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The Slow and Steady passive portfolio update: Q3 2014

The portfolio is up 5.17% on the year (to date).

The Slow and Steady portfolio is back with another update! And this quarter’s progress has been both slow and steady.

We’ve inched forward another 2% over the last few months – Europe and UK equities holding us down like concrete boots, while the US stock market and Government bonds have been our buoyancy aids.

The Slow and Steady portfolio is Monevator’s model passive investing portfolio. It was set up at the start of 2011 with £3,000. An extra £8501 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.

In terms of raw numbers, our portfolio has made just over £300 since our last Slow and Steady portfolio update. We’re now up over 20% overall, with an annualised return of 6.7%.

Here’s the portfolio lowdown in spreadsheet-o-vision:

We're up!

This snapshot is a correction of the original piece. (Click to make bigger).

The inevitable correction

The galloping bull market of the last five years is naturally causing a lot of jitters.

  • Is our luck about to run out?
  • Should we assume crash positions?
  • If global markets are overvalued is it time to stop investing in equities?

Much of the nervousness stems from the seemingly universal law that what goes up must come down. The question is when?

For a scientific-sounding answer, many pundits reach for valuation measures like the P/E ratio and CAPE. If CAPE is any guide then the US is more than 50% overvalued right now.

But is CAPE any guide? A Vanguard study found that CAPE has previously only explained 40% of the variance in future returns over 10 years.

Now, 40% is pretty stellar in comparison to other metrics Vanguard looked at, but it still leaves us with more unknowns than Donald Rumsfeld.

Meanwhile, CAPE’s predictive power over the course of one year plunges to less than 10%.

According to financial researcher Michael Kitces, CAPE’s peak correlation with real returns occurs over an 18-year horizon.

That’s no basis at all for deciding to abandon your asset allocation.

Steady on

The desire to do something is driven by our human instinct to control the uncontrollable. But believing we can predict the future is an illusion. Any change we make could damage our prospects as much as help. It’s a crap shoot.

Remember, as ordinary Joes and Josephines, we have no information that is not available to every other investor in the world.

High valuation levels, the end of QE, geopolitical strife – it’s all on everybody’s TV screen.

What drives the market’s next move will be new information as yet unknown. We won’t be the first responders, so far better to stick to the plan and rely on long-term growth to lift us clear of short-term difficulties.

Consider too that the UK doesn’t look overvalued according to CAPE, and nor does most of the rest of the world.

The US accounts for 25% of the Slow and Steady portfolio. Even a nightmare 50% plummet in the US would only knock us back 12.5%.

Obviously nothing happens in isolation, but the point is this is a diversified portfolio that doesn’t stand or fall purely on the fortunes of one market.

Furthermore we already have an inbuilt mechanism to take the edge off overheating markets.

It’s called rebalancing.

Incoming

Enough of the mental anguish, let’s get on with counting the spoils.

The British Government paid £21.93 interest into our bond fund last quarter. More loose change than life-changing.

Rather than blow it on pies, we’re automatically reinvesting our windfall using an accumulation fund.

New transactions

Every quarter we propel another £8502 into the financial cosmos – hoping that one day our little pound probes will take us to a new world where the rat race does not exist.

We use Larry Swedroe’s 5/25 rule to trigger rebalancing moves. We haven’t breached any of our thresholds this quarter, so there’s no need to trim any funds.

All that remains then is to split our cash in line with our asset allocation strategy:

UK equity

Vanguard FTSE U.K. Equity Index Fund – OCF 0.08%
Fund identifier: GB00B59G4893

New purchase: £127.50
Buy 0.66 units @ £192.64

Target allocation: 15%

Developed World ex UK equities

Split between four funds covering North America, Europe, the developed Pacific and Japan3.

Target allocation (across the following four funds): 49%

North American equities

BlackRock US Equity Tracker Fund D – OCF 0.17%
Fund identifier: GB00B5VRGY09

New purchase: £212.50
Buy 146.45 units @ £1.45

Target allocation: 25%

European equities excluding UK

BlackRock Continental European Equity Tracker Fund D – OCF 0.18%
Fund identifier: GB00B83MH186

New purchase: £102
Buy 62.73 units @ £1.63

Target allocation: 12%

Japanese equities

BlackRock Japan Equity Tracker Fund D – OCF 0.17%
Fund identifier: GB00B6QQ9X96

New purchase: £51
Buy 38.84 units @ £1.31

Target allocation: 6%

Pacific equities excluding Japan

BlackRock Pacific ex Japan Equity Tracker Fund D – OCF 0.19%
Fund identifier: GB00B849FB47

New purchase: £51
Buy 23.63 units @ £2.15

Target allocation: 6%

Emerging market equities

BlackRock Emerging Markets Equity Tracker Fund D – OCF 0.26%
Fund identifier: GB00B84DY642

New purchase: £85
Buy 75.62 units @ £1.12

Target allocation: 10%

UK Gilts

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

New purchase: £221
Buy 1.63 units @ £135.67

Target allocation: 26%

New investment = £850

Trading cost = £0

Platform fee = 0.25% per annum

This model 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 = 0.16%

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

Also note, there are currently cheaper, similar index trackers that can be used to build this portfolio. The existing Slow & Steady funds are competitive enough that it’s not worthwhile switching immediately. We can afford to wait for the competition to settle down.

If you’re a new investor, though, then do compare the Vanguard and Fidelity index fund range against the BlackRock components.

Take it steady,

The Accumulator

  1. The Slow & Steady portfolio is virtual. It’s a model portfolio designed for discussion and to show how a passive portfolio might operate and perform on a small scale. []
  2. The Slow & Steady portfolio is virtual. It’s a model portfolio designed for discussion and to show how a passive portfolio might operate and perform on a small scale. []
  3. You can simplify the portfolio by choosing the do-it-all Vanguard FTSE Developed World Ex-UK Equity index fund instead of the four separates. []

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{ 30 comments… add one }
  • 1 EarlyRetirementGuy October 7, 2014, 9:42 am

    There’s always a strong urge to “do something”, especially with the Accumulation funds. Have just used your Trustnet advice to work out the hidden dividend payment which has hopefully steadied the do something urges for another year.

  • 2 Under The Money Tree October 7, 2014, 9:55 am

    “What drives the market’s next move will be new information as yet unknown. ”

    A very simple, oft neglected, point very well made!

  • 3 ermine October 7, 2014, 11:34 am

    > one day our little pound probes will take us to a new world where the rat race does not exist.

    I like it. Although it’s a bit hokey, that Stephen Covey chap has got a point when he stated effective habit#2 “Begin with the End in Mind”

    It’s always good to know why you’re forgoing all that consumerism. And as someone who seen the sunlit uplands, the prize is worth the price 🙂

  • 4 Rajkanwar Batra October 7, 2014, 12:55 pm

    Hi, Is 6.7% annualized return based on dividends reinvestment?

  • 5 Neil October 7, 2014, 1:41 pm

    Yes the return will include div re-invest as these are all accumulation funds so done automatically.

  • 6 steve October 7, 2014, 1:59 pm

    But the pies are so tasty.

  • 7 Hello, world! October 7, 2014, 3:56 pm

    Hi – a fellow young newbie investing here!

    I’m a lazy investing, there’s no denying it. I do not like the idea of building a portfolio and then rebalancing when required. I’ve chosen the easier option: vanguard life strategy 60%. Although this fund does a great job in diversification, my only concern is that is it enough just to solely invest in a vanguard LS, or do you still have to further branch out? If wanted a greater return, I potentially buy into a small caps fund? I still have an entire working life ahead of me as i’m still in my early 20s.

  • 8 ermine October 7, 2014, 6:36 pm

    @Hello, world

    What you need is the article on here Vanguard Lifestrategy turns passive investing catatonic .

    Passive investors often style themselves as lazy investors and you’ll be hard-pressed to find a lower maintenance option than this at the cost.

    Long story short keep calm and carry on, though some might say the 80% fund is more suited to someone at the start of their working life?

  • 9 Hello, world! October 7, 2014, 6:58 pm

    @ Ermine

    I have indeed read that article, thanks!

    The reason I’ve have chosen 60% over 80% is because my risk tolerance is not as high as I would like it to be. 20% allocation to bonds, a much safety option than equity, seemed far too low for my appetite.

    If I find I have more money than my living overheads I might buy some ( not a lot ) units in the 100% LS – Balance the risk vs reward.

  • 10 woody085 October 7, 2014, 7:36 pm

    @ Hello, world!

    I would be less worried about holding 80% or more in Equities if you are regularly investing, especially as you have the best part of 45 years until state pension age!.

    I find a good way to change the risk is by blending Vanguard Lifestrategy 20% and 100% funds. For example to achieve 70% Equities 62.5% in LS 100% and 37.5% in LS 20%. This makes it easier, and less costly to rebalance if risk changes later. Changing from LS 60% to 80% will cost the whole dilution levy (0.1%) again but using 20% and 100% you will only pay a small amount of the dilution levy on rebalance.

    Obviously depends on your platforms trading costs as well.

  • 11 EarlyRetirementGuy October 7, 2014, 8:02 pm

    @World – I went for the 80% when I first started in my mid-20s. A relatively high risk but with potentially 40 years of employment income ahead of you it could well be worth the higher early risk for higher early gain which then compounds more. If worst were to happen; there’s still plenty of time to recover from it.

    As for branching out further – Can’t see much point in doing that through other stocks/funds. Instead look to do so through mortgage repayment, employer pension, buy-to-let etc.

  • 12 ermine October 7, 2014, 8:57 pm

    @Hello, World – I see you’ve also read this one on how to lifestyle VGLS 🙂 which is what you and woody085 propose.

    I’m with earlyretirement guy – the whole point of VGLS is to get an all in one win. Why complicate it when you bought simplicity?

  • 13 NearlyThere October 7, 2014, 9:00 pm

    Tim Harford compares active investing to picking supermarket queues … and falls in favour of the passive ‘take the average for zero effort’ http://timharford.com/2014/10/pick-a-fund-any-fund/

  • 14 weenie October 7, 2014, 11:16 pm

    @ERG and @World

    I only started investing in my 40s and am in mostly LS 80%! Guess I have a fairly high risk tolerance!

  • 15 sceptic October 9, 2014, 8:01 am

    It is (still) hard to believe that the ‘best way’ to invest in these days is an ETF.

    1) Because of market weighted indices I buy all the stuff which is completely overvalued. Not only that. I buy more of it than the undervalued stocks in the index.

    2) I will participate at the next correction with a beta of 1 (with the equity part of my portfolio). Look at 2007-2009. What did the MSCI World do? Compare it to ‘defensive stocks’ such as Nestle, McDonald’s, Coca Cola. How did they do?

    I do not know when a correction will take place, so I want to stay invested. But I do know that certain sectors perform better in such a period than others. So why should I buy an ETF and own a lot of stuff I would not want to invest in in the first place (i.e. overlaued tech stocks, Southern European banks etc.)?

  • 16 The Investor October 9, 2014, 9:44 am

    @sceptic — Go and run a hedge fund then. 🙂 If it’s so obvious to you when stuff is ‘completely overvalued’ and you are able to profit from it, you should easily manage to be among the 1% (repeat 1%!) of active managers who manage to beat the market after costs over the long-term. 🙂

    Although… possibly it’s not so obvious, eh?

    Doesn’t mean it can’t be done — or isn’t something anyone should try (and as regular readers here know I do try myself) — but vague statements about ‘obviously’ overvalued or unattractive areas of the market you don’t want to own are not evidence of outperformance, they are just vague statements. (In fact, they are exactly the sort of thing that leads active managers to underperform — for instance it was perfectly possible some Southern European banks could outperform a couple of years ago when they were being dumped by ‘smart’ money, given their lowly valuations).

    I don’t expect it to sway you (and I have no desire to sway you for that matter 🙂 ) but you might find this interesting:

    http://monevator.com/passive-index-investing-feels-wrong/

  • 17 Rajkanwar Batra October 9, 2014, 10:21 am

    @sceptic Every body to their own. I tend to follow investor’s position that ETF is the way to go for most people.
    I do pick stocks but I am aware that it go down to zero. The reason why I still do this is when I believe market has over reacted to something I have a little bit more insight into. For example I bought Tesco recently as it makes sense to buy even on earnings basis without the growth story. As an accountant in my opinion what ever accounting irregularities were there are unlikely to be major from what I read. I think it would bounce back as it is a great business being a loyal customer for it myself. Further I have full believe in new CEO as being a sensible leader.
    That said that I am fully aware that i could lose all my investment(extremely unlikely) any minute but I am willing to take that risk with open eyes.

  • 18 magneto October 9, 2014, 10:57 am

    @RB
    Interesting view on Tesco. Good contrarian stuff.
    We are focused on progressive yields so the dividend cut rules out Tesco from our portfolio. Waiting to see what Warren Buffet will do with his ~4% stake after admitting buying Tesco was a ‘bad mistake’.

    @The Investor
    Regard the rebalancing to constant asset allocations as a healthy step in the right direction but not the same as constant (downside) risk. Needs some more thought than that to achieve constant risk.
    As Malkiel says inter alia in A Random Walk, ‘Risk is the chance that expected security returns will not materialize and, in particular, that the securities you hold will fall in price’.
    So the question is with say a 50/50 allocation does such an allocation provide the same portfolio risk with PE both at 8 and at 30?
    Maybe the constant allocation never claimed to be constant risk?

  • 19 Rajkanwar Batra October 9, 2014, 11:19 am

    @magento Finger’s crossed. The problem with Tesco is that grocery market has reached saturation point in UK and they have failed to make it big in any of the other market or diversify to another business model.
    An outsider CEO is a good bet in that situation.
    I am heartened by the fact that their online delivery operation is one of the earliest and the best in industry which should shield them from fast major technological change.
    At double the price of an year ago it would have been a very racy bet but not so much now.

  • 20 Grand October 9, 2014, 1:28 pm

    Question,

    When you guys receive a dividend (income fund or ETF) do you re-invest it back into the same fund or does it just go into your regular investing pot for it to be spread around?

    Grand

  • 21 CADmonkey October 9, 2014, 3:14 pm

    My question is;
    Once you have built up a nice retirement fund in Accumulation tracker funds & wish to retire, how do you get your money out? Do you simply sell of a lump of your stash each year & live off it, while the rest remains invested? Or can you transfer the whole lot into Income funds.

  • 22 The Accumulator October 11, 2014, 9:52 am

    @ Magneto – if one market has soared to PE 30 and the other fallen to PE8 then I’m likely to be rebalancing out of PE 30 and into PE8 taking advantage of the potential but not the certainty of mean reversion at some, unknown, point in the future. Keep it up and over the long run you’re likely to be OK but not immune to trouble.

    @ Grand – I do both.

    @ CAD – either is fine, though you’ll need a lot more wealth if you intend to live purely off income.

  • 23 Mellie October 14, 2014, 11:42 pm

    Always interesting to see this experiment develop – as I have a similar(-ish) set-up myself. And a wee side question – is there an article on Monevator with a dummy’s guide to calculating annualised returns in Excel. Am a monthly investor, using a couple of different investing platforms with differing amounts each month. Would prefer to keep in Excel as have a master doc set up already for current accounts, savings, household bills etc. But am struggling to find (or perhaps I should admit – understand the correct formula to use ;-)) to give an elegant solution to calculating the annualised returns?

    Keep up the great site!

  • 24 The Investor October 15, 2014, 11:49 am

    @Mellie — Glad you’re enjoying the site. Regarding the annualized return question, I’ve got such an article waiting in the wings. 🙂 At the moment we’re working through the last few “How to win the loser’s game” videos on Thursdays, but it will be up a week or two after that.

  • 25 mikamola November 26, 2014, 2:01 pm

    Just had a question about the Vanguard fund used for UK portion of this … Is it really ‘Vanguard FTSE U.K. Equity Index Fund’ ? I’ve only been able to find this at TER 0.22% on their website which seemed a bit steep for a ‘standard tracker’ [at this end of the market anyway].

    The one at 0.08% TER is FTSE U.K. All Share Index Unit Trust

    To be honest, I’m not sure of the differences but they appear to be measured against different benchmarks [according to the Vanguard website anyway] and wondered if you could just clear up which fund you’re referring to in this portfolio?

  • 26 marone December 2, 2014, 8:11 pm

    @mikamola – The ‘Vanguard FTSE U.K. Equity Index Fund’ was recently merged together with the ‘Vanguard FTSE UK All Share Index’, shortly after this update was published.
    As a result, the Equity Index is no longer available for investment.

    These are the details of the All Share Index –
    Name: Vanguard FTSE U.K. All Share Index Unit Trust (ACC)
    ISIN: GB00B3X7QG63

    This is a link to Morningstar offering further details of this particular index –
    http://www.morningstar.co.uk/uk/funds/snapshot/snapshot.aspx?id=F00000LWVH

  • 27 stu December 15, 2014, 3:09 am

    curious to see Q4 😉

  • 28 Phil January 5, 2015, 11:29 am

    Forgive my lack of detail knowledge, couldn’t find it in any other post. Could you perhaps expand on your excel table headings? Ie: What exactly is asset class inflow/ outflow and how/why does asset gain/loss differ to fund gain/loss?

    Is one the price of stock where as other is stock+dividend/accum? I assume this table is linked to another detailing your quarterly top ups?

    Additionally regarding the lifestrat alternative, is anyone else concerned at its strong US bias over the model portfolio here? I believe lifestrategy 80% accum is 40% US equity!?

  • 29 The Accumulator January 5, 2015, 9:45 pm

    Hi Phil, asset class gain/loss differs because the portfolio has used a couple of different funds for some of the asset classes over time. For example, we started out with HSBC’s US index fund but now use BlackRock’s US fund. So fund gain / loss shows the numbers for the current BlackRock fund while the asset class column shows the numbers for our US holdings over the lifetime of the portfolio i.e. HSBC and BlackRock together.

    Asset class inflow shows how much of our total wealth we’ve invested into each holding over the portfolio’s lifetime, while outflows are how much we’ve sold. All sales have been rebalancing moves. e.g. selling US stocks to buy more bonds.

    The Lifestrategy funds roughly invest in line with global stock market values. It’s the ultimate wisdom of the crowds i.e. investing in line with the aggregate decisions of the entire planet’s public investors.

    I can see why you raise the concern – after all US stocks have been on a tear and valuations are expensive. But I don’t think we can second guess what the future holds. If it makes you uncomfortable then you can go to LifeStrategy 60 or hold an extra wedge of bond fund alongside your LifeStrategy 80.

  • 30 Phil January 5, 2015, 10:52 pm

    Ahh, that makes more sense now, thanks for the speedy explanation!

    Was just curious on peoples thoughts regards us exposure, not so much attempting to time the market ( don’t worry, i’ve read lots of your posts here regarding that!) but if the 40% was too much in any account. I guess its just a personal decision, regarding currency risk and more diverse companies etc… many thanks.

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