# Pick and Mix Portfolios – your choice from zero to £1M

Today’s post is about fitting together the various portfolios we describe here at 7 Circles into a coherent whole as you move along your journey to financial independence. It’s Pick and Mix Portfolios.

Contents

###### Pick and Mix Portfolios

I’ve been asked by a reader to explain how all the various portfolios that I write about fit together.

- Most investment websites focus on a single portfolio (which they usually want to charge you to look at).
- Our philosophy is different.

All of the portfolios are based on principles that have worked over time, but they won’t all work well at the same time.

- So the idea is that as your pot grows, you add more elements (portfolios) to it.

It’s another take on the principle of diversification, or hedging.

- The question is, which order do we add the portfolios, and when?

###### Which portfolios?

So far we’ve talked about eight or nine portfolios on this website, depending on how you look at things:

- SmallCap (AIM)
- PiggyBack (Main market)
- Dividends / Income
- Bonkers (Momentum)
- ETFs
- Investment Trusts
- HL portfolio
- Mike’s portfolio
- Technical Analysis (spread betting / shorting)

There’s a bit of overlap between the Bonkers and TA portfolios since they both use momentum / trend-following strategies, but for the purposes of today, let’s assume that the Bonkers portfolio sticks to stocks and funds.

- There’s also the potential to combine the PiggyBack and the SmallCap portfolios into a single “UK Stocks” portfolio if you are short of cash.

We’ve also talked about using AIM to shelter assets from IHT, and VCTs to reduce income tax when you’ve used up your annual pension allowance.

- These are specialised situations that we can ignore for the purposes of today’s post.

We can rule out two of the nine portfolios:

- Mike’s portfolio is already a Pick and Mix of the underlying portfolios, and
- The HL portfolio will become a Pick and Mix portfolio as it grows
- currently it’s just a simplified version of the ETF portfolio
- but as more money is added, it will also encompass the other portfolios, following the same basic progression that is outlined in this post

So that leaves us with seven to consider.

###### Classification

Let’s try and organise the seven a little bit.

The first useful classification is passive vs. active, since we’ll probably want to split our cash evenly between the two approaches:

- passive funds will tend to be cheaper
- active approaches are usually a bit more expensive, but can outperform in certain markets (undeveloped, illiquid) and at certain points of the cycle (particularly bear markets)

Here’s the split – it’s a bit one-sided:

###### Assets

Let’s try another way of looking at things – asset allocation.

This is a complicated subject, but the helicopter view would divide assets into three categories:

- UK equities
- International equities
- Non-equities (property, infrastructure, private equity, bonds, cash, commodities, hedge funds)
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These three groups allow us to access the two main dimensions of diversification:

- geography
- growth assets vs uncorrelated (stability) assets

This classification is a bit more useful:

###### Safety first

We can also rank the portfolios in order of risk.

This will be useful when we consider which order to add them, since the sensible approach is safety first – start with the safest portfolio and spiral out towards the riskier ones.

- The underlying principle here is that we won’t begin a new portfolio until we’ve reached the minimum viable size for the ones we already have.

Here’s my ranking, starting with the safest:

- ETFs
- Investment Trusts
- Dividend / Income
- Piggyback (UK Main)
- SmallCap (AIM)
- Bonkers (Momentum)
- TA (spreads & shorts)

The good news is that the first portfolio on the list (ETFs) covers the three main asset classes, so we don’t need to worry about our asset allocation becoming too distorted.

###### How big?

Finally, we can look at the practicalities of using these portfolios:

- How many stocks do we need, and in what size?
- What’s the minimum size of a portfolio?
- What’s the target size that we would prefer to hold?

These are obviously subjective numbers.

- We’re trading off costs (smaller sizes are more expensive to trade) against diversification.

I’ve put some numbers into the table below to get you started:

We can begin our journey with as little as £14K, and by the time all of the portfolios have reached their target size, we’ll have 239 positions across a pot of £525K.

###### Property

Of course, the real world is slightly more complicated.

Our 7C investors working their way towards financial independence have two basic goals:

- a roof over their heads
- a pot of money they can draw a retirement income from

The cost of a home varies widely across the UK, but for today I’ll look at the latest averages from the government:

- UK prices averaged £218K in September
- In England the average was £234K
- In London the average was £488K

###### Withdrawal rates

When I started writing this blog back in 2014, I thought that you could safely withdraw 4% pa from your pension pot.

- I’ve since been persuaded that this is too aggressive in the current economic climate, and so I plan to use a 3% safe withdrawal rate (SWR).

I’ll also assume that the average investor is targeting a retirement income of £25K pa, which is close to the national average (median) wage.

- So with a 3% SWR, they need a pension pot of £750K.

###### The journey

Combining the pension pot of £750K with a carefully chosen property worth £250K gives us a final target portfolio of a nice round one million pounds.

- Of this, 25% will be property, and to simplify things I’ll assume that this is accumulated smoothly along the journey from zero to £1M hero.

Now we need to choose our Pick and Mix snapshots – which sizes of portfolio should we review?

I’ve gone for the following:

- 10K
- 25K
- 50K
- 100K
- 250K
- 500K
- 1M

Let’s get started.

###### £10K

With £10K, and assuming we have £2.5K in property equity, all we can do is use the remaining £7.5K to begin our ETF portfolio.

###### £25K

With £25K, of which £6.3K is property equity, we can reach the minimum portfolio size of £14K for the ETF portfolio.

- That means we have £4.8K left over to put into investment trusts.

###### £50K

We have £12.5K in property, and 50% of the rest needs to go into ETFs (to maintain our active / passive split).

- The remaining £19K is less than the minimum investment trust portfolio size of £25K, so it all goes into ITs.

###### £100K

Things start to get slightly more interesting at this point.

We have £25K in property.

- 50% of the rest means £38K in ETFs.

We can now hit the £25K minimum for ITs, and still have £13K left over to put into our next portfolio.

- I’ve chosen Dividend / Income as the next safest on the list.

###### £250K

From here on, we really can Pick and Mix Portfolios:

- we have £63K in property
- 50% of the rest means £94K in ETFs
- we have £25K in investment trusts
- we can hit the £20K minimum for the next three portfolios
- and still have £9K left to get the Bonkers portfolio underway

Seven of the eight portfolios (including our property asset) are now in play.

###### £500K and £1M

This is just more of the same really.

- All eight portfolios are now in play.

At £1M, all of the portfolios are past their minimum size, and we are closing in on the target size for each of them

- Note that it’s only our commitment to 50% passive / 50% active that prevents us from being there already.

###### Summary charts and tables

Here’s a table to show the allocations across portfolios at each size:

And here’s the same thing as a chart:

Here are the percentages in each portfolio at each size:

And here is that table as a chart:

###### Conclusions

This is just one illustrative journey from zero to £1M.

You can make your own assumptions about:

- which portfolios you are interested in
- how much property you want to have
- your passive / active split

Each of these has the potential to change things dramatically.

The basic point here is that the “exciting” portfolios are not suitable for people with moderate amounts of money.

- Below £100K, stick with ETFs and investment trusts.
- From £250K upwards, you really can Pick and Mix Portfolios.

Until next time.

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