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The Slow and Steady passive portfolio update: Q2 2015

The portfolio is down 4.72% on the quarter.

Ouch – our model passive portfolio has hit a speed bump. We’ve gone backwards for the first time in three and a half years.

Every single asset class has taken a hit, even our bonds.

We’ve lost a grand in the three months since our last Slow & Steady report, and 4.72% has been scalped off our virtual wealth.

But hey, look at all the green numbers! On an annualised basis every asset class except for global property is up1 and the portfolio overall has still made 8.19% per year.

189. S&S tracker

N.B. Glb Prop, Dev World, Small Cap and Inflation Linked bonds show year-to-date returns as holdings are less than one year old. (Click to enlarge).

In short, there’s nothing to worry about. This is perfectly normal. If anything, it’s the last three and a half years of smooth growth that has been weird.

The Slow & Steady portfolio is Monevator’s model passive investing portfolio. It was set up at the start of 2011 with £3,000 and an extra £870 is invested every quarter into a diversified set of index funds, heavily tilted towards equities. You can read the origin story and catch up on all the previous passive portfolio posts here.

The standard deviation of equities is around 20% and the expected return is around 5%, which means that in two out of any three years, we might expect them to land anywhere in the +25% to -15% zone.

A portfolio like this with a fair slug of UK government bonds, can expect a deviation of around 15%. But that’s just statistics. Anything can happen in reality, and what has happened recently is no more than a wee stumble. It’s useful to get a small jolt like this rather than to be lulled into thinking our investments can only ever go up.

So don’t worry too much about the Greek crisis. Crises comes as standard in the markets. Things can get far worse and at some point they will. Whether it’ll be anything to do with the Greeks or some other as yet unknown and unexploded bomb – who knows?

In the meantime, let’s practice a few safety drills: Stay away from the news, crack open a book on stock market history, and check out those huge jagged ravines on the charts.

At some point, you, me and our portfolios will fall down one. Brace, brace, brace!

New transactions

Every quarter we throw another £870 into the market’s wind machine. Our cash is divided between our seven funds according to our asset allocation. With all asset classes off the boil, at least we’re buying everything more cheaply this time.

We use Larry Swedroe’s 5/25 rule to trigger rebalancing moves, but all’s quiet on that score this quarter. So we’re just topping up with new money as follows:

UK equity

Vanguard FTSE UK All-Share Index Trust – OCF 0.08%
Fund identifier: GB00B3X7QG63

New purchase: £87
Buy 0.546 units @ £159.44

Target allocation: 10%

Developed world ex-UK equities

Vanguard FTSE Developed World ex-UK Equity Index Fund – OCF 0.15%
Fund identifier: GB00B59G4Q73

New purchase: £330.60
Buy 1.5 units @ £221.02

Target allocation: 38%

Global small cap equities

Vanguard Global Small-Cap Index Fund – OCF 0.38%
Fund identifier: IE00B3X1NT05

New purchase: £60.90
Buy 0.322 units @ £189.07

Target allocation: 7%

Dividends last quarter: £4.48 (If I were a rich man, yubby-dibby-dibby-dum…)

Emerging market equities

BlackRock Emerging Markets Equity Tracker Fund D – OCF 0.24%
Fund identifier: GB00B84DY642

New purchase: £87
Buy 75.652 units @ £1.15

Target allocation: 10%

OCF down from 0.27% to 0.24%

Dividends last quarter: £10.47

Global property

BlackRock Global Property Securities Equity Tracker Fund D – OCF 0.23%
Fund identifier: GB00B5BFJG71

New purchase: £60.90
Buy 41.885 units @ £1.45

Target allocation: 7%

Dividends last quarter: £13.21

UK gilts

Vanguard UK Government Bond Index – OCF 0.15%
Fund identifier: IE00B1S75374

New purchase: £121.80
Buy 0.865 units @ £140.78

Target allocation: 14%

UK index-linked gilts

Vanguard UK Inflation-Linked Gilt Index Fund – OCF 0.15%
Fund identifier: GB00B45Q9038

New purchase: £121.80
Buy 0.812 units @ £150.01

Target allocation: 14%

New investment = £870

Trading cost = £0

Platform fee = 0.25% per annum.

The portfolio is notionally held with Charles Stanley Direct. You can use its monthly investment option to invest from £50 per fund. Just cancel the option after you’ve traded if you don’t want to make the same investment next month.

Take a look at our online broker table for other good platform options. Look at flat fee brokers if your portfolio is worth substantially more than £20,000.

Average portfolio OCF = 0.17%

If all this seems too much like hard work then you can always buy a diversified portfolio using an all-in-one fund such as Vanguard’s LifeStrategy series.

Take it steady,

The Accumulator

  1. Though please see the note in the caption. []

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{ 20 comments… add one }
  • 1 Moongrazer July 7, 2015, 12:15 pm

    Great update, TA. The last 3 months have been a great reminder that what the markets giveth, the markets taketh away. I had to laugh when, having started investing about 4 months ago, I was up an amazing 5% after just 1 month – now I’m under by the same amount. Equities are truly a fickle beast. 🙂

  • 2 Gregory July 7, 2015, 12:48 pm

    I will never understand the home biased portfolios.

  • 3 Andy July 7, 2015, 2:35 pm

    I know passive investing is about the long term but is it not slightly worrying that all asset classes are down? Even bonds? Are the bonds not there to protect against the equity under-performing?

    I am just about dive into equities in the next few weeks and this has got me a bit nervous. I guess I should look at the plus side that I am buying when they are a bit down?

  • 4 Dawn July 7, 2015, 5:05 pm

    Encouraging and settling article which reminds us not to panic and keep going despite what’s going on.

  • 5 Bluejeansman July 7, 2015, 7:41 pm

    Gregory : Home country bias is because your expenses are typically in one country, so you dont want to expose yourself to too much currency fluctuation which apparently is unpredictable. As to how much you should tilt toward home country, maybe it is a matter of personal preference. Americans can get away with almost zero international diversification. Here in UK the typical advice is to have no more than 45% in UK stock market. But then what is home ? This is the era of globalization. Personally I dont know where I want to retire, and I feel like I am a global nomad. So I always have this nagging doubt about how to construct my global portfolio.

    Andy : when markets crash, I believe at least US short term government bonds benefit from the “flight to safety”. Regarding your fear about market crash, nobody has a crystal ball but in the very long term you are likely (not guaranteed) to come out ahead, is all one can say. I have bought index funds at various peaks, but I kept buying even in the trough and I havent done too badly.

  • 6 Bluejeansman July 7, 2015, 7:47 pm

    To add to the last point, as many Bogleheads would say, just make sure you are comfortable with your asset allocation. Ask yourself how much of a portfolio crash you are willing to tolerate. Double that should be your stock allocation. i.e if you go for a typical 60% stock, 40% bond portfolio, be prepared for 30% portfolio loss (i.e equity portion drops by 50%).

    there are various other forum discussions where people slice-n-dice their portfolio Paul Merriman style, (google it and look up Bogleheads) where they claim that slice-n-dice can give you the same return as total-market investing, with much less volatility. These are vast subjects, so it is not easy to make up our mind one way or the other.

  • 7 Curious Sarah July 8, 2015, 2:47 am

    Now please don’t shoot me down (I do agree this is a 30-40 year plan!) but if you’re only aiming to get 5% on average each year from equities and we have already made 8.19% on average a year in this portfolio since it was born then should you not consider it time to subtract some of the equities money?

    Because 8.19% is more than 60% more than 5% and so it’s more likely than not we’re due for a fall to bring it back to average? (Or even lower, because this portfolio owns lots of bonds and they will do worse than 5% so maybe 4% or even 3% overall, against the 8.19% that’s “in the kitty”?)

    I would add that I hope to make more than 5% a year from my shares (I may be dreaming but I believe I read on nowhere other than Monevator that 10% was hit in the past??! 🙂 ) but I am taking your number here.

    Yes, yes, I know, don’t dabble with it. 🙂 🙂

    (p.s. Thanks The accumulator for doing these updates!)

  • 8 SavvyJames July 8, 2015, 4:46 am

    The image really does say it all: slow and steady definitely wins the race ultimately. Nice update and keep it going!

  • 9 magneto July 8, 2015, 11:25 am

    Andy has put his finger on today’s dilemma.

    “I know passive investing is about the long term but is it not slightly worrying that all asset classes are down? Even bonds? Are the bonds not there to protect against the equity under-performing?”

    After the thirty year plus bull market in bonds, can we expect bonds from present low yields, to continue to zag while stocks zig?
    Sebastian Lyon, Investment Manager for PNL is among those (see PNL annual report) who notes that correlations seem to be approaching 1 for most asset classes.

  • 10 Tyro July 8, 2015, 11:29 am

    @Curious Sarah: I’d have thought the point of a slow, steady, passive approach like this is to help prevent you from playing those sorts of mindgames with yourself. Quite apart from (a) you don’t know when mean-reverting may happen, so it could be that there are years’ worth of ahead-of-mean returns to come first which you’ll miss out on if you are constantly tinkering every time your portfolio moves a little way from the supposed mean, and (b) means differ over different time periods, and also shift through time, so how do you decide (in the first case) or recognise (in the second) what the relevant mean is?

  • 11 dearieme July 8, 2015, 12:40 pm

    I suppose “slow and steady” implies forward movement, because stock market reversals are often fast and erratic.

  • 12 R July 8, 2015, 2:07 pm

    TA — I hope the book is coming along well. Say you have a global portfolio (like the Slow and Steady) and you don’t know where you will be retiring (in the UK, in the Eurozone, somewhere else). Does it make sense to track the value of the portfolio only in British pounds (GBP)? Would it make sense to track it in Special Drawing Rights (XDR)?

  • 13 Paul S July 8, 2015, 3:46 pm

    Given that both stocks (US in particular) and bonds both seem to be in bull territory, how should we react if both of these asset classes tank together? Or this that so unlikely that it’s not worth worrying about?

  • 14 MyRichFuture July 8, 2015, 4:26 pm

    I’d agree with TA that this latest drop should be treated like a welcome reminder. Give it another five years and see if anyone remembers this quarter. Somehow, I doubt they will…

  • 15 magneto July 9, 2015, 11:40 am

    @ Paul S

    “Given that both stocks (US in particular) and bonds both seem to be in bull territory, how should we react if both of these asset classes tank together? Or this that so unlikely that it’s not worth worrying about?”

    It may be premature and certainly foolish to assume so; but the long awaited bear market in both stocks and bonds might just have begun.

    The ‘slow and steady’ does not as far as this reader has registered have explicit exposure to cash as an asset class.
    To state the blindingly obvious, some allocation to cash might be helpful for the investor if the above comment is indeed a serious ‘worry’ and might provide rebalancing opportunities.
    Again to stae the obvious, the other asset class which many investors will have direct exposure to, and which is often overlooked in such discussions is real estate, but that exposure may well have limited rebalancing opportunities!

    The ‘slow and steady’ is a terrific passive portfolio for the ‘risk’ financial assets. Cash and to a lesser extent RE, can kick-in to ease the pain of any set-back, should Bonds and Stocks both tank together.

  • 16 The Accumulator July 9, 2015, 9:51 pm

    @ Andy – it’s not unsettling to me. Bonds are there to counter-balance equities but they are not guaranteed to zig when equities zag. Moreover, anything can happen in a short period like 3 months. The prevailing characteristics of any asset class only emerge over time. The longer you’ve got the more likely it is that an asset will conform to its average performance. Think in terms of years. A few decades is even better.

    @ Magneto – This time it’s different, eh? I’d expect correlations to drift and bonds did their job nicely a few years ago when equities were down and also in 2008.

    @ R – I don’t know. It’s not something I’ve considered tbh.

    @ Paul S – it’s possible for both asset classes to tank together. If it happens then hold on tight. The very worst thing you can do is panic and lock in losses when the herd is stampeding for the exit.

    @ Sarah – the expected 5% return is the average UK real return for equities since around 1900. Sure, some decades have been better, some have been worse, just don’t bank on you being one of the jammy ones. That way it’ll be a nice surprise if you are and not a disaster if you’re not. The S&S numbers from Morningstar are not inflation adjusted so we’d need to revise down a bit for the real return.

    This portfolio has still got 16 years to run so, under those circumstances, there’s no hay to be made by banking equity returns. That asset class will continue to be our growth engine but we have to accept that sometimes we’ll be knocked backwards. The alternative is market timing and evidence shows that investors end up cutting their own throats when they try to anticipate events.

    The best way to bank returns is to rebalance from hot asset classes into your underachievers in accordance with your asset allocation. In other words, buy low, sell high.

  • 17 Naeclue July 12, 2015, 12:38 am

    I cannot remember the last time global equities and gilts both dropped over a calendar year. Certainly not this century. It could happen though.

    Cash is not important for the portfolio right now as more is being invested each quarter. In a few more years though, if this was my 20 year portfolio, I would either add cash deposits as a class, or a short dated bond fund as the bond duration of the existing funds are quite long and that would make me nervous. Perhaps the indexed linked bonds serve the same purpose? Not sure as it is not an asset class I have ever looked at (perhaps I should).

  • 18 taccumulator July 12, 2015, 10:14 am

    UK equities and bonds last both dropped together in 1994 according to this tool from Vanguard: https://www.vanguard.co.uk/uk/portal/investor-resources/learning/tools#Asset

    Although they’re including corporate bonds in their definition of bonds.

    Stagflation of 1973 – 74 also smashed both asset classes but that was followed by one of the all-time bull runs in the ’80s and ’90s.

  • 19 Liam August 21, 2015, 12:09 pm

    Hi everyone, not sure if it’s a bit late to comment on this post but I’m looking for some advice. I’ve just started out researching how to invest and I have a couple of questions.

    1. I would like to passively invest via an ISA, so would I be right in thinking the maximum I could invest would be for example £4k to start, then £1k a month thereafter for 11 months, thus equaling the £15k per year? (Way above what I could actually afford but just wanted to check my understanding of the ISA)

    2. Stamp duty on UK equities. Is this something I have to deal with via a tax return (or something else) or does the platform or fund deal with this 0.5%?

    3. Based on reading a lot of the articles on this site I have come up with the following, any suggestions/advice/stupid errors pointed out would be great:

    UK gilt 10%
    UK index linked 10%
    UK corporate bond 5%

    UK equities 10%
    Dev ex UK 35%
    Emerging 10%
    Global property 10%
    Global small cap 10%

    I’m 24 years old, and so based on reading the 100 minus age rule of thumb that’s how I came up with the equitiy/bond split.

    Thanks for any advice.

  • 20 The Accumulator August 21, 2015, 8:06 pm

    Hi Liam,

    Your ISA investing example does work but it doesn’t matter when the money goes in as long as you don’t exceed your ISA allowance in that tax year. In other words, your £15,240 could all go in on day 1 or day 365 with nothing in between and that would be fine.

    Funds take care of stamp duty for you.

    There’s nothing wrong with your asset allocation. If you knew yourself to be particularly risk tolerant then you could up your percentage to equities. If you’re risk adverse then you might increase your allocation to bonds. But as no-one knows what their risk tolerance is until they’ve experienced some market turmoil then this looks like a reasonable place to start. You have plenty of time to wait for a stock market recovery when they get hit and you can always increase your allocation to bonds in the future if watching your wealth nosedive causes you unnecessary stress.

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