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How to automatically invest and dollar cost average with a Ray Dalio or David Swenson asset allocation using Hargreaves Lansdown

chanman · Jul 9, 2018 · 2 Comments

We know we should save and invest but how should we invest? We’ve seen from a previous article that we should dollar cost average to even out our entry price. But what should we invest in?

I’m a big believer in following (scratch that, copying) the best. Who are the best asset managers over the long term? I’m going to talk about two: David Swensen, CIO of Yale University Endowment and Ray Dalio, co-CIO and founder of Bridgewater Associates, and look at the asset allocations that they use.

What is an asset allocation?

An asset allocation is how your asset classes within your portfolio are divided. An asset class is a type of asset, so one asset class could be stocks (equities), it could be bonds (fixed income), it could be property, gold or just straight cash. It could even be cryptocurrency :).

So for many people, their major asset class is property ie their house, which dominates their portfolio. That might be an asset allocation of 98% property, 2% cash (in the bank).

What is the point of a good asset allocation?

All investors are looking for returns and they’re all looking for the biggest returns they can get. However, the biggest possible returns come from being concentrated in a few investments. Think Bitcoin in 2017. You could have made a lot of money and you could have lost a lot of money.

The point of a good asset allocation is to reduce the bumpiness, the downsides that come with concentration, whilst still producing decent returns.

Stocks over the past 100 years have produced around 8% per year. However, this comes with a good deal of bumpiness. Within those 100 years, you’ve had several bull markets and several bear markets. How do you even out the bear markets and the bull markets? You diversify into other asset classes like bonds and property. You might not get the 8% returns that you might get over the long term had you invested solely into stocks, but you will get a more even ride.

David Swensen’s asset allocation

David Swensen has a phenomenal long-track record, averaging 13.9% per year in the 20 years to 2015. To put that into context, most managers don’t make to 10 years let alone 20 years. And even fewer of those make it to those sort of returns. Swenson is pretty much a unicorn.

I first heard about him from Ramit Sethi’s excellent personal finance book, I Will Teach You To Be Rich (comedy title I know, but it’s real deal, legit advice and I reviewed the book in a previous article here). In the book, Sethi outlines Swensen’s asset allocation.

David Swensen Asset Allocation
Screenshot of David Swenson’s Asset Allocation. Taken from NPR (https://www.npr.org/2015/10/17/436993646/three-investment-gurus-share-their-model-portfolios)

Ray Dalio’s All-Weather asset allocation

Ray Dalio also has a stellar long-term track record. He manages the biggest hedge fund in the world, valued at USD$120bn. He has a few strategies and one that is featured in Tony Robbins’ book Money is called the All-Weather strategy. It follows a so-called risk parity model and this is helpfully laid out in this article from Tony Robbins’ site. The objective of Dalio’s asset allocation is to produce a portfolio that does well in good times and bad times in the market.

Here’s a quote from the Robbins article:

First, Dalio says, we need 30% in stocks — for instance, the S&P 500 or other indexes, for further diversification in this basket.

Then, you need long-term government bonds. Dalio recommends 15% in immediate term (seven- to ten-year Treasuries) and 40% in long-term bonds (20- to 25-year Treasuries). This counters the volatility of the stocks.

Finally, Dalio rounded out the portfolio with 7.5% in gold and 7.5% in commodities. As he notes, “You need to have a piece of that portfolio that will do well with accelerated inflation, so you would want a percentage in gold and commodities. These have high volatility. Because there are environments where rapid inflation can hurt both stocks and bonds.”

Lastly, don’t forget to rebalance. Meaning, when one segment does well, you must sell a portion and reallocate back to the original allocation. This should be done at least annually, and – if done properly – it can actually increase the tax efficiency. For more information on rebalancing see our article on investment strategy.

Now you’re ready for whatever comes your way, be it the longest bull run in U.S. history… or a sudden crash.

asset allocation Ray Dalio

Differences between the two asset allocations

You’ll see from both asset allocations that they are quite different in make up. Dalio’s is heavier on bonds, with government bonds making up 55% of his allocation. Swensen’s asset allocation has a total of 30% in government bonds. Dalio’s also has gold (7.5%) whilst Swenson’s does not. Dalio has no property whilst Swensen does (REITS 15%).

Similarities between the two asset allocations

They are both well-diversified, and particularly, they aren’t too heavily weighted towards stocks/equities. A lot of the time, you might want to go for maximum growth, so you might put your whole allocation towards stocks/equities, and whilst this might achieve strong growth over the long-term (20 years), you will have some bumpiness and losses in the bear markets that are inevitable. The bonds will help even this out, although perhaps at the expense of maximal returns. Following Swenson’s asset allocation though might net you a 13% average annual return, which is pretty damn awesome.

Why dollar cost average?

We’ve seen from my earlier article that dollar cost averaging is a way to achieve the likelihood of a good entry price. Say that you had £10,000 to invest in one stock, say Rolls Royce. You could put that all into Rolls Royce now at 981p, or you could invest £1,000 into Rolls Royce at the same time each month for a total of 10 months. Your average entry price might be £10.58 or it might be £8.70, but at you won’t be kicking yourself if you entry price was £8.70 and not £9.81 as it would be if you pumped it all in today.

Why automatically invest?

If you’re not a great saver (I’m NOT a good saver), then automatically investing is a great idea. It means that you don’t have to rely on manually investing, and you don’t have to rely on your discipline and willpower to do so either. You set up a sweep from your paycheck on pay day, that takes money from your current account so that you don’t even see it. You don’t miss it. This then is wept into your investment account.

Why use Hargreaves Lansdown as your investment platform?

I’ve been using Hargreaves Lansdown for several years now. It’s a very user-friendly platform and one of the biggest for normal, retail investors like you and me. It also has access to a huge range of funds from different fund managers and has the ability to allow automatic investing on a monthly basis. It will pull money from your bank account (an amount that you set) and at the same time each month (7th), it will invest according to your instructions.

Check out Hargreaves Lansdown here.

So how do we replicate the Swenson or Dalio asset allocation within Hargreaves Lansdown?

Now we get to it! The most important things when selecting which investments to make within Hargreaves Lansdown to achieve the above asset allocations are:

  1. reducing your tax. Tax will eat and destroy your long-term returns if you let it. This means only using a tax-sheltered investment vehicle. This means in the UK that you MUST invest through a Stocks and Shares ISA. There are annual limits on the amount of money that you can put into this to invest, but I personally don’t come near those. If this is an issue for you, then max out your Stocks and Shares ISA first, before investing through a normal investment platform.
  2. minimising fees. Active fund managers will charge up to 2% per year to manage your money. This might not sound a lot but it is! If you’re making 8% per year in returns but you have to give the manager 2%, then that’s 25% of your total returns! We’re going to look mostly at low-cost, low-fee, index funds.
  3. good ratings by the investment platform. Hargreaves Lansdown have a useful tool called the Wealth 150, which they say:

The Wealth 150+ is a selection of our favourite funds available to UK investors. We believe Wealth 150+ funds offer the ultimate combination of first-class long-term performance potential and low management charges. It is designed for people who would like to choose their own funds and doesn’t constitute a personal recommendation.

Why choose the Wealth 150+?

  • A strong track record of selecting funds which deliver impressive overall long-term performance in each sector
  • Our experienced research team analyses all the major markets and sectors to identify the best long-term prospects
  • We spend thousands of hours each year scrutinising investment strategies, performance analysis, and fund managers
  • Some of the lowest ongoing fund charges available anywhere

Below we also include our Wealth 150 funds which we believe have excellent long-term prospects, but don’t have quite the same combination of ‘best-in-class’ performance potential and low charges as Wealth 150+ funds. Additionally, we include our Wealth 150+ trackers – our favourite funds that track the performance of a stock market index. (Here’s the link to the above quote from Hargreaves Lansdown)

The last two things, minimising fees and good rating, are our main criteria when selecting the right index fund for each asset class.

Here is my initial spreadsheet with the relevant index funds against each asset class:

This spreadsheet shows how I split a monthly investment of £275 according to the David Swensen asset allocation, or at least as close as I can get to it. (I’ve recently upped this to £375 per month as I’ve finished paying my student loan off :))

Here are the relevant screens in Hargreaves Lansdown to set up your monthly investments:

asset allocation David Swensen
This is the monthly savings screen which shows how I split a £375 investment each month

 

asset allocation David Swensen
The pending orders as Hargreaves Lansdown settle/complete your monthly orders

 

asset allocation David Swensen
Current portfolio with a David Swensen-inspired asset allocation and held at Hargreaves Lansdown

What asset allocation do you use? Let me know in the comments below.

Also let me know any questions in the comments below!

How I bought my very first Ethereum cryptocurrency (for complete beginners)

chanman · Jun 6, 2017 · Leave a Comment

How to buy Ethereum

In my last post, I wrote about how to buy bitcoins for a complete beginner.

Since then, I’ve wanted to buy other cryptocurrencies to diversify my exposure to cryptocurrencies.

I want a basket of cryptocurrencies.

Next on the list is Ethereum.

How to buy Ethereum

Now this wasn’t as straightforward as buying Bitcoins, possibly because it’s a much younger coin.

First up, like with Bitcoin, you need a wallet.

Googling ‘best ethereum wallet’ doesn’t yield good results.

Instead, go to the source again (as we did with Bitcoin). Go to Ethereum.org.

Here, download the Wallet:

How to buy Ethereum
From Ethereum.org

Next, install it.

This isn’t that straightforward, so here are two great videos showing you how to do so for Mac:

Once you’ve installed and backed-up your wallet, it’s time to load it with Ethereum.

Where to get Ethereum?

Google will take you to Coinbase.

Unfortunately, I had the same problems with Coinbase as I did when trying to buy Bitcoin.

I couldn’t even get past the verification stage.

I’ve tried to upload ID documents to Coinbase multiple times and each time I fail.

It’s not user-friendly at all.

So I googled it again and I was delighted to learn that Bittylicious actually sell Ethereum along with other coins.

The only negative I read was that Bittylicious prices can be higher than other exchanges.

The price difference wasn’t enough to put me off though. The fact that I had already gone through the ID verification stage with Bittylicious and wouldn’t have to do it again was a godsend.

At the time of writing, the price on Coingecko for GBP was:

GBP price for ETH at 7.20pm GMT 6th June 2017 – Coingecko.com

 

Whilst on Bittylicious, the price was:

GBP price of ETH on the same date and time

 

That’s a difference of £10 or 5%. It’s not small, but it’s not terrible.

Anyway, follow the instructions for Bittylicious in terms of bank transfers to the seller and use the Ethereum wallet address for delivery/receipt, and you’ll have your first Ethereum.

Like with Bitcoin, start small with your buys and get comfortable first.

Good luck! Let me know how you get on in the comments below.

Next stop, buy some Monero.

How I bought my very first bitcoins (for complete beginners)

chanman · May 15, 2017 · 4 Comments

How to buy bitcoins

The recent cyberhacks got me thinking about bitcoin. I also saw an old article on the brilliant Sprezzaturian website by Mikael Syding where he outlines becoming expert in a hot topic and consulting on that newfound knowledge (in this example, Bitcoin and Blockchain).

I watched a few videos on what Bitcoin and Blockchain are:

I looked at the price and historic prices were for Bitcoin:

Bitcoin chart IG Index
Credit: IG Index

My usual self would have ploughed into this kind of hockey stick action.

Luckily for me, it’s not that easy to buy the underlying assets.

Let’s look at how to buy bitcoins.

Bitcoin Wallet

You need a Bitcoin wallet in which to store your Bitcoins.

I looked on Google for best Bitcoin wallet and came to articles by 99 Bitcoin. This is a good website which recommended Coinbase.

I checked out Coinbase and Xapo and leant towards Coinbase because it was an exchange (where I could buy Bitcoins) as well as being a wallet. A one stop shop which was attractive to me as I am naturally lazy.

However, I tried to open an account at Coinbase but had issues uploading ID documents, which meant I couldn’t open an account at that time.

Frustrated, I did some searches on ‘Coinbase reviews’. There were lots of bad reviews about how people’s accounts being closed with no reason and people losing their Bitcoins.

Not getting an account with Coinbase was actually a lucky escape, so I decided to go back to the source.

The official website is bitcoin.org

Here it offers a selection of wallets and rates them according to 5 criteria.

Coinbase didn’t come out of it well.

Check out the page and click on the icons for each provider to see the most up to date assessments by the official Bitcoin page.

I went with Electrum.

Install your chosen wallet according to the instructions from the provider.

Bitcoin Exchanges

Again, I went straight to the source at Bitcoin.org and found a list of reputable exchanges. (Important because Exchanges can go tits up – look at Mt. Gox)

I decided to test each.

The first listed for the UK was Bittylicious.

This was straightforward to get up and verification of ID took under 24 hrs.

Before given the all clear, you’re allowed to make a very small trade.

So go to your wallet (above) and find your Bitcoin address.

Plug that into the address bar on the trading page.

I bought 0.025 of a Bitcoin (BTC) first.

Then I bought 0.2 BTC.

After each trade settles, check your wallet that the bitcoins have been received.

Final tips on how to buy Bitcoins

Start with a small trade. Don’t go sticking thousands of pounds into your first trade. Get comfortable with small trades first.

Try different exchanges and find one that you’re comfortable and that you trust with your gut.

I Will Teach You To Be Rich by Ramit Sethi – key takeaways

chanman · Sep 2, 2016 · 1 Comment

I Will Teach You To Be Rich by Ramit Sethi

I read I Will Teach You To Be Rich by Ramit Sethi before I read The Richest Man in Babylon (see previous post). However, I Will Teach You To Be Rich (IWT) can be taken as building on many of the principles in The Richest Man in Babylon (RMB). IWT is RMB for the 21st century.

Summary of the book

IWT is split into 6 sections:

1. Get out of debt first

Don’t save or invest until you’ve got out of debt. Interest rates on credit card debts far outweigh any possible gains from high-interest savings accounts or investments in equities or bonds. Eg. a 26% interest rate on your credit card balance is going to be bigger than the interest of 2% you might get on your savings account or the 10% annual return you might get from your investments.

Sethi gives the reader exact scripts for negotiating lower credit card interest rates to help you pay off your debts faster.

2. Set up no-fee, high-interest bank accounts

This is much harder to do now in the post-2008 low-interest rate world. Still you can find no-fee accounts and accounts with more attractive rates. As of writing, check out the Santander 123 current account which pays 3% on balances up to £20,000.

(Update from May 2020, Marcus by Goldman Sachs probably has the best savings interest rate at the moment at a paltry 1.20%)

3. Open an investment account

Savings will only get you so far. You need a return above inflation to keep your money. In the UK, that’s about 2%.

Historically, over the long-term, equities return around 8% per year.

The enemies of good long-term investing are things that eat into your profits.

  • Fees,
  • Taxes and
  • Poor investments.

Pick a low-cost investment account (like Hargreaves Lansdown).

Pick a tax-free account like a Stocks and Shares ISA (again see Hargreaves Lansdown)

Most managers lose against the market. Instead, beat 85% of managers by just ‘buying the market’. This means investing in index tracker funds which have the advantage of being lower cost than active managers. Again, remember that fees eat into your returns.

4. Conscious spending

Track where your money is going. Stop spending money on things you don’t want. Spend money on things that you value.

5. Automate your financial system

We aren’t rational creatures. We have limited willpower. Take this fallibility out of the equation by setting up automatic mechanisms to move money through your system, from salary to investments.

6. Get your investments right

Invest your hard-earned savings wisely. Invest according to your age. When you’re young, lean more heavily to equities, and reduce your exposure when you’re older.

Follow successful asset allocation (i.e. the split between your asset type – equities, bonds, cash, property).

Sethi recommends David Swenson’s asset allocation split. Swenson is the legendary Chief Investment Officer of Yale’s Endowment Fund.

What can we learn from I Will Teach You To Be Rich?

I Will Teach You To Be Rich is filled with practical and genuinely helpful, detailed advice.

I took two main insights from IWT.

First off, the overarching framework for getting rich.

(1) Get out of debt.

(2) Save as much as you can.

(3) Invest these savings according to a proven asset allocation like David Swenson’s.

(4) Rebalance the asset allocation periodically.

Secondly, and more importantly, how Sethi recognises the reality of how we as humans are irrational and often our own worst enemy in working towards our goals.

So the overarching framework makes sense. We know it makes sense. So why isn’t everyone rich? Because it’s hard and requires discipline. We’d rather spend the money. Sethi’s advice doesn’t rely on willpower and self-discipline. He advocates automating and systematising.

Set up your bank accounts to automatically transfer money to a savings account and your investment account. This way, it’s not relying on you to remember to transfer the funds across.

I’ve automated my savings and investments. Every month, I get paid into my current account. The next day, I’ve set an automatic rule for the next day to sweep £500 to my investment ISA, which then has automatic instructions to invest in equity funds and bonds. (Read about how I’ve set up my automatic investing through Hargreaves Lansdown here.). I follow the David Swenson asset allocation that Sethi recommends.

His argument for following a great like David Swenson is persuasive. In essence, why would I think I was more qualified to allocate assets than an investing great?

I definitely recommend this book. My biggest problem was having a ‘head in the sand’ approach to my personal finances. This book gave me the framework to take control of my money and peace of mind was worth way more than the cost of a paperback. I’ve actually bought more copies to give to friends and family.

What I learned from The Richest Man in Babylon by George S. Clason

chanman · Aug 15, 2016 · 2 Comments

The Richest Man in Babylon

I first heard of The Richest Man in Babylon from Fighting Mediocrity who made a fantastic animated video review of it. (Check it out here.)

I bought it on Kindle for next to nothing: £1.99!

It’s a short book and reads like an allegory similar in style to The Alchemist.

Synopsis

In ancient Babylon, an ordinary family man is struck one day that he is not rich and in all likelihood never will be rich.

He and his friends decide to ask the richest man in Babylon for his secrets to becoming rich.

Takeaways and analysis

The overall objective recommended is the image of ‘fattening up your purse’. It’s a great image to have in your mind when you’re reading this book. Imagine your wallet slowly getting fuller and fuller.

Rule 1

Pay yourself first. Save 10% of your income and spend the rest.

Clason makes the point that most people don’t pay themselves first. They spend what they earn or worse, spend more than they earn.

Keep one out of every 10 pounds.

Pay yourself first.

Interestingly, MJ DeMarco in The Millionaire Fastlane makes the point that most people do not pay themselves first even when they think they do. If you are employed, then the Government takes most of your gross pay first anyway.

DeMarco says truly paying yourself first would be by getting paid into a company structure, attributing expenses to the company, then finally paying tax on the profits. So the Government eats last.

Rule 2

Control your expenditure

This sounds obvious but it’s not. Or at least, most people don’t act like it’s obvious. Clason alludes to Parkinson’s Law whereby your expenditure fills to meet your income. So as your income rises, so does your expenditure.

Most of what we think are necessary expenditures are nothing of the sort.

We don’t need to go on holiday. We don’t need Netflix. We don’t need to go out to dinner twice a week.

Those are wants and desires.

Clason has a great line regarding this: Confuse not the necessary expenditures with thy desires.

Rule 3

Make your 10% you saved work for you. Create income streams.

Whether that’s investing in loans generating interest or ventures to generate earnings and capital appreciation.

Rule 4

Guard your treasures from loss 

Don’t put your hard-saved money into high-risk ventures.

Rule 5

Make of thy dwelling a profitable investment.

Rule 6

Ensure a future income.

Make sure to look after yourself when you can’t work.

Rule 7

Increase thy ability to earn.

Good luck tends to go to honest, hard work and industry and not to speculators and gamblers.

Clason makes the point that fortunes were never truly made at the gambling tables. The only people to get rich in gambling is the house.

What can we learn from The Richest Man in Babylon?

If you earn £48,000 a year, your monthly gross salary is £4,000.

Of this, taxes in the UK will leave you around £2,500 in your pocket (take home pay).

Clason says that we should save £250 of this. The rest is for us to spend as we wish.

We might say that it’s difficult to live without that £250. Wouldn’t life be boring without little treats and expenses here and there?

Pay yourself first.

Think about fattening up that purse.

Next, make that 10% saved every month work for you.

I put mine into an equity fund called Aurora.

You might simply put the 10% into a savings account and earn interest on it.

Don’t touch this treasure. Let it grow and grow.

In 10 years, instead of nothing, you’d have £25,000 minimum in your wallet.

In all likelihood, you’d have much more because of the extra earnings of your 10% treasure and the power of compounding.

The Richest Man in Babylon is an absolute classic of personal finance. It’s as applicable today as it was in the 1920s.

I highly recommend it.

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