What’s in a financial independence portfolio is probably less important than the amount you save and invest in it. All the same, I do have a portfolio plan.
Disclaimer: this is not financial advice. Financial advice is personal to your circumstances and tells you “you should do this!”. This is just for discussion/ entertainment/ journalism. Copy if you like, but it’s your money and your risk. Don’t blindly trust some random on the internet – even if it’s me.
Liquid assets and illiquid assets
There are four types of UK tax-advantaged investment schemes that I’ve considered in my financial independence campaign:
- Stocks and shares Individual Savings Account (ISA)
- Pensions
- Enterprise Investment Scheme/ Seed Enterprise Investment Scheme
- Capital gains tax exemption on UK gold and silver bullion
Of these, the only the stocks and shares ISA contains liquid assets – that is, I can sell what’s in the ISA whenever I want, pretty much without effort. Well, I guess the gold and silver is too, but you need specialist buyers or sellers for that kind of thing, so it’s a lot less liquid.
Stocks and Shares ISA
The workhorse of any UK financial independence portfolio is the stocks and shares ISA. You can pay up to £20,000 per year across a combination of stocks and shares ISA, cash ISA and Innovative Finance ISA (usually peer-to-peer lending). Anything that grows in it, gives you dividends or pays interest from it is legally shielded from the tax man. It’s something that our US financial independence campaigners can only dream of!
You can buy bonds, shares, ETFs, REITs and investment trusts within a stocks and shares ISA. They’re great, love them.
If you want a stocks and shares ISA, you need to be aware that there’s a difference between the platform (which holds your cash and investments) and fund providers (which operate the units of the fund that you’re buying). For example, Vanguard is both a platform and a fund provider, so you can buy Vanguard funds in a lot of other platforms. This is important because you get charged fees for the services of both platform providers and fund providers. As a rough rule of thumb, you want your total fees to be less than 1%, especially if you’re doing this yourself or using a robo-investor to do your investments for you. Expect to pay a bit more if you want to use a financial advisor to manage your money.
Pensions
I’m not going into too much detail here. If you’re trying to weigh up whether to invest through a pension or an ISA, I wrote a post about it that has a lot more detail. For this post, it’s enough to say that your deposits are given tax relief, but I don’t count this as liquid because you can’t draw on pension money until you hit a retirement age. In the UK, minimum retirement age is 55 but rises to 57 in the year 2028. By the time I get there, it might be 60. The important point is that it’s generally not possible to withdraw that money if you need it for some awesome opportunity, so for my purposes it’s illiquid.
Technically, you can draw your pension early – but the tax man wants 55% of it. Probably not a good move.
Enterprise Investment Scheme (EIS) / Seed Enterprise Investment Scheme
I’ve got a bit of money in start-ups, most of which I invested before I realised that financial independence was possible and desirable. A lot of the start-up companies I invest in are private companies whose shares (private equity) is covered under either EIS or SEIS.
EIS means that you get a 30% income tax rebate from buying shares, and any capital gains you make from the shares is tax free. SEIS is a little more generous, at 50% income tax rebate plus the capital gains tax exemption. There’s a bit more to it, but that’s the general tax advantage.
Private equities are pretty illiquid. You need to be a certified investor to buy them, they can’t just be marketed to anyone, mostly because the companies are at high risk of going bust. I don’t rely on these for my financial independence campaign and just treat the money as spent.
Capital gains tax exemption on UK gold and silver bullion
UK gold and silver coins that have a legal tender value are capital gains tax exempt. Gold sovereigns count as having a face value of £1, as they’re the original £1 coin (so I understand). This makes UK gold quite interesting as a top-up investment, as you can hold onto it for decades and sell it whenever you want without any tax considerations. Note that gold in the UK is VAT free, but silver isn’t. If you’re interested in learning more, I wrote a post about buying gold for diversification and another about my brief side hustle in silver trading.
Gold and silver are fairly illiquid. If you’ve got a lot of them, you’re going to want a specialist buyer – like a gold and silver coin dealer. They’re not that common. You would probably try to sell small amounts privately, but this takes time and there’s no guarantee of a sale.
Yeah, yeah – so what’s in the ISA?
Like I said, the stocks and shares ISA is the workhorse of any UK financial independence portfolio. Mine is no exception!
I’ve set mine up so that it’s a liquid asset and has a bit of diversification between asset classes in case disaster strikes and I need to sell up. I also have gold and some crypto, so I spread my risks pretty widely and I’ve set my ISA up to compensate for that.
Here’s what’s in the ISA – I’ll explain why afterwards:
| Name | Exchange | Ticker symbol | % holding |
|---|---|---|---|
| Vanguard ESG Global All Cap fund | LSE | V3AM | 70% |
| Warehouse REIT | AIM | WHR | 5% |
| Urban Logistics REIT | AIM | SHED | 5% |
| Secure Income REIT | AIM | SIR | 4% |
| Regional REIT | LSE | RGL | 4% |
| iShares Developed Markets Property ETF | LSE | IWDP | 4% |
| Nintendo | DE | NTO | 4% |
| National Grid | LSE | NG | 4% |
That gives me around 78% of the ISA in companies, via the ETF and the two picked shares. Around 22% (outside of the Vanguard ETF) is in property through the REIT ETF and the various REITS.
How I picked the core ETF
My financial independence portfolio is heavily weighted on a single, global ETF – the Vanguard ESG Global All Cap fund, V3AM. I did previously have two separate Amundi ETFs that did the same job, but this one was preferred because it has over 5,000 companies in it. As my core holding, I wanted it to be split across geographies and distributed across as many shares as I could get away with (I believe in diversification).
ESG means “environmental, social and governance”. In theory, this fund avoids investing in fossil fuels, controversial weapons and companies with unethical governance policies. I’ve heard rumours that the ESG rating isn’t much more than “greenwashing”, so I can’t confirm that it’s accurate, but I didn’t want to invest in oil companies when I don’t see oil being a growth industry over the next few decades.
If you’re interested, I wrote a guest post on Home in the Green, which explains why it pays to invest in ESG funds. They’re outperforming their non-ESG equivalents and encouraging good behaviour, so I’m keen.
Disadvantages of this fund include the low UK weighting (I think it’s about 4%) and the balance of geographies may not suit all investors. It works for me. It’s also quite high in fund provider fees at 0.24%, but I don’t think that’s world-ending. The non-ESG equivalent comes in at 0.22%. I’ll live.
REITs in my financial independence portfolio?
Real Estate Investment Trusts (REITs) aren’t too far removed from being huge, crowdfunded landlords. That’s… a horrendous oversimplification, by the way, but the gist of how they work is there. It’s good enough to explain the net result to me, at least, which is that I get rent payments.
I wrote a whole post on REITS if you’re interested.
They’re pretty much performing the function of a bond ETF in my financial independence portfolio, in that they’re a diversification from pure equities into another asset class that isn’t correlated the same way and which provides income. However, unlike bonds, I expect a real return from REITs that I wouldn’t get from bonds. I don’t plan to sell my REIT holdings, so the share price matter less to me than the yield from them. I’m averaging roughly 4-5%.
There’s a property ETF to give me exposure to the US and EU, but most of these are UK REITs. My core ETF holding is biased against the UK, so this property being in the UK shouldn’t be too much of an issue.
For the most part, I like logistics hubs as investments. That’s why I’ve weighted SHED and WHR quite heavily, even though they’re Alternative Investment Market (AIM) REITs. With Brexit pushing up warehouse demand and COVID driving us to online shopping, I don’t see demand for good warehouse space dropping in the next decade.
The individual shares
I have two picked shares in the pot.
Nintendo
I originally had a Van Eck video games ETF. I like games, they’re not going away and the market is never saturated. The same consumers will buy new games year after year. However, the fund got quite a lot of media and YouTube coverage, so it ended up with a P/E ratio that was way overvalued. I jumped ship when it was 45.
I still likely video games, so I searched in the top 10 holdings of the fund for companies that a) weren’t a huge part of my ETFs (at the time, an Amundi SRI fund) and b) had a P/E ratio of less than 25 and a price to book value of less than 4. That narrowed it down to Electronic Arts and Nintendo. Electronic Arts has since been dropped as it became overvalued.
Nintendo has a strong brand, good profitability, and differentiates itself from its competitors in the console market. Where all other games companies go for dark and gritty games or greater realism, Nintendo goes for whimsical and unique ways to interact with the device. The Nintendo Wii was ahead of its time with the motion sensors, and the Switch is a unique console design. Coupled with being a mature company with solid fundamentals and even paying a small dividend, I’m happy to invest in this for the long term.
Of course, unlike other video games companies, Nintendo isn’t a growth stock – but that doesn’t bother me.
National Grid
National Grid pretty much has a state sponsored monopoly on UK infrastructure. Electricity is always increasing in demand and even green energy companies need the grid. Until we all get solar-panelled roofing and can live off the grid, this company barely needs to achieve anything to have great results. It has a good P/E ratio of around 18, a price to book value of around 1.7 and a dividend yield of over 5%. Yes, please. Into the pie it goes!
My ISA platform
As I said in my 2021 FIRE campaign plan, I have switched this year from Wealthsimple as a robo-investing platform to Trading 212. This is because I like controlling my investments and making the minor decisions, and I’ve now learned enough to be confident. There’s nothing wrong with Wealthsimple though, I enjoyed reasonable performance from my portfolio in the two years with them.
I may do a Trading 212 review at a later date, because there are good and bad features of the platform. However, the thing that’s awesome and should be incorporated into every platform ever is the pies feature.
The pies feature allows you to effectively design your own financial independence portfolio by percentage allocation. That’s how I know my allocations from the table earlier. There’s a nice button for you to rebalance the portfolio every so often and when you pay into the pie it asks if you want your money to be split by your percentage allocation or used to redistribute when you pay in. It’s absolutely brilliant.
If you want to try out Trading 212, use this referral link for us to both get a free share worth up to £100.
I did have a waiting time to get offered an ISA with Trading 212, which is one of the negatives of the platform, but so far I’ve been pleasantly surprised.
What, no gold?
I don’t hold my gold in an ISA, so it’s a bit beyond the scope of this post. It’s not at all to do with having to work out all the percentages, so nyah!
OK, fine. Loosely, I have the ISA as my main vehicle. That’s what I pay into every month, without fail. Every so often I buy a bit of gold or crypto. As long as the value of the gold doesn’t exceed 25% of the value of the ISA and the crypto doesn’t exceed 50%, I can use my side hustle cash or savings from a budget to pay into those. If they do exceed these figures (such as in the recent crypto bull market, where my little pot skyrocketed in value temporarily, or during a market crash) then all liquid asset money goes into the ISA.
I’m sure I should be more technical, but it works well enough for me. The benefit of enjoying my investment journey far outweighs the risk of underperforming investments.
