I’ve changed my portfolio allocations: here’s why.

Quick point: pensions are staying the same

I’m not deviating from the classic FIRE playbook on pensions. Long term goals, 10 yrs or more out, I’m still a big fan of index funds and that’s still the most appropriate vehicle for my pension investments.

At the time of writing I am 38 years young. A 30-year pension horizon can weather a lot of global stock market downturns and come out fine. The pensions aren’t getting messed with.

Why I’m changing

Now that I’m building two businesses, there are a couple of changes to my overall portfolio that will ring true:

  • If my businesses succeed, the shares in those will dwarf my other investments. Investing energy in these is my biggest potential upside.
  • My biggest risk is that I become cash flow poor before I can get a business to succeed.
  • I can side hustle for odd jobs, but those are going to be few and potentially far between.
  • Governments around the world are going through a “print money, tax more” strategy. I expect this to be true for the next 5 years.

So I’m going to want to take some kind of income while leaving funds invested to give me the best chance of success, but I also don’t want to sell anything.

What I started with

Ignore pensions. Here’s what I had:

  • Shares in index funds of my choosing = c.£60k
  • Physical gold = c.£12k
  • Bitcoin = c.£18k
  • Buffer cash that I’m treating as spendable to smooth out my self-employment income.

So realistically that’s not a lot.

And, of course, that was never meant to be enough. I was meant to grind for a few more years in a high-salary job.

It’s enough that I could coast for 30 years and have a reasonable chance of generating £12k-£20k a year outside of pensions.

Minor changes

I’ve decided to leave the physical gold alone. That has done surprisingly well given that I only paid for something like £5k of it. I like it as a long-term hedge and its purpose is to be the emergency fund of absolute last resort.

I’ve left the Bitcoin alone, too. It’s a bear market for Bitcoin and probably will be until back end of next year, so I think I want to take a chance and hold it for a while. That said, if I need to dip into savings, that’s probably the one I’ll take a hit on.

Biggest change

I’ve decided to re-brigade the £60k of equities into a dividend portfolio.

This is to give me some income *now* to top up my limited earnings. Not nearly enough to live on, but a contribution.

It’s no harder for me to reinvest the dividends that I don’t need to spend if I manage to bring in enough money to, but if I need cash then the dividends are a conceptually easy and comfortable additional income stream for me.

How I’ve done this

My Wealthify portfolio has been closed and shifted into my Lloyd’s Sharedealing so that I have less to manage.

I covered dividend investing previously in this post.

What I’ve gone for is the following allocation:

  • 20% allocation to L&G UK Quality Dividends Equal Weight ETF
  • 20% allocation to L&G Europe ex-UK Quality Dividends Equal Weight ETF
  • 20% allocation to National Grid plc
  • 15% allocation to Vinci SA
  • 12.5% allocation to E.ON SE
  • 12.5% allocation to Terna SpA

This should give a yield of around 4% after taxes, which covers the operating costs of my personal services company and means that I can ignore capital growth and market valuations.

Ideological biases

I wanted to reduce my overall exposure to the US. My pensions are very US-exposed, but I think that the concentration of index funds in US tech companies was leaving me at a larger volatility risk than most FIRE people acknowledge.

I covered the downsides of global index investing in this post.

I didn’t want to move away from indices entirely, so they’re still a big chunk here, but I’m looking at the way the world is changing and thinking that electricity and grid infrastructure is likely to be increasing in demand, and noted that most of the infrastructure companies tend to be semi-monopolistic behind a regulatory moat.

Electricity companies are a preference for me. The world is switching from fossil fuels to renewable electricity, I don’t see people abandoning cars in the next 20 years, and everything needs more and more electricity: so grid operators are now too important to be allowed to fail.

People talk about the poor service of water utilities but no one complains about grid infrastructure. Supply? Sure. But the boring wires, cables and substations? People are just happy to be connected.

How do you justify the individual company weighting?

The four companies here are infrastructure providers.

E.ON, Terna and National Grid between them operate power grids in the UK, North America, Italy and Germany. Vinci builds and operates energy, roads, and water infrastructure in various global locations.

If the lot, I’d say Vinci is the highest risk play.

These companies aren’t going to grow rapidly, but they’re essential to European infrastructure. They pay good dividends, they’re almost too big to fail, and I see that electricity is kind of an essential in the Western world.

The ETFs meanwhile have a heavy European (and global) banking and financial services exposure.

Even though I have a few big pots there and I’m infrastructure-tilted, I’m still diversified to a reasonable extent across jurisdictions and to a degree across industries.

Even so: in a traditional employed person’s portfolio this would be a huge concentration risk. 20% of equities on a single company? Ballsy!

However, in the context of my overall assets, I’m diversified across asset classes and even income sources. That’s entirely intentional. There’s risks here but they’re managed.

Principles you can take away

Diversified portfolios are perfect for consistent earners

If your main source of income is your job, sticking to index funds and maybe adding a rental property, some gold or some Bitcoin on the side is a very good play.

A salaried job comes with predictable income that should be enough to cover your expenses plus a surplus for investing. The employment is a predictable wealth generator. A simple, diversified portfolio makes the most sense to maximise the benefits of that predictability.

The weaknesses are the concentration risk, because you only have one employer (generally), and the limited upside potential. You’re never going to cash out from building a career in the way that you can from selling a business.

The model changes for self-employed people

A self-employed person has different considerations.

They can’t be sacked per se, and they can have multiple clients so have diversification of their income sources is easier to achieve. They can invest in efficiencies within their business to achieve an internal rate of return, which an employee can’t do because any efficiency benefit they generate goes to their employer.

There’s also, depending on the business, more upside potential.

The business owner’s weakness then is that they have unpredictable/ varying income. Their strength is that the business itself is a high upside investment with a degree of built-in diversification.

This means that doing things like drawing income from the investment portfolio makes sense if it frees up capacity to allow the business to be invested in.

It also means that concentration risk in a portfolio is (generally) reduced anyway because the investment portfolio isn’t the whole portfolio of assets.

There is more than one way to invest for FIRE

If you ever go on a FIRE forum, subReddit or community, you’ll see lots of people telling you that stock picking is just gambling, index fund and chill (etc).

This ignores the idea that you could manage risks outside of an equities portfolio.

In fact, in Your Money or Your Life, it was suggested to use US government bonds as the primary vehicle. Equities don’t even feature in the book, just the idea of putting your money into savings and living on less. The version I read even had an author’s introduction warning against relying too much on index tracker funds.

I’m not poo-pooing the classic index fund investment models at all, but you shouldn’t be prevented from looking at your specific situation and trying to work out if they’re the best option for you. In most cases, they probably will be; but not all.

My financial independence campaign continues!