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

Edmond Chan · Jul 9, 2018 · Leave a Comment

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.

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:

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.
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.
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

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

Also let me know any questions in the comments below!

Inching towards 100kg on the bench press

Edmond Chan · Jun 6, 2018 · Leave a Comment

One of my big goals in the gym is to hit 100kg on the bench press. I don’t know why that precise number to be honest. Maybe it’s just because it’s a nice round number. or maybe because not many people can do it. It’s a respectable number. I see a lot of guys in the gym doing 70kg, 75kg, 80kg. But not many doing 100kg. Okay it’s not superman weights, but it’s respectable. It means that I’ve worked at it and stayed consistent and I’ve got there. It could be a domino of success, that leads to more success, more confidence and more momentum for bigger things.

I asked my mate Nour who benches 120kg and he said that it might take me a month or so to get there from here. Currently, I bench 82.5kg at 5 reps for 3 sets. With appropriate rest in between workouts and eating properly, he says I should be able to get to 100kg in a month. I think that’s a bit optimistic, as I see myself increasing in weekly increments of 2.5kg. That would take me 7 weeks from here. He also said he had some issues going from 97.5kg to 100kg. I asked him if it felt good hitting 100kg. He smiled, nodded and said ‘yeah’!

Let’s get there.

A post shared by EDMOND CHAN (@edmondchan1000) on Jun 9, 2018 at 6:25am PDT

Wake up and get down the gym

Edmond Chan · May 30, 2018 · Leave a Comment

I’m not a morning person but in the last two months, I wake up, have a coffee to loosen my bowels, take a shit, shower, shave, then I go down to my little community gym which is right down at the bottom of my block. It’s literally 2 mins away which means I have literally NO excuse not to go.

I aim for 20 mins. I do bench press first (currently 80kg 5 reps 3 sets), 3 x 5 pull ups, seated row (5 x 90kg x 3 sets), overhead press (5 x 70kg x 3 sets).

If I didn’t go, I’d feel like a pussy. When I do go, I feel strong, powerful, and disciplined. What better way to start the day.

Do it.

In pursuit of better sleep

Edmond Chan · May 28, 2018 · Leave a Comment

I’ve been an insomniac for most of my life. The first memory I have of it being a thing for me was in my first or second year at boarding school when my housemaster remarked on it. He said it was a condition that affected bright people. Of course, I took that. 🙂

Left to my own devices on school holidays, I would stay awake long past midnight. I would read the latest Harry Potter until I finished it, say at 6am in the morning. I would then wake at 11am or 12 noon and not be tired until the early hours again. Over and over. This is fine when you’re on holiday but less so when you have stuff to do the next morning.

I remember at university, I had a 9am exam on Personal Identity. I went to bed at 11pm and watched the hours tick by. By 4am, I was literally punching the walls in frustration. I knew that I had to sleep in order to be at my best in the exam but as 7am rolled around, I knew that ship had sailed. I still did okay in that exam but it was a classic example of insomnia getting the better of me.

The same happened on my attempt to get into the Army. I stayed over at Westbury and that night went to bed at 12am and couldn’t get to sleep for ages. The 5.30am wakeup call and early tests should have screamed at me that this probably wasn’t the best-suited career for me.

Later, I had a second round interview for a pupillage at a criminal law chambers at 12pm on a Saturday. I had done well at the first interview and now was the big one. I lay in bed all night knowing that I needed to sleep to do well in the debates that I knew were coming. I didn’t sleep a wink and all the coffee in the world couldn’t help me. Needless to say, I didn’t get the job.

Insomnia hits every now and again in bursts. I can’t predict when it happens. But when it does, it hits for a few days at a time. I’ve gone through periods where before work the next day, I’ve had to get out of bed at 2.30am/3am and go and drink a few shots of port just to calm my mind down and almost numb my mind so that I can get just a few hours before waking at 7.45am. I’m not at my best at work by any stretch.

The results of insomnia aren’t good. On zero sleep, you feel sweaty as your body is unable to regulate its temperature properly. You feel hazy and almost drunk. You start praying for bedtime although you know that’s miles away. You crave sugar hits and empty carbs. You pray that you don’t have any difficult tasks that require mental sharpness. Did I say that you start praying for bedtime?

What would be the dream? I would love to be able to sleep whenever I wanted. To put my head down at 10pm and be asleep within 10 minutes would be amazing. Angelique is exactly like this. She can close her eyes and be asleep in 2 minutes. To be a morning person like you read in the press, where CEOs like Tim Cook get up at 4am to work out would be the dream. I come closest to being a morning person when I’m back from a visit to Australia, when the jet lag means I’m tired at 8.30pm and wide awake and bouncing out of bed at 5.30am.

What’s working for me at the moment….

Touch wood, I’m almost there. Without jinxing it, my sleep has been okay for a couple of months now. Here’s my routine:

I try to get up around 6.30am so that I’m tired around bedtime. I have a coffee to loosen the bowels and after that, I shower and go to the gym to lift some compound movements to stress the central nervous system. I do bench press, pull ups, seated rows, overhead press in 2o minutes, then up for another shower, then work.

I try not to eat supper too late in the evenings, ideally around 8pm, then the sleep hygiene wind down routine kicks in. I try to avoid too much blue light from screens. I have my laptop screen set to dim after sundown (try installing f.lux). I also set my mobile to dim as well. I try to have just low lighting in my flat after dark and try to be in bed by 12am at the latest.

I write down on post-it notes any thoughts I have for the next day and I try not to have any meetings booked in for the morning, so that I don’t have that anxiety of trying to get a good night’s rest beforehand.

To help calm my mind down at bedtime, I take two capsules of Kalms and then two tablets of melatonin. Melatonin is the hormone that tells your brain to sleep. This might seem like a bit of a cocktail, and it might also be a bit of placebo, buts it’s working for me. Also, I need Angelique to be in bed as well. I like to feel safe as well so I check the doors a couple of times (might well be my OCD as well).

For now, it’s working. I feel great. Rested and energetic. Let me know if any of this has helped you in the comments below.

To paraphrase Jocko Willink, Decisiveness Equals Freedom

Edmond Chan · Apr 1, 2018 · Leave a Comment

The legendary Jocko Willink says that Discipline Equals Freedom. I take this to mean that accepting and embracing discipline and structure in your life will take away the need for willpower as well as paralysis by analysis and procrastination.

In recent days, I’ve been feeling good and I think it’s down to making decisions, quick decisions and good decisions about things big and small.

Deciding yesterday in a Waterloo pub that I’d book us in for lunch in 25 minutes in St. John and Uber it there was pretty good. (Angelique seemed to like the decisiveness)

And today, we took inspiration from my sister and decided to sell our flat and buy a bigger one. It’s a decision we’ve put off and off, but having made it in 5 minutes of discussion in the car on the way to dim sum with my Dad, was decisive for sure.

Of course, it’s nothing like an Obama-sized decision but for me, someone is probably quite indecisive (although I wouldn’t like to call myself that, who would?!), making decisions quickly has been liberating.

If you’re not decisive, you’re probably weighing up all your options before making a decision.

But, paradoxically and counter-intuitively, umming and ahhing is the wrong thing to do.

Think about an easy decision, one where the options are just so obviously imbalanced, where one is great and the other is bad. In that case, you just pick the great one in no time at all.

But where the options are more balanced like on a wine list or menu, then you might um and ah, taking your time over the decision and weighing up the lost pleasures of the option you pass over. In cases where the options are finely balanced, then there’s not much to choose between the options and you should just plump for one. Don’t waste time and mental energy faffing over the decision.

Where the decisions are much bigger like should you move house, change careers, end a relationship, move countries, the pros and cons feel so complex that you don’t make any decision at all. Hopefully, the decision gets made for you or you happen to end up with the right outcome just by having not made any decision at all.

That’s pretty shit though isn’t it? Passively bumbling through, feeling paralysed by the options. No wonder you don’t feel liberated most of the time. Like me, you’re not captaining the ship. That ship is the most important ship of all: you.

What’s exhilarating about making a decision is that you are saying to yourself that YOU are in control. YOU are committing to this course of action. That there’s nothing more to be said.

Decisiveness equals freedom.