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The Slow and Steady passive portfolio update: Q3 2015

The portfolio is down 2.33% year to date.

How are you feeling? A bit roughed up? A little battle weary? Or have you barely noticed your portfolio sinking like a submarine with a leak?

Our passive Slow & Steady portfolio has certainly followed the markets downwards. We’ve lost 3.3% in the last three months and 7.82% in the last six.

But then again, if you zoom out a little bit we’re only down 2.33% in 2015. And we’re up 2.52% in the last year and up on average 6.22% a year since the portfolio was founded.

Crisis is a matter of perspective.

Here’s how we’re looking right now:

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

N.B. Global 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).

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 recent turbulence is a good test of your mettle because this is normal investing weather. UK data is hard to come by, but plenty of US writers have been fishing out interesting stats…

For example Ryan Detrick tells us that the S&P 500 has pulled back at least 5% in 94% of all years since 1960.

It’s tumbled at least 10% in 53% of all years – that is one-in-two.

So this choppiness we’re going through now? It’s commonplace – it’s the last four years of uninterrupted gains that were the exception.

More optimistically, Larry Swedroe quoted a report from Dimensional Fund Advisors (DFA) on the market’s bouncebackability (Hells bells! I typed that in for a laugh and the spell-checker didn’t even blink. It’s a real word now).

DFA found that after drops of 10%, the S&P 500 between January 1926 and June 2015 returned on average:

  • 23.6% over the next year
  • 8.9% a year over the next three years
  • 13.3% a year over the next five years

Developed markets tend to behave similarly, for the most part. And lo, DFA found between January 2001 and June 2015 that – after 10% falls – developed international markets return on average:

  • 24.7% in the next year
  • 12.7% a year over the next three years
  • 12.9% a year over the next five

Same analysis for emerging markets, this time between January 1999 and June 2015:

  • 42.2% in the next year
  • 13.4% a year over the next three years
  • 11.2% a year over the next five years

So stay cool. Things will almost certainly get better. Regardless of the crisis de jour, a little blood-letting is normal. Even healthy, because it’s the volatility that forces the weak to sell, enabling resilient investors to buy more at better prices.

The beauty of bonds

If the last six months have been too much for you then consider increasing your allocation of bonds.

Ours have risen to the occasion yet again – slowing the downdraft over the last three months.

Also, despite these quarterly Slow & Steady updates, I can’t recommend enough not looking at your portfolio when things get ugly.

I’ve peeked at my personal portfolio only once in the last six months, and out of sight is certainly out of mind.

I’ve found plenty to worry about during that time, but China’s slowdown and US interest rates haven’t even touched the sides.

New transactions

Every quarter we bowl another £870 down the market’s alley. Our cash is divided between our seven funds according to our asset allocation. We use Larry Swedroe’s 5/25 rule to trigger rebalancing moves, but no boundaries have been breached so we’re just topping up with new money as follows:

UK equity

Vanguard FTSE UK All-Share Index Trust – OCF1 0.08%

Fund identifier: GB00B3X7QG63

New purchase: £87

Buy 0.578 units @ £150.51

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 1.57 units @ £210.09

Target allocation: 38%

Global small cap equities

Vanguard Global Small-Cap Index Fund – OCF 0.38%

Fund identifier: IE00B3X1NT05

New purchase: £60.90

Buy 0.346 units @ £175.86

Target allocation: 7%

Dividends last quarter: £6.23 (Money, money, money!)

Emerging market equities

BlackRock Emerging Markets Equity Tracker Fund D – OCF 0.24%

Fund identifier: GB00B84DY642

New purchase: £87

Buy 88.703 units @ £0.98

Target allocation: 10%

Global property

BlackRock Global Property Securities Equity Tracker Fund D – OCF 0.22%

Fund identifier: GB00B5BFJG71

New purchase: £60.90

Buy 41.344 units @ £1.47

Target allocation: 7%

OCF down from 0.23% to 0.22%

UK gilts

Vanguard UK Government Bond Index – OCF 0.15%

Fund identifier: IE00B1S75374

New purchase: £121.80

Buy 0.83 units @ £146.82

Target allocation: 14%

Interest last quarter: £12.58

UK index-linked gilts

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

Fund identifier: GB00B45Q9038

New purchase: £121.80

Buy 0.785 units @ £155.16

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 that company’s 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 buy a diversified portfolio using an all-in-one fund such as Vanguard’s LifeStrategy series.

Take it steady,

The Accumulator

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{ 36 comments… add one }
  • 1 @algernond October 6, 2015, 10:08 am

    ‘If the last six months have been too much for you then consider increasing your allocation of bonds.’
    – surely one should only do this once a dip has recovered, or the loss is permanent?

  • 2 Mr Zombie October 6, 2015, 10:43 am

    24% over the next 12 months would do very nicely indeed 🙂

    You’ve peaked at your portfolio only once in the last six months? A time battered veterans approach, for sure :). I update a networth tracker every weekend, but that is partly just an excuse to play with spreadsheets. And it’s not nearly as scary when your portfolio is small enough that your contributions have largely negated any downward market movements.

  • 3 MyRichFuture October 6, 2015, 10:53 am

    Nice to see those stats concerning the markets’ ability to bounce back. PS. Every day I curse Soccer AM. The English language is definitely going down the Tubes.

  • 4 The Rhino October 6, 2015, 11:26 am

    very reassuring post – many thanks

    @algernond I think ideally your asset allocation should be independent of what the market is doing. I.e. you may have a mechanical strategy to increase your fixed income allocation percentage as you age, irrespective of what the market is doing.

    Also, I think if a volatile market informs your attitude to risk tolerance, i.e. you may be less risk tolerant than you imagined, it would be rational to increase bond allocation as a result without worrying about recovery from dips etc. What you probably shouldn’t then do is revise your attitude to risk back up during a bull market. Only let your tolerance come down, not up.

  • 5 M from There's Value October 6, 2015, 12:59 pm

    Really like these updates. As you say, it’s a matter of perspective how much we’ve lost or gained – a friend of mine always used to say that everything in life could be boiled down to our perception of it i.e. we can look at things from different viewpoints and come with more positive or negative feelings accordingly.

    Cheers

  • 6 James October 6, 2015, 2:20 pm

    I was looking for a way to track my portfolio and something like the spreadsheet you’re using looks like it would work really well.

    I was wondering if you’d please be upload a blank template so we can all share in the wisdom?

  • 7 Anakenaman October 6, 2015, 3:17 pm

    I’d just like to add my voice to the chorus of appreciation for this latest update and for the site in general. It’s definitely the most accessible source of investing wisdom that I’ve found. Having tried to absorb and implement that wisdom as best I can in the form of my own investing strategy, I find that I’m now far more comfortable living with (although not yet able to tune out!) market gyrations.

    Hearty appreciation to all of the contributors!

  • 8 Moongrazer October 6, 2015, 6:00 pm

    Excellent update, as always! The article seems to be missing from the front page of your website, though.

  • 9 Moongrazer October 6, 2015, 6:01 pm

    Ah wait, it’s just missing from the “www.” version of your website – similar to previous issues. 🙂

  • 10 Jeff October 6, 2015, 11:26 pm

    I use a google spreadsheet to track portfolio values & save a permanent csv file record every month.

  • 11 T Ellis October 7, 2015, 9:03 am

    I use the Financial Times free portfolio tooling, it updates everything for you. Although, it does let me look at it more often than I should!

  • 12 The Investor October 7, 2015, 9:29 am

    @Moongrazer — Thanks for the heads up. We know how to fix this and will do later, but we don’t know why it happens yet. 🙁

  • 13 PB October 7, 2015, 3:26 pm

    Re. the BlackRock Global Property Securities Equity Tracker Fund that you mentioned, I have looked it up on the Blackrock site. It doesn’t say anywhere whether it’s made of physical assets of synthetics. Any ideas? Thanks.

  • 14 Nick Newbury October 7, 2015, 4:12 pm

    I am in a position to invest a sum of £10.5k via this years ISA, the other £4.5k was taken up by investment in Woodford fund. Question is do I let the market sort their latest turmoil or go straight in with my £10.5k divided up as per % allocations laid out by MR Monevator?

  • 15 The Rhino October 7, 2015, 4:47 pm

    Does this help?

    ‘The fund may invest into companies contained in the above
    indices, constituent companies, transferable securities,
    permitted money-market instruments, permitted deposits, and units
    in collective investment schemes. Derivatives and forward
    transactions may be used for the purposes of efficient portfolio
    management’

    taken from the KIID and Fund Factsheet referenced below:

    http://www.fundslibrary.co.uk/fundslibrary.dataretrieval/Documents.aspx?type=packet_fund_class_doc_factsheet_private&user=hl_web_test&sedol=B670Q95

    http://www.fundslibrary.co.uk/fundslibrary.dataretrieval/Documents.aspx?sedol=B670Q95&type=packet_fund_class_doc_simplified_prospectus&user=hl_web_test

  • 16 The Rhino October 8, 2015, 10:41 am

    @Newbury

    Answer is ‘it depends’..

    See:

    http://www.rickferri.com/blog/investments/6-things-to-consider-when-investing-a-lump-sum/

    as linked from a recent weekend read for sensible advice on the matter

  • 17 Tim G October 8, 2015, 12:55 pm

    “DFA found that after drops of 10%, the S&P 500 between January 1926 and June 2015 returned on average:

    23.6% over the next year
    8.9% a year over the next three years
    13.3% a year over the next five years”

    I know it’s stating the obvious, but it’s probably worth remembering that these averages will cover a pretty wide range of outcomes – even bigger bounces, of course, but also times when a 10% fall has been the precursor to continued decline or a period of stagnation.

  • 18 The Rhino October 8, 2015, 2:08 pm

    @Tim G – very good spot, those no.s are indeed useless in isolation due to your observation, that’s a nice Taleb type anecdote, never trust your gut-feeling when it comes to probability and risk..

    I should never have felt reassured, but yet I did..

  • 19 The Investor October 8, 2015, 3:29 pm

    @TheRhino @Tim G — Hi, it says “on average”. This means “on average” they have delivered positive annualized returns over those periods. If they always did we would have said “always returned”. 🙂

    All we’re ever dealing with is averages, based on historical experience.

    It’s not impossible for a set of situations to occur that mean UK shares never rise again from here. They’re all bleak and unlikely happenings in my opinion, but it’s possible.

    If you’re putting money into UK/US shares for long-term investment, it’s very probably at least in part because “on average” shares have returned 7-11% nominal returns (or your favoured number) over that long-term. If you don’t think you should be reassured by the DFA numbers in the piece above, then you should not be reassured by those long-term figures either. It’s all the same thing.

    None of this means shares can’t fall 50% from here. They can always fall 50% from here.

    As Tim G says, sometimes they certainly have gone on to fall further, and as he also says it’s stating the obvious… 😉 Every 50% decline blatantly obviously started with a 10% decline. Heck, it started with a 1% decline! 🙂

    You always have to think about a range of outcomes all the time when investing. Get rid of “tipped to rise”, “certain to fall”, “will lose you money”, “are a sure winner” type tabloid thinking. (Not speaking to anyone specifically, just generally).

  • 20 The Rhino October 8, 2015, 4:08 pm

    Yes nothing at all wrong with the language and the no.s in the article, its my initial interpretation that is incorrect, i.e. what I thought I’ve gleaned from those no.s. My warm feeling is misplaced without some additional confidence interval data (that may well be present in the referenced articles)

    To put it in concrete terms, if there were 100 10% drops over the time period, 99 of which were small and negative and one was massive and positive, it could average out at 23.6% over the next year. Of what benefit to me is that 23.6% value? Not much you could argue, it hasn’t given me a useful picture of what occured, at least not in isolation..

  • 21 The Rhino October 8, 2015, 4:11 pm

    sorry – should be ’99 of which were followed by small and negative drops in the next year and one was followed by a massive and positive gain in the next year,

  • 22 Tim G October 8, 2015, 4:55 pm

    @TI I hope I didn’t come across as patronising, pedantic or snarky – it certainly wasn’t my intention! I’m sure all Monevator readers understand that an average is just that.

    What worries me slightly about the DFA figures is that they present returns but not the risk. If you say to someone “after a 10% fall in the market, the average return for the next 12 months is 23.6%” I suspect they will make two assumptions:
    – if I invest after a 10% fall I will probably come out ahead
    – if I invest after a 10% fall I will on average make a 23.6% gain

    The second assumption is supported by the figures, but the first is not. As The Rhino points out, the statistics are actually compatible with a loss being the most likely outcome if the average is composed of lots of small losses and a few big gains.

    Most Monevator readers are presumably pretty well versed in the at times frightening volatility of stock markets and will probably guess that these reassuring figures might conceal some pretty individual nasty events and a reasonably high chance of sustaining a loss. But it would have been nice of DFA to have included some figures on the range and likelihood of different outcomes, a.k.a. risk. After all, if we made investment decisions on the basis of average returns alone our portfolios would be bulging with emerging market equities!

  • 23 The Rhino October 8, 2015, 5:29 pm

    “If you’re putting money into UK/US shares for long-term investment, it’s very probably at least in part because “on average” shares have returned 7-11% nominal returns (or your favoured number) over that long-term. If you don’t think you should be reassured by the DFA numbers in the piece above, then you should not be reassured by those long-term figures either. It’s all the same thing.”

    Correct – you also need to understand the shape of the distribution of those returns.

  • 24 Tim G October 8, 2015, 5:39 pm

    … and while I am criticising the DFA statistics, it’s worth noting that DFA have a very specific definition of what constitutes a 10% pullback. It is “consecutive negative return days resulting in a 10% or more decline”.

    I can see why you would do this for statistical purposes (it makes the job a lot easier) but it means that you are actually dealing with a subset of stock market declines – basically, those of the short and sharp variety. So if the stock market trends down over a few weeks or even months but with plenty of blips, it might well lose 10% or more without qualifying for inclusion. There’s no way of knowing whether this would affect the outcomes – it certainly seems possible that short, sharp falls might have higher bouncebackability (!!) than long, slow ones.

    Another problem is that the pullbacks are defined by an endpoint (at minimum, one positive return day) which we obviously can’t identify in advance, but which will also figure in the returns.

    If you want to ‘apply’ the DFA model in practice, you have two options:
    1. invest as soon as consecutive days lead to a >10% drop or
    2. wait until the >10% drop is followed by a positive return day.

    In the first case, you will get lower returns than the model predicts because on some of these occasions the market will continue to drop – something you would have avoided if you had waited until the endpoint.

    And in the second case, you will also get lower returns because you will miss out on the first positive return day after a major drop.

    I know that DFA are not advocating this as an investment strategy as such, but this still means that any average return figures should be taken with a pinch of salt.

  • 25 Nick October 8, 2015, 8:47 pm

    Investing is not about timing but time in the market? That said is it not a good time to get in when markets are low?

  • 26 R October 9, 2015, 6:25 am

    May be not a question for a financial blog, but as I have never encountered the term “bouncebackability” before I wonder how it differs from “resilience” and relates to “mean reversion”?

  • 27 Brod October 9, 2015, 12:40 pm

    Bouncebackability 🙂 is a “gift” to the English language from Iain Dowie in about 2004/5/6 when manager of Crystal Palace Football Club to describe the team’s ability to bounce back from a recent defeat. I’m not too sure he would know “mean reversion” is. And I would think resilience has more to do with being able to withstand a pummeling while it’s happening?

  • 28 Topman October 9, 2015, 5:42 pm

    @Brod – “….. a gift to the English language …..”

    Ah, the beautiful game. It has spawned some linguistic jewels in its time and mashed many a perfectly functional saying e.g. “off my own back” instead of “off my own bat” D Beckham Esq, and the wince-inducing (for me at least) “the proof is in the pudding” instead of “the proof of the pudding is in the eating”! Squeaky “bun” anyone?

  • 29 The Accumulator October 9, 2015, 7:02 pm

    @ James – here’s a link to a decent spreadsheet: https://www.bogleheads.org/wiki/Calculating_personal_returns

    @ PB – it’s physical

    @ Brod – Do I like that!

    @ Tim G and Rhino – it should be pretty easy for you to dial up a chart of US stock returns over the period to see if you can spot the Big One that you’re wondering about. More obviously, those stats clearly aren’t designed as some kind of investing strategy but to bolster the confidence of those wobbling in the face of a correction. The whole point of investing in the market is that history has shown that over the long run you get paid for it, though it may take 20 or 30 years to come good. Even then, no guarantees. In other words, no one should take any figures in isolation but draw their conclusions from a broader study of market history and probability, while remaining conscious of the fact that the future won’t look like the past – for better, for worse or for average.

  • 30 edel October 13, 2015, 11:24 am

    Hi I have a question- given how there is 100 put in each month to the different funds- how do you track its increase? as technically any increase in value is due to investing more money? how do you calculate what is because of increase in share price?
    thanks

  • 31 The Accumulator October 13, 2015, 8:39 pm

    Hi Edel,

    If you use a money-weighted formula then you can calculate your returns while accounting for periodic injections (or withdrawals) of cash. Check out the Bogleheads link above (comment 28) and you’ll be able to download a spreadsheet that does just that. They use the term investor return.

  • 32 Nicholas November 5, 2015, 9:05 am

    I’ve just spent half my day perusing your site and I was initially delighted to come across this portfolio blog. I’m British but I live in Singapore (yay! no capital gains tax!) and I started buying ETFs around this time last year. I followed the simple Bogleheads’ formula (30% IGLS, 35% VWRL, 35% VUKE).

    I was thinking of adding some diversity, hence how I came upon this blog. However, I am massively disappointed to discover that I can only buy ETFs and not a single Index fund via my broker. I can’t even find the codes to add them on my Android Stockspy app!

    Do you have any idea why this might be? Do I have to be in the UK to buy their Index funds?

    There’s only about 11 or 12 ETFs available from Vanguard.co.uk and so I don’t see how I can replicate a single aspect of the portfolio. I’ve looked at iShares as well.

    Thanks for any tips 🙂

  • 33 The Investor November 5, 2015, 10:14 am

    @Nicholas — We’re not experts on investing from overseas, not least because as you’ve discovered many of the quirks only seem to become apparent when one finds oneself in a foreign land.

    We did write an article a while back on where to go for expat investing insights, which might be helpful to you: http://monevator.com/expat-investing-and-tax-us-and-uk/

  • 34 The Accumulator November 7, 2015, 8:01 am

    Nicholas if you can access VFEM then that’s Vanguard’s Emerging Market ETF. IWDP from iShares gets you global property (developed markets).
    If you’re struggling for choice, does your broker provide US domiciled ETFs too? Watch out for withholding tax and ensure you carefully research implications of holding US domiciled ETFs e.g. inheritance tax

  • 35 Nicholas November 10, 2015, 4:18 am

    Hello The Investor and The Accumulator,

    Thank you for your replies and your advice. I have a few more questions after doing more research, if you wouldn’t mind indulging me. Caveat: I’m good with Excel and my broker charges a flat 0.25% rate for all transactions and many of my workarounds below involve getting around the absence of a global equivalent by buying up its components. It might be fiddly, but I could do it.

    REITS:

    As I understand it, any ETFs I get from the NYSE I’ll have to pay 30% dividend withholding tax on, and if I die prematurely and my stocks are worth $60,000+, there’s some kind of inheritance tax. The latter won’t be an issue for me, but the former might put me off.

    I checked out IWDP which presumably is preferable to the US-domiciled VNQ and VNQI or REET. Apparently it has an effective TER of 0.93%:

    https://www.bogleheads.org/forum/viewtopic.php?t=162448#p2439596

    One way around this would be to avoid the US altogether, and get the European, UK and Asian sectors only from iShares, which would also lower the TER a bit. Sounds reasonable?

    UK & INTERNATIONAL STOCKS

    There is no developed world ex UK ETF from either iShares or Vanguard. The best I can do is slice and dice to get the individual components and with the European ex UK, I can then get ISF and/or VMID, which would be an easier way of measuring my UK component, but would add an extra 4 or 5 ETFs to deal with. Alternatively I could keep VWRL and maintain a small amount of VFEM to tilt in that direction, as I understand VWRL already contains some emerging markets. I like simplicity, but I also like the rationale behind slicing and dicing: and my broker charges just a 0.25% flat rate so it’s not cost prohibitive.

    Thoughts? I suspect you’d suggest simplicity!

    NOT KNOWING WHERE I’M GOING TO RETIRE:

    At the moment I have 37% in VMID, a similar amount in VWRL, and 23% in IGLS and everything is in sterling. Is this potentially a problem for me in the future? (I’m 35, planning on investing for 20-25 years).

    Living in Singapore I could start to have a dual home bias and buy the Singaporean index and/or bond funds. This way I can get some currency diversification in. Alternatively I could buy bonds in US dollars.

    Thoughts?

    BONDS:

    At the moment I only have IGLS. Assuming I stick with UK bonds for the time being, is it worth swapping IGLS for VGOV, given the lower expense ratio? And then add IS15 or SLXX as the corporate part (and keep a ratio of 70% gilts to 30% corporate bonds).

    GLOBAL SMALL CAP:

    The US Vanguard site only has US small cap, not global. iShares doesn’t have a global ETF but you could build one from the component parts. I presume they would be so small, percentage-wise, that it would be too fiddly. I could just take the US and/or European sectors instead.

    Thoughts?

    Once again, thank you for any suggestions and help. Most appreciated!

    Nicholas

  • 36 The Accumulator November 12, 2015, 7:27 pm

    If you’ve got VWRL then you don’t need Dev World ex UK. You’ve already got it plus a small slug of UK and EM. Then the decision is purely whether you tilt towards EM with VFEM or UK with FTAL perhaps.

    If I was buying a US based ETF then I can fill in a W8-BEN form to get 30% withholding tax down to 15%. Is there not a similar arrangement in Singapore?

    IWDP – withholding tax – I’m a bit suspicious of that uprated TER calculation. What is it relative to? All ETFs that invest outside of their domicile will pay some level of withholding tax on their underlying investment. As a UK investor holding ETFs based in Ireland I avoid withholding tax on the dividends it pays out to me but not on the dividends that underlying shares pay to the fund. This applies to every ETF investing outside of the UK (or US from the perspective of a US investor). So investing in say European or Asian ETFs doesn’t avoid that but no-one has calculated the cost of that, if indeed that IWDP cost is accurate.

    There’s no advantage in home bias beyond protecting yourself from currency volatility as you approach retirement. I personally wouldn’t worry about it 20-25 years out if it was my money.

    Bonds – my personal approach would be to hold domestic gov bonds for stability. I wouldn’t stretch for yield with corporate bonds. Not everyone agrees but I think that’s because they’re stretching for yield rather than emphasising stability which is the job of bonds.

    Yes, agreed on global small cap. But if I was choosing from a US selection, I’d probably go for US small value getting diversity from the style tilt rather than the geography.

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