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Our Slow and Steady passive portfolio

This is no easy time to be a passive investor. Sluggishness and sloth are on the run, hounded by the January urge to FIX EVERYTHING NOW! Gym membership is soaring, joggers are pounding the streets, and the magazines are touting 10 easy steps to a faster, fitter, slimmer you.

Well, you won’t find any of that nonsense here. Instead, let’s kick back down a gear with the world debut of the Slow & Steady passive investment portfolio.

Every journey begins with the first step

The Slow & Steady portfolio is a model portfolio for Monevator that aims to illustrate how new private investors can overcome some of the difficulties associated with passive investing in the UK. In particular, we’ll use the portfolio to offer clear strategies for investing relatively modest sums without incurring injurious costs.

I’ll report back periodically on the portfolio’s performance, and hopefully it will develop into a useful long-term project.

Note: This is just an exercise. It’s no more than my own response to the practicalities of passive investing in the UK, according to the assumptions laid out below. The Slow & Steady portfolio is not intended as a real-world solution to any individual’s investing needs (including mine). You can see an archive of all the posts in this model portfolio series, including the latest updates.

The assumptions

No model portfolio would be complete without a set of assumptions to make it dance. Here are mine:

  • Time horizon: 20 years.
  • Initial contribution: £3,000 lump sum.
  • Regular contribution: £750 per quarter.
  • Investment vehicle: Index funds only. No trading fees incurred. ETF/Vanguard trading fees are prohibitive at this level of contribution.
  • Fund selection: Index funds are chosen on the basis of availability to UK retail investors on an execution-only basis. The cost of the portfolio will be kept as low as possible by choosing funds with the lowest Total Expense Ratio (TER) available without paying trading fees.

Each fund will track a benchmark index that is appropriate to its role in the portfolio’s overall asset allocation.

  • Asset allocation: The portfolio will not cover every asset class due to its relatively small size and the lack of suitable tracker products available. The core of the portfolio is invested in UK equities and developed world equities.

The Developed World ex-UK allocation is split into four separate funds because a single, suitable fund is not available. Further explanation here.

Emerging markets are included for additional geographic diversification and as an expected returns booster. UK Gilts should help to diversify the equity risk inherent in the portfolio.

The 80% allocation to equity should be considered aggressive and is a reflection of the long time horizon and my personal risk tolerance. The allocation to equity will be adjusted as the time horizon shrinks.

  • Rebalancing: the portfolio will be roughly rebalanced to the target asset allocations whenever new money is added.
  • Tax: The portfolio is assumed to be held in a tax-sheltered stocks and shares ISA. Fund ISAs from Interactive Investor are fee-free.
  • Dividends: All funds chosen are accumulation funds. Accumulation funds automatically reinvest dividends back into the fund (in contrast to income funds which distribute dividends back to the investor).
  • Performance: I shall report back on the portfolio’s performance once per quarter.

The Slow & Steady passive portfolio

Here’s the portfolio mix that these goals and assumptions have delivered:

UK equity: 20%

HSBC FTSE All Share Index – TER 0.27%
Fund identifier: GB0000438233

Initial purchase: £600
Buy 173.31 units @ 346.20p

Developed World ex UK equity: 50%

Split between four funds covering North America, Europe, the developed Pacific and Japan.

North American equity: 27.5%

HSBC American Index – TER 0.28%
Fund identifier: GB0000470418

Initial purchase: £825
Buy 439.77 units @ 187.6p

European equity ex UK: 12.5%

HSBC European Index – TER 0.37%
Fund identifier: GB0000469071

Initial purchase: £375
Buy 77.4154 units @ 484.4p

Japanese equity: 5%

HSBC Japan Index – TER 0.28%
Fund identifier: GB0000150374

Initial purchase: £150
Buy 222.7171 units @ 67.35p

Pacific equity ex Japan: 5%

HSBC Pacific Index – TER 0.37%
Fund identifier: GB0000150713

Initial purchase: £150
Buy 60.88 units @ 246.4p

Emerging market equity: 10%

Legal & General Global Emerging Markets Index Fund – TER 0.99%
Fund identifier: GB00B4MBFN60

Initial purchase: £300
Buy 557.7245 units @ 53.79p

UK gilts: 20%

L&G All Stocks Gilt Index Trust – TER 0.25%
Fund identifier: GB0002051406

Initial purchase: £600
Buy 379.03 units @ 158.3p

Total fund purchases: 7

Total cost: £3,000

Trading cost: £0

Right, that’s all there is to the Slow & Steady portfolio for now. We’ll check back in a few months time to see how things are going.

Take it steady,

The Accumulator

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{ 52 comments… add one }
  • 49 john November 22, 2013, 3:43 pm

    Accy & Jimbo,

    What about Vanguard’s FTSE All World ETF at .25% instead of your FTSE All Share and International ex-UK combos?

    I was looking to offset 70% of equity with 30% of iShares Global Inflation-Linked Bonds ETF (.25%) so long as it’s Sterling hedged.

    I’m sure that will cover me most ways going forward at the most cost effective way.

    Also one query on trading, do you factor the trading percentage as a percentage of the overall funds worth i.e 2 trades of £600 at £1.50 is .5% but as a percentage of a fund that is 4800 that .125% right?
    So if that continues, for instance, under the jurisdiction of Charles Stanley I make that out as a total annual charge of .625% initially, with that figure coming down as, hopefully, the value of the fund goes up?

  • 50 Mike Rodent March 29, 2017, 1:34 pm

    I am very interested in your site and the advice on it.

    Thanks for giving this specific fund recommendation advice (of lot of tracker investing advice is rather unspecific). Over the past year I have moved several £100 000s from cash (and property) into mainly (90% of them) passive funds, most of them US Index trackers, essentially the usual suspects: HSBC US Index, Vantage S&P 500, etc. At this stage I have several confusions as a newbie passive investor: 1) why would I want to invest in Japan or China or emerging markets? I can understand investing in USD-, £- (were it not for Brexit) or €-held stock. But Far East indices seem to go all over the place, as do their currencies… and I’m never going to want to live in that part of the world… 2) for me one of the BIGGEST PROBLEMS EVER is identifying the funds people are talking about: you actually quote the “Fund identifier” (aka ISIN) ref no. above. Most “recommenders” don’t … and it’s a huge source of confusion (for me) because so many funds have incredibly similar names but turn out to be as different as chalk and cheese.

    My biggest puzzle at the moment is how to diversify my passive investing without putting much in the UK or the Far East. Europe might be OK … maybe EU funds might even be quite cheap at the mo with concerns over Brexit effects. What do you think about diversification into trackers pertaining to a particular geographical + non-geographical sector? Eg. US financial funds index, or US tech funds index, if one exists?

  • 51 Mike Rodent March 29, 2017, 7:45 pm

    Hello Accumulator…

    Thought I’d take a look at this: HSBC European Index ISIN: GB0000469071. (Incidentally Cavendish told me it’s “not available to buy in an ISA any more as it is the old style bundled fund so you would have to use the new clean version of the fund if you want to use the HSBC European Index Fund”, which is ISIN GB00B80QGH28… I wonder what they mean by “clean”: it’s the same manager and fund size…).

    My question is: how do we ascertain that a fund like this is indeed a “tracker”. Just because of the word “index” in the name, and the low charges? When I look here (http://www.morningstar.co.uk/uk/funds/snapshot/snapshot.aspx?id=F00000OOB2) it’s actually quite confusing as to what it does: “The fund seeks to provide long term capital growth by matching the return of the FTSE Developed Europe excluding UK index. The fund seeks to invest in companies that make up the FTSE Developed Europe excluding UK index.” This suggests quite a bit of active “picking and mixing”… do you delve into this question of what constitutes a tracker anywhere on your site?

  • 52 The Accumulator April 2, 2017, 8:55 pm

    Hi Mike, re: your question about diversification, this piece is probably the most succinct and rational explanation of passive global diversification I’ve ever read: http://monevator.com/why-a-total-world-equity-index-tracker-is-the-only-index-fund-you-need/

    Everything I’ve read about industrial sectors leads me to believe that they’re not a good idea because you’re not rewarded for the concentration risk you take.

    Here’s a piece on naming conventions: http://monevator.com/fund-names-explained/

    Basically, if a fund has the word index in its name then you are usually in business. If the factsheet says it seeks to match the return of a certain index then you can rest easy, it’s an index fund.

    Clean funds – in olden days, um before about 2012, you could buy funds that included broker or IFA commissions within their management charge. The financial intermediaries could then pretend their services were free although really they got their payment via the backdoor from the fund – this was ‘dirty’. Now all funds you can buy are ‘clean’. Clean in the sense that you can see what they charge you for their services, while the intermediary – broker or IFA – is obligated to tell you what they charge. So it’s all out in the open, smelling fresh.

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