don’t plan to unless it is for personal reasons, to buy just 1 family house.

As many people reading this know, stock prices fell about 1 month ago, and I took the opportunity to increase my holdings, by decreasing my holdings in government bonds, and buying falling stock prices at lower prices.  Therefore, my holdings are 90%-10%.  Around 30% of my assets are linked to the UK, 40%+ to international markets and 30% to emerging markets.

Some context here.  I am from the UK, the pound has fallen and FTSE has increased less than other markets recently and I am not near retirement.  If I was 10 years away from retirement, I would look to hold 30%-35% in government bonds, and decrease my holdings in emerging markets to 10%.

So what are the advantages of this strategy? It isn’t speculative, it is liquid so I can sell and buy easily, it is diversified and long-term.  It is a fact that markets outperform bonds and other assets in the long-term, but are more volatile.  In a sentence, they are more volatile, but produce more long-term.

When markets go back up, I will use some fresh cash to bring my holdings back to a 80:20 or 75:25 ratio, and then again rebalance when the next stock price sell-off happens (bond prices tend to rise when markets fall).

What’s my long-term goal?  To get to a stage where I can sustain myself with passive investments.  A good guide is the 4% rule.  It is safe to take $12,000  a year ($1,000 a month) out of a $300,000 portfolio to make sure inflation doesn’t erode the portfolio, $3,000 a month out of a $900,000 portfolio , $6,000 a month from a 1.8M portfolio and so on. Nobody knows what is around the corner, which is why people should be focused on diversifying their wealth and income as soon as possible.

Will interest rate raises affect your portfolio?

Interest rates are rising around the world.  Markets have increased dramatically since 2009, and a lot of people put that down to low interest rates and QE from central banks.  How true is this?

Before we go into that, we have to realize how undervalued the S&P and other major markets were in 2009.  The 00s were the first decade where on the last day of the year (December 31 2009) markets were below where they were on the first day (January 1, 2000) in real terms.  Even in the 1930s, a combination of deflation after the great depression and markets recovering after 1933-1934, meant that a patient investor had more in his or her account at the end of the decade, at least adjusted for the deflation.

Any measure of value shows how low markets were in 2009.  Takes the price to earnings ratio, which is one of the best measurements of how `fairly priced` markets are, given that it looks at the stock market versus the revenue of the firm.  The S&P price:earnings ratio went as low as 12, and was under 20 until 2015.  We are now at around 26. By historical standards that is high but nowhere close to where we were in 1999 before the stock market crash.

Ultimately, with inflation running at 2%-3% or more, interest rate rises to 1%-2% aren’t attractive enough to investors.  Importantly, for long-term patient investors, this is close to irrelevant.  As Warren Buffet once said, the Dow will probably go to 1M, so whether you buy at 26,000 and it goes down to 15,000, or it goes up next month, that is close to irrelevant.  Markets tend to rise over time, so a patient investor shouldn’t care about what happens in the meantime.