After hours of research and analysis, I have created a FIRE portfolio that consists of a range of low-cost index tracking funds. The aim of the portfolio is to be low maintenance, low cost, well diversified and give a decent return.
Latest FIRE Portfolio Stats
All the stats and charts below show our FIRE Portfolio as it stands today. The charts update automatically every month.
Here’s All the Background Info on How I Developed our FIRE Portfolio
Avoid the Biggest Portfolio Mistake – You
Having been guilty of exactly this myself in the past, let’s get this one out of the way. General perceived wisdom backed by statistical evidence from the likes of Jack Bogle (founder of Vanguard), Warren Buffett and various others says that over the long run, investors get better returns using broadly diversified low-cost index-tracking mutual funds & ETFs.
They also tell us that ‘time in the market beats timing the market’. Meaning that buying and holding over the long term is key.
Warren Buffett has famously said that in the event of his death his instructions in his will is to put 90% of his wife’s money into a low cost S&P 500 tracker and 10% into short term treasury bonds. Because for the average/unsophisticated investor this is the best approach (and from his perspective, you and I are unsophisticated investors, however much you may think otherwise)
So this means not buying individual company shares, trying to predict future high growth sectors, buying actively managed funds or trying to buy low sell high.
However, what do most of us do. We buy individual company shares, pick sectors or themes we think will outperform and buy actively managed funds because the fund manager has a great track record of returns. Basically, a lot of us do the opposite of what we should do.
Human nature is a strange thing.
Information Sources
I did loads of research to narrow down my FIRE portfolio choices. In particular I found the following sources the most useful.
https://www.bogleheads.org/wiki/Simple_non-US_portfolios
General FIRE Portfolio Overview
Before we look at the portfolio I have selected, let’s take a look at the construction of the Vanguard FTSE Global All Cap Index Fund (VAFTA). This is a very broad index tracking fund that invests in large, mid-sized and small company shares in developed and emerging markets around the world. Basically it covers everything with a market weighted proportional allocation.
Since it was first created in Oct 2016 it has averaged a return of 9.13% per annum. Over a longer period of 10 years, the index it tracks (FTSE Global All Cap Index), has returned 10.61%.
| Region | % Allocation |
|---|---|
| North America | 62% |
| Europe | 16.4% |
| Pacific | 11% |
| Emerging Markets | 10.3% |
| Middle East | 0.2% |
| Value | Core | Growth | TOTALS | |
| Large | 18% | 29% | 28% | 75% |
| Medium | 6% | 9% | 5% | 20% |
| Small | 2% | 3% | 1% | 6% |
| Sector | % Allocation |
|---|---|
| Technology | 19.60% |
| Financials | 15.10% |
| Consumer Discretionary | 14.00% |
| Industrials | 13.90% |
| Health Care | 11.70% |
| Consumer Staples | 6.20% |
| Energy | 5.50% |
| Basic Materials | 4.60% |
| Real Estate | 3.50% |
| Utilities | 3.20% |
| Telecommunications | 2.80% |
| Market | % Allocation | Region |
|---|---|---|
| United States | 58.90% | North America |
| Japan | 6.10% | Pacific |
| United Kingdom | 4.10% | Europe |
| China | 3.60% | Emerging Markets |
| Canada | 3.10% | North America |
| France | 2.70% | Europe |
| Switzerland | 2.40% | Europe |
| Australia | 2.30% | Pacific |
| Germany | 2.10% | Europe |
| Taiwan | 1.80% | Emerging Markets |
The reason why it is worth understanding how this index is constructed is because it creates a more or less perfectly neutrally balanced stocks portfolio. So it is worth checking the weightings of any portfolio you create against it to make sure you are not unintentionally ’tilting’ towards a specific region, sector etc.
For example if your portfolio has 80% exposure to the United States, you are ’tilting’ by +21% (80% vs 58.9%).
There is nothing wrong with tilting, within reason, you just want to do it intentionally not accidentally.
Also, tilting toward the US, particularly the S&P 500 may not be as tilted as you might think. Yes it will be biased to large caps but because the companies in the S&P 500 are very international, you aren’t necessarily making yourself overweight toward the US. This is a similar story for the FTSE 100.
Anyway, now we’ve got our heads around all of that lets get into an overview of my FIRE portfolio and some things you might want to consider if you were to copy it.
First off, I have 4 different ‘pots’ to fill 2 SIPPs and 2 ISAs. I don’t want exactly the same funds in each pot as I want to spread my risk a bit e.g. not all with one provider, not tracking the exactly same indexes (the MSCI World Index is not quite the same as the FTSE All World Index for example).
Secondly I want low cost index tracking funds. There will be no actively managed funds.
Because of the fee structure of my broker (Interactive Investor) there are no extra costs buying 1 fund vs 10 funds (it’s free to invest on a regular monthly basis) and I get 2 free sales trades per month, which is more than I’ll need. If I do need to make more than 2 sales in a month then it’s a fixed £5.99 fee. If your brokers fee structure is different it is something worth thinking about when it comes to how many funds you want to hold.
All the funds, except one (EQQQ), are accumulation not distribution, simply so I don’t have to deal with reinvesting dividends. If I were putting this into a General Investment Account, which is subject to CGT & Dividend tax, rather than a SIPP or ISA which are not, I would use the distribution equivalents instead to make the tax calculation easier.
Whilst I only want a handful of funds in total for ease of management, I do want the ability to tilt towards or away from a market. For example, I may or may not want 10% in Emerging Markets. If you go with the 1 fund portfolio approach using something like VAFTA you can’t change that. If you go with a 2 or 3 fund portfolio you can.
I am happy with and am deliberately doing some tilting e.g. toward the USA via the S&P 500 (see point above that this isn’t as much of a tilt as you might first think).
I want a little bit of spice with a small % (<10%) of the portfolio, so I am deliberately tilting towards the NASDAQ and US small-cap value. But I do not intend to keep these holdings over the longer term.
The NASDAQ (which is US tech stocks) has had a terrible few years and I’m speculating that over the next 3-5 years it will bounce back strongly.
US Small Cap Value has done really well over a long time period (30 years) and I’m hoping it will continue to outperform.
The FIRE Portfolio
| Holding Vehicle | Name | Ticker | Asset Group | Fees | % Allocation Overall |
|---|---|---|---|---|---|
| ISA 1 (Me) | Vanguard S&P 500 UCITS ETF Acc GBP | LON:VUAG | S&P 500 | 0.07% | 23% |
| INVESCO MARKETS III PLC EQQQ NASDAQ 100 UCITS ETF Dis | EQQQ | Nasdaq 100 | 0.30% | 3% | |
| SPDR® MSCI USA Small Cap Val WtdETF USD Acc | USSC | US Small Cap Value | 0.30% | 6% | |
| ISA 2 (MAFF) | Invesco MSCI World ETF Acc GBP | MXWS | Developed World Large & Mid Cap | 0.19% | 13% |
| iShares MSCI World Small Cap ETF USD Acc GBP | LON:WLDS | Developed World Small Cap | 0.35% | 4% | |
| iShares Core MSCI EM IMI ETF USD Acc GBP | EMIM | Emerging | 0.18% | 4% | |
| SIPP 1 (Me) | Vanguard FTSE All-World ETF USD Acc | VWRP | All World Large & Mid Cap | 0.22% | 13% |
| Vanguard FTSE Global All Cap Index Fund Acc | GB00BD3RZ582 | All World Large, Mid & Small Cap | 0.23% | 13% | |
| SIPP 2 (MAFF) | Vanguard FTSE Dev World ETF USD Acc | VHVG | Developed World Large & Mid Cap | 0.12% | 16% |
| Vanguard FTSE Emerg Markets ETF USD Acc | VFEG | Emerging | 0.22% | 4% |
FIRE Portfolio Allocation
I won’t bore you with all the stats, suffice to say I have analysed the constituents of this portfolio at a fairly detailed level and in terms of my ’tilts’ it puts me overweight towards the US (circa 70% vs 60% for VAFTA) and Small Caps (10% vs 6% for VAFTA). This is nearly all down to the funds I have in ISA 1 and is deliberate on my part. If you wanted a more neutral portfolio i.e. not so tilted, then you would change the funds in ISA 1 (see below for some ideas).
FIRE Portfolio Expected Returns
For the purposes of all my planning I have assumed a 7% gross average annual return. This is pretty conservative, especially as I tend to use 2.7% as my annual inflation number. Most people use a 2% figure for inflation to give a net real return of 5%, I’m using a slightly more conservative 4.3%.
No Bonds FIRE Portfolio
The sharp eyed amongst you will notice that I have no bonds at all in my portfolio. I’m 100% equities and I’m 50 years old, so by my age most people would have at least 20% bonds in their portfolio. There are three reasons for this:
- In an interview I watched with Jack Bogle he was asked about bonds and one of his comments was that if you have some other form of uncorrelated asset such as a guaranteed pension income you can think of that like a bond. I have a defined benefit pension that will pay me a guaranteed income when I’m 60
- Over the long-term stocks outperform bonds and given I can tolerate the risk, because of the DB pension, then I’m happy to take the risk
- These things aren’t set in stone, if, 10 years down the line I decide I want bonds in the mix I’ll add them
US vs UK ETFs
One of the slightly frustrating things you’ll come across when doing research for your own portfolio construction is that a lot of the advice you’ll find is from the US. So you see portfolios like 100% VTI, 80% VTI 20% VXUS, 80% SPY 10% AVUV 10% BND etc etc.
Trouble is these funds aren’t available to buy in the UK or Europe, so you end up hunting around to try and find the UK equivalents which is easy for most but really hard for others (e.g. there is no UK single fund equivalent of VXUS and there isn’t an ETF equivalent of VTI).
Rather than clog this post up with the different alternatives I’ll do a separate post on What are the UK Equivalents of Popular US Funds?
FIRE Portfolio Examples
My FIRE portfolio may well have too many funds in it for a lot of people or have too much of a tilt to the US for some. So here are some alternatives:
If you just one a one fund portfolio, then I would go for either of these:
100% – Vanguard FTSE All-World ETF USD Acc (VWRP or VWRL if you want the distribution version)
100% – Vanguard FTSE Global All Cap Index £ Acc (VAFTA or VAFTI for the distribution version)
The difference between the two is that the latter includes small cap.
If you want to simplify ISA 1
ISA 1 is the highest risk group of funds and will need regular monitoring/adjustment. If you want to simplify it down to one US fund I would go for the Vanguard U.S. Equity Index Fund (VAUIA or VAUEI for the distributing version).
Transitioning to this portfolio
Currently our ISA & SIPP portfolios have a large amount of cash in them, a number of individual company shares and a range of index tracking ETFs (some of which are in the new FIRE Portfolio). In short they are a mishmash of stuff rather than what I now want to achieve.
The plan is to:
- Set up regular monthly investments in the new funds with the amounts in accordance with my target allocation. The money for this will come out of the cash already held in those accounts
- Monthly drip feeding in this way (called Cost Averaging) over a 24-month period will help protect against a short-term market drop and with my brokerage it is free of dealing fees if you do it this way
- Over the course of 12 months, sell off all the non-wanted stocks/ETFs, starting with the individual company shares first as they are the highest risk. Again this will be relatively low cost as my brokerage gives me 1 free trade per month, so I’ll be using those up for a start. Reinvesting the proceeds via the drip feeding process.
So, in two years time the plan is to be fully invested across our ISAs & SIPPs in the FIRE Portfolio. If the markets take a real beating over the next 12 months or so, I may accelerate the plan to 12 months.