I hope you’re enjoying these good times as an investor. 2017 was another pain-free 12 months for our Slow & Steady passive portfolio . 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 . 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):
- The portfolio is up 52% since we started seven years ago.
- That’s 10.92% annualised, or around 8.5% in real1  terms. The historic real return of an equity portfolio hovers right around the 5% mark, so we’re living through a blessed time, believe it or not. (All the more so as we’re laden with sluggish bonds, too.)
- Emerging Markets was the star performer: up 21% this year.
- The FTSE All Share contributed 13.35%, with the FTSE 100 global behemoths larging it up on a weak pound.
- Our biggest holding – the Developed World ex-UK – brought in a similarly welcome 11.39%, with Europe and Japan scoring a rare victory over the US (which nevertheless hit new highs during the year).
With equities looking flush, it’s no surprise that our annual bond gains pale by comparison:
- UK inflation-linked bonds – 2.24% higher.
- UK Government bonds (conventional gilts) – up 1.64%.
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  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  and catch up on all the previous passive portfolio posts .
But we should never get hung up on recent performance. Our longer term returns tell a slightly different story. Over seven years:
- The Developed World is the clear leader, up a staggering 15.5% annualised.
- Emerging Markets delivered near 10% annualised, but at the cost of some fearsome volatility along the way.
- We’ve only owned Global Small Cap for the last three years but it’s brought home a handsome 16.82% annualised.
- Global property has brought in 9% annualised over three years; it failed to keep pace with inflation with an insipid 2% this last year.
- Conventional government bonds have delivered 5% annualised over the full period – so around 2% to 2.5% ahead of inflation. A good performance by historical standards.
We’ve had a great run, with the portfolio working like the textbook example it’s meant to be:
- Equities are powering up our wealth.
- Government bonds are a handy diversifier, but they’re lagging over the longer term.
- Emerging Markets are hugely volatile and often diverge from the Developed World.
- The US market shows that a single market can trounce all-comers for a decade or more. As we can’t predict which market will win, we stay diversified.
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  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 , 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 . 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:
Vanguard FTSE UK All-Share Index Trust – OCF  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%
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%
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 . 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  or tool  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  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 .
Take it steady,
- That is, after-inflation [↩ ]