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The Slow and Steady passive portfolio update: Q3 2016

The portfolio is up 27.31% year to date.

The early Autumn heatwave is hotting up the Slow and Steady portfolio as much as the jumpy squirrels in my garden. Should we bask awhile in the good times or should we scurry – gathering more acorns to guard against the inevitable chill ahead?

Okay, let’s bask. After last quarter’s Brexit bounce put us up 10% in three months, we’ve popped on a further 7% since July. It’s lucky the forecasters aren’t paid by results.

The Slow and Steady portfolio is Monevator’s model passive investing portfolio. It was set up at the start of 2011 with £3,000 and an extra £880 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 Slow and Steady is up 22% in 2016, and 27% in the last 12 months. I don’t know how your personal portfolios look, but if you’ve enjoyed similar gains and have tucked away a substantial amount then you’ll have noticed a surprising swelling in your wealth.

Over a longer timeframe the Slow and Steady portfolio is trimmed back to 13% annualised over three years, and 11.5% annualised since we gunned its engines at the start of 2011. Still, that will do nicely!

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

Slow & Steady portfolio tracker, Q3 2016

It’s adding up. Our portfolio has swollen 44% since 2011. We’ve put in a notional £20,770, versus its current worth of £29,992.

We’re not doing anything clever here. Nothing out of character. We’re just rigorously sticking to a standard passive investing strategy.

The important thing is that we patiently plough our corn into a strategic allocation of funds and don’t chase performance.

This year’s best performer is emerging markets; up 33% in 2016. Last year, emerging markets stank the house out – down over 12% – easily our worst performer of 2015.

It’s interesting to note that inflation-linked gilts are our second best performer of the year, and were second worst last year. I’m not trying to claim this is a significant pattern but I am drawing attention to the sheer futility of flinging money at the hottest funds of the moment.

Our linkers have also performed quite differently from conventional gilts over the last few months – growing over 12% versus 2%. Does the market think the latest BOE interest rate cut has likely staved off recession but heralds a greater possibility of future inflation?

Also noteworthy is that the average maturity of the bonds in our linker gilt fund is near 25 years. That’s the stuff of long-term bond funds, which means this holding is highly sensitive to interest rate rises.

Its duration is 23 and that tells us the value of the fund will fall by 23% for every 1% that market interest rates (not BOE ones) rise. The same is true in reverse – the fund will grow in value for every 1% cut in market interest rates.

Given index-linked gilt yields are well into negative territory, it’s worth considering the limited upside of the asset class versus the potential for downside.

Linkers are the best defence against unexpected inflation but short-term bond funds are a decent alternative that balance inflation protection versus interest rate risk.

About that chill

Lots of gloomy commentators in the US are preaching dark times ahead for equities as growth keeps pushing valuation measures like the Shiller P/E Ratio to dizzy heights.

Investors haven’t earned these returns they say. Growth is disconnected from the fundamentals they say.

Remember they’re talking about the US market. Most of the rest of the world looks quite cheap and even Robert Shiller – he of Shiller P/E – thinks UK equities look reasonable.

Only about 25% or so of the Slow and Steady portfolio is invested in the States. And The Investor and I were fighting running battles against DIY pundits claiming the US was overvalued four years ago. You’d have missed out on muchos return if you’d listened to the alarmists back then.

Investing 25% in the world’s global superpower is no overcommitment and I’m not in the least bit worried about it. The US market could defy predictions for years to come and I could shoot off both feet trying to dodge the wrong bullets. Should the US falter then we’re diversified enough to cope.

Still, if you feel otherwise, there are techniques to help you gently trim the sails.

New transactions

Every quarter we plunge another £880 into the market’s inky depths. 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 all’s quiet 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: £70.40
Buy 0.405 units @ £173.77

Target allocation: 8%

Developed world ex-UK equities

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

New purchase: £334.40
Buy 1.222 units @ £273.57

Target allocation: 38%

Global small cap equities

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

New purchase: £61.60
Buy 0.264 units @ £233.55

Target allocation: 7%

Emerging market equities

BlackRock Emerging Markets Equity Tracker Fund D – OCF 0.25%
Fund identifier: GB00B84DY642

New purchase: £88
Buy 66.768 units @ £1.32

Target allocation: 10%

Global property

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

New purchase: £61.60
Buy 31.333 units @ £1.97

Target allocation: 7%

UK gilts

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

New purchase: £132
Buy 0.795 units @ £166.13

Target allocation: 15%

UK index-linked gilts

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

New purchase: £132
Buy 0.681 units @ £193.77

Target allocation: 15%

New investment = £880

Trading cost = £0

Platform fee = 0.25% per annum.

This model 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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{ 76 comments… add one }
  • 51 Passive Investor October 8, 2016, 3:51 pm

    @algernond. As is clear from the above I am not a professionally trained financial professional but I am a have 25 years of investment mistakes behind me. As mentioned above international inflation protected bonds don’t protect against UK inflation. They carry exchange rate risk and it’s hard for me to see their place in a UK portfolio. The easiest rule of thumb is to hold bonds with a duration less than your investment horizon. In this case you are buying a known predictable stream of cash flows and short-term losses in capital don’t matter as they will be made good when the bond expires. I had previously been reassured by the long duration of Linkers because under ‘normal’ conditions their value responds more to UNEXPECTED inflation than intetest rate rises. But now I see a triple whammy of even more extended duration, of prices assuming 3% inflation and the near certainty that any future gains from unexpected inflation above 3% will be countered by capital losses due to interest rate rises. My general view is more or less with William Bernstein and Tim Hale who recommend short duration high quality bonds as the fixed income component of a portfolio.

  • 52 magneto October 8, 2016, 4:03 pm

    @ TI

    “@magento — You realise you’re just reinventing the wheel? Don’t you think generation after generation of investor has described themselves as “intelligent” with their market timing, tactical asset allocation, and other active exploits? ”

    Not me guv!
    See Ben Graham and Wm Bernstein!

  • 53 The Investor October 8, 2016, 4:09 pm

    @magneto — I’m well aware of their use of the word “intelligent”, and have books by both on my shelf, including “The Intelligent Investor”.

    That is why I said “reinventing the wheel”, as well as the fact the you are advocating successful tactical asset allocation despite being an individual who doesn’t seem to understand some of the investing basics (no personal offense meant, it’s just a comment on previous discussions we’ve had) and has basically no reason to think you or anyone else could do better than the entire class of professional tactical asset allocators who have failed to successfully tactically allocate.

    Just so you’re aware I’m close to the point where I’m going to delete misleading posts of yours rather than reply to them, because I haven’t got time to explain the same thing over and over, and I don’t want other readers being misled. Again, nothing personal, it’s just a reflection of my time commitments and educational aims for this site.

    All the best.

  • 54 magneto October 8, 2016, 6:35 pm

    The ire/problem arising may be due to the at least two meanings of the I word.
    When used here it is specifically intended to mean :-
    “(of a device) able to vary it’s state or action in response to varying situations and past experience.”

    It is not a derogatory term for any alternative!
    REPEAT
    It is not a derogatory term for any alternative!

    All the alternatives can be equally I….. in their aims and practices.
    Horror struck to be lumped in with the TAAs!

    The series of articles relating to the present low interest rates are particularly promising and will be followed most closely.
    And do keep up the occasional active topic.
    The recent one on REITs stirred us sufficiently to take some action!

  • 55 hyperhypo October 9, 2016, 8:29 pm

    @magneto…..my question re. cash within my sipp was musing how to prepare for a period …4 years hence perhaps …when i’d want to draw exclusively on the sipp to provide living expenses in advance of a DB scheme commencing…
    .and i was wondering how / when to commence creating the cash to draw upon, concurrent with questions of asset allocation within my imminent new scheme (company scheme transfer to SIPP) …my bearing in mind the notion of keeping two year’s cash expenses. As presently have no cash buffer at all.

  • 56 magneto October 10, 2016, 10:30 am

    @ hyperhypo

    “my bearing in mind the notion of keeping two year’s cash expenses. As presently have no cash buffer at all.” hh

    This monevator link on emergency funds may help :-

    http://monevator.com/its-an-emergency-fund/

    There may well other articles on this subject, to which others might suggest.

  • 57 hyperhypo October 10, 2016, 11:23 am

    @magneto…..my question re. cash within my sipp was musing how to prepare for a period …4 years hence perhaps …when i’d want to draw exclusively on the sipp to provide living expenses in advance of a DB scheme commencing…
    .and i was wondering how / when to commence creating the cash to draw upon, concurrent with questions of asset allocation within my imminent new scheme (company scheme transfer to SIPP) …my bearing in mind the notion of keeping two year’s cash expenses. As presently have no cash buffer at all. I have a blank canvass which to dispose of nearly 5 years of aggressive pension saving , yet becalmed on a sea of choice….

  • 58 puggy October 11, 2016, 10:59 am

    Just a quick question about brokers:

    I went with iii, and put in some order requests over the weekend. They are still sitting there as ‘active’, i.e. unactioned. Is it normal for it to take days to buy a fund?? I’m uncomfortable having my cash just sitting with iii and not knowing when they will actually complete the purchases..

  • 59 Fat but fun October 11, 2016, 11:07 am

    @Puggy. Have the same issue with HL & Vanguard. Part of the delay is due to paperwork catching up with trades. Your trade may have already been executed.

  • 60 puggy October 11, 2016, 11:09 am

    Ah ok – thanks for the info 🙂 I’m new to this, so I naively thought it would be almost instant…

    cheers!

  • 61 Scott October 11, 2016, 11:32 am

    @puggy. I’m also with iii – In my experience (and I might have got the timings slightly wrong on this) if you place a fund order on a working day, the order will be processed at the start of the following working day (based on previous end of day price for the fund) and iii then take until after the END of the next working day to display the transaction. If a non-working day intrudes then this will delay things further.

  • 62 puggy October 11, 2016, 11:48 am

    @Scott – thanks, that’s reassuring at least. Maybe it will teach my some patience 🙂

  • 63 magneto October 12, 2016, 10:59 am

    @ hyperhypo

    Only suggestions :-

    Try leafing through the monevator articles library to see if anything suits.

    Tim Hale’s book ‘Smarter Investing’ esp section 3.1 might prompt some thoughts.

    If looking for multiple investors’ input/discussions around a specific problem, then there are such forums as the US Passive Forum ‘bogleheads.com’, and perhaps others for that type of wider debate.

    Good Luck

  • 64 hyperhypo October 17, 2016, 9:25 pm

    @magneto ….thank you for your encouragement.
    I’ve deployed my resources thus:

    47% VLS60,
    47% VLS40
    6% Blackrock Global property
    whilst i draw breath.

    This seems a fair starting position, given my age and experience…

  • 65 PassivelyPassiveInvestor October 31, 2016, 6:17 pm

    Been following this blog for ages, as an example of what to do with the cash I wanted to save for the kids. Whilst I find it interesting, I’m so passive, I’d rather read up what cleverer people than me think about what they should do (i.e. you) and just take the risk in following that great advice. Plus its like joining along on the ride.

    I’m currently with Charles Stanley and this is the first month I’ve actually managed to reach the split % across the board (as I started only last year) but I see that CSD say I have to trade a minimum of £100 in any particular fund as a top up (this is after the % minimum to invest IN the fund I mean).

    So am I looking in the wrong area? How do you top up with £61.60 in Global Property for instance? (the allocation you’ve decided on this quarter)

    Many thanks!

  • 66 The Accumulator November 4, 2016, 6:20 pm

    Hi, you can set up a minimum monthly payment with CSD from £50. Just give ’em a call if you’re having problems.

  • 67 puggy November 4, 2016, 6:50 pm

    BTW, is anyone worrying about the possible effect of a Trump victory? I see predictions of 10-15% slump in a lot of funds. Are any of you trying to hedge, and if so, how?

    thanks!

  • 68 oldie November 18, 2016, 6:20 pm

    I am sure you are aware of this report but nevertheless, see link below.
    Welcome info. for “passives”.

    http://m.citywire.co.uk/money/fca-best-buy-and-rated-funds-fail-to-beat-market/a971879

  • 69 The Accumulator November 18, 2016, 7:03 pm

    Thanks for the tip-off Oldie!

  • 70 Mike November 21, 2016, 4:36 pm

    Do you know why the Vanguard FTSE INDEX Fund is only rated as 2 Stars?

  • 71 The Accumulator November 22, 2016, 10:46 pm
  • 72 Kayvaan December 8, 2016, 10:03 pm

    Great site and great series. My question is how would you balance the portfolio if you had a longer time frame, say a 30 year SIPP?

    I’d imagine you’d bring the bonds back down to where you started at 20% (or lower?) and redistribute that to the developed world and UK equity funds, as that’s where you’ve stripped over the last couple years.

    Am I close?
    Asking for a friend 😉
    Thanks!

  • 73 The Accumulator January 3, 2017, 5:19 pm

    Hi Kayvaan,

    I think the bond allocation is more a function of risk tolerance than time. These pieces attempt to sum up practical ways that an investor can get a handle on risk tolerance:

    http://monevator.com/what-you-need-to-know-about-risk-tolerance/

    http://monevator.com/how-to-estimate-your-risk-tolerance/

    If I stripped back bonds further though I probably wouldn’t push up the UK holding as I’m on a mission to cut out home bias and the UK market is only worth 5 – 6% of the market.

    I’d probably look to diversify more: property up to 10%, global small cap up to 10%, emerging markets up to 15% of equity allocation. Small cap and emerging markets are highly volatile asset classes though, so what’s right for me may well not be right for your friend.

    Also, see this rethink on UK linkers: http://monevator.com/why-uk-inflation-linked-funds-may-not-protect-you-against-inflation/

    Sorry it took me so long to reply!

  • 74 Marianne January 4, 2017, 11:32 am

    Hi, I have a lump sum that I am thinking of investing in a Vanguard LifeStrategy Accumulation fund (as don’t know enough yet to confidently do something like the above), but is there a best day/time to invest the lump sum? Best wishes and happy new year!!

  • 75 Kayvaan January 16, 2017, 12:42 am

    Accumulator,

    No worries! This whole website is brilliant and you do a great service, you don’t owe me anything! Your detailed reply is very appreciated.

    Thanks again

  • 76 Kieren February 17, 2017, 6:01 pm

    Great Blog/Website – have found it really informative.
    In terms of the spreadsheet you are using to keep track of your investments. Where are you sourcing the Asset Class Annualised Performance figure from?
    Are you calculating it or is it a standard number?
    Could you give a bit more of an explanation around it. I have googled it and think I get the principle but would be interested in how you re using it.
    Thanks

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