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The Slow and Steady passive portfolio update: Q3 2017

The Slow and Steady passive portfolio update: Q3 2017 post image

September was a bit rocky for the Slow & Steady portfolio. All told we nosed up by another 1% over the quarter.

Looking into our different asset allocations, our temperamental friend, Emerging Markets, shed over 3% in September but put on more than 4% overall since our last report. Meanwhile our two gilt funds continue to slide in the face of rising interest rates and UK economic uncertainty.

It’s all just the usual bump and grind as our advancing index harvesting machine reaps the growth of global capitalism. Here’s the latest portfolio crop in spreadsheet form:

Slow & Steady portfolio tracker, Q3 2017

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 £900 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.

Don’t look now

The recent performance of Emerging Markets tells us a lot about how het up we should get when a volatile asset class takes a dive.

The following graph shows the performance of our iShares Emerging Markets index tracker over the past month according to data site Trustnet. It doesn’t look or feel great:

Emerging Markets dipped in the last monthIt’s hard not to feel pain when staring at a sharp downhill tumble. But if we zoom out over three months, the situation is reversed. Emerging Markets are still comfortably up:

Emerging Markets are comfortably up over 3 monthsAlthough the chart doesn’t show it, Emerging Markets were the best performing asset class in our portfolio during this period. But was the recent dip the beginning of a terrible fall? The garden was looking a lot rosier in late August.

A year gives us a much better perspective:

Emerging markets have been stellar over a yearThat September slip is nothing we haven’t seen before. There was even nastier spill last November. Over the course of the year Emerging Markets are up by 15% – only bettered among our holdings by our Global Small Cap fund.

Now let’s zoom out again:

Emerging Markets look better still over 5 yearsThis five-year view reminds us how wild a ride Emerging Markets can be. They rose 45% in the last half-decade but went precisely nowhere for nearly four years. You can see how a previous peak in April 2015 was wiped out in the blink of 12 months. Compared to that, the last month is nought but a wee dip.

Personally, my brain cannot help but read triumph in those upward slopes and feel the queasy in every dip. But those are temporary concerns. In stark contrast to the advice of the mindfulness brigade, investing is not about living in the now.

The graph is a good analogy for how we’ll feel in the future. The longer your perspective, the less important those daily, monthly and even yearly results will look and feel. A couple of decades of growth should smooth away their impact, leaving them as barely traceable outlines of a distant event whose significance is confined to the past.

New transactions

Every quarter we tip another £900 into the market mixer. 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: £54

Buy 0.278 units @ £194.27

Target allocation: 6%

Developed world ex-UK equities

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

Fund identifier: GB00B59G4Q73

New purchase: £342

Buy 1.088 units @ £314.30

Target allocation: 38%

Global small cap equities

Vanguard Global Small-Cap Index Fund – OCF 0.38%

Fund identifier: IE00B3X1NT05

New purchase: £63

Buy 0.233 units @ £270.11

Target allocation: 7%

Emerging market equities

iShares Emerging Markets Equity Index Fund D – OCF 0.25%

Fund identifier: GB00B84DY642

New purchase: £90

Buy 58.747 units @ £1.53

Target allocation: 10%

Global property

iShares Global Property Securities Equity Index Fund D – OCF 0.21%

Fund identifier: GB00B5BFJG71

New purchase: £63

Buy 32.847 units @ £1.92

Target allocation: 7%

UK gilts

Vanguard UK Government Bond Index – OCF 0.15%

Fund identifier: IE00B1S75374

New purchase: £234

Buy 1.468 units @ £159.38

Target allocation: 26%

UK index-linked gilts

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

Fund identifier: GB00B45Q9038

New purchase: £54

Buy 0.296 units @ £182.34

Target allocation: 6%

New investment = £900

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 ISA portfolio is worth substantially more than £25,000.

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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{ 27 comments… add one }
  • 1 Adrian October 3, 2017, 10:22 am

    re. Emerging Markets the issue I have with the FTSE indexing is that it excludes some of the Chinese giants like Alibaba.

    I prefer indexing the world using the MSCI way so Fidelity Index World and Fidelity Index Emerging Markets or alternatively SWDA and EMIM.

  • 2 Jon October 3, 2017, 11:47 am

    I’ve been a lurker on this site for several months now. It’s a very interesting read, so thank you for writing!
    I’ve never invested in my life, and while I know that you are not supposed to time the market, I just can’t help but think about if I should start investing right now or not! I realise in the long term it doesn’t matter, but it’s just that small voice in the back of my head telling me to hold off that I need to convince!

  • 3 Alex P October 3, 2017, 4:17 pm

    Don’t be afraid of market highs: nearly 7% of all trading days have been all-time highs since the 50s. This is what to expect in a generally rising market. It’s the reason you are thinking of investing in stocks in the first place. See here: http://uk.businessinsider.com/what-happens-after-stocks-hit-all-time-highs-2016-11?r=US&IR=T

  • 4 dearieme October 3, 2017, 9:08 pm

    @Jon; if you are considering a regular monthly investment, starting now may be fine. But if it’s a lump sum you’re considering investing “in the long term it doesn’t matter” is plain wrong. Or, to be more accurate, has been plain wrong in the past.

  • 5 The Borderer October 4, 2017, 12:41 am

    @Adrian.
    Vanguard FTSE Developed World ex-UK Equity Index Fund has marginally outperformed SWDA over the last 5 years.
    iShares Emerging Markets and EMIM have moved in lock step.
    I think the only difference between them are charges you may incur for holding a fund vs an ETF

  • 6 Adrian October 4, 2017, 7:50 am

    @The Borderer
    The reason the Vanguard fund has outperformed SWDA is that it’s ex-UK.

  • 7 The Borderer October 4, 2017, 8:12 am

    @Adrian
    Who knows? Could be that SWA OCF is 5 bps higher than Vanguard?

    My point really was that over time small variations in holdings between global index trackers seems to make very little difference. Both own c60% USA so that’s probably been the main driver.

    Minimising expenses will have a much greater compounding effect IMHO. I myself own both, but am charged by TD Direct for owning Vanguard but not SWDA, so what the overall difference is over time is I don’t know.

  • 8 Jon October 4, 2017, 10:49 am

    @dearieme
    Well, from reading this blog I’ll likely be investing monthly. Plus, I’m not sure what you mean by it “may” be a good time to invest now?

    I thought the point was that you are not supposed to time the market, and that even if you do have a lump sum (providing it is appropriately balanced etc), it doesn’t matter at what point you invested if you are looking for the long term? Unless we are going down the path of “I don’t know whether there will be a functioning society in 30 years time”!

  • 9 The Rhino October 4, 2017, 12:44 pm

    @Jon – the inconvenient truth is that if you are unlucky with the timing of a lump sum then you can do quite badly – no matter what the asset class, i.e. housing, equities, bonds etc. stretching over say a decade or more worst case.

    Drip feeding mitigates this as you buy the ups and the downs.

    The argument that its all ok if you’re in it for the long term is sort of true but only gets you so far as inevitably you need to buy stuff at certain points in your life, and in the long run your dead. A bad run on an asset class can consume a sizable % of your lifespan and/or leave you short just when you need it.

    You don’t need some sort of apocalyptic event to occur to do badly unfortunately – just the normal booms and busts can do it.

    But on the flip-side – you stash it all under the mattress in gold doubloons and you’ll almost certainly do badly

    Thats the deal with investing – balancing risk and return. Theres no way round it.

    Thats probably what dearime means when he uses the word ‘may’. You may do well, you may not, you can’t know. You have to operate in the sea of probability rather than the binary islands of yes/no – good/bad

  • 10 Factor October 4, 2017, 1:20 pm

    @Jon

    As always, whatever else you do, don’t keep all your eggs in one basket!

  • 11 Jon October 4, 2017, 1:37 pm

    OK thanks both. As previously said, I’ll be investing monthly and trying to appropriately diversify (hopefully following this blog’s tips!)

  • 12 The Rhino October 4, 2017, 1:39 pm

    @Factor – quite. I should have extended,

    “Drip feeding mitigates this as you buy the ups and the downs.”
    with
    “Drip feeding mitigates this as you buy the ups and the downs. Diversification mitigates this by owning multiple, hopefully uncorrelated or negatively correlated, assets.

  • 13 arty October 4, 2017, 7:57 pm

    Though of course drip feeding may not mitigate it at all if you’re unlucky – nothing stopping the market tanking immediately after one has completed a, say, 2 year drip feed of a lump sum…

  • 14 The Investor October 4, 2017, 9:48 pm

    Developed world equity markets go up far more than they go down. If you drip feed for two years and the market goes up 30% while you’re doing so, you’ve paid a price for your caution — because for much of the period your money was in cash earning near-0% instead of the rising market — just as much as if the market had fallen. But few people are wired to think that way.

    You might say you’d prefer to try to avoid the maximum loss more than to make the maximum gain, which is completely fair enough — such a reaction tells you that you are better off drip-feeding money in, because you’re more loss averse.

    Ultimately it’s an emotional / risk control decision, not an optimizing returns decision, for most people.

    Here’s more:

    http://monevator.com/lump-sum-investing-versus-drip-feeding/

    Also note that this has been my answer for 10 years of the life of this blog now. 🙂 For almost all that time, markets have been rising. For the past 10 years some commentators have been suggesting the market is too high and ripe for a fall…

    Some day I’ll say something similar about drip feeding and point people to that article, and the market will go on to crash 20% over the next 12 months.

    That won’t derail the thinking, or mean such an action was wrong. You have to invest *knowing* this could happen tomorrow and will happen someday. You might be the unlucky one. And you must be honest about your ability to become interested in investing, and then suddenly be better than the world’s global markets at judging what is cheap and what is expensive. (Really?)

    Plan your finances accordingly! 🙂

  • 15 Adrian October 5, 2017, 9:44 am

    Looks like the biggest factor in global passive investing for those in the UK over the next few years is going to be Sterling vs Dollar.

  • 16 Andrew October 5, 2017, 10:45 am

    Cool post.

    Can you explain your rationale and how you decided your bond allocation and deciding how much for inflation-linked bonds? Is their merit in foreign gov bonds?

    Also, how do you decide how much home bias/UK asset allocation?

  • 17 dearieme October 5, 2017, 3:57 pm

    “how do you decide how much home bias/UK asset allocation?” I’ll tell you how I do it. Our house is in the UK, our DB pensions are in the UK, our State Pensions are in the UK, so our financial assets will be heavily biased outside the UK. Somewhere with hopes of good growth, so not the EU. Somewhere where the stock market doesn’t look v expensive, so not the US. Therefore the Far East/Pacific, including Japan.

  • 18 Adrian October 5, 2017, 4:49 pm

    People have been saying for years US shares are expensive – but they keep going up.

  • 19 Malcolm Beaton October 5, 2017, 11:41 pm

    Hi dearieme
    I thought why not buy a World Index Equity Tracker-that gets the world stock markets in the right proportions
    Do the same for Bonds-hedged to the pound-has same efficiency
    Biggest proportion of equities and bonds will be US-rightly so?
    The all I need to decide is the Asset Allocation
    As I am old and have got a big enough “pile” -30/70 -equities/bonds does it for me
    Vanguard has the requisite funds
    Worked for the last fourteen years-can sleep at night!
    xxd09

  • 20 james October 6, 2017, 8:05 pm

    I like to think as my measure of success as time in the market not how a stock performs. This allows me not to worry about timing. If i had a lump sum i would invest it all now (i know its easy said but hard done).

  • 21 AncientI October 7, 2017, 2:57 pm

    Hi all and “The Investor”

    I read your link regarding drip feeding and thought does it still apply now we are in the age of brexit. I am so far 20% invested but still have 80% in the bank and noticed that the value of my investments changed hugely with the value of the pound

    Basically what im concerned with is, If I lump all in now and the value of the pound rises I will be down substantially, The reason I am particularly concerned about this is because the pound has already fallen alot recently and im wondering if it might be over-sold and a rebound is due.

  • 22 The Investor October 7, 2017, 5:17 pm

    @Ancientl: I agree it’s a legitimate concern. Have a read of this:

    http://monevator.com/currency-hedged-etfs/

    I need to do my follow-up! 🙂

    Note that predicting currency moves is notoriously difficult and makes stock market forecasters look good (and they’re not!) Personally whatever you decide I’d do it on the grounds of what’s a sensible and stable long term position/strategy, rather than a short-term ‘bet’. I think this is where you are coming from anyway.

    I’m slightly concerned with your comment “the value of my investments changed hugely”, if you mean over the past few weeks.

    This is nothing: Imagine logging into your account and seeing your portfolio half the value of its peak. I’m not being pedantic, this can and probably will happen someday. Hence my concern about the word “hugely”. Don’t over-invest in shares for your risk tolerance! 🙂 On the other hand if you’re a new investor it does take some time to get used to the swings. Maybe an additional argument for drip feeding in that case.

    Please remember none of this is personal advice, all just food for thought.

  • 23 Andrew October 7, 2017, 8:03 pm

    I would go with UK bonds. No currency risk, similar expected returns?

  • 24 Maximus October 7, 2017, 8:15 pm

    Jon,
    It really is all about time as opposed to timing so the best time to start investing is always now (as long as you have your regular expenses covered and at least 6 months salary worth of savings).
    Statistically, investing a lump sum in one go will gain the best returns over the long term, but if you fear the worst then start monthly drip-feeding into a low cost diversified fund of your choice and let compound interest work its magic…

  • 25 The Investor October 7, 2017, 8:17 pm
  • 26 Jack Duckworth October 16, 2017, 10:57 pm

    Hi Investor,

    I hope you are well!

    Please could you explain this sentence for me: “Meanwhile our two gilt funds continue to slide in the face of rising interest rates and UK economic uncertainty.”

    Do you mean that the threat of an increase of the BoE rate will harm bond allocations? Or have I misunderstood this?

    Also, I invest in Vanguard 60% currently. I have just put a lump sum in my ISA within this fund. Are there any indications currently that this is a bad idea?

    Thanks very much!

  • 27 Jack Duckworth October 17, 2017, 12:36 am

    I guess another question could be: is the 40% bond allocation likely to take a hit/crash if rates go up? Or are the bonds of a type/mix that will not be overly affected and can recover? Talk on forums is that bonds generally are high-risk at this stage and many are steering clear of them. Perhaps VLS80 would be a safer option for that reason?

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