A Monevator reader writes:

“I’m wondering if you have any general advice for someone on the edge of choosing between Vanguard’s LifeStrategy fund or going DIY (i.e. a Slow and Steady rip-off, adjusted for risk I’m comfortable with)?

I’ve been going over it all for too long, devouring this site and others. I’ve also read Smarter Investing, as well as a handful of other books on the topic.”

Dear Reader,

You’re not alone – a lot of people freeze at this stage. I was personally stuck in analysis paralysis for over a year before I made my first investment.

I was going round in circles, like a plane awaiting permission to land. Eventually I realised that I already had all the permission I was going to get.

I was frightened of doing the wrong thing and was hoping that the ‘right answer’ would somehow strike me like lightning.

But the truth is that if you’re deciding between different shades of a diversified passive investing strategy then you’re already as close to the right answer as you can get.

Like crack parachutists, most passive investing strategies will land you in roughly the same ballpark, and it’s fruitless to try to predict which one will come closest to the bullseye.¹

Jump out of the plane! You won’t break your legs so long as you:

• Diversify across global equities and high-quality government bonds.

• Take a conservative approach to risk tolerance. If you have no experience in the market and you’ve got more than 15 years of investing ahead of you, choose a 60:40 or 50:50 global equity:government bond split until you have some idea of how you will respond in a crisis.

• Keep your costs low. The evidence against high fees is overwhelming. The UK’s financial regulator, the Financial Conduct Authority (FCA), published a report showing that benefiting from cheaper – but typical – passive fund costs could mean you 44% better off versus typical active fund costs.

• Take action over a difference of 1% or 0.5% in fund and broker fees – but don’t sweat less than 0.1%.

• Begin! The sooner you start investing, the easier it will be for you to reach your goal. So just start. Put away what you can into your ISA or in your pension – but stop putting it off. Get some momentum going, then work out the finer details like how much you should be investing later. (In fact do this next, once you’re investing monthly. It’s not hard.)

• Automate your plan. Don’t panic sell and don’t chop and change.

Even though I was committed to the passive way from my earliest investing years, I still sought advantages through optimisation.

That’s a very human thing to do, but the most important lesson I’ve learned since is to keep things simple.

Don’t take my word for it, ask Warren Buffett

Warren Buffett is one of the world’s richest men and one of the greatest investors of all time. He doesn’t need your money, he has nothing to prove, and he is a legend in his own lifetime.

He recommends plain vanilla passive investing.

Buffett makes his case in three pages of condensed and delightful wisdom that you can read in his 2017 Berkshire Hathaway shareholder letter².

To condense Buffett’s wisdom still further:

The bottom line: When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients. Both large and small investors should stick with low-cost index funds.

Over the years, I’ve often been asked for investment advice, and in the process of answering I’ve learned a good deal about human behavior. My regular recommendation has been a low-cost S&P 500 index fund.

To their credit, my friends who possess only modest means have usually followed my suggestion.

I believe, however, that none of the mega-rich individuals, institutions or pension funds has followed that same advice when I’ve given it to them. Instead, these investors politely thank me for my thoughts and depart to listen to the siren song of a high-fee manager or, in the case of many institutions, to seek out another breed of hyper-helper called a consultant.

Human behavior won’t change. Wealthy individuals, pension funds, endowments and the like will continue to feel they deserve something ‘extra’ in investment advice. Those advisors who cleverly play to this expectation will get very rich. This year the magic potion may be hedge funds, next year something else.

The likely result from this parade of promises is predicted in an adage: “When a person with money meets a person with experience, the one with experience ends up with the money and the one with money leaves with experience.”

If you want hard evidence instead of sage advice, read about Buffett’s winning bet against the hedge fund industry. The gory details are recounted from page 21 of the same letter.

Warren Buffett, pah! Enter The Accumulator!

It’s tough to follow a Warren Buffett mic drop (are people still dropping mics?) but I think I can do it with the tale of The Accumulator versus The Accumulator’s Mum.

The Accumulator’s Mum knows naff all about investing – having outsourced all responsibility to her family office, aka The Accumulator.

The Accumulator can at least claim he knows more about investing than his mum.

The Accumulator’s Mum has beaten The Accumulator over the last seven years.

The Accumulator put his mum into a Vanguard LifeStrategy fund.

While The Accumulator knew his mum needed the simplest strategy possible – and so gave her one – he himself wanted to ‘optimise’ through factor investing, REITs, over-balancing into the lowest P/E ratio investments, yadda yadda, yadda.

All that effort left The Accumulator trailing The Accumulator’s Mum’s higher passive exposure to the US market and her lower exposure to value equities.

The Accumulator hasn’t told his mum about this. If you’re reading mum, you’re welcome.

Please don’t go on about it.

Oblivious investing

You’ve heard from Warren Buffett and the Accumulator’s Mum. What more do you need?

Allow me to cite one last source – a wise and unassuming US financial blogger called Mike Piper, aka The Oblivious Investor.

Piper is one of those rare bloggers who risked their reputation by announcing that they’ve reduced their strategy down to ‘The Accumulator’s Mum’ level of easy-peasy-ness.

Piper made a succinct case for simplicity, stating:

The primary reason we made the change was to defend against what I’ve come to see as the biggest threat to our investment success: me.

To be more specific, it’s my temptation to tinker that scares me.

Piper’s evidence-based approach taught him that asset allocation is not precise – he calls it a sloppy science. Moreover, he realized that his expertise could be counterproductive and that the smartest move he could make was to reduce the chance that he’d screw up his own plan.

Piper’s answer was to move everything into a Vanguard LifeStrategy fund.

(In the interests of balance, please note that alternatives to Vanguard’s LifeStrategy fund are available.)

Take the plunge

My own experience has been similar to Piper’s: simplicity has a value all of its own.

The promise of complex strategies often goes unfulfilled, as illustrated by our recent look at the last 10-years of investment returns.

I’ve had to learn a lot to realise I don’t need to know as much as I thought.

The no-brainer approach really is a no-brainer.

Take it steady,

The Accumulator

1. You can spend forever reading about which strategy worked for the last ten years or 21.5 years or what have you – but that doesn’t tell you what’ll work in the future. Sometimes it might even be a contrarian signal. [↩]
2. See pages 23 through to 25 [↩]

What caught my eye this week.

Remember when I said I was going to simplify the compiling of my Weekend Reading links?

Well this one is ridiculously long and took pretty much a day to pull together.¹

Is it better for all this heft?

When I first started linking to other blogs like this back in 2008 or 2009, I’d include just a half-a-dozen or so and some well-wishes for the weekend.

Now you need to set aside some time just to read the list of potential articles to read!

I suppose it’s easier than browsing every site for all these stories for yourself. I’m equally sure some would prefer heavier curation.

But simplicity does not come easy to me.

Nearly a decade ago I advocated simplicity in investing as best for most people – yet for some reason I centered my argument around a lecture on anthropological research into child learning behaviours.

Yep, that’s the stuff that made Monevator into the household name it is today!

Simple does it

I’m pretty normal in drifting into over-elaboration. There seems to be a human tendency to make things more complicated than they need to be, whether we’re talking about smartphones, relationships, or investment portfolios.

I did however come across a really great – and simple – piece in praise of investing simplicity (via Abnormal Returns) this week.

On his Movement Capital blog, investment advisor Adam Collins writes:

It took me a while to realize that the solution to complexity isn’t managing it better – it’s avoiding it altogether.

So simple. Go read it!

[continue reading…]

1. If this sounds crazy, consider that I vet everything. What’s more I read at least five posts or articles for every one that makes it here, and these days ever more of that reading is left until Thursday/Friday. [↩]

Achieving a big financial goal is hard. Paying off the mortgage, securing financial independence, retiring early – or at all…

When a plan demands discipline over a decade or more, how do you stop yourself going off the rails?

Doing it on auto-pilot is one way: you resign yourself to a multi-decade slog that becomes its own analgesic.

But even then, you’re throwing everything at it and have precious little to show for your sacrifices. No fit bod to parade on the beach. No medals. Nothing to post on Instagram.

How can you make your progress tangible enough to stop your goal going the way of so many diets, exercise regimes, and plans to change the world?

My answer is to lash myself to the mast with a sailor’s knot of mind-tricks:

• Checkpoints – artfully arranged to regularly boost morale.

• Redefine the goal – like a government target that shape-shifts for benign reasons rather than to ‘hoodwink the electorate’.

• Sharing your secret – declare your intentions to the people you care about failing in front of.

• Write your own story – a grand tale that convinces you that you’re doing something worthwhile.

• Future-gazing – indulge your dream just enough to follow it.

Here’s some tips on using these tricks to get over the hump.

Checkpoints

Split and lap times help athletes to pace themselves and measure their progress.

It’s the same for us.

• Splits show you how far you’ve come at each waypoint on your journey so far. For example, you may have £10,000 invested after one year, £25,000 invested after two years, and so on.

• Lap times measure your progress from one waypoint to the next. For example, you put away £10,000 in year one, and then grow your pot by another £15,000 in year two.

You’re likely to gain a bigger psychological boost from lap times when you start out – your initial progress can seem dazzling if you’ve not saved or invested before.

As for splits, to make these effective at the beginning you should measure your progress from your start point and not your end point.

“I’ve socked away more money than I’ve ever saved before in my life,” works much better than “I’ve saved 5% towards my overall goal,” while “Wow, we’ve doubled our stash in our second year,” is much more life-affirming than “We’ve still got 90% of the way to go.”

The higher your savings rate and the more you invest, the more likely it is you’ll be able to rocket out of the gate and clear the hurdles when momentum slows.

Try flipping your view between percentages and figures. I was thrilled to accumulate my first four-figure sum. Later, you’ll earn a high five when you hit five-figures. Then, somehow, a five-figure portfolio becomes routine… until six-figures is around the corner. Did you ever think you’d see the day? I thought only debts came in six-figures.

Later you’ll only rub your eyes when your number is reporting mid-six figures. And then high six-, and then…

Use the halfway line as your initial lure. Everything speeds up once you’re past halfway. You’re on the downhill section and the grind turns into your countdown towards the finish.

Around that point it’s better to measure your progress against what’s left to do.

Halfway becomes one-third, melts into 25% then only 10% to go. Switch between percentages, fractions, and figures. Or picture the remainder as a pie, a mountain path, an escape tunnel reaching the surface… whatever doses you with dopamine.

Every year of a 10-year plan theoretically contributes 10% to the total – but your fourth year from the finish could knock 25% off your number, the next year could be worth 33%.

Granted, investment returns will also push you back and propel you forward.

But I’m talking about visualising the journey here, not the precise outcome. That’s subject to events beyond our control.

How many checkpoints?

I set my checkpoints close enough together to give me a regular shot in the arm, but far enough apart that I don’t numb myself to the rate of progress.

The higher your savings rate and the less susceptible you are to desensitisation, the more checkpoints you can have.

My brain enjoys two overlapping sets of checkpoints.

Row 1: “Come on Accumulator!”

My first row of juicy carrots is planted four months apart.

I look at how much I’ve put away every April, August, and December. Note I’m only looking at savings here, not my total stash. The market has often knocked me back over these short three-month periods, so I try not to look at my overall portfolio value.

Early on, your savings rate is likely to swamp any market noise. Later, you’ll have to rationalise the downturns by consoling yourself with buying on the cheap self-talk.

Why don’t I check my portfolio quarterly, like I do with our Slow & Steady model portfolio?

Because it’s less hassle to do it tri-annually, the progress bar is fuller, and I get enough quarterly BS in my day job.

Row 2: So far-y, so-goody

I have a second row of carrots that I nibble on a six-monthly basis – in May and November.

That’s when I compare our net worth (including our portfolio’s total value) to the same point 12-months previously.

These checkpoints anchor to the anniversary on which we first started down this road.

The point of checkpoints

The two row system works for me because each tunes into a different wavelength.

The triannual check provides a steady beat. Meanwhile our savings rate is high enough that we nearly always register some progress against the same position a year ago. (Although admittedly it helps that we’ve been investing through a raging bull market.)

What’s more, the two rows of carrots give me five data-points that tickle the brain in different ways. I even maintain mental Chinese walls between them by logging the numbers on separate spreadsheets.

You can view your progress through a third lens by stretching your scale across the years.

This one – like so many of my best ideas – I got from Stalin.

Uncle Joe liked five-year plans. My regime uses three-year plans.

Anything beyond three years seems like forever to me. But the potential for transformation within that timeline is almost magical to my mind. When Mrs Accumulator and I are running on empty, we compare our progress against where we were three years ago. The difference is always astonishing, and the sacrifice feels worth it.

We tell ourselves we can review things again in three years. Maybe we’ll make different choices if it’s not working?

Three years later, it’s always working. (I know, I know – past results are no guarantee of future performance.)

My system might not be right for you. So invent your own checkpoints – as many as needed to reliably shoot a positive jolt through your brain circuitry. Balance your need for pep talks to get you through the funk against your need to see meaningful progress.

(If you’re checking weekly or six times daily then you have a problem!)

Redefine what you’ve achieved

Your efforts create your progress, but you can be creative about what progress looks like. While my final destination is complete financial independence, it helps to celebrate the smaller milestones along the way.

For example, you could take comfort from achieving any of the following:

• “We’ve got an emergency fund that’ll see us alright for the next three years if we’re scrap-heaped at work.”

• “I’ve got enough in ISAs to take the next year off!”

• “My SIPP could now fund retirement from age 68 – if you include the State Pension.”

• “My SIPP could now fund retirement from age 68 – even if you don’t include the State Pension.”

• “We’ve got enough to fund our essentials for the rest of our lives, but not yet the luxuries.”

• “We can FIRE if we reduce our annual budget by £3,000 a year.”

• “My stash allows me to sack off full-time work and go part-time at X hours per week.”

• “We can FIRE¹ if I give up foreign travel / horse racing / crystal meth.”

• “We’ve got enough for one of us to be financially independent. If I died tomorrow then my partner would have enough to live on. Mental note: must check the brake cables.”

And so on.

Allow your ego to take a bow – as long as it doesn’t endanger the overall mission – and bask for a moment in how much you’ve achieved, even though there is still some way to go.

Redefine what you need to achieve

Keep learning, and you may become happier about living off a smaller amount.

Perhaps you started out thinking you needed a million, or that you wanted to live off your dividends.

But later you might learn enough about sustainable withdrawal rate (SWR) strategies to be comfortable with a different balance of risk.

Maybe you decide a higher SWR is appropriate for your situation. Or maybe you’ll come to model the State Pension as part of future cashflows, rather than dismissing it as an abstract concept that won’t ever figure in your life.

Perhaps you’ll learn how to live on less, or finesse your understanding of the tax system or annuities, or you’ll downgrade your desire to leave an inheritance?

Pulling on such levers can change the game.

Sharing the secret

I’ve let a few people into my inner FI circle – not to mention the Monevator readership.

I don’t want to let myself down in front of the people I’ve told.

Nobody else, bar Mrs Accumulator, has any skin in our game. They wouldn’t care if I failed. But their knowledge of the plan makes failure less palatable to me.

Pride, eh? Not normally a virtue but you can make it work for you.

Writing your own story

You against the world. You against ‘the man’. You fighting for freedom, for change, for a better future.

Inching towards a number on a spreadsheet probably won’t sustain you for long. But setting your struggle within a meaningful narrative is the backdrop to all human endeavours, even mine.

Make sense of your pain by telling yourself why you’re doing it:

• You’re on a grand adventure.
• You’re doing something really hard that few will – or even can – do. (True!)
• You’re gonna be a secret millionaire.
• You’ll be happy.
• You’ll be secure.
• You’ll spend more time with those who matter most.
• You’ll pursue your true calling and never do anything just for the money again.
• You’ll evangelise for a better way of life.
• You’re prepping for the fall of civilisation.
• You’ll live a better life aligned to your values.

Perhaps this sounds flippant but I really believe it. Do it right and the road to financial independence can catapult you up Maslow’s heirachy.

Financial independence isn’t the end of all your troubles obviously. It doesn’t solve anything for some, but others have flourished.

Future-gazing

Every now and then, maybe once a year, Mrs Accumulator and I will talk about our hopes for our financially independent future.

We’re much older in that world – much older than we ever pictured. But it’s a happy place, and for a few moments we can draw some energy from that future timeline to power our present day. Optimism is human fuel.

Take it steady,

The Accumulator

1. Financial Independence, Retire Early. [↩]