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The Slow and Steady passive portfolio update: Q4 2017

I hope you’re enjoying these good times as an investor. 2017 was another pain-free 12 months for our Slow & Steady passive portfolio [1]. We ended 9% up on the year.

Coming in the wake of that monster 25% bunk-up in 2016, checking the numbers all year was a soothing ego-balm – about as mentally challenging as telling your mum you got a promotion, or handing over a Christmas present to a child.

The bulls have owned the global stock markets like the streets of Pamplona [2]. It was the kind of year that makes us all look like investing geniuses, as the portfolio numbers below show (brought to you by G-Whiz spreadsheet-o-vision):

Our portfolio is up 10.92% annualised [3]

With equities looking flush, it’s no surprise that our annual bond gains pale by comparison:

These are nominal returns. Our fixed income assets have actually lost value after inflation.

The Slow and Steady portfolio is Monevator’s model passive investing [5] portfolio. It was set up at the start of 2011 with £3,000 and an extra £935 is invested every quarter into a diversified set of index funds, tilted towards equities. You can read the origin story [6] and catch up on all the previous passive portfolio posts [7].

But we should never get hung up on recent performance. Our longer term returns tell a slightly different story. Over seven years:

We’ve had a great run, with the portfolio working like the textbook example it’s meant to be:

Portfolio maintenance

It’s portfolio MOT time! With every stock market around the world steaming ahead, it’s an auspicious moment to reduce our exposure by moving 2% of our wealth away from equities and into government bonds.

We’re not doing this on a whim, though. We’re simply following the risk management [8] tactic we committed to when we set up the portfolio, redeploying into less volatile bonds in 2% steps every year.

With 13-years left on this model portfolio’s investing clock [9], we’re now 66/34 in equities versus bonds. The plan is for our allocation to be 40/60 equities versus bonds by the end. We should be well insulated from a sudden stock market crash by that point.

As it is, the US market is richly valued, so I’m more than happy to snip back the Developed World fund by 2% (it’s over 50% invested in the US). That 2% shifts into the UK Government Bond fund. We’ll likely be very glad about that should markets dive in 2018.

We could have made marginal cuts to our other equity positions instead – Global Small Cap, Emerging Markets, the UK’s FTSE All-Share or Global Property – but we left them alone to maintain a healthy level of diversification across asset classes.

Our 2% asset allocation shift also merges into our annual rebalancing move [10]. Every year we rebalance the portfolio back to its preset target asset allocation. Again this is about risk management, as we cream off the profits from assets that have soared in value and plough the proceeds into cheaper markets whose time should come again.

This quarter it means selling a chunk of Emerging Markets and Developed World and scooping up UK Government Bonds and a few Inflation-Linked Bonds in exchange.

Remember, we’re not making a judgement call. We’re just staying in line with the asset allocation we have set.

Increasing our quarterly savings

Now to deal with inflation. The sharp-toothed money nibbler has bitten off 3.9% this year according to the latest Office for National Statistics’ RPI inflation report.

To maintain the value of our contributions, we must therefore ‘inflate’ our own quarterly investments from £900 in 2017 pounds to £935 in 2018 wonga.

We’ll do that every quarter in 2018, although we’re only putting in £931.73 this time. Why? Because the rebalancing rejiggery equals a £3.27 contribution to Global Small Cap. That’s under our platform’s £50 minimum investment limit, so we’ve written it off for the sake of convenience.

Here’s this quarter’s buy and sell:

UK equity

Vanguard FTSE UK All-Share Index Trust – OCF [11] 0.08%

Fund identifier: GB00B3X7QG63

Rebalancing sale: £20.78

Sell 0.102 units @ £203.88

Target allocation: 6%

Developed world ex-UK equities

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

Fund identifier: GB00B59G4Q73

Rebalancing sale: £881.44

Sell 2.674 units @ £329.60

Target allocation: 36%

Global small cap equities

Vanguard Global Small-Cap Index Fund – OCF 0.38%

Fund identifier: IE00B3X1NT05

New purchase: £0 (Leaves fund pretty much bang on 7% target allocation)

Target allocation: 7%

Emerging market equities

iShares Emerging Markets Equity Index Fund D – OCF 0.25%

Fund identifier: GB00B84DY642

Rebalancing sale: £285.94

Sell 175.964 units @ £1.63

Target allocation: 10%

Global property

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

Fund identifier: GB00B5BFJG71

New purchase: £245.78

Buy 124.697 units @ £1.97

Target allocation: 7%

UK gilts

Vanguard UK Government Bond Index – OCF 0.15%

Fund identifier: IE00B1S75374

New purchase: £1674.16

Buy 10.28 units @ £162.86

Target allocation: 28%

UK index-linked gilts

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

Fund identifier: GB00B45Q9038

New purchase: £199.95

Buy 1.059 units @ £188.79

Target allocation: 6%

New investment = £931.73

Trading cost = £0

Platform fee = 0.25% per annum.

This model portfolio is notionally held with Charles Stanley Direct [12]. 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 [13] or tool [14] for other good platform options. Look at flat fee brokers if your ISA portfolio is worth substantially more than £25,000. The Slow & Steady portfolio is now worth over £38,000 but the fee saving isn’t yet juicy enough [15] for us to push the button on the move yet.

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 [16].

Take it steady,
The Accumulator

  1. That is, after-inflation [ [19]]