Early retirement: are you a FIRE starter?

Person with firework, representing Financial Independence Retire Early

Remember when you were a teenager? It’s probably the richest you’ve ever been in your life.

You were still living rent-free with your parents, with few or no expenses to speak of. Virtually everything you earned from your pocket money or part-time job was yours to do with as you wished.

How many of us would love to return to the sort of financial freedom we had in those days?

Financial freedom is the driving force behind the FIRE (Financial Independence Retire Early) movement.

FIRE aficionados prioritise saving and investing as much as possible, along with spending less, in their most profitable working years. This means they can stop working much sooner than most people and live off the income generated by their investments and previous frugal lifestyle.

Many of them blog about it, too, notably ‘Simple Living in Somerset’ and Mr Money Mustache, who has been ‘retired’ for 15 years and is still only 46 years old.

How do they do it?

Good question! You could while away a week reading FIRE bloggers like Maynard Paton and still come away with the conclusion that they seem to be working harder than ever managing, and writing about, their investments, especially in the face of Covid-related stock market falls.

Don’t know about you, but spending more than a few hours a month tending to your investments doesn’t sound like a peaceful ‘retirement’ to us.

And as evidence-based advisors, we wouldn’t advocate continual churning of your portfolio to try and maximise returns, even – especially – in turbulent times like these.

Many FIRE advocates are prolific active investors, whose focus is spotting stocks that are ‘hot’ and trading them to maximise returns. It’s a risky strategy and one no evidence-based investor would choose to follow.

But retiring early? Super-early? That doesn’t sound like such a bad idea.

So how do you do it without risking everything and staying true to your evidence-based principles?

Planning is the key

Like most successful lifestyles, the key is to start early and plan thoroughly.

But don’t forget: the frugal lifestyle you allocate yourself in your early 20s, saving half of what you earn and living on baked beans, may be trickier to maintain as you progress through different life stages.

Starting a family, especially, can be like turning on a money tap that takes 20 years to turn off.

Sitting down with an evidence-based financial planner as soon as possible will give you a head start on making your FIRE dreams come true.

Enthusiasm and excitement can only take you so far. Setting goals and then creating a financial roadmap will give you more of a chance of achieving them.

Let’s say you’re 25 and you want to achieve financial freedom when you’re 45. That’s more than 20 years (at least) before most people retire.

You can look forward to the state pension (as long as you’ve contributed at least 10 years’ worth of national insurance payments), and any occupational or private pension. But you won’t be able to access these, as things stand, until you’re at least 66 (for the state pension) and 55 (for private provision) respectively.

Don’t forget you’ll need 35 qualifying years of NI payments to get the new full State Pension if you do not have a National Insurance record before 6 April 2016.

How will you fund those 20 pre-pension years (and beyond, if you want to live comfortably)?

You can assume you’ll continue to earn a reasonable amount before you’re 45. But don’t presume your expenses will stay the same, even if you forego things like a car, foreign holidays or private education for your kids.

An evidence-based financial planner will be able to build a roadmap to age 45 which takes into account most of the predictable turns and diversions life will throw at you.

What does ‘retirement’ mean?

The traditional view of ‘retirement’ is ‘stopping work and enjoying life’.

Of course, this implies that you don’t enjoy work, which isn’t always the case. But implicit within the term ‘retirement’ is doing very little, apart from hedonistic pursuits such as long holidays and plenty of gardening.

If you retire in your 40s it’s unlikely that you’ll be ready to settle down with a trowel and a seed catalogue.

Many FIRE advocates have made this mistake, though, notably blogger Finimus:

“I’m fairly sure that when I was saving hard in my 20’s I had the vague idea that my future multi-millionaire self would be spending his days lounging around on his private sun-bleached Caribbean island draped in nubile dusky maidens, or perhaps heli-skiing with super-models in the Alps. What wasn’t in mind: doing the grocery shop, popping some washing on, un-packing the dish-washer, and then picking my daughter up from hockey club. Sure – these are all things that need doing, but they aren’t very exciting, are they? This is more house-husband than super-rich.”

Blogpost ‘Early retirement: Boring’, 14 November 2020.

Stop work in your 40s, and even with the finances well taken care of, you’ll still probably have relatively young children to support, along with, perhaps, elderly parents to care for.

More to the point, life is boring without a sense of purpose. For most of us, that sense of purpose is covered by ‘work’, which exists primarily to help us fund ‘life’.

Those who have made sense of FIRE, like Mr Money Mustache, still do some form of work to keep things ticking over; but a lot less, and a lot more enjoyably, than they would have done in their pre-FIRE days.

Even if you are lucky enough to be able to live completely and fully on your investments, there are only so many cruises you can go on.

Stopping work at 45 means you probably have another 45 years to fill.

Plan how you’re going to spend those years, as well as how you’re going to fund them, and you could make FIRE work for you.

A Timely Reminder on the Perils of Market Timing

It’s certainly understandable if the economic uncertainty unfolding in the daily news has left you wondering – or worrying – about what’s coming next. No matter how you feel about the U.S. entering into a trade war with China, or a potential no-deal Brexit, it’s hard to deny that the prospect is currently causing considerable market turmoil.

Regardless of how the coming weeks and months unfold, are you okay with gritting your teeth, and keeping your carefully structured portfolio on track as planned? This probably doesn’t surprise you, but that’s exactly what we would suggest. (Unless, of course, new or different personal circumstances warrant revisiting your investments for reasons that have nothing to do with all the tea in China.)

That said, the news is admittedly unsettling. If you’ve got your doubts, you may be wondering whether you should somehow shift your portfolio to higher ground, until the coast seems clear. In other words, might these stressful times justify a measure of market-timing?

Here are four important reminders on the perils of trying to time the market – at any time. It may offer brief relief, but market-timing ultimately runs counter to your best strategies for building durable, long-term wealth.

  1. Market-Timing Is Undependable. Granted, it’s almost certainly only a matter of time before we experience another recession. As such, it may periodically feel “obvious” that the next one is nearly here. But is it? It’s possible, but market history has shown us time and again that seemingly sure bets often end up being losing ones instead. Even as recently as year-end 2018, when markets dropped precipitously almost overnight, many investors wondered whether to expect nothing but trouble in 2019. As we now know, that particular downturn ended up being a brief stumble rather than a lasting fall. Had you gotten out then, you might still be sitting on the sidelines, wondering when to get back in. The same could be said for any market-timing trades you might be tempted to take today.
  2. Market-Timing Odds Are Against You. Market-timing is not only a stressful strategy, it’s more likely to hurt than help your long-term returns. That’s in part because “average” returns aren’t the near-term norm; volatility is. Over time and overall, markets have eventually gone up in alignment with the real wealth they generate. But they’ve almost always done so in frequent fits and starts, with some of the best returns immediately following some of the worst. If you try to avoid the downturns, you’re essentially betting against the strong likelihood that the markets will eventually continue to climb upward as they always have before. You’re betting against everything we know about expected market returns.
  3. Market-Timing Is Expensive. Whether or not a market-timing gambit plays out in your favor, trading costs real money. To add insult to injury, if you make sudden changes that aren’t part of your larger investment plan, the extra costs generate no extra expectation that the trades will be in your best interest. If you decide to get out of positions that have enjoyed extensive growth, the tax consequences in taxable accounts could also be financially ruinous.
  4. Market-Timing Is Guided by Instinct Over Evidence. As we’ve covered before, your brain excels at responding instantly – instinctively – to real or perceived threats. When market risks arise, these same basic survival instincts flood your brain with chemicals that induce you to take immediate fight-or-flight action. If the markets were an actual forest fire, you would be wise to heed these instincts. But for investors, the real threats occur when your behavioral biases cause your emotions to run ahead of your rational resolve.

We’d like to think one of the most important reasons you hired a financial adviser is to help you avoid just these sorts of market-timing perils – during just these sorts of tempting times. Even if you do everything “right” in theory, we still cannot guarantee your success. But we are confident that sticking with your existing plans represents your best odds in an uncertain world.

So, if you have your doubts, please let us know. It’s our job – not to mention our moral and fiduciary imperative – to offer you our best advice across all of the market’s moves. While market-timing may be illusory, we are here for you, ready to explore various real steps you can take to shore up your investment resolve, regardless of what lies ahead.


Key Questions for Investors

Thanks to Dimensional Fund Advisors for this guest post.

Focusing on what you can control can lead to a better investment experience.

Whether you’ve been investing for decades or are just getting started, at some point on your investment journey you’ll likely ask yourself some of the questions below. Trying to answer these questions may be intimidating, but know that you’re not alone. Your financial adviser is here to help. While this is not intended to be an exhaustive list it will hopefully shed light on a few key principles, using data and reasoning, that may help improve investors’ odds of investment success in the long run.

  1. What sort of competition do I face as an investor?

The market is an effective information-processing machine. Millions of market participants buy and sell securities every day and the real-time information they bring helps set prices.

This means competition is stiff and trying to outguess market prices is difficult for anyone, even professional money managers (see question 2 for more on this). This is good news for investors though. Rather than basing an investment strategy on trying to find securities that are priced “incorrectly,” investors can instead rely on the information in market prices to help build their portfolios (see question 5 for more on this).


* Year-end WM/Reuter’s London Close FX rates used to convert original US dollars data to British pound sterling.

Source: World Federation of Exchanges members, affiliates, correspondents, and non-members. Trade data from the global electronic order book. Daily averages were computed using year-to-date totals as of December 31, 2016, divided by 250 as an approximate number of annual trading days.

  1. What are my chances of picking an investment fund that survives and outperforms?

Flip a coin and your odds of getting heads or tails are 50/50. Historically, the odds of selecting an investment fund that was still around 15 years later are about the same. Regarding outperformance, the odds are worse. The market’s pricing power works against fund managers who try to outperform through stock picking or market timing. One needn’t look further than real-world results to see this. Based on research, only 17% of US equity mutual funds and 18% of US fixed income mutual funds have survived and outperformed their benchmarks over the past 15 years.


Source: Mutual Fund Landscape 2017, Dimensional Fund Advisors. See Appendix for important details on the study.

Past performance is no guarantee of future results.

  1. If I choose a fund because of strong past performance, does that mean it will do well in the future?

Some investors select mutual funds based on past returns. However, research shows that most funds in the top quartile (25%) of previous five-year returns did not maintain a top-quartile ranking in the following year. In other words, past performance offers little insight into a fund’s future returns.

Source: Mutual Fund Landscape 2017, Dimensional Fund Advisors. See Appendix for important details on the study.

Past performance is no guarantee of future results.

  1. Do I have to outsmart the market to be a successful investor?

Financial markets have rewarded long-term investors. People expect a positive return on the capital they invest, and historically, the equity and bond markets have provided growth of wealth that has more than offset inflation. Instead of fighting markets, let them work for you.


In British pound sterling. UK Small Cap is the Dimensional UK Small Cap Index. UK Marketwide Value is the Dimensional UK Marketwide Value Index. UK Market is the Dimensional UK Market Index. UK Treasury Bills are UK One-Month Treasury Bills. UK Inflation is the UK Retail Price Index. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. See appendix for index descriptions.

Past performance is no guarantee of future results. The graph is for illustrative purposes only, figures presented are hypothetical and not indicative of any investment.

  1. Is there a better way to build a portfolio?

Academic research has identified these equity and fixed income dimensions, which point to differences in expected returns among securities. Instead of attempting to outguess market prices, investors can instead pursue higher expected returns by structuring their portfolio around these dimensions.

Relative price is measured by the price-to-book ratio; value stocks are those with lower price-to-book ratios. Profitability is measured as operating income before depreciation and amortisation minus interest expense scaled by book.

  1. Is international investing for me?

Diversification helps reduce risks that have no expected return, but diversifying only within your home market may not be enough. Instead, global diversification can broaden your investment opportunity set. By holding a globally diversified portfolio, investors are well positioned to seek returns wherever they occur.


Number of holdings and countries for MSCI United Kingdom Investable Market Index (IMI) and MSCI ACWI (All Country World Index) Investable Market Index (IMI) as at 31 December 2016. MSCI data © MSCI 2017, all rights reserved. Indices are not available for direct investment.

International investing involves special risks such as currency fluctuation and political instability. Investing in emerging markets may accentuate these risks. Diversification neither assures a profit nor guarantees against loss in a declining market.  

  1. Will making frequent changes to my portfolio help me achieve investment success?

It’s tough, if not impossible, to know which market segments will outperform from period to period.

Accordingly, it’s better to avoid market timing calls and other unnecessary changes that can be costly. Allowing emotions or opinions about short-term market conditions to impact long-term investment decisions can lead to disappointing results.

In British pound sterling. UK Large and Mid Cap is the MSCI United Kingdom Index (gross dividends). UK Total Market is the MSCI United Kingdom IMI Index (gross dividends). Developed Markets ex UK is the MSCI World ex UK Index (gross dividends). Emerging Markets is the MSCI Emerging Markets Index (gross dividends). Global Real Estate is the S&P Global REIT Index (gross dividends). UK Treasury Bills are UK One-Month Treasury Bills. WGBI 30-Year UK Hedged is the Citi World Government Bond Index UK 1–30+ years (hedged to GBP). WGBI Five-Year Hedged is Citi World Government Bond Index 1–5 Years (hedged to GBP). Global Fixed Income Hedged is Bloomberg Barclays Global Aggregate Bond Index (hedged to GBP). MSCI data © MSCI 2017, all rights reserved. S&P data provided by Standard & Poor’s Index Services Group. Prior to 1975: UK Three-Month Treasury Bills provided by the London Share Price Database; 1975–present: UK One-Month Treasury Bills provided by the Financial Times. Citi fixed income indices © 2017 by Citigroup. Data provided by Bloomberg. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio.

Past performance is no guarantee of future results.

  1. Should I make changes to my portfolio based on what I’m hearing in the news?

Daily market news and commentary can challenge your investment discipline. Some messages stir anxiety about the future, while others tempt you to chase the latest investment fad. If headlines are unsettling, consider the source and try to maintain a long-term perspective.

  1. So, what should I be doing?

Work closely with a financial adviser who can offer expertise and guidance to help you focus on actions that add value. Focusing on what you can control can lead to a better investment experience.

  • Create an investment plan to fit your needs and risk tolerance.
  • Structure a portfolio along the dimensions of expected returns.
  • Diversify globally.
  • Manage expenses, turnover, and taxes.
  • Stay disciplined through market dips and swings.

Please feel free to contact us if you would like a no cost, no obligation appraisal of your current portfolio(s).


Question 2: The sample includes US mutual funds at the beginning of the 15-year period ending December 31, 2016. Each fund is evaluated relative to the Morningstar benchmark assigned to the fund’s category at the start of the evaluation period. Surviving funds are those with return observations for every month of the sample period. Winner funds are those that survived and whose cumulative net return over the period exceeded that of their respective Morningstar category benchmark.

Question 3: At the end of each year, US mutual funds are sorted within their category based on their five-year total return. US mutual funds in the top quartile (25%) of returns are evaluated again in the following year based on one-year performance in order to determine the percentage of funds that maintained a top-quartile ranking. The analysis is repeated each year from 2007– 2016. The chart shows average persistence of top-quartile funds during the 10-year period.

Questions 2 and 3: US-domiciled open-end mutual fund data is from Morningstar and Center for Research in Security Prices (CRSP) from the University of Chicago. Index funds and fund-of-funds are excluded from the sample. Equity fund sample includes the Morningstar historical categories: Diversified Emerging Markets, Europe Stock, Foreign Large Blend, Foreign Large Growth, Foreign Large Value, Foreign Small/Mid Blend, Foreign Small/Mid Growth, Foreign Small/Mid Value, Japan Stock, Large Blend, Large Growth, Large Value, Mid-Cap Blend, Mid-Cap Value, Miscellaneous Region, Pacific/Asia ex-Japan Stock, Small Blend, Small Growth, Small Value and World Stock. Fixed income fund sample includes the Morningstar historical categories: Corporate Bond, Inflation-Protected Bond, Intermediate Government, Intermediate-Term Bond, Muni California Intermediate, Muni National Intermediate, Muni National Short, Muni New York Intermediate, Muni Single State Short, Short Government, Short-Term Bond, Ultrashort Bond and World Bond. See Dimensional’s “Mutual Fund Landscape 2017” for more detail. Benchmark data provided by Bloomberg Barclays, MSCI, Russell, Citigroup and S&P. Bloomberg Barclays data provided by Bloomberg. MSCI data © MSCI 2017, all rights reserved. Frank Russell Company is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Citi fixed income indices © 2017 by Citigroup. The S&P data is provided by Standard & Poor’s Index Services Group.

Question 4: DIMENSIONAL UK SMALL CAP INDEX: January 1994–present: Compiled from Bloomberg securities data. Market capitalisation-weighted index of small company securities in the eligible markets excluding those with the lowest profitability and highest relative price within the small cap universe. Profitability is measured as operating income before depreciation and amortisation minus interest expense scaled by book. Exclusions: REITs and investment companies. The index has been retroactively calculated by Dimensional Fund Advisors and did not exist prior to April 2008. The calculation methodology for the Dimensional UK Small Cap Index was amended in January 2014 to include direct profitability as a factor in selecting securities for inclusion in the index. July 1981–December 1993: Includes securities in the bottom 10% of market capitalisation, excluding the bottom 1%. Rebalanced semiannually. Prior to July 1981: Elroy Dimson and Paul Marsh, Hoare Govett Smaller Companies Index 2009, ABN-AMRO/Royal Bank of Scotland, January 2009.



DIMENSIONAL UK MARKETWIDE VALUE INDEX: January 1994–present: Compiled from Bloomberg securities data. The index consists of companies whose relative price is in the bottom 33% of their country’s companies after the exclusion of utilities and companies with either negative or missing relative price data. The index emphasises companies with smaller capitalisation, lower relative price and higher profitability. The index also excludes those companies with the lowest profitability and highest relative price within their country’s value universe. Profitability is measured as operating income before depreciation and amortization minus interest expense scaled by book. Exclusions: REITs and investment companies. The index has been retroactively calculated by Dimensional Fund Advisors and did not exist prior to April 2008. The calculation methodology for the Dimensional UK Value Index was amended in January 2014 to include direct profitability as a factor in selecting securities for inclusion in the index. Prior to January 1994: Source: Dimson, Elroy, Stevan Nagel and Garrett Quigley. 2003. “Capturing the value premium in the UK”, Financial Analysts Journal 2003, 59(6): 35–45. Created Returns, converted from GBP to USD using the WM/Reuters at 4 pm EST (closing spot), from PFPC exchange rate.

DIMENSIONAL UK MARKET INDEX: Compiled by Dimensional from Bloomberg securities data. Market capitalisation-weighted index of all securities in the United Kingdom. Exclusions: REITs and investment companies. The index has been retroactively calculated by Dimensional and did not exist prior to April 2008.

UK ONE-MONTH TREASURY BILLS: Provided by the Financial Times Limited. Prior to 1975: UK Three-Month Treasury Bills provided by the London Share Price Database.


UK RETAIL PRICE INDEX: Provided by the Office for National Statistics; Crown copyright material is reproduced with the permission of the Controller of HMSO.
























Divorce Law Reform Aims To Reduce Conflict

Divorce laws look set to change, with the government planning to introduce reforms designed to reduce family conflict.

The proposals follow a public consultation, with family justice professionals and others voicing their support for reform.

It will mean an update to the 50-year old divorce laws, which have been shown to make the conflict worse between divorcing couples.

As part of the consultation, it was found that the current divorce system can reduce prospects for reconciliation, and can also damage relationships between parents and children, following the divorce.

Justice Secretary David Gauke said:

“Hostility and conflict between parents leave their mark on children and can damage their life chances.

“While we will always uphold the institution of marriage, it cannot be right that our outdated law creates or increases conflict between divorcing couples.

“So I have listened to calls for reform and firmly believe now is the right time to end this unnecessary blame game for good.”

Aidan Jones OBE, Chief Executive at relationship support charity, Relate said:

“This much-needed change to the law is good news for divorcing couples and particularly for any children involved.

“The outdated fault-based divorce system led parting couples to apportion blame, often resulting in increased animosity and making it harder for ex-partners to develop positive relationships as co-parents.

“As a large body of evidence shows, parental conflict is damaging to children’s wellbeing and chances in life, whether the parents are together or separated. It’s good that the government has listened and taken action on this, demonstrating commitment to reducing parental conflict.

“While divorce isn’t a decision that people tend to take lightly, we do support the extension of the minimum timeframe which will allow more time to reflect, give things another go if appropriate, and access support such as relationship counselling or mediation.”

Under current laws, divorce requires proof that a marriage has broken down irretrievably. It forces spouses to provide evidence of ‘unreasonable behaviour’ or years of separation, even where a mutual decision has been taken to part ways.

In practice, very few divorces are contested in the courts. But the ability to fight the divorce has been used by abusive partners to continue their own coercive and controlling behaviour.

This ability to contest a divorce is effectively removed under the new rules.

Under the new proposals, the government will remove these grounds for divorce, retaining the irretrievable breakdown of a marriage as the sole ground for divorce.

Instead of having to provide evidence of a ‘fact’ around behaviour or separation, divorcing couples will instead need to give a statement of irretrievable breakdown.

The existing two-stage legal process referred to as decree nisi and decree absolute, will remain in place.

There will also be a new option for a joint application for divorce. Each spouse will still be able to initiate the process on a sole basis.

One changes being introduced as part of the new proposals which could be unpopular is the introduction of a minimum timeframe of 6 months, from petition stage to final divorce.

There will be a minimum timeframe of 20 weeks from petition stage to decree nisi, and then 6 weeks from decree nisi to decree absolute.

This new minimum timescale reflects views in the consultation that couples ‘feel divorced’ when the court grants a provisional decree of divorce, the decree nisi.

Having a minimum timescale between petition and decree nisi is designed to give divorcing couples a meaningful period of reflection, during which time they have the opportunity to stop the process.

But where divorce is inevitable, the minimum timescale will better enable couples to reach agreement on practical arrangements for the future.

Courts will retain the power to expedite the process where appropriate. The new divorce legislation is expected to be introduced as soon as Parliamentary time allows.

If you are considering divorce, it’s essential to seek professional advice as early as possible in the process.

In addition to legal advice from an experienced family law professional, you should speak to a financial planner too so you can understand all of the personal finance implications and options.

Money Management Lingo – Cutting Through Financial Jargon

Doctors write prescriptions. Mechanics perform tune-ups. Lawyers prepare briefs. Financial advisers help you manage your money. Ultimately, it’s that simple. But like any other profession, we sometimes have a funny way of saying it.

Just as it’s good to know that Enter your PIN doesn’t mean you should jab a sharp object into your phone, understanding some of the “shoptalk” we use can help you manage your money more effectively, and hold more meaningful conversations with your adviser. Following are a few of the most common terms related to money management.


Your assets are like the organs that sustain your financial being and feed your financial worth. Cash is the consummate asset, because you can do just about anything you want with it. That said, cash is not expected to generate future income unless you invest it in other assets, such as stocks, bonds, commodities, real estate, and similar holdings.

Unit Trusts, OEICS and Exchange-Traded Funds

You might own some assets directly, such as shares, a rental property, or a gold bar. For efficient investing, it’s common to own shares of unit trusts, exchange-traded funds (ETFs) or similar structures, which in turn hold batches of these underlying assets on your behalf.

Fund Managers

Fund managers such as Dimensional Fund Advisors or Vanguard provide and manage the funds and ETFs in which you invest. Each manager typically offers a varied “family” of funds representing different batches of assets – such as funds for investing in domestic, international or emerging markets stocks; funds for investing in short-term bonds; funds for investing in Real Estate Investment Trusts; and so on.

Investment Accounts

Investment accounts are “containers” for holding your funds and various types of individual assets. Accounts are typically “regular/taxable,” or “tax-advantaged,” with different tax treatments depending on the type of account. Taxable accounts are basically any accounts that are not subject to special tax treatment. Tax-advantaged accounts include structures such as ISAs and Pensions.


Custodians hold your investment accounts on your behalf. They may also execute transactions upon your direction, such as adding or removing money into or out of your account, or buying or selling holdings within it. Your custodian also periodically reports account activities to you, typically monthly. Here at Oak Four, specific custodian(s) typically serve these essential roles, including submitting their independent reports directly to you for your review.

Note: We strongly recommend ensuring your financial adviser is never also your custodian. If your adviser is responsible for managing your investments AND they are the only source for reporting the results to you, it makes it too easy for the criminally minded to hide their malfeasance by sending you fake reports. Think Bernie Madoff.

Investable Assets

Investable assets are assets that are already part of, or readily available to add to your investment portfolio. Money currently “tied up” in your home, business or similar ventures is certainly of worth to you, but it’s not considered an investable asset when it’s already being used to fulfill other important roles. Future income from your career, the future sale of a business, or similar sources of expected income are not yet investable assets either – not until you’ve received the money, and set some of it aside for investing.

Your Investment Portfolio

Combine all your accounts containing all your investable assets (no matter what kind they are or where they’re held), and that’s your investment portfolio.

Assets Under Management

For some of your accounts, our services are twofold: We advise you on how to invest the assets within your total portfolio, plus we serve as a liaison with your custodian to facilitate account management – such as set-up, closure, transfers and trades. For these accounts, we include their assets in your Assets Under Management (AUM). For other accounts, such as your company pension, another provider may already be managing account transactions for you. We still include these assets in our ongoing advice, portfolio management, performance reports, and financial planning services. But they are typically excluded from your AUM totals.

Want To Know More?

Now that you’re getting the hang of some of our specialised lingo, what else can we answer for you? As a fiduciary adviser, responsible for serving investors’ highest financial interests, we consider it our privilege and duty to not only help you manage your money, but to help you actually understand what we’re talking about when we do.

#lingo #jargon #moneymanagement 

Asset Allocation – What is it and Why it Matters

Asset allocation. It’s so ingrained in how we manage our clients’ investment portfolios, we talk about it all the time. But what is it? What are assets, and what happens when you allocate them?

Asset Allocation: A Classy Subject
Big picture, an asset is anything beneficial you have or have coming to you. For our purposes, it’s anything of value in your investment portfolio. After bundling your investable assets into asset classes, we allocate, or assign, each asset class a particular role in your portfolio.

To offer an analogy, allocating your portfolio into different asset classes is similar to storing your clothes according to their roles (pants, shirts, shoes, etc.), instead of just leaving them in a big pile in your wardrobe. You may also further sort your wardrobe by style, so you can create ideal ensembles for your various purposes. Likewise, asset allocation helps us tailor your portfolio to best suit you – efficiently tilting your investments toward or away from various levels of market risks and expected returns. Your precise allocations are guided by your particular financial goals.

That’s it, really. If you stop reading here, you’ve already got the basics of asset allocation. Of course, given how much academic brainpower you’ll find behind these basics, there is a lot more we could cover. For now, let’s take a closer look at those asset classes.

Asset Classes, Defined
At the broadest level, asset classes typically include domestic, developed international, and emerging market versions of the following:

  • Equity/stocks (an ownership stake in a business)
  • Bonds/fixed income (a loan to a business or government)
  • Hard Assets (a stake in a tangible object such as commodities or real estate)
  • Cash or cash equivalents

Just as you can further sort your wardrobe by style, each broad asset class (except for cash) can be further subdivided based on a set of factors, or expected sources of return. For example:

  • Stocks can be classified by company size (small-, mid-, or large-cap), business metrics (value or growth), and a handful of other factors more recently identified.
  • Bonds can be classified by type (government, municipal or corporate), credit quality (high or low ratings), and term (short-, intermediate-, or long-term due dates).

We can then mix and match these various factors into a rich, but manageable collection of asset classes – such as international small-cap stocks, intermediate government bonds, and so on.

Generally speaking, the riskier the asset class, the higher return you can expect to earn by investing in it over the long haul.

Asset Allocation, Implemented
To convert plans into action, we turn to select fund managers with low-costs fund families that track our targeted asset classes as accurately as possible. Sometimes a fund tracks a popular index that tracks the asset class; other times, asset classes are tracked more directly. Either way, the approach lets us turn a collection of risk/reward “building blocks” into a tightly constructed portfolio, with asset allocations optimised to reflect your investment plans.

The Origin of Asset Allocation
Who decides which asset classes to use, based on which market factors? To be honest, there is no universal consensus on THE correct answer to this complex and ever-evolving equation. As evidence-based practitioners, we turn to ongoing academic enquiry, professional collaboration, and our own analysis. Our goal is to identify allocations that seem to best explain how to achieve different outcomes with different portfolios. As such, we look for robust results that have:

  • Been replicated across global markets
  • Been repeated across multiple, peer-reviewed academic studies
  • Lasted through various market conditions
  • Actually worked, not just in theory, but as investable solutions, where real-life trading costs and other frictions apply

Asset Allocation in Action
As we learn more, sometimes we can improve on past assumptions, even as the underlying tenets of asset allocation remain our dependable guide. Bottom line, by employing sensible, evidence-based asset allocation to reflect your unique financial goals (including your timelines and risk tolerances), you should be much better positioned to achieve those goals over time.

Asset allocation also offers a disciplined approach for staying on course toward your own goals through ever-volatile markets. This is more important than most people realise. As Dimensional Fund Advisor’s David Booth has observed, “Where people get killed is getting in and out of investments. They get halfway into something, lose confidence, and then try something else. It’s important to have a philosophy.”

So, now that you’re more familiar with asset allocation, we hope you’ll agree: Properly tailored, it’s a fitting strategy for any investor seeking to earn long-term market returns. Please let us know if we can tell you more.

Six Financial Best Practices for 2019

So, are you ready to get ahead for 2019? Here are six financial best practices for the year ahead. Pick a few of them or take on the entire list. Either way, you’ll be that much further ahead by the time 2020 rolls around.

  1. Do nothing. If you have a well-built investment portfolio in place, guided by a relevant investment plan, your best move in hyperactive markets is to let that plan be your guide. That often means doing nothing new with your holdings. We list investment inaction as a top priority, because “nothing” can be one of the hardest things to (not) do when the rest of the market is in perpetual motion!
  2. Double down on your planning. That said, a “do nothing” approach to turbulent markets hinges on having that relevant plan in place, guiding your appropriately structured portfolio. A fresh new year can be a great time to tend to your investment plan – or create one, if you’ve not yet done so. Have any of your personal goals changed, or will they soon? How might this impact your investment mix? Have market conditions put your portfolio ahead of or behind schedule? Are you unsure where you stand to begin with? It’s time well-spent to periodically ensure your plan remains relevant to you and your personal circumstances.
  3. Prepare for the unknown with a rainy-day fund. Time will tell whether 2019 markets are friendly, foul, or (if it’s a typical year) an unsettling mix of both. Having enough liquid, rainy-day reserves to tide you through any rough patches is a best practice no matter what lies ahead. Knowing your near-term spending needs are covered should help with both the practical and emotional challenges involved in leaving the rest of your portfolio fully invested as planned, even if the markets take a turn for the worse.
  4. Redirect your energy to contributing financial factors. While you’re busy staying the course with your investments, you can redirect your attention to any number of related financial and advanced planning activities. While you don’t necessarily need to act on everything at once, it’s worth reviewing your financial landscape approximately annually, and identifying areas in need of attention. Maybe you’ve got a debt load you’d like to reduce, or an estate plan that’s no longer relevant. Perhaps it’s been too long since you’ve reviewed your insurance line-up, or you’d like to revisit your philanthropic goals in the context of the latest tax laws. Refreshing any or all of these items is likely to contribute more to your financial success than will fussing over the stock market’s daily gyrations.
  5. Perform a cybersecurity audit. Protecting yourself against cybercriminals is another excellent use of your time. With the new year, consider revisiting a few basic, protective steps, such as: changing key passwords on your most sensitive login accounts; reviewing your credit reports. Especially with child identity theft on the rise, these actions apply to your entire household. Unfortunately, even minor children are now at heightened risk.
  6. Have “that money talk” with your kids, your parents, or both. Speaking of your kids, when is the last time you’ve held any conversations about your family wealth? It’s never too soon to begin preparing your minor children for a financially literate adulthood. As they mature, their financial independence rarely happens by accident, with additional in-depth conversations in order. Then, as you and your parents age, you and your kids must prepare to step in and assist if dementia, disability or death take their tolls. There also can be ongoing conversations related to any legacy you’d like to leave as a family. For all these considerations and more, an annual “money talk” can be critical to successful outcomes.

So, there you have it: Six creative ways to bolster your financial well-being while the stock market does whatever it will in the year ahead. While this list is by no means exhaustive, we hope you’ll find it an approachable number to take on … with two critical caveats.

First, we’ve got a bonus “financial best practice” to add to the list:

Above all else, remember what your money is for.  Money is meant to fund your moments of meaning.

So, be it resolved for the year ahead: Next time you find your stomach tightening at the latest frightening or exciting financial news, tune it out. Walk away. Go do something you love, with those whose company you cherish. Circling back to our first call to inaction, not only will this feel better, it’s likely to be better for your financial well-being.

Second, we recognise that each of these “easy” best practices aren’t always so easy to implement. We could readily write pages and pages on how to tackle each one.

But instead of writing about them, we’d love to help you do them. At Oak Four, we work with families every day and over the years to convert their dreams into plans, and their plans into achievements. We hope you’ll be in touch in the new year, so we can do the same for you.

Brexit: How to Navigate Financial Market Volatility

As the old Chinese curse has it: “May you live in interesting times”. With Brexit negotiations ongoing, it’s certainly interesting times in British politics, with likely consequences for investment markets.

There’s still a great deal of uncertainty over the outcome of Brexit. The anticipated ‘decisive vote’ has been postponed, for now, so Theresa May can seek more reassurances around the Irish border backstop.

We’ve also had confirmation from the European Court of Justice that the UK can unilaterally withdrew its Article 50 notice and effectively cancel Brexit, without seeking approval from other EU countries.

We can’t know for sure what is going to happen next.

One possible scenario is a lost vote in the House of Commons followed by the resignation of Theresa May, and then a new leadership election within the Conservative Party; possibly even a General Election in the New Year.

We do know that investment markets dislike uncertainty.

As we move ever closer to the 29th March departure date, that uncertainty only grows.

With global stock markets already displaying some volatility in recent months, due to US and China trade war and, more recently, inverted yield curve in the US, that growing uncertainty could result in greater volatility, market corrections and (understandably) nervous investors.

Despite this uncertainty and its potential impact on investment portfolios, we’re clear about how we will navigate any choppy investment market conditions ahead.

In simple terms, our approach towards investment advice and management remains unchanged.

Here’s why.

The portfolios we recommend for clients are well diversified. This means that we don’t recommend putting all of your eggs in one basket, instead spreading portfolios across several investment asset classes, sectors and themes.

This diversification is a really important aspect of risk management when investing money.

From the perspective of any Brexit induced volatility, diversification means our clients are not overly exposed to investment assets which are most likely to respond to domestic turmoil.

It means that, when the newspapers and newsreaders are screaming about billions of pounds being wiped off the value of the FTSE 100, this is only one small part of your investment portfolio.

In recent years, this diversification within the portfolios we recommend and manage has moved further from the UK to include a higher proportion of global assets.

Thinking about the UK equity holdings within client portfolios, there’s an interesting consequence of the high proportion of overseas earnings from FTSE 100 companies, for example.

In the aftermath of the Brexit referendum, many investors were surprised to witness the FTSE 100 rise by more than 10% in three months.

During this time, the weakness of Pound Sterling was boosting the profits of FTSE 100 companies with overseas earnings. Around 70% of FTSE 100 earnings come from outside of the UK, making a weak Pound Sterling beneficial for these companies.

I’m not suggesting that a Brexit meltdown leading to a collapse in the Pound will have the same positive impact on UK equities next time, but it’s worth keeping in mind that things aren’t always as simple as they first seem when it comes to investing money.

Our approach towards investment advice and management also remains unchanged because our clients are long-term investors.

Any increased volatility we experience over the coming days, weeks and months will likely be short-term, having little meaningful impact on the long-term performance of portfolios.

One exception could be where clients are making withdrawals from their portfolios in retirement. But in this case, we allocate a sufficient amount to cash in order to avoid needing to draw down from invested assets during periods of extreme market correction.

We’re staying the course because we know that attempting to time the investment markets is futile.

When markets are volatile, there’s always a temptation to try and sell before they have fallen to the bottom and then buy again before they rise to the top.

Nobody can do this consistently well. The more likely outcome is selling low before buying high. Do this enough times and you can cause some serious harm to your wealth.

With all of this said, we understand that it can be unpleasant to watch investment market volatility and experience falls in the value of your portfolio.

Regardless of how often we remind investors that volatility is a normal part of the long-term investing journey, our heart is bound to overrule our head on occasion, especially when the media does their level best to sensationalize what is going on.

If you’re feeling nervous about investment markets in the wake of the Brexit news this week, talk to us.

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The Vital Role of Rebalancing Your Portfolio

If there is a universal investment ideal, it is this: Every investor wants to buy low and sell high. What if we told you there is a disciplined process for doing just that, and staying on track toward your personal goals while you’re at it? Guess what? There is. It’s called rebalancing.

Rebalancing: How It Works

Imagine it’s the first day of your investment experience. As you create your new portfolio, it’s best if you do so according to a personalised plan that prescribes how much weight you want to give to each asset class. So much to stocks, so much to bonds … and so on. Assigning these weights is called asset allocation.

Then time passes. As the markets shift around, your investments stray from their original allocations. That means you’re no longer invested according to plan, even if you’ve done nothing at all; you’re now taking on higher or lower market risks and expected rewards than you originally intended. Unless your plans have changed, your portfolio needs some attention.

This is what rebalancing is for: to shift your assets back to their intended, long-term allocations.

A Rebalancing Illustration

To illustrate, imagine you (or your adviser) has planned for your portfolio to be exposed to the stock and bond markets in a 50/50 mix. If stocks outperform bonds, you end up with too many stocks relative to bonds, until you’re no longer at your intended, balanced blend. To rebalance your portfolio, you can sell some of the now-overweight stocks, and use the proceeds to buy bonds that have become underrepresented, until you’re back at or near your desired mix. Another strategy is to use any new money you are adding to your portfolio anyway, to buy more of whatever is underweight at the time.

Either way, did you catch what just happened? Not only are you keeping your portfolio on track toward your goals, but you’re buying low (underweight holdings) and selling high (overweight holdings). Better yet, the trades are not a matter of random guesswork or emotional reactions. The feat is accomplished according to your carefully crafted, customised plan.

Portfolio Balancing: A Closer Look

We’ve now shared a simple rebalancing illustration. In reality, rebalancing is more complicated, because asset allocation is completed on several levels. First, we suggest balancing your stocks versus bonds, reflecting your need to take on market risk in exchange for expected returns. Then we typically divide these assets among stock and bond subcategories, again according to your unique financial goals. For example, you can assign percentages of your stocks to small- vs. large-company and value vs. growth firms, and further divide these among international, U.S., and/or emerging markets.

One reason for these relatively precise allocations is to maximise your exposure to the right amount of expected market premiums for your personal goals, while minimising the market risks involved by diversifying those risks around the globe and across sources of returns that don’t always move in tandem with one another. We, and the fund managers we typically turn to for building our portfolios are guided by these tenets of evidence-based investing.

Striking a Rebalancing Balance

Rebalancing using evidence-based investment strategies is integral to helping you succeed as an investor. But like any power tool, it should be used with care and understanding.

It’s scary to do in real time. Everyone understands the logic of buying low and selling high. But when it’s time to rebalance, your emotions make it easier said than done. To illustrate, consider these real-life scenarios.

  • When markets are down: Bad times in the market can represent good times for rebalancing. But that means you must sell some of your assets that have been doing okay and buy the unpopular ones. The financial crisis of 2007–2009 is a good example. To rebalance then, you had to sell some of your safe-harbor holdings and buy stocks, even as popular opinion was screaming that stocks were dead. Of course history has shown otherwise; those who did rebalance were best positioned to capture available returns during the subsequent recovery. But at the time, it represented a huge leap of faith in the academic evidence indicating that our capital markets would probably prevail.
  • When markets are up. An exuberant market can be another rebalancing opportunity – and another challenge – as you must sell some of your high flyers (selling high) and rebalance into the lonesome losers (buying low). At the time, this can feel counterintuitive. But disciplined rebalancing offers a rational approach to securing some of your past gains, managing your future risk exposure, and remaining invested as planned, for capturing future expected gains over the long-run.

Costs must be considered. Besides combatting your emotions, there are practical concerns. If trading were free, you could rebalance your portfolio daily with precision. In reality, trading incurs fees and potential tax liabilities. To achieve a reasonable middle ground, it’s best to have guidelines for when and how to cost-effectively rebalance. If you’d like to know more, we’re happy to discuss the guidelines we employ for our own rebalancing strategies.

The Rebalancing Take-Home

Rebalancing using evidence-based investment strategies makes a great deal of sense once you understand the basics. It offers objective guidelines and a clear process to help you remain on course toward your personal goals in rocky markets. It ensures you are buying low and selling high along the way. What’s not to like about that?

At the same time, rebalancing your globally diversified portfolio requires informed management, to ensure it’s being integrated consistently and cost effectively. An objective adviser also can help prevent your emotions from interfering with your reason as you implement a rebalancing plan. Helping clients periodically employ efficient portfolio rebalancing is another way Oak Four seeks to add value to the investment experience.

Misperceptions About Market Corrections: Are You Prepared?

If you enjoy fine literature, we recommend all of Warren Buffett’s annual Berkshire Hathaway shareholder letters, dating back to 1965. While financial reports are rarely the stuff from which dreams are made, Buffett’s way with words never ceases to impress. His 2016 letter was no exception, including this powerful insight about market downturns:

“During such scary periods, you should never forget two things: First, widespread fear is your friend as an investor, because it serves up bargain purchases. Second, personal fear is your enemy.”

This actually is a good time to talk about scary markets, since we haven’t experienced a severe one in a while.

For example, the CBOE Volatility Index (VIX), aka, “the uncertainty index,” is a generally accepted gauge of how confident (or not) investors are that the market is going to be volatile (or not) during the next little while. The lower the number, the smoother the presumed ride … although, as usual, there are no guarantees the markets will actually do as they’re told.

As of August 8th, the VIX was hovering in the range of 10–37, year to date. To put this in context, the VIX peaked at about 60 during the bear market of 2007–2009. You’d have to go back just over a decade to witness similar periods of relative calm.

What should we make of these numbers? Scanning financial news, you’ll find the usual range of attempted interpretations: “We are worried about …” “Economic indicators suggest that …” “Geopolitical events are likely to …” and so on.

What else is new? While it’s highly unlikely the VIX will remain this calm forever, nobody can predict when it might turn, or why or how dramatically it may spike back up when it does. As always, we counsel against shifting your portfolio in reaction to near-term forecasts. This includes prognostications of perceived volatility, or lack thereof.

Instead, let’s use the relative calm as a perfect time to do a reality check on what scary markets really represent, and how to manage them when they occur.

How well-prepared are you today, in anticipation of tomorrow’s market downturns?

This brings us back to Buffett’s words of wisdom. Contrary to common perception, scary markets can actually be your friend. Some of your best returns are delivered in their immediate aftermath and, as Buffett suggests, there may be some “bargain” buying opportunities. BUT, you have to be there to benefit, which is why personal fear becomes your enemy if you panic and flee during the downturns.

So, how can we prepare? Instead of fussing over when the next market downturn may or may not occur, here are some great questions to consider:

Market Returns — Are you taking on enough stock market risk in your portfolio to capture a measure of expected returns when they occur (often unpredictably and without warning)?

Market Risks — Are you fortifying your exposure to market risks and expected returns with enough lower-risk holdings, so you won’t fall prey to your fears the next time markets tumble?

Personal Goals — Have you assessed whether your current portfolio mix is optimised to achieve your personal goals? Speaking of goals, have yours changed, warranting portfolio adjustments?

Personal Risk Tolerance — Have you been through past bear markets? If you discovered you’re not the risk-taker you thought you were (or, conversely, you sailed through with relative ease), does your current portfolio mix of safer/riskier holdings accurately reflect what you learned?

Actual Analytics — Have you carefully considered what a 30% or so market downturn would mean to you in real pounds and pence? Yes, it could happen. If it did, and you feel you’d be unlikely to hold firm with your current holdings, additional preparation may be warranted.

In short, you can prepare for the next down market by having a well-planned portfolio in place today — one you can stick with through thick and thin. Neither too “hot” nor too “cold,” your portfolio should be just right for you. It should reflect your financial goals. It should be structured to capture an appropriate measure of expected returns during good times, and allow you to effectively manage your personal fears throughout.

When is the last time you’ve thought about your portfolio from this perspective? If it’s been a while — or never — let’s talk. Because there’s never a better time than today to ensure you are well-prepared for tomorrow.

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