Reader Ham asked a great question last week about the Vanguard LifeStrategy funds. These funds offer an excellent way of buying a diversified market portfolio using index funds, without the faff of managing the portfolio yourself or the expense of paying someone else to do it for you.

Ham wanted to know how easy it is to increase your bond allocation in the LifeStrategy funds as your biological clock ticks towards retirement.

The answer is it’s quite straightforward, if a bit fiddly, and it may well save you a lot of pain in later life.

Nudging your portfolio’s asset allocation towards bonds as you age is a widespread investing practice known as lifestyling. It steadily reduces your exposure to risky equities to reflect how you’ve ever less time left to recover from stock market falls.

By employing lifestyling, you’re less likely to be one of those case studies in the newspapers’ money pages, grimacing beneath the headline: “I lost half my pension 6 months before retirement and must now stack shelves until I’m 102”.

Lifestyling in action

A well-known rule of thumb is to hold an equity allocation equal to your age subtracted from 100, with the remainder held in bonds.

For example, a 40-year-old would hold 60% in equities and 40% in bonds. (Hmm, I just wrote ‘and 40% in bones’, a Freudian slip if ever there was one).

On hitting 41, a passive investing lifestyler would respond by raising his bond allocation to 41% while winding down his equities allocation to 59%. And then perhaps a little party (with hats) and a quick look at Oil of Olay products online.

Keep up the lifestyling and by the time our surprisingly smooth-looking hero reaches 60, his asset allocation will be a less volatile 40% equities and 60% bonds.

Stuck in time

As Monevator reader Ham recognised though, the Vanguard LifeStrategy funds have a static asset allocation – your equities / bond mix is effectively frozen in aspic.

Invest in the Vanguard LifeStrategy 60% Equity Fund at age 40 and you can rely on it to still be rebalancing you back to 40% bonds by the time you’re 60, even though a 60% bond allocation might be more appropriate.

Vanguard in America offers target retirement funds that automatically lifestyle your assets for you. We’re a bit behind the curve as always in the UK.

It is possible however to lifestyle manually for only a little bit more effort.

The trick is that instead of investing in one fund, we must invest in two [swoons with shock].

To continue our example above, our age-defiant investing role model would start out 100% in the Vanguard LifeStrategy 60% Equity Fund but would gradually raise his bond allocation by increasing exposure to the Vanguard LifeStrategy 40% Equity Fund.

This is the lifestyle

Our Vanguard LifeStrategy fund lifestyling strategy works like this:

Age	Fund	Fund allocation	Portfolio equities/bond split
40	LifeStrategy 60% Equity Fund	100%	60:40
	LifeStrategy 40% Equity Fund	0%
45	LifeStrategy 60% Equity Fund	75%	55:45
	LifeStrategy 40% Equity Fund	25%
50	LifeStrategy 60% Equity Fund	50%	50:50
	LifeStrategy 40% Equity Fund	50%
55	LifeStrategy 60% Equity Fund	25%	45:55
	LifeStrategy 40% Equity Fund	75%
60	LifeStrategy 60% Equity Fund	0%	40:60
	LifeStrategy 40% Equity Fund	100%

All you need do is annually invest an additional 5% of your total portfolio in the Vanguard LifeStrategy 40% Equity Fund to achieve the required 1% lifestyle uplift in your bond allocation per year.

At age 42, 10% of our hero’s portfolio would be in the 40% Equity Fund, at 43 it’s 15% and so on until by age 60 he’s 100% in the bond-biased fund and preparing to spend the lot on experimental stem cell regenerative injections.

Notes on this lifestyling LifeStrategy

• Include new contributions as well as your current assets when calculating your 5% annual shift.

• The two funds will grow (or shrink!) at different rates so you’ll also need to rebalance.

• Vanguard funds are only available through a limited number of outlets.

• You’ll pay a dealing fee to Alliance Trust every time you buy and sell a fund but get off Scot-free with Bestinvest – except Bestinvest charge higher annual fees! So the best option depends on your trading habits and account needs.

• Aside from these cost concerns, switching between the two funds in an ISA or SIPP shouldn’t be an issue.

Our lifestyling strategy holds true for any two LifeStrategy Funds that sit on adjacent rungs of Vanguard’s equity / bond allocation ladder. As long as you shift 5% of your assets per year into the next bond-skewed fund along, then you’ll lifestyle your funds on time and reduce your exposure to risk.

Take it steady,

The Accumulator

Some good reading from around the Web.

A couple of years ago I wrote about how some statistics suggested that we might be in for a decade of 20% returns from the stock market.

Of course, the FTSE 100 pushed on very swiftly from around 4,000 to touch 6,000. Great, but it also meant that much of those mooted 20% gains were in the bag.

After its recent travails, however, the FTSE All-Share is now down to a forward P/E of 9. A few more months of going nowhere, and that will be an historical P/E of 9, too.

I think this is bargain territory, even if you discount the crummy alternative returns on bonds and cash. Look at those and presume they’re rational (a controversial decision given all the Central Bank intervention in the market!) and I think the FTSE 100 could justifiably trade nearer 10,000.

Now you know why I always sound so bullish!

Happily, I’m not alone. Recent research from Fidelity found that after previous periods when the FTSE All-Share has traded on a P/E of around 9, it has returned on average an annual 11% real return over the next decade.

The Motley Fool wrote up the Fidelity research, including this table:

FTSE All-Share P/E ratio	Proportion of Observations	Average annual real return over 10 yrs
Less than 5	1%	15%
5-8	10%	12%
8-11	18%	11%
11-14	28%	7%
14-17	16%	4%
17-20	13%	2%
20-23	8%	1%
23-26	3%	0%
26-29	3%	-1

Feel free to fret about Europe or the number of old people in the market, or whatever else you consider yourself an expert on to find a reason not to invest.

I personally find the precedents more enlightening, and continue to buy all the shares I can for the long-term.

[continue reading…]

There are a few entrepreneur characteristics that you find more often in the self-made wealthy than in other homo sapiens.

Most entrepreneurs have something to prove to the world, for instance, and the few who don’t usually want to change it.1

And they all want to be rich, too, whatever they say – if only in that we all secretly want to be rich (even if we’re aware that there are pros and cons to being wealthy).

What about creativity? Tenacity? A head for numbers? A nose for a deal?

These supposed key traits seem to be as randomly distributed amongst entrepreneurs as Mr Potato Head pieces stuck onto spuds in a blackout.

Loathe gritty Duncan Bannatyne and would rather make money like Warren Buffett? Pick your hero and go for it.

Prefer Bannatyne’s hands-on approach to ex-Dragon Richard Farleigh’s airy-fairy theory? The world’s your deep fried Mars bar.

Types of entrepreneurs: The Visionary

Examples: Steve Jobs, Anita Roddick

Visionaries are entrepreneurs driven by a desire to change the world – and the capacity to imagine how to do so.

Vision on its own is just daydreaming, so such an entrepreneur needs other skills to make the vision a reality. Steve Jobs boasted the attention to detail of a reigning monarch, as well as a genius for design and consumers’ desires.

But it was his vision that made transformative products like the iPhone and the iTunes store, and so turned Apple into the world’s largest company.

• Key strengths: Imagination, egotism, seeing the big picture, attracting brilliant followers.

The Adventurer

Examples: Richard Branson, Donald Trump

If Richard Branson had been born 600 years ago, he’d have been a tussle-haired knight with a winning smile, eager for his next campaign.

Branson is in it for the means, as much as the ends. Obviously he likes money, but it’s an enabler and a way of keeping score. It’s the excitement of execution that gets his blood going – and when that’s not enough, he puts his life in danger some other way, such as his balloon rides.

Adventurers may boast crossover traits with other entrepreneurial classes, but they’re primarily adrenalin junkies who you couldn’t pay to give up their ‘fix’.

• Key strengths: Bravery, energy, tenacity, ‘work hard / play hard’ culture.

The Opportunist

Examples: Alan Sugar, Duncan Bannatyne

One reason the communists never stood a chance is that nothing moves as fast as money. From market traders to multinationals, plenty of business is inspired by seeing an opportunity – a gap in the market, a product that’s a hit in a distant land – and racing to profit from it.

Alan Sugar in the 1980s is a great example of an arch-opportunist. He only got into electronics by accident, and he no more dreamed Steve Jobs’ dreams of a PC revolution than he imagined he’d shave wannabe moguls calling him ‘Sir’ on the BBC. Yet for more than a decade nobody in Britain did a better job at spotting gaps in the market and making a killing.

Opportunism doesn’t mean thinking small. At one point Amstrad commanded 25% of the European PC market!

• Key strengths: Spotting gaps, speed of execution, cost to market.

The Asset Allocator

Examples: Warren Buffett

Some people wouldn’t call Warren Buffett an entrepreneur.

But I would.

Ultimately all successful entrepreneurs thrive because they put existing resources to a more productive use for profit, whether they’re selling a job lot of fancy duvets at an East End market or combining great design and a bunch of previously unconnected bits of technology to invent the iPhone.

Asset allocators are the purest example of this – they cut out the messy production lines and marketing campaigns.

When an asset stripper flogs apart a business to create something worth more in pieces – or when Warren Buffett sees a company’s true worth before the market and directs his capital towards it – I’d say they’re adding value.

• Key strengths: Valuation, number crunching, curious, thick-skinned.

The System-iser

Examples: Henry Ford, Akio Morita

Some people are brilliant at process. Henry Ford is an obvious example, having pretty much invented the modern production line.

I think you could put a lot of creative industry wealth creators into this class, too.  Such people often think they’re visionaries, but really they’re great at turning creativity into something that runs to a schedule, and therefore can be bottled and sold.

Process is what turns brilliant prototypes into consistent profits. Every penny you can shave off every stage of the production pipeline – or every feature you can pack in that increases value ahead of your cost – builds value.

• Key strengths: Strategy and logic, attention to detail, employee management.

The Specialist

Examples: Bill Gates, Felix Dennis

Some people have a calling – a field they were born to. Luckily for them, capitalism enables the business-savvy ones to make a bucket of loot, too.

Bill Gates is a good example. Whereas it’s relatively easy to imagine Steve Jobs running Pixar, the animation house he acquired in 1986, it’s pretty hard to imagine Bill Gates watching a Pixar movie.

Jobs rose to eminence in computing partly because the number of technology-literate people who wouldn’t wear socks in sandals is vanishingly small. In the 1980s, it was close to zero. Jobs was a designer who could have turned his hand to many other different fields, albeit it less mega-successfully. Gates would have been a patent lawyer or an engineer if born a couple of decades earlier. He needed personal computers to unlock his brilliance.

This sounds a bit mean-spirited, but I don’t mean it that way. The world is full of specialists who turn their love and aptitude for a certain field or product or service into something we all rely on, from scientists to architects to artists.

They are lucky that a few can make a lot of money at it – because they’d be doing it anyway, even if they couldn’t.

• Key strengths: Dedication, motivation, knowing themselves.

The Small Business Person

Example: At a corner shop near you

There’s something belittling about the label ‘small business’ that probably begins life in the boys’ changing room at school.

Happily, in the business world size matters but it’s all relative – and having your own modestly statured company is the number one outlet for those determined to be entrepreneurs.

Many entrepreneurs would rather be top dog at a tiny company they own than to be a ‘Senior Divisional Manager for EMEA and Innovation’ at some giant.

The best franchises offer a great take on this entrepreneurialism. Few are the children who dream of selling foot-long sandwiches, cleaning drains, or supplying offices with photocopying paper. Yet plenty of people who have a yen to make money have made fortunes by implementing other people’s systems with a tenacity to terrify the competition.

The average freelancer or contractor is a small businessman or woman, too. In fact, anybody who is not working for a monthly pay slip would do well to consider themselves Me PLC, rather than as a worker for hire. As well as potentially making you more money in the short-term, it might get your mind ready for when you want to expand.

• Key strengths: Flexibility, personal relationships, stamina.

The spare room / free time entrepreneur

Example: Everywhere!

Thanks to the Internet, it’s probably never been easier to start a side business while staying in your day job.

Making a decent side income, well that’s another matter.

Even the communists at The Guardian have been running a series on being a website mogul, but in truth it’s much harder to make money blogging than it seems. eBay is also increasingly the domain of the big winners.

But there are plenty of other avenues to explore – and the harder or more specialised the better, as there’s much less competition.

Think hard about what you can bring to market. The cost of starting a side business is usually low, and even a little extra income can be worth a lot.

You probably won’t make a million, but a successful part-time business could get you on your way!

• Key strengths: Desire, time management, and caution.

Don’t forget us when you make it

Before you get carried away, please review some of the reasons NOT to start a business.

I always get nasty comments when I point them out, but survivorship bias looms large when we forget that the few famous entrepreneurs – even the hundreds of relative unknowns in the Sunday Times’ Rich List – stand on the broken backs of uncountable also-rans.

So be sure to consider your own opportunity cost.

And then do it anyway.

If you’re really an entrepreneur, that is.

Have I missed out any particularly interesting types of entrepreneur? This is a very broad church, so let’s have your ideas in the comments below! Otherwise read Felix Dennis’ How to Get Rich, which is probably the best DIY guide ever written to grubbing about for treasure.

1. This and the rest of the article is based on my fairly numerous personal encounters with successful entrepreneurs as well as copious reading. Plus the movie Brewsters Millions. [↩]