When it comes to DIY Investing you have 3 main choices: –

1. Full DIY

2. Semi DIY (Done For You)

3. No DIY!

In this article, we cover all of these options in more detail and also some other over-arching considerations that are essential to navigating through the maze of personal finance, investment and financial independence.

1. Full DIY

This is where you pick your own stocks, bonds, or other investments that you think will ‘beat the market’. In short, DON’T BOTHER! This is the best way to jeopardise your Financial Independence Retire Early plans.

Unless of course, you are an investment professional spending all day performing technical analysis and fundamental analysis of stocks, bonds, commodities etc. Maybe then it could be appropriate, but for the majority of investors, this is a sure-fire way to lose money. This includes Robinhood investors, ‘meme’ stock investors, tech stock investors, just don’t do it, YOU WILL LOSE MONEY!

2. Semi-DIY (Done For You)

This is the halfway house in between Full DIY above, and No DIY below. This is what I call Done For You (DFY) investing and there are a number of ways it can be done. Even at this level of investing, there are still decisions to be made by a DIY investor.

Ready-made Portfolios/Funds

The main online brokers in the UK (and the US, and elsewhere) offer ready-made standard, globally diversified, portfolios. A globally diversified portfolio is the standard portfolio construction used by most pension companies investing most people’s workplace pensions for example.

But as mentioned above, even in this case, you still have to decide between the different brokers offering these portfolios and the different portfolios they offer.

For example, one of the main UK brokers, Interactive Investor, offer some ‘quick-start funds’ they have selected from the universe of funds and fund providers. Namely the Vanguard Life Strategy funds or the BMO Sustainable funds. Which one to go for? These are the kinds of questions I will be addressing on this blog.

Whilst we are talking about online brokers use this site to compare their costs, pros, cons etc.

AJ Bell (You Invest) have their own set of funds picked by AJ Bell investment managers. These are packaged up for investors based on risk and you can go through and answer some basic questions to assess your attitude to risk to decide which to choose.
(This is essentially what "robo-advisors" do – see the Robo Advisors section below) 

Robo-Advisors

Robo-advisors offer a digital platform to allow investors to answer a set of questions to determine their basic investment needs and attitude to investment risk. Based on these answers a standard automated algorithm will suggest a fund or tailor-made portfolio without any human oversight or decision-making. This effectively automates this small part of what an IFA would do for you in setting up a tailor-made portfolio. So while you don’t get the same level of service or advice, you will end up with a portfolio for a fraction of the cost.

I personally invest with the most well known UK robo-advisor… Nutmeg as part of my ISA. Nutmeg will slot you into a standard portfolio based in risk tolerance. Nutmegs investment managers then adjust and manage these portfolios for their customers.

>>> Nutmeg Offer >>>

(This is a referral link and should you decide you like Nutmeg and invest with them, would mean you would pay no Nutmeg management fees for 6 months when you invest £500 or more.)

3. No DIY/DFY

i.e. Go talk to a financial advisor. (That’s an IFA in the UK – Independent Financial Advisor). Of course, the trade-off here is cost. Young people who are in the ‘accumulation’ phase of their wealth-building tend to plum for one of the ‘done for you’ investing options above.

But, if you are a bit older and have amassed a sizeable sum of money or are approaching retirement, then it is more appropriate to pay an IFA to ensure your retirement is on track and plan out the most tax-efficient way to access your retirement funds.

In this case, paying a financial advisor (or financial planner) is still a good idea to get a portfolio set up that is relevant to your circumstances looking at things like your age (how close you are to retirement age), attitude to risk, financial position, retirement goals, tax position etc. These all factor into a relevant portfolio and a financial plan that will be a guide to your retirement.

Like a good accountant, a good IFA can pay for themselves many times over so don’t simply dismiss the idea because of cost.

ISA vs Pension

When it comes to investments and financial independence, it’s not all about pensions. In the UK (and US) there are two tax wrapper account types that are typically used to save and invest in a tax-efficient way… pensions (SIPP’s, workplace pensions, personal pensions etc) and ISA’s - Individual Savings Account (IRA’s in the US). An ISA can can be a cash ISA a stocks ISA (invested in stocks and shares).

People often ask the question “Which is best… ISA vs SIPP?” The answer is… BOTH. Broadly speaking ISAs and Pensions are tax-efficient ‘vehicles’ through which you can generate long term wealth

Ideally, you should utilise both ISAs and SIPPs (or other types of pension) for their tax benefits. It is now law (in the UK) for employers to provide a workplace pension. Or maybe you are self-employed and have your own SIPP pension. In either case, money that you earn is invested before tax to give you the advantage to build up a bigger nest egg.

Your 'take home' salary/income is taken after income tax is applied. This money can then be invested in a tax-efficient ISA that grows free of tax but can also be taken out (or withdrawn) without paying any tax. i.e. Money that you take out of your ISA does not ever need to be declared on a tax form or self-assessment form.

This is NOT the case with pension or SIPP income when it is taken. Standard income tax applies on this income when you take/withdraw your pension (because it was not paid on the original earnings). In other words, a pension is just a tax deferment scheme.

Various studies have been carried out comparing the amount of tax paid between a pension/SIPP vs an ISA. Turn’s out that the tax paid is roughly the same. So ISA’s can also be thought of as a supplemental pension, but regardless, investing in both a pension and ISA will give you the tax advantages of both.

"Tax Wrapper" Accounts: Personal vs ISA vs Pension

Many people have these 3 types/categories of savings or investment accounts:-

• Pension/SIPP. A quarter of the pension can be taken TAX-FREE at age 55 and then the rest can be used in a number of mechanisms (drawdown, annuity) etc, the subject of which is for another article!

• ISA. Can be taken out/spent tax-free at any age! Sounds better than a pension right, but of course you have already paid income tax on the money in an ISA before its paid into the ISA.

• Personal (GIA). This is just a general term for any savings account or investment account that is not one of the two generally available ‘tax wrapper’ accounts above. Any income you take from a personal account is subject to either income tax or capital gains tax depending on how the returns on the account are generated. (Again, that will be the subject for another article).

Because you can access money in an ISA before retirement age, they are generally viewed as more of a medium-term investment account, but equally can essentially act as a second pension, and DIY investors will have different views and priorities for their ISA based on their circumstances. 

For example, you could sit somewhere in between, viewing ISA(s) as both long term and medium term. So you could have about a half of your ISA allocated to a ‘core’ globally diversified fund and the other half as income-based (dividend paying) investments paying a tax free income.

The generally received wisdom is to try to max out both pensions and ISA's. Pension contributions are made essentially tax free but you pay tax when you start withdrawing the pension. ISA contributions are made with money that has already been taxed, but once inside the ISA account you pay no tax when you withdraw.

In the UK, you can invest up to £60K per tax year in a pension and £20K per year in an ISA. If you are lucky enough to be in a position where you have maxed out the 20K per year ISA limit then you have the option on investing into a Personal (non-tax wrapper) account generally called a General Investment Account or GIA. GIA is just a generic term for anything outside the Pension/ISA 'tax wrapper' accounts. You could have 5 savings accounts with different banks and then maybe a stock and shares account with an online broker. Collectively, these accounts make up your GIA. 

Asset Allocation & Investment accounts

What is your overall 'Asset Allocation'?

Once you reach this level of investment you will need to think about your overall ‘asset allocation’. For example, if your Pensions and ISA's are invested mostly in stocks and bonds, do you also invest in these asset classes in your personal portfolio (General Investment Account(s) GIA )? 

Personally I am willing to take a bit more risk in my GIA. I already have a lot of exposure to the standard stocks and bonds asset classes in Pensions and ISA's so to increase my overall diversification I might look into alternative investments so I am not beholden to the stock/financial market across my entire portfolio.

Consolidating Investment accounts

It is, however, generally considered to be good practice to consolidate existing pensions into one low cost pension provider so you have a single view of your pension level and can make withdrawal arrangements with that one provider/broker when the time comes. I did this on the Vanguard UK platform and they puled in all my existing pensions and I then decided which of the funds on the Vanguard platform to invest the proceeds into.

Core, Income, Growth, Diversification

Another way to think about your Pensions, ISA's, and personal (GIA) account/portfolios is to consider what their main purpose is for you. In general these are Core, Income, and Growth.

Most people who have standard company pensions for example will be invested by the pension provider in a ‘core’ globally diversified portfolio. This is your core portfolio invested in standard risk asset classes which are mainly stocks and bonds. It is your 'core' portfolio that provides your best chance to achieve an almost guaranteed longer term growth from which you will eventually retire. Set and forget and let the diversified portfolio do its work over the longer term.

Why Global Diversification for Your Core Portfolio?

The main reason that most pension providers and IFAs use globally diversified funds as a standard core investment is that, over time, they provide the best returns for the least amount of risk. Because they are globally diversified they tend to smooth out problems caused in one region of the world.

Bonds and the DIY Investor

Bonds are typically the second highest allocation in pensions after stocks. Some pensions/portfolios have a standard 60% equities, 40% bonds allocation whist other might be closer to 70/30 or use a 'glidepath' where investors ‘glide’ into a higher bond allocation as retirement approaches to protect the value of the funds accumulated.

Watch out for Home Bias

Some pension providers/portfolios may have too much of a ‘home bias‘. So, for example, a UK broker (or pension providers) might have portfolios with a UK equities/bonds bias with a lack of exposure to global markets such as the US. If the US does a lot better than the UK (as has been the case for many years now) the UK biased portfolios will not grow as much as the UK & US portfolios. This could be down to brokers/investors being biased to funds and companies that they know about. Another reason might be removing currency exchange risk that comes from investing in foreign stock markets and then converting the returns into a stronger Pound. Some home bias may be preferable for these reasons but in general the numbers have been crunched on this issue which is why most pension providers go for the mostly globally diversified portfolio.

Keeping it Simple Cuts Your Costs, Saves Time, and Avoids Mistakes

If you have one main fund or ETF for your core portfolio it comes with an added advantage. As you have just one fund you are not trading in and out of different stocks or funds incurring trading costs when buying and selling. Not to mention all the time and effort saved. What is the most valuable commodity of them all… time!

If I want to pound cost average (buy/invest regularly whether markets are going up or down reducing purchasing costs) I can do that much more easily if I own one fund. If I try to do this over a number of funds and/or stocks it becomes costly and time-consuming

Amateur investors often make investing mistakes. It’s just a fact. The one-fund core portfolio cuts all of these mistakes out by design.

Personally I use one fund for my Core portfolio but I keep my options open to choose 'income' assets as well as 'growth' assets to diversify my overall portfolio.

Income & Growth

Income and Growth assets have the potential to add extra dimensions to an overall portfolio to potentially generate better returns. Defensive income paying shares pay a dividend even if their share price goes down and can benefit from investors 'rotating' into these shares in a downturn. Whilst this has the potential to protect their share price and therefore your portfolio in a downturn, the reality is that dividend stocks will also go down in price in a sell-off or bear market.

Growth stocks tend to do well when the financial markets are coming out of a crash and can provide greater returns to a portfolio when markets are in recovery mode.

• Core: Standard low-risk low-cost globally diversified funds providing good long term growth typically returning 7% to 9% per annum. These core stock market investments are likely to go up and down with the markets, but over the longer term, should grow. I also consider Capital Preservation investments (usually in the form of bonds) to form a subset in the Core portfolio. They are designed to protect your capital in market busts or as you approach retirement.

• Income: Funds, Stocks, and REITS aimed at higher levels of income and yield. The main aim here is to re-invest the dividends and income back into the same investments to achieve a compounding effect for returns. Income generated from these investments can be taken as income as and when needed.

• Growth: I split growth into two parts. Growth and High Growth. “High Growth” is for investments like tech stocks, biotech, and maybe other ‘Frontier’ type companies who are pushing the boundaries. Think Amazon or Microsoft in the early days of their existence. The “Growth” part of the portfolio invests in a basket of investments from regional stocks and funds to commodities such as precious metals and miners, and maybe ‘thematic‘ investments such as ESG (Environmental Social Governance) which has done well in recent times.

As mentioned above though, building Income and Growth portfolio’s will take some extra effort and it’s perfectly acceptable to set a Core portfolio up, which could be just one diversified fund or ETF, and then forget about investing.

• Core-Preservation. A.K.A Capital Preservation in the form of Bonds and/or Multi-Asset Funds.

• Core. One or more standard globally diversified funds.

• Income (Equities). Dividend funds/ETFs.

• Income (Property & Infrastructure). Property & Infrastructure income bearing assets and investments. Can includes REITs / BTL

• Growth (Equities). Growth-oriented funds, themes and individual growth stocks. For most DIY investors this category would tech stocks/funds.

• Growth (Commodities). Owning the commodities themselves such as Gold and Silver.

• High Growth (Equities). 'Frontier' Tech oriented stocks and funds. Includes BioTech / Green-tech etc.

The Core-Satellite Approach

As a DIY investor I am able to select well known funds such as ETFs/Index funds or Investment Trusts to form a Core portfolio that would typically be invested in globally diversified stocks.

Setting up this kind of simple Core portfolio and forgetting about it in the same way as many do for standard company/workplace pensions is a simple DIY strategy that is perfectly acceptable. Set and forget, then let the fund/portfolio do its thing over the longer term and then get on with your life! Job done.

But on top of this Core, more active DIY investors have the option to invest in one or more ‘Satellite‘ investments to potentially generate higher returns or maybe focus the portfolio on generating an income that can be used in drawdown when you are withdrawing your pension.

This is commonly called a ‘core-satellite’ approach; build a strong foundational core to the portfolio, around which we add ‘satellite’ investments for specific goals such as higher growth or income generation.

The main benefit is greater flexibility and control over the overall portfolio and a greater level of diversification than a standard core globally diversified portfolio.

And it’s not just about seeking higher growth or income. As I touched on above, Capital Preservation in the form of gold, bonds or bond-like multi-asset funds can come in very handy in bear markets or market downturns. If I have capital preservation assets already set up in my portfolio. I can divert some (or all) of my core portfolio into my capital preservation assets and shield my capital from the downturn.

This is why I track the potential warning signs of a major downturn. I can make decisions if I see trouble brewing and protect my portfolio(s) that I have spent my entire life building.

Click the button link below for each portfolio to see examples and options to implement these investing goals)...
DISCLAIMER: This is not financial advice tailored to anyone’s personal circumstances and should not be considered to be any kind of recommendation.