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Why a diversified portfolio needs more than just bonds

After a gruelling year in which bonds got pasted, it’s time to take a hard look at the other defensive assets that can comprise a truly diversified portfolio. Bonds alone are not enough. 

We Brits imported the idea that government bonds can shoulder the burden of defensive duties alone from the US. But their perspective is misleading, because their bonds have performed much better than ours:

A chart showing how US bonds would bolster a diversified portfolio against US stock market risk

Data from JST Macrohistory 1 and Aswath Damodaran. January 2023.

The chart shows annual real returns2 of US equities against US government bonds over the past 123 years. 

When the blue equity bars head south, we want the orange bond bars to point north. 

In a nutshell, the case for US government bonds is pretty sound:

  • US Treasuries are often negatively correlated3 with US equities in a crisis. (They tend to rise when equities fall). 
  • US bond losses have been quite merciful. Up until 2022, that is! 
  • For a defensive asset US bonds have done pretty well: 1.44% annualised from 1900 through 2022. 

(All returns quoted in this piece are inflation-adjusted real returns.)

The track record of UK gilts is less impressive:

A chart showing how gilts diversify against UK equities risk, with a diversified portfolio not benefiting in the UK as much as the US

Data from JST Macrohistory and FTSE Russell.

As an aside, as a proud citizen of Blighty I can’t help but notice how the thick-wooded mass of positive US equity returns in the first graph contrasts with the stunted scrub-land of their UK counterparts in the second. It’s a reminder of why we need to be globally diversified.  

The really unflattering comparison though is with our government bonds. 

Bungling bonds

The UK experience is that our gilts relatively rarely put in a positive performance when equities are down.

In fact, the rise of gilts when equities tumble is mostly a 21st Century phenomenon. 

Gilts are more temperamental than their US cousins. They’ve meted out bear market losses five times and breached -30% losses twice.

To top it off, their long-term growth contribution is a measly 0.91% annualised return. 

UK government bonds have been less effective than US Treasuries in large part because we’re more vulnerable to inflation over here. 

Why a diversified portfolio needs a multi-layered defence

Bonds hate accelerating inflation. So we need to layer in additional diversifying investments, which aren’t as susceptible to the inflationary money bandit. 

How diversifying asset classes fare when equities turn negative

Click to enlarge. Gold GBP data from The London Bullion Market Association and Measuring Worth. Cash data from JST Macrohistory and JP Morgan Asset Management. January 2023.

This chart shows how several key diversifying asset classes perform when we narrow the focus to years when equities posted a negative annual return. 

Exciting technical note: In this chart I’ve used the performance of UK Treasury Bills as a proxy for cash. Ordinary investors can hope to do better with ‘best buy’ savings accounts. Gold returns are priced in pounds.

UK equities ended the year down 42 times out of 123 from 1900-2022. That’s 34% of all occasions. Ideally we’re looking for defensive assets that pop their heads over the 0% parapet whenever the going gets rough with shares.

We can see cash offers some limited resistance at times. Gold wins a medal for defying the big, bad bears of the 1970s and the Global Financial Crisis

But not a single asset class relieves the pain with convincing regularity – not across the entire timeframe. 

There are also wasted years when nothing works.

This muddy picture suggests we need a bit of everything. 

How often defensive assets support a diversified portfolio 

A bar chart showing how often gilts, gold and cash outperform equities in a negative year

The bar chart shows how often each asset class succeeded in diversifying against equity losses. By which I mean they weren’t as bad as equities that year. It doesn’t mean they always clocked up a positive return. 

Gilts softened the hard equity rain in just under 70% of all stock market down years. Gold rode to the rescue almost 80% of the time. Meanwhile cash deployed its emergency parachute on 86% of occasions. 

On the other hand, each diversifier sometimes made matters worse:

  • Gilts 31% of the time
  • Gold 21% of the time 
  • Cash 14% of the time 

Remember we’re talking inflation-adjusted returns here, which explains why cash can be a loser even when shares are down.

Nobody’s perfect

I don’t think the fallibility of portfolio diversifiers is widely understood. Many investors expect their portfolio countermeasures to work perfectly every time. They don’t. 

In fact, all three diversifiers failed simultaneously 10% of the time. That means equities were actually the least-worst asset class to own during those particular down years.

Oh, you were hoping your defensive assets would actually produce a positive return during a crisis were you?

Tsk! Some people. 

Okay, just for you let’s see how often the diversifiers landed sunny-side up.

Frequency that diversifying asset classes produce positive returns

How often gilts, gold and cash positively diversify against equity risk

Hmm, not great. 

Gilts coughed up a positive result barely 29% of the time. Gold scrapes over the 40% line and cash manages a 42% hit rate. 

And all three turned negative simultaneously in 36% of years that equities fell. 

Psychologically that’s going to grind down anyone if they don’t realise it’s perfectly normal! 

Portfolio diversification isn’t broken. This happens sometimes. More often than we’d like to think.

Although it’s easier to live with if we remind ourselves that storms pass and the long-term outlook is highly favourable.  

What is the best diversifying asset class when equities fall?

Which asset class generates the strongest performance during a down year?

Cash dominates the field, then gold. Gilts head up the defence only 17% of the time. 

A pie chart showing which asset classes are the best diversifiers when equities fall


Again, that blue wedge shows that the diversifiers fell further than equities four years out of 42. 

(Note: The pie doesn’t sum to 100% due to rounding errors and The Investor’s allergy to decimal points.)

But not all stock market slumps are equally terrifying. How do the diversifiers offset the risks of equities during the biggest disasters faced by UK investors?

Defensive diversifiers vs the UK’s eight worst bear markets

Our historical record contains some dark days. The all-time low occurred when the stock market collapsed -72% in 1972-74

Meanwhile, World War One and the Spanish Flu combined to smash stocks -57% from 1913 to 1920. 

World War Two was the awful sandwich between two bears. The first letting rip in the late 1930s, with the second only subsiding by 1952. 

Here’s how often each asset class blunted the UK stock market’s eight biggest blows:

Asset  Outperformed equities Positive return Best diversifier Failed
Gilts 6 3 1 2
Gold 8 4 4 0
Cash 7 4 3 1

By this measure gold and cash still look like the UK’s leading emergency first responders.

Gold beats equities in all eight nightmare scenarios. It delivers a positive return four times, and was the best diversifier four times. Cash notches similar numbers.

That’s especially worth noting if you’re a retiree whose sustainable withdrawal rate depends on your portfolio surviving an investing tsunami of a similar magnitude. 

If you combine the three defensives into a single diversified portfolio then:

  • All assets outperformed equities six times out of eight. 
  • All assets were in negative territory on three occasions. 
  • At least one asset managed a positive return five times. 

There wasn’t a single calamity when all three assets failed to improve portfolio returns. 

Horses (of the Apocalypse) for courses 

World War One and its aftermath was terrible across the board. Cash was the top-performing asset on this occasion. But it was still down a cumulative 45% by New Year’s Eve 1920. 

The Great Depression wasn’t as big a shock to the UK system as it was to America’s. Our equities were down -29%. But gilts and cash both rose by over 20%, with gold not far behind. 

Also note that:

  • The diversifiers all have a pretty good record against deflation. Especially gilts. 
  • Everything fell into the red during World War Two and stayed there. 
  • Gilts really benefit from negative correlations with equities from the Dotcom Bust on… until 2022. 

The connection here is interest rates. Gilts are likely to perform in a crisis when interest rates are cut rapidly to deal with falling demand. But gilts are typically a loser when interest rates rapidly rise – especially when inflation rears its ugly head. (Hello 2022!)

Gold also has a solid track record during 21st Century slumps. Partly thanks to the role of the dollar as a safe haven. 

King dollar to the rescue

Sterling generally weakens like a balding Samson during ‘risk-off’ events. Which means that UK investors who own USD-priced assets – including gold – will often experience a welcome ‘bounce’ in that corner of their portfolios when the dollar appreciates.

If you’re intrigued but not convinced enough to hold unhedged US Treasuries in your diversified portfolio, then gold is another way to benefit from that currency shift during a market storm. 

Would you like to play a game of Risk?

Inflation, pandemics, and war are the major threats that are hard to adequately defend against. 

The years when all three diversifiers turn simultaneously negative occur around World War One, World War Two, the Suez Crisis, and the Covid/Ukraine polycrisis. 

Government bonds were useless in four out of five of those onslaughts. But you wouldn’t have wanted to be without them in the Great Depression, the Dotcom Bust, or the Global Financial Crisis. 

A realistic reading of history admits the scale of those events is not predictable. 

Remember that a number of smoking crises had already been snuffed out before Europe combusted into World War One. Even then the major players thought the war would be short. 

The Great Depression was preceded by the euphoria of the Roaring Twenties. 

Hitler could have been stopped earlier. 

The world was unprepared for Covid. And Putin’s Ukraine atrocity, too. 

I could go on.

The point is we don’t know what will happen. So why not lean into diversification and spread your bets across every useful defensive asset class? 

Isn’t there anything better to diversify risk? 

Property REITs, private equity, infrastructure, dividend stocks, and other equity sub-asset classes are all highly-correlated when there’s a global FUBAR. 

So I say: “Next!” 

Index-linked bonds and broad commodities are the two obvious next stops. But our short-term index-linked bond fund pick was beaten by gold and cash in 2022. That’s despite its supposed role as an inflation hedge.  

The short answer to that conundrum is that index-linkers can provide good protection against prolonged, unexpected inflation – provided you buy individual index-linked gilts for a reasonable price, and hold them to maturity. 

The even shorter answer is it’s complicated. Especially with index-linked gilt funds.  

Non-retirees may well be better off relying on equities to simply outpace inflation over time. 

Broad commodities are a wild card. They’re occasionally awesome as in 2022 and 1973-74. But more often they’ll drag you down like concrete Ugg boots. 

Moreover, commodities’ long-term returns look like chump change. Which brings us to another important point.

Diversifiers must be growth-positive 

Why not just ditch government bonds? Here’s one reason: gilts’ long-term growth rate is better than gold or cash.

The 1900 to 2022 scores on the doors are: 

  • Equities: 4.85% 
  • Gilts: 0.91% 
  • Gold: 0.82%
  • Cash: 0.45% 

Gilts are twice as good as cash, as measured by UK Treasury bills. It’ll be a closer run thing with best buy cash accounts. But the point still stands. 

The expected returns of government bonds are higher than gold and cash. 

Diversifying risks in a down market

Doubtless we can dial up an optimal blend of assets based on historical returns to reassure ourselves we have the best diversified portfolio possible.

But the truth is there’s no point in finessing asset allocation to the last percentile when past is not prologue. 

What the UK’s historical asset class returns tell me is we need them all – because we need to be ready for anything.

For portfolio equity allocations of 60% and above, I’d personally take the defensive remainder and split it evenly three ways between government bonds, gold, and cash.

Or four ways if you are keeping the faith with index-linked bonds. (I am.)

This is a rough-and-ready solution but that’s fine because ‘Man plans and God laughs’.

Apologies to all the non-men out there but it’s a good adage. 

Take it steady,

The Accumulator


P.S. If I was starting my diversified portfolio from scratch, I’d invest in global government bonds hedged to GBP rather than just gilts. Here’s some ideas for the best bond funds.

P.P.S. You may conclude that you should just invest in US securities and be done with it. But there’s no guarantee that America’s charmed run will continue. Not because its superpower status is imperilled but because US returns have lagged the rest of the world for entire decades in the past. Ultimately, equity results rest upon valuations. If the prices of US securities are bid too high then they will disappoint those who buy based purely on recent performance. Stay global!

P.P.P.S. I examined UK returns going back to 1871, but equities were only down one year in the Victorian Golden Age. Our top-hatted forebears had to cope with a -1.1% thrashing in 1891, triggered by the Baring Crisis. Gilts and cash were both marginally positive that year, with treasury bills just edging it. 

P.P.P.P.S. This is getting silly now.

  1. Òscar Jordà, Katharina Knoll, Dmitry Kuvshinov, Moritz Schularick, and Alan M. Taylor. 2019. “The Rate of Return on Everything, 1870–2015.” Quarterly Journal of Economics, 134(3), 1225-1298. []
  2. Real returns subtract inflation from your investment results. In other words, they’re a more accurate portrayal of your capital growth in relation to purchasing power than standard nominal returns. []
  3. A positive correlation of 1 indicates two assets move up or down together in perfect sync. A negative correlation of -1 indicates they move in opposite directions: when one rises, the other falls. We want diversifying assets to be negatively correlated with equities when stock markets slump. Although we don’t want them to nose-dive when equities rise, either, so ironically it’s best that two assets aren’t perfectly negatively correlated. A correlation of 0 shows that two assets are randomly correlated. In other words, their movements have no relation to each other. []
{ 88 comments… add one }
  • 1 Troy February 7, 2023, 11:15 am


    I was wondering if It’s possible to buy US bonds or T-bills? If so what’s the best way of doing this?

    Many thanks,

  • 2 AtlanticSpan February 7, 2023, 1:41 pm

    Thanks again for a wonderfully informative piece Accumulator.
    Your pearls of wisdom cause me to pause and think, before making any impetuous decisions.

  • 3 Moo February 7, 2023, 2:11 pm

    Another great post.
    I was already on board the general message of holding Cash and Gold (and linkers and (yes) commodities), but was even still somewhat surprised how poorly Gilts have done. It confirms my approach, but has me wondering whether I should reduce my Gov bonds even more…
    You hint that Global Govt Bonds might be better than Gilts. Did you look at how they compared? I guess it might be difficult to get data back so far to make the full comparison? I have split my conventional Gov Bonds between Gilts and Global (hedged) but am wondering if I should go all the way to 100% Global.

  • 4 Nomis February 7, 2023, 2:35 pm

    Thanks for the insight!
    Does anyone have a recommendation for a cheap passive gold fund please? I’m only coming up with ETFs from my research and I get charged for dealing these so would prefer a fund!

  • 5 Mousecatcher007 February 7, 2023, 3:02 pm


    I’ve often wondered the same but I don’t think any execution only platform offers them. The ETF choice on offer is pretty substantial though.

  • 6 Meany February 7, 2023, 4:00 pm

    Great stuff. Been thinking about this a lot since you gave us the 10/10/10/10 defence formula.
    To echo from my conclusions:
    (1) The $ is a sort of universal defence multiplier. The question is which
    assets to use it on – probably gold & mid/long bonds.
    (2) Linkers especially lately are not as diverse as the other stuff
    [in 2023? If there is a lot of unexpected inflation rates will stay
    “high” so linkers get pulled both ways; if none they are bad bonds]
    (3) Some swing looks like a good idea – maybe certain defences should
    only be bought when the market goes high.
    (4) is there a better “4th category”? people suggest finding ways to
    buy the VIX, and risk-off:risk-on currencies. Not _broad_ commodity
    which has a lot of self-cancellation, but a few specific commodities.

    btw, am I really buying this? I’m really using it as a framework to think about what to hold – I’m not using a permanent allocation. My own for-real “4th category” is managed defensive funds because I don’t think the bond bucket should be static and I still haven’t enough knowledge to diy it to my satisfaction.

  • 7 Eadweard February 7, 2023, 7:19 pm

    Great article. I too have been reassessing my allocation to bonds. I did this using PortfolioCharts and switching bonds for cash in various asset allocations.

    For a 60/40 portfolio, with the 40% either cash or 10 yr gilts: using gilts the portfolio drawdowns are slightly worse (ulcer index 16 for gilts, 14 for cash), but the median annual return is substantially higher (6.2% for gilts, 4.9% for cash). I see a similar pattern for other asset allocations – permanent portfolio, pinwheel – so the result is not a fluke with 60/40.
    So using gilts in a portfolio has not historically given better stability than cash, but it has given substantially better returns.
    From this same data set, pure bonds did, as expected, give substantially better median return than pure cash – 4% vs 2.8%.

    The conclusion I draw from this is that its only worth holding intermediate or long bonds if you are being rewarded with substantially higher yield than cash.
    Currently the UK yield curve is flat (2yr gilt yield 3.5%, 10 yr gilt yield 3.3%) and ISA cash rates are over 4%, so I’m leaving the cash/bond part of my portfolio in cash and short duration bonds until bond funds have a more appealing YTM.

    On a tangent to this, I would like to hold unhedged global bonds, not gilts. However I can’t find any unhedged global sovereign bond fonds that are short duration – only intermediate to long duration global (iShares SGLO or Lyxor GOVD), or short US treasuries (iShares IBTS). Does anyone know of any short duration unhedged global sovereign bond funds or ETFs?

  • 8 Wodger February 7, 2023, 10:01 pm

    I presume these elaborate defensive measures are not generally relevant to accumulators who are still several years away from reaching their FI number?

  • 9 Sparschwein February 8, 2023, 2:43 am

    Great post. I’ve spent much time mulling over my asset allocation over the past years. I want to be FI in a few years and not keen to see my hard-earned go up in smoke if the next crisis hits. But, how to protect against inflation as well?

    Commodity stocks, Gold and TIPS have been staples for a while. (The Royal London Linker funds has a ~5 years duration, still quite sensitive to interest rates. I prefer short TIPS e.g. TP05.)
    Added some medium and long bonds last year when yields returned to half-decent levels again.

    Global macro and diversified trend following look like the missing pieces. These strategies are inherently uncorrelated or anti-correlated with the stock market and independent from duration. There are funds with a good 10-year track record and excellent results in 2020 and 2022. Unfortunately for retail investors it takes some digging for information and jumping through hoops with different platforms.

  • 10 Naeclue February 8, 2023, 11:21 am

    One of my objections to gold is that for centuries it was synonymous with money, but that is no longer true. In the early 1970s the US dropped convertibility of the US dollar to gold, so only the history from then on has any real relevance. Gold has been very volatile over that period.

    Gold has become fashionable and talked about recently as it is close to all time highs, but look at the history following the peak around 1980 for what gold can do to your wealth.

    I think there is a case to be made for holding long duration bonds, although I now prefer cash deposits and short duration when competitively priced, but gold I would not touch with a barge pole.

    Of the other asset classes, the only one that would interest me would be property/land, but for most people the most tax and cost efficient way to gain exposure is through your own home. Any other so-called diversifiers are, at least as far as retail investors are concerned, expensive junk. I really wish this was not the case, but sadly it is. All IMHO of course :).

  • 11 The Accumulator February 8, 2023, 11:36 am

    @ Moo – long-term data isn’t publicly available for global bonds but I’d guess it’d look worse than gilts on a historical basis. Mainly because the index would feature German, Japanese, Italian, French, and Austrian bonds that were absolutely hammered by world wars and inflation.

    The reason why I’d invest in global bonds (hedged to GBP) now is to diversify against single country risk.

    Like you, I had a handle on how bad gilts could be but was still surprised by this outcome.

    I keep getting tempted by commodities but only in proportion to how well they’ve done recently 😉

    @ Meany – the dollar tailwind makes gold a really good defensive proposition I think.

    @ Eadweard – yes, that’s it in a nutshell. And it makes sense that bonds entail more risk for more reward than cash. Can’t see a government bond fund fulfilling your criteria but there is an aggregate one:
    HSBC Bloomberg Global Sustainable Aggregate 1-3 Year Bond UCITS ETF. It’s about 70% govies.

    @ Sparschwein – Tell us more about what you’ve found on the global macro and trend following fronts.

    @ Wodger – it depends how susceptible to risk you are e.g. how well you’d hold up during a market panic. Or less vividly, how well your plan would cope if the stock market has a lost decade. I think accumulators have to consider the defensive side too.

  • 12 Tom-Baker Dr Who February 8, 2023, 11:38 am

    Great post, TA, as usual!

    I see cash as a special type of bond with zero duration. So I try to allocate a minimum of 15% and a maximum of 20% to Gold and a minimum of 20% and a maximum of 25% to cash and bonds.

    Cash is a couple of Money Market funds and an instant savings account with enough to cover a year of basic expenses. Then T-Bills for a couple of years expenses. After that 1-3 years Treasures, then something with longer duration and inflation linkers (TIPs and global short duration linkers). I try to get a bit of exposure to every part of the yield curve to get diversification and to build a rough ladder 🙂

  • 13 Tom-Baker Dr Who February 8, 2023, 12:27 pm

    @Troy (#1) – You can get T-Bills and US Treasuries ETFs and funds. Some are hedged to Sterling, some are not. Vanguard has an unhedged T-Bills ETF that is available from some UK investment platforms such as ii but not from Vanguard UK. I’ve never bought individual T-Bills and US Treasuries, if that is what you meant, so I can’t help you there.

  • 14 Brod February 8, 2023, 12:34 pm

    My defensive allocation is:
    5% cash,
    10% inflation linked Global Govt. bonds hedged to GBP (GISG);
    10% inflation linked Global Govt. bonds UNhedged (GIST);
    15% Gold.

    And the equity portion globally diversified

    I’ve been humming and harring about moving 5% each of GISG/T to some long term nominal bond fund when interest rates are more or less stable, but then I think defensive allocation for defence; equities for return. What the short end of duration gives me is a solid base, do I need return for that?

    @Tom-Baker Dr Who – nice “re-factoring” of the cash drag issue. I will adopt your mental accounting… I mean sound practice!

  • 15 The Accumulator February 8, 2023, 12:59 pm

    @ Naeclue – your point is well made – I think we’d be foolish to chuck bonds overboard entirely and draft in large percentages of gold into our portfolios. Gold is highly volatile as you say, and I need to do a post on that gold bear market you mention so that we have a fully rounded picture of the asset class on the site.

    That said, we can point to bear markets at least as long for other major asset classes such as equities and bonds.

    Where I do differ though is on dismissing the history of gold before the 1970s. I do think you make a valid argument in that it’s hard to imagine the same regime governing gold again in the future. But then, the record for every asset class is replete with circumstances that may never be repeated. For example, the deflationary era of the 1920s and 1930s, or the world wars, different taxation regimes, capital controls, or perhaps even the ZIRP era we may just have emerged from.

    I’ve come to the conclusion that it’s best to show as wide a variety of conditions as possible. Too many people just predict the last few years out into the future whereas the main lesson I draw from the historical record is we can’t predict what we’re going to face next.

    @ Tom-Baker Dr Who – thank you! And thanks for sharing your approach seems eminently sensible.

  • 16 The Accumulator February 8, 2023, 1:00 pm

    Ah – thanks for that Brod. I’m finding it really interesting to see how different people are tackling the defensive side of their allocation.

  • 17 Evan February 8, 2023, 1:50 pm

    Thanks TA. On your international government bonds point, I think back to your article on “the point of bonds” – https://monevator.com/bond-asset-classes/.

    You say “there seems little point in devoting a portion of your bond allocation to AAA–AA rated countries that are in the same low yield boat as the UK. You’d be taking on a fair chunk of currency risk in the part of your portfolio that’s meant to offer stability.”

    Has your thinking changed on this? I was considering changing to global bonds, but this specific paragraph convinced me not to tinker.

  • 18 xxd09 February 8, 2023, 2:02 pm

    Riding out the storm by doing nothing
    33% Global Equities Index Fund
    61% Global Bond Index Fund hedged to the Pound
    6% Cash (2 years living expenses)
    Currently Portfolio down 4% over 1 year -was as low as 13%-on its way back?
    Wife and I now 76 so should make it to the finish with capital intact -hopefully!

  • 19 Moo February 8, 2023, 2:52 pm

    I try to only change my allocation when I believe I am switching from an overvalued to an undervalued (or at least fair valued) asset. It’s a bit “active” but the point is to stop me jumping on a bandwagon when everyone is talking about an asset that has done well recently.
    A few years ago I wanted to add Gold, but I thought the price was high. However, Commodities had been falling for years so I went that way (for the time being). After another year or 2 of falls it has now paid off.
    The ups and downs on Gold and Commodities are so long that I would especially reiterate my point at the beginning – only add them to your portfolio when you think they are good value! (e.g. been falling relative to inflation for some years). It’s a difficult call to make, but if you can’t buy at that point then they are probably not the asset for you.
    Buying at the wrong time could see you losing money for 20 years (as has been mentioned by others here).

  • 20 Ade February 8, 2023, 5:15 pm

    Thanks so much for this post – perfect timing!

    I’ve been going back and forth on this a lot lately – pulled the pin and will be going FI in the summer, so need a better plan for the defensive side (mostly cash + a recent addition of intermediate bonds).

    As has already been suggested, the *recent* major events such as the COVID crash, the Truss fiasco and commodity inflation point to USD as possible diversifier vs. GBP. The trouble is, has it always been the case, or just another inconsistent variable based on FX, or maybe just importing future political risks? The crude zig and zag might just work in situations like these? ‘Safe haven’ + commodities also priced in USD.

    I’m pretty settled on 65% All Cap World equity. How to split the 35% keeps shifting.

    Cash (retail/ISA/PBs) is certainly going to get a larger share than I first envisioned, maybe up to 20%.

    For the rest, I’m toying with the idea of Vanguard Global Aggregate Bond VAGS GBP hedged + VAGU USD hedged to capture the USD exposure, sticking the global everything model in bonds too (or iShares IGLO + IGLH).

    The Vanguard Global Agg Funds (not the ETFs) both GBP and USD hedged go back to May 2009 – certainly adds some volatility, but I can see the Brexit vote plus the other blowouts a mile off on the chart. Total return over the period = 44% GBP vs 87% USD.

    The Royal London short index linked fund is also of interest, but the upside performance over this recent inflationary period is mild from what I can make out. Maybe if high inflation persists this will win out.

    Not sure I fancy gold, maybe if there is a valuation crash that allows a lower entry point down the track.

    I would be grateful if anyone has any further thoughts on the USD bond holding?

  • 21 Steph February 8, 2023, 5:39 pm

    I tend to sway towards @Naeclue’s views but as a newbie investor it’s always good to hear others views and opinions.

    I seem to remember another Monevator article from not very long ago, can’t remember the title now, on defensive assets where TA said he would probably only consider using gold as just a “one trick pony” in decumulation to protect against SRR etc. (at an allocation something like 5 – 10% if I remember right.)

    From this latest article that opinion seems to have changed to that of now continually holding it – presumably this is due to all the calamity of 2022 and the panic now that bonds are not (always) as defensive as many investors believed they were. So now we have gold in the mix as well as various bonds and cash.

    It seems as we learn more from history we will need to keep adding in more and more defensive assets to protect against one thing or another (throwing in a whole bunch of vaccines for the next upcoming plagues, could be likely next!)

    Some of us passive investors don’t see this as a “hobby” – just a means to an end really but we want simplicity/convenience in our portfolios and not large demands on time (from admin./rebalancing etc.) and also without the added costs in fees all the time. Also not everyone wants to be invested in VG LS (or similar mixed funds) – preferring more cost effective global trackers or the like.

    So how much more will we be able to add in before all these have too much of a negative “drag” on the portfolio, considering the acknowledged limited protection each of these seems to provide in a downturn. If you end up by maybe trying to (over) protect against every single (but often rare) downside risk, are you not reducing the upside a great deal over the long term if you just otherwise held equities + cash?

    I know there are the implications of SRR in drawdown and volatility of your portfolio in these times but if you have the cash to ride these out? (and your attitude to extreme volatility is high obviously.) It seems cash has (slightly) been the best diversifier anyway.

    It seems from your findings there have been many more good years for equities than bad (nearly two thirds of the time) and your chart shows equities have suffered losses of over 30% only 4 times in the last 122 years so it depends if you can weather/stomach this. I know if you hit a very bad period like in the 1970’s when the fall in equities was not much under 60% it would be a disaster for most, especially if it lasts for long, but rare it seems (so far.)

    I suppose it also depends on the size of the portfolio and so the amount of cash you can afford to hold outside of it. Obviously with smaller portfolios it would not be an option.

    Since most of us already hold a reasonable amount of cash to cover our daily living/bills and foreseeable near term spending (and some of us hold more – maybe for a few years) then couldn’t you be just as well off and without all the bother of what will soon be getting towards holding a supermarket size basket of defensive assets?

  • 22 SemiPassive February 8, 2023, 6:18 pm

    The bulk of my low risk pension pot is in a cash-like fund which is a blend of 0-5 year gilts, money market funds and 0-5 year investment grade corporate bonds. It held up pretty well during last year’s carnage.
    For a Stocks and Shares ISA low risk allocation I have chosen iShares IS15 (sterling corporate bond 0-5 year) which has an average YTM of just over 5%.
    I will probably add a significant holding to that ETF in my SIPP eventually, as I get closer to retirement. Its longer duration brother SLXX is still yielding less, so, as Eadweard mentioned, why bother.
    Maybe the time to “buy duration” will come in another year or so, as I can remember when SLXX was yielding at least 0.5% over IS15.

    I don’t see any appeal in longer dated gilts or global govt bonds from developed nations that yield even less.
    Short dated US Treasuries yes, certainly if I was a US investor. But if you want to hedge them to GBP then after the hidden costs the effective yield seems to get knocked back similar to gilts.
    So then the decision becomes whether to go unhedged and bet the pound won’t strengthen.
    Again, why bother with that faff if you can get 5% on IS15 with low volatilty or 4% on a Cash ISA.
    And regarding risk on corporate bonds, yes I am aware credit spreads can blow out in a bad recession, but I would just buy more then.

    I see the risk of having a substantial portion of your portfolio yielding virtually nothing or only a 3rd of the CPI rate as worse over the longer term.

  • 23 Harry February 8, 2023, 6:50 pm

    @TA, thanks for a great (well timed) article.

    @Ade, I’m in a similar position to you.

    I’ve gone round in circles trying to decide a split between bonds (global but which ones?) & Cash but this article has made me think I need more of a spread of defensive assets. So, I’m thinking maybe I should just subcontract out that part of the portfolio and use a mix of Ruffer/CGT & cash?

  • 24 The Accumulator February 8, 2023, 7:31 pm

    Lots of people seem to have ruled out a recession forcing yields down and bonds making a chunky capital gain as fast as you can say “flight to quality”? Discuss!

    @ Evan – the currency risk is taken care of by choosing global bonds hedged to GBP. There are some options here: https://monevator.com/best-bond-funds/

    Previously I was agnostic about holding gilts vs global bonds (hedged to GBP) but that was before Liz Truss and the events of the last half decade. I’m not sure the single country risk is worth taking anymore when there are decent diversified options available. That said, I still hold my gilts and haven’t changed my own portfolio. Call it inertia.

    @ Ade – the ‘flight to the dollar’ does not always work. Quickly eyeballing down years since 1986 I can see gilts beat unhedged equities in 1987, the early 90s recession, 1994 and 2011. It’s pretty marginal during the dotcom bust but US Treasuries edge it.

    That particular dataset runs from 1986-2011 and shows overall gilt returns beating treasuries during that period.

    This piece shows a string of recent US wins plus superior returns from 2009-2020:

    Much as I don’t see the pound relinquishing its ‘risk-on’ status anytime soon I think this unhedged US bond business is a currency play and a crapshoot.

    It makes more sense to me to invest a small allocation in gold and get an uncorrelated asset that also benefits when the dollar rises against the pound.

    @ Harry – this might help you think through options on the defensive side:

  • 25 Sparschwein February 8, 2023, 9:04 pm

    Currency is just another dimension across which I want diversification. I learned this the hard way in 2016. GBP is risk-on and reliably tanks at the wrong moment. It has been on a decades-long downward trend (so much for the academic mean reversion theory). Most stuff here is imported, and most people want holidays in the sun or move abroad permanently for retirement.

    USD is the obvious first choice as the global reserve currency and safe-haven during crises. I don’t see any evidence that USD status will change anytime soon. Still I want some more diversification and keep ~1/3 in USD and another ~1/3 in a bunch of other currencies including gold.

    Corporate bonds have a quite high correlation with the stock market, which defies the purpose of the bond position imo. Aggregate bond ETFs usually contain a big chunk of corporates. So do most active bond funds, plus some really opaque stuff such as CDOs of GFC fame (which also seems to apply to the Royal London not-so-short Linker funds).

  • 26 Ade February 8, 2023, 11:04 pm

    @TA – Thanks for the link to the US Treasury vs Gilts post – I had read it (I read them all!) must have slipped my mind.

    Reading it again though, I can’t help thinking it does, to me at least, suggest some kind of USD exposure works in certain situations. Part of the mix with the other recommended diversifiers, gold, cash & index-linked bonds, etc.

    I wasn’t really positioning any one government’s debt against gilts though, more, as you highlight, a pure, smallish, currency play. While hoping to gain the natural yield of the underlying global aggregate bond fund and all that it includes along the ride.

    I can’t help thinking I want as many Michal Gove’s spasming to their own beat as I can get! Hoping one of them is jumping up at just the right moment!

    @ Steph – I think I know what you mean. The difference for me at least, was the simpler the better while working, earning, saving. If you compare most of the ‘defensive’ assets and plot them over a long enough period, then add global equity, it sure does flatten most of them down a hell of a lot due to the relative lower volatility. Holding enough in short-term debt/cash etc to avoid bailing out at the bottom of an equity slump was good enough for me.

    Moving into drawdown, I can’t help thinking I’ll want to clip the winners in the sale for living expenses during the rebalance. More hopeful mental accounting, I guess.

    @ Harry – ~10x the fees of a simple ETF Tracker jumps out – will take a longer look though – thanks.

  • 27 Sparschwein February 8, 2023, 11:49 pm

    The main reason for diversification is that stock market returns are *not guaranteed* even over the long-term. Otherwise there wouldn’t be any equity risk premium. Sure, ‘on average’ and in ‘most’ scenarios stocks outperform by a long shot, but unfortunately we get to live only one future which could be quite different from the past average.
    And, when investing at high historical valuations, the expected return goes down and risk goes up.
    Scott Cederburg has done some really eye-opening research on the dispersion of long-term stock market outcomes, and the not-so-great historical track record of bonds (e.g. google Rational Reminder podcast).

  • 28 Tom-Baker Dr Who February 9, 2023, 12:18 am

    I think that most retail investors underestimate the importance of diversification across bond maturities.

    I’ve worked for almost two decades modelling Interest Rates. One of the first things you learn is that different parts of the yield curve often move independently of each other respecting some no arbitrage constraints. The yield curve can become steeper, invert, etc.

    In drawdown you have more diversification and flexibility, if you are exposed to as many different maturities in the yield curve as you can. Often bonds of some maturities are going down in price at the same time those of other maturities are going up or at least not going down as much. If you’ve only got short duration, medium, or long duration alone rather than all of them, you will reduce your options as rates move. Some bond funds mix everything, but it’s important to have exposure to different parts of the yield curve in separate securities in your portfolio. This way when you need money, you can sell just what is going up or at least what is not going down as much in price rather than having to sell a bit of everything.

  • 29 xxd09 February 9, 2023, 12:27 am

    As an ancient investor who has travelled this investment road for some time I eventually ended up with these thoughts many years ago
    Equities are for growth but are volatile-50%+ swings
    Bonds are for wealth preservation,reduction of portfolio volatility and possibly some return in that order
    In fact even with the current scenario these “facts” have proved themselves yet again
    (Bond’s unusually have gone down but nothing like equities )
    I have thought about Gold,REITs etc but all these alternative investments seemed to be too expensive and opaque for amateur investor like me
    Had gilt ladders ,investment trusts etc -complicated and required much effort
    So settled as stated in a previous post -one global index equities fund and one global bond index fund hedged to the pound plus some cash
    Simple ,cheap and easy to understand
    Investors should concentrate on factors under their direct control-cutting costs,saving as much as possible and live frugally
    Leave the market alone to do its compounding thing
    Boring but works-probably wise to get your excitement elsewhere!

  • 30 Matthew February 9, 2023, 8:55 am

    Cash is like a zero duration gilt, even says on banknotes “I promise to pay the bearer on demand”
    So to choose gilts over cash in the first place you’re introducing duration risk – and it’s duration that was a problem.

    I see fixed income as risky in a sense -because it’s fixed, it can *only* improve it’s yield in a rising rate environment by becoming cheaper, because it’s fixed it can’t increase the income without capital loss like equities or property could
    So would we say that bonds have more duration risk than equities? – of course less default risk though. Cash has neither of the two, and without duration is more redeployable – gives more of a rebalancing bonus at times like that?

  • 31 Moo February 9, 2023, 10:26 am

    @Matthew (and others)
    Cash is not like a zero duration gilt (in the same way that a square is not like a cube with zero height!). It’s a totally different beast.
    Because of recent events (recency bias) there are a lot of comments about the benefits of cash and short duration bonds. The point about gilts with intermediate or long duration is they (should) tend to go up when stocks crash. The flight to safety. This is what happened in the Covid crash. Cash can’t do that. The main benefit of this is to stabilise your portfolio (a bit) and reduce worry/panic selling. But it also provides *more* rebalancing bonus than cash, not less.
    @TA – this made me wonder whether your analysis of the benefits of gilts misses something. The diversification benefit of gilts may be much shorter timewise than the annual data in the article, as happened in 2020. Instead of negative equity years perhaps the analysis should be by bear markets? You’re going to need more detailed data. I might have to downgrade my appreciation of this article 😉

  • 32 Moo February 9, 2023, 10:37 am

    @TBDW @xxd09
    I like the contrast between your comments.
    Technically TBDW may be right that there is benefit to holding different durations separately. But I think xxd09 is also right – that for most investors the simplicity of a single bond fund is good enough!

  • 33 Matthew February 9, 2023, 10:48 am

    @moo – Point taken about recession protection – Is it true that duration is behind that? I think gilts vs cash protect you against different types of risk – recession vs rate rises – so the rebalancing bonus will depend on what type of problem occurs – hence cash outperforming in this situation, I suppose a compromise is medium dated gilts or a mixture.

    I just think that as duration gets shorter, it becomes more cashlike in that it would reach maturity to become cash sooner – duration risk drops and redeployability increases. – it’s a cube that’s shrinking on the z axis, becoming the square.

    And I suppose we need portfolios to watch duration as they derisk, not just the proportion of bonds

  • 34 The Investor February 9, 2023, 11:12 am

    My view on all this is that if you’re a young to middle-aged investor (/starting out versus your eventual expected lifetime savings) you can hold an awful lot of diversified equities, with cash as a buffer, and then not bother too much about bonds at all if you want. (Or you can own something like the LifeStrategy 80/20. Same difference now yields are up.)

    I’ve long thought the risks of complication from everything else isn’t worth it when starting out:


    As your journey as an investor continues, it’s really vital to find out how well you can stomach volatility and ideally to bolster it.

    Developing a capacity to ride out downturns in the market will likely reward you much better (in the shape of higher long-term total returns) then developing a deep interest in the correlations of the bond market.

    But caveats abound, which is where this sort of research and thinking about asset class correlations comes in so useful.

    1) Some people can’t emotionally take downturns, even when short-lived. I don’t think the ability to do so is anything like so rare as the literature/casual writing would suggest (Vanguard has regularly reported that only a tiny number of its investors traded anything in prior crashes, and its very everyday clientele are hardly emotionally-repressed Masters of the Universe). But there do exist people who just can’t bear to suffer losses. The best strategies for them are still going to be behavioural (principally — don’t look!) but having a big chunk of cash AND other safety-cushion assets such as the appropriate duration bonds makes sense for them, especially now bonds are yielding something. If bonds bounce even 5-10% when your stocks are down 20% and you have enough of them, you’ll appreciate it. The fact this didn’t happen last year doesn’t mean it won’t happen in the future.

    2) Everyone’s ability to stomach and take risk changes with a growing portfolio, fewer lifetime savings ahead, and old age and changed priorities. For a de-accumulating 65-year old (or an early FIRE-ee), the case for having something huge like 50-60% outside of equities is far stronger than for a 25-year old at their second job with their first SIPP. I am not suggesting 50-60% in cash/bonds/gold/Birkin bags is appropriate or not. I’m saying the pros and cons are vastly different between these two cohorts.

    3) Everyone faces the very rare but non-zero chance that equities will have a crappy run for 20-30 years. Even global equities but especially local markets. For instance, if the US market spends the next 10-20 years going nowhere or declining while the rest of the world catches up (which the relative valuations might suggest is likely right now) then even global trackers will feel it, given they have 60-70% in the US market. There is a precedent for this (Japan). And there’s certainly nothing in economic theory that says you’re owed your 5-7% real return over your particular investing lifetime. This non-zero chance of poor equity returns is an argument why everyone should have *something* other than equities. Even if just 10% in cash because you’re starting out.

    4) Real-life returns are geometric, not arithmetic. I won’t get into the maths here, but the takeaway is that if you want to increase your likelihood of getting a ‘good’ result then it’s worth paying the cost of giving up on the possibility of the very best result (100% equities) and instead reduce volatility in your portfolio by including a fewer other assets. This diversification adds a return drag (because equities have the highest expected return) but provided you’re up for rebalancing (or your happy to leave it to Vanguard or similar with its all-in-one fund) then you should benefit from lower portfolio volatility over the years increasing the probability of you getting a ‘good’ result. (And, again, you also take off some of the tail risk of truly tragic results).

    These four points are very simple (well, the first three are! 🙂 ) but this whole discussion turns on them.

    It’s also why a reader should take a step back from the counsel of any other particular reader (or us writers!) and have a think.

    You are not them. You probably do not know their circumstances. Even if they share their portfolio allocation, you probably don’t know their net worth, their work/income situation, or what proportion of their total assets this portfolio represents. And even if they share that, do they also share their family situation, their dependents, their age, their health status, or how much sleep they got in the Covid crash?

    Etc etc.

    There are commentators on this blog with net worth in excess of £10m, and more than one earning seven-figures. And there are newbies starting out with a Nest pension.

    Over the years I have seen both extremes give their input as to what optimal investing looks like, without much framing or a nod to the situation of the other.

    Now I believe we absolutely can all learn from each other, and our different approaches. 🙂 But there’s no universally right and not much that is definitely wrong.

    There’s what works from you, informed by evidence certainly but also by a clutch of personal factors and attitudes.

  • 35 The Accumulator February 9, 2023, 12:22 pm

    @ Tom-Baker – really interesting point about holding different durations separately.

    @ Moo – yes, I’m pretty sure you’re right that monthly data would confer fresh insights. Just a few days ago I stumbled across monthly total return gilt data that gets me back to 1998 but haven’t found anything before that.

    I’m doubtful we’d be any more impressed by gilts though when it really counts. The shortest bear markets that are over in months e.g. 1987 Black Monday are the most easily withstood. But bears that last years are the most fearful kind and the annual data captures the response reasonably well.

    The picture on that is relatively clear:

    If the crisis features runaway inflation then bonds are thrown onto the back foot e.g. the World Wars, 1972-74.

    If the crisis is recessionary i.e. demand is in freefall then bonds are hard to beat: Great Depression, Dotcom Bust, Global Financial Crisis.

    We live in a world where either type of bear can arrive without warning – especially if you don’t anchor excessively on the recent past. Thus I think in terms of defending against both threats. Unfortunately, there isn’t a single asset class that reliably does that. Hence:

    Nominal government bonds for severe recessions
    Index-linked bonds for unexpected inflation (but so many complications!)
    Gold – can defend against both types of crisis but not reliably so
    Cash – for its liquidity and ubiquity. Moreover, because it’ll help us during the kind of personal crisis that can overwhelm anyone.

    @ Steph – you make many excellent points and I have sympathy for your view about not overcomplicating it. You’re right, there is a danger of negative drag and I think this is a particularly real and present danger with gold. Cash fans, too, often forget that it’s been negative every year since 2008 (bar a brief upward blip in 2015).

    I do think that 2022 has taught us something about the risk of bonds – something that many people understood on a rational level previously but perhaps now more deeply on an emotional level too. It’s one thing to invest in a Vanguard Lifestrategy fund to keep things simple and understand that leaves a flank undefended. But we’ve heard from people who invested according to 60/40 orthodoxy, and then reacted to 2022 by effectively saying: “Nobody told me this could happen!”.
    We tried but perhaps didn’t beat the drum hard enough.

    Either way, I think whatever approach you take is fine as long as you know the risks. If someone wants to invest 100% in equities and believes they’ll get through a lost decade, or -72% Seventies-style bear market, with only minor psychological damage then best of luck!

    Re: your overloaded shopping basket of asset classes (love that by the way, will probably pinch it at some point) – that’s effectively what the investment industry tries to sell us and I concur with Naeclue that the bulk of it is junk.

    I think we’ve got a palette of five assets to choose from along with clear pros and cons as outlined above. With equities being the 5th for long-term growth, plus private property in the form of a house (as mentioned by Naeclue) as a 6th.

    But you don’t necessarily need all five – depending on your personal blend of risk exposures.

    I maintain that gold is easy to dispense with especially for accumulators. It’s main role is to lower volatility in a crisis but at the expense of some long-term growth. Hence, I still think the use case par excellence is as emergency ballast during the first 15 years of retirement. But if I was an accumulator who particularly feared volatility then I’d allocate 5-10% to it too.

    I do hear you on the simplicity point though and I’m minded of that classic adage: Make everything as simple as possible but no simpler.

  • 36 Seeking Fire February 9, 2023, 12:22 pm

    @34 Investor. What you said in spades….

    If you are 40 years old with a net worth of £10m and spend £100k a year. Probably 90% equities, 10% cash. Massive margin of safety.

    If you are 60 years old with a net worth of £500k and spend £20k a year. Probably more like 50% equities, 35% bonds, 15% cash. Low margin of safety.

    Frame of reference is everything

  • 37 The Accumulator February 9, 2023, 12:27 pm

    @ TI – great comment. Your point about ‘Don’t look’ makes me wonder whether the rise of smartphone trading apps makes the average Jo(e) more susceptible to volatility i.e. it becomes too easy to look, and once we can, we can’t help it.

  • 38 Tom-Baker Dr Who February 9, 2023, 12:47 pm

    Moo (#32) – My humble opinion about this issue is better summarised by Einstein when he wrote “Everything should be as simple as it can be, but not simpler!”

    TI (#34) – Great comment! Personal context is very important in investment. Unfortunately, most of us can only honestly comment based on our own experiences and circumstances 🙂

  • 39 SemiPassive February 9, 2023, 1:06 pm

    “Lots of people seem to have ruled out a recession forcing yields down and bonds making a chunky capital gain as fast as you can say “flight to quality”? Discuss!”

    A recession caused by rising interest rates to combat double digit inflation, so I think we are in for another year of bonds being correlated with equities, like 2022. Although I think any bond losses will be muted compared to last year since the rates have already come up as far as they have from so low.
    It just seems unrealistic to expect a 40 year bull market in bonds to only take a year to unwind before the next bond bull market starts.

  • 40 Andrew F February 9, 2023, 1:41 pm

    First time comment but been reading for a few years.

    I agree with the thrust of the piece that has been written here. Bit surprised though. Your prior views suggested anything outside bonds or equities was an error. In earlier posts you’ve pushed back against some who made comments which actually now seem the same as the points 1 to 4 that TI made in post 34.

    Personally, I can’t really imagine having so little diversification and accepting big losses but I’m wondering what is the reason for the less strident views?

  • 41 The Investor February 9, 2023, 2:00 pm

    @Andrew F — Thanks for reading for a few years, and for commenting. Presuming the comment was directed at @TA, I’ll leave him to answer it. But I would just add we’re not a hive mind on this. (See my post above highlighting cash as a sole diversifier from 2010, for example. That was me not @TA).

    So my points 1-4, while I think @TA would agree with them, they aren’t @TA’s points 1-4 or even Monevator’s points 1-4.

    The other issue perhaps while I’m here is the audience of articles. It is easy to be discursive in the comments. It is much more difficult to write a (say) 1,500 to 2,000 word article that will simultaneously make a main point for a typical reader without having to shed some nuance or (at the other extreme) writing a text book.

    Our 700 word articles of yesteryear have still inevitably become 1,500-2000 word articles for this reason.

    Finally, and definitely without wanting to relitigate it, the big clash I personally recall having with a respected reader wasn’t because *their* investing views as suited them were stridently argued against (not by me anyway) but because they were somewhat stridently against *our* articles, and the fact they didn’t reflect *their* investing reality. At least as best I could tell, it was a bit befuddling to be honest. The general / additional points they’d made for years were always hugely welcome and noted as such, and they were an asset to the site.

    But Internet discussion tends to eventually degrade into a clash of two reasonable people that share more in common than they differ, sooner or later. There’s probably one of those ‘Laws’ to explain it.

  • 42 The Investor February 9, 2023, 2:06 pm

    p.s. Also, personally I am still learning after 20 years and investing for me is a work-in-progress. I think that’s true for most of us.

  • 43 Haphazard February 9, 2023, 2:49 pm

    Now would be an interesting time to ask Lars Kroijer the same question I put to him a year ago: Does he still think its ok to use a government bond fund for your “low risk” asset, in his proposed two-fund portfolios?

    My impression is that we muddle up different things when we are looking at the role of defensive assets. And I think this is reflected in some of what The Investor says above.

    Is the defensive asset there to:
    a. Stop you selling up in a panic, because your equities just nosedived, or
    b. So that on date X, when you need your investment for a specific event, it has not just nosedived the month before. So you might want some kind of lifestyling taper.

    If it’s (a), this has to do with your own behaviour and risk tolerance – which might change over time.
    Whereas (b) might apply more to people who, for example, planned to buy an annuity or pay for student fees – on date x, rather than shuffle into drawdown at some stage.

    It’s interesting that target date funds come in one flavour, as regards the lifestyle taper element – nobody asks you what you are planning to do on the relevant date. I think many fund managers now assume retirees will go into drawdown – perhaps that is not helpful for people who are planning to buy an annuity?

    Personally, I feel a bit reluctant to switch more into cash right now, if it means effectively “selling low”, possibly “recency bias”, and losing the benefits of rebalancing. But I can see the logic in the longer term (or pre 2022, if we could turn back the clock!). I’m also increasingly interested in holding bonds directly – perhaps we could have an article on that?!

  • 44 The Accumulator February 9, 2023, 3:06 pm

    @ Andrew F – I’ve never believed that diversifying outside bonds and equities is an error. By all means point me to those comments – either there’s context missing I need to supply or I worded them badly. I’ve been writing for years about how to diversify beyond equities and bonds:





  • 45 Henrik February 9, 2023, 7:27 pm


    one question I have to the folks who have already achieved a portfolio of 25-33x of annual spending to FIRE is: Are you really keeping like 30-40% in Bonds / Gold / Cash etc to diversifying the portfolio? Rather than thinking in percentages I prefer to think in years. Say you have 25x annual spending in your portfolio (4% rule) and have 30% of that in Bonds etc. That means you have 7.5 years in Bonds / etc. To me that feels to much because chances are stocks will recover way quicker than 7.5 years.

    I feel comfortable maybe holding 4-5 years of living expenses in bonds and another year in cash. The rest can go to the equity bucket. In other words if the portfolio grows way beyond 25 years of living expenses one could start increasing the equity bucket again slowly.

    Also see the “warren buffett portfolio allocation” with 90% stocks and 10% t-bills.

  • 46 Sparschwein February 10, 2023, 12:51 am

    This is a really interesting and important discussion. Good that Monevator is questioning the 60/40 orthodoxy.

    @TA’s post from Oct 2021 is very prescient.

    My 2 cents: We have been through a fundamental regime change last year. Much of the received wisdom has become obsolete. Projecting the recent past into the future (always questionable) leads to failure. Asset correlations flip. Bonds turn from valuable diversifiers to liabilities. Commodities from “crappy equities” to star performers and diversifiers.
    Adapt and innovate, or fall behind.

    The assumption that “stonks always go up” seems to be still widespread and entrenched. Stocks *probably* go up in the long run – or we may get another Japan or 1970s scenario. Nobody knows. Diversification is about hedging these longer-term uncertainties.

  • 47 Sparschwein February 10, 2023, 1:36 am

    @TA – back to the diversification strategies I mentioned earlier.

    Hedge funds are hugely diverse. It makes no sense, as some articles do, to lump them all together and draw sweeping conclusions.

    From what I found (based on the book “Investing Amid Low Expected Returns” and a bunch of other sources), most hedge fund strategies do not offer any diversification benefits vs. stocks. This also applies to presumably market-neutral equity long/short.
    But two strategies have shown to be anti-correlated with stocks when it counts most, in a downturn.

    1. Global Macro with long volatility bias. It makes sense from first principles that this should be anti-correlated with stocks, and BHMG have shown this over decades. BHMG are issuing new shares and the premium to NAV has come down recently, which imo makes them investable again.

    2. Trend following – managed futures diversified across multiple asset classes.
    (Not the same as momentum factor ETFs.)
    Did very well during the GFC and last year, with long periods of poor returns in between. Some funds with decent 10+ years track record are available through AJ Bell or IB. It takes some persistence to find them and cut through the bureaucratic nonsense.

    This involves betting on active managers of course, which is a risk.
    So is missing out on proper diversification.

    I wouldn’t bother and go for something like 90% stocks/5% physical gold / 5% cash if I knew how to hedge the stock market risk with options. This is complicated. Simply buying puts or VIX futures is too expensive. One needs to get the timing right too. Tail risk strategies worked well in March 2020 but did poorly last year.

    @all disclaimer: DYOR, don’t buy stuff just because a random piggy on the internet says so, and all that.

  • 48 The Accumulator February 10, 2023, 9:26 am

    @ Sparschwein – thank you for coming back to this. I’ve been trying to nudge TI into writing about the pros and cons of BHMG as it seems like his wheel house.

    @ Henrik – yes, I have looked at it this way and I get why you do it. Much depends, I think, on how quickly we might expect equities to recover from a bear market. And not just any old bear market but a severe one.

    The average recovery time for the US is about 4.5 years but that’s the average. Almost 40% of their bears lasted longer than average: 12 years in the case of 1973-74 and 13 years for the Dotcom bust. Recovery from the Great Depression took over 15 years.

    That’s the US, too. A market that’s been well above average across the historical record.

    The key to a realistic view on this problem is to look at recovery periods in inflation-adjusted terms:

  • 49 Moo February 10, 2023, 10:15 am

    @Henrik @TA
    As TI said there are lots of factors specific to the individual. As well as the withdrawal rate there are also annuities, pensions and other income which might allow a more risky portfolio allocation.
    But if your portfolio is just large enough to meet your needs (e.g. the 4% WR you mention and no other means), then seeing it halve in value would I think be very scary – serious reconsideration would be necessary. Therefore a hefty chunk of defensives is required. That’s the main reason I think why you would want 40% defensives (in this specific case).
    I don’t agree with your thinking of consuming the defensive allocation during a bear market. First, I don’t think 5-6 years is enough. Not only has the stock market got to recover its value in *real* terms but also grow enough to replenish your defensive allocation which you have just chewed through.

    But in reality, this is not what I would do. Some of the defensive allocation would be used to buy equities at their reduced prices (driven by rebalancing not market timing, of course). The calculations then get somewhat more complicated than your rule of thumb so I won’t play out the whole scenario here.
    But as I said before, a big part of the defensive allocation is to allow you to sleep at night through the next DotCom, GFC, Covid crash (or worse). 🙂
    – but again if you are not so dependent on your portfolio then defensive allocations can be lower.

  • 50 BBBetter February 10, 2023, 10:20 am

    “Sterling generally weakens like a balding Samson during ‘risk-on’ events. ”

    Did you mean risk off events?

  • 51 The Investor February 10, 2023, 10:54 am

    @BBBetter — Oops, yes! Thanks, will update.

  • 52 ianH February 10, 2023, 1:55 pm

    My God! Just Googled ‘Birkin bags’ as a possible potfolio diversifier and found out you can spend £165,000 on a handbag! WTAF?

    Quite a chuckle to be going into the weekend with.

  • 53 Steph February 10, 2023, 1:57 pm

    @TA – thank you for your comprehensive reply. You tell some very good truths as does TI in post 34, which do change my thoughts particularly as I’m not getting any younger.

    I was thinking along the same lines as @Henrik about either holding maybe 4 (possibly 5) years spending in bonds and 2/3 in cash but more recently, due to the problems bonds have had, thought about 6/7 years all in cash and rest in 100% global trackers. Mainly for the ease/simpilcity/lack of faff as I’m sure it’s what many (“don’t really wannabe”) investors like me would RATHER do (I like an easy life) but life’s never that simple is it! I think it does put potential investors off investing though, as they just think it seems over complicated and so too much bother to fit in with their already hectic/demading lives. Saying that the adage you gave is very relevant – “Make everything as simple as possible but no simpler.” I agree that maybe going too simple is not always in your interests and could have disastrous consequences.

    If I was much younger, so had more time, or had a very large portfolio, where taking drawdowns in a falling market over many years would still not result in a poor outcome (before my “oak box” makes its final journey) I would still consider it, as I don’t think the sort of general volatility of the stock market worries me that much and I don’t think I would be the type to panic sell but what concerns me is what concerns most of us – any long drawn out downturns that a falling portfolio couldn’t sustain – the dreaded SRR.

    As you pointed out, when you look at some of these past downturns (however rare they may be) such as the 73-74 crash which was as much as -72% and that the US market took 12 years to recover (and so the global market pretty much the same as well I imagine) then you really would end up in the asylum. I never realised it went on for that long. In that case I wouldn’t have suffered minor psychological damage, I’d have needed some electrodes for some of that electroconvulsive therapy used back then!! So I do need to have a re-think about what I will fill that supermarket shopping basket with.

    I am new to this (<2yrs) and majority of my savings were in cash accounts/cash ISA's prior to this as back in my early days we were told stockmarket was "gambling" and "risky" but nowadays it seems less so with passive investing strategies.

    I think asset allocation is THE most difficult part though, to get right and where most mistakes can be made, if not careful, and which could have a devastating effect – potentially for the rest of your life. You really have to deeply think about it/get good information and guidance to enable you to make an informed decision based on your circumstances (and also reassess it now and again in the light of changing circumstances/events over time.)

    A very pertinent and well made point is what TI said earlier in his post (34) point 4, in that "if you want to increase your likelihood of getting a ‘good’ result then it’s worth paying the cost of giving up on the possibility of the very best result (100% equities) and instead reduce volatility in your portfolio by including a few other assets" and "then you should benefit from lower portfolio volatility over the years increasing the probability of you getting a ‘good’ result."

    This point was also very well made by ZXSpectrum48k – in an earlier one of your artcles on "How to improve the 60/40 portfolio" in 2021 (post 37) where he said ……."Yes, equities outperform pretty much everything over the long term. We all know that. Endowments know that. It’s just it’s not compatible with their objectives. It’s not their job to outperform or maximize returns. Their job is not to fail. This is something that seems to get lost. In investment, winning most of the time is the default position. It’s understanding how not to fail that is hard. One thing I’ve learnt in over twenty years of investment is that you always want options, you want to hold the initiative. You never want to be in a situation where the only choice you seem to have is to stop-out or pray. Neither hope nor belief are investment strategies."

    At my age, I am aware that time is ticking on and need to decide before it runs out altogether – you can get yourself tied up in knots with it and so can then end up doing nothing. This can be equally as bad as making a rash decision.

    Life's complicated! Anyhow in light of this i've just thrown that supermarket shopping basket in the bin, and got a van instead. How else am I going to get all the gold home? (Just started digging out the vault under the house!)

  • 54 Bill G February 10, 2023, 4:15 pm

    British gold coins with a nominal value are CGT-free. I have had great fun collecting coins such as the those from the Queen’s Beasts set of 1oz gold coins. True, these will not pay an income but you can take great Smaug like pleasure rolling the coins between your fingers!
    Being truly fungible you can sell and replace them at will, which is very different to fine art or antiques where you are unlikely to get back exactly that which you sold.

  • 55 Cottonsands February 10, 2023, 10:50 pm

    Thank you for a useful and pertinent article.

    One thing I am always confused by is whether to count my emergency fund as part of the defensive allocation of my portfolio.

    I am early into the investing journey and 20% of my non pension assets are in cash as my emergency fund. If I am going for a 60-40 portfolio outside of my pension, is it wise to count that 20% in cash as part of the 40 defensive?

    If I consider them separately, then obviously I end up being significantly over defensive.

    @steph I absolutely agree that asset allocation is the hardest part for newer investors. I think my problem is that everyone has different views on asset allocation, but, as I don’t have my own view yet, I end up very unsure as to what to do!

  • 56 xxd09 February 11, 2023, 12:14 am

    Some thoughts Cottonsands
    When young probably 100% equities with some cash as an emergency fund for a washing machine etc -especially if you have a secure job
    As your savings accumulate then include bonds -for less losses,less volatility and less growth-plus still some cash for washing machine replacements
    Retire with equities and bonds plus 2 or 3 years living expenses in cash so as to ride out downturns without having to sell bonds or equities
    Asset Allocation changes as you age and have more savings at risk
    The evolution of the Asset Allocation is obviously very personal and depends on ability to take risk,how much saved etc
    Count all your savings including cash in your Asset Allocation
    Presumably your cash will be earning interest in a high interest account

  • 57 The Accumulator February 11, 2023, 9:13 am

    @ Steph – yes, TI’s point that diversification helps us avoid an extremely bad outcome is right on the money.

    We’re more likely to run into outlier events than we think, too. It’s quite probable that most of us will invest for 60 years (20-30 accumulation, 30-40 retirement).

    Let’s say I started investing in July 1914 – then I ran into WW1, the Great Depression, WW2, and 1972-74. Oh my god.

    If I started investing 50 years ago I ran into 1972-74, the Dotcom Bust, the Global Financial Crisis and COVID. I personally think we got off lightly with those last two.

    Having a percentage in an asset that does OK during an extreme event, and enables you to rebalance into equities when they’re on sale – that makes all the difference.

    Re: the complexity of asset collection (as mentioned by Cottonsands too)

    My personal experience as a beginner was that I spent a lot of time worrying about the last few per cent of my allocation and about how to optimise it.

    Later on though, it became clear that there’s no such thing as an optimal allocation. It’s also perfectly fine to think in terms of coarse blocks of asset allocation. There’s no need to think any smaller than chunks of 5% or even 10%.

    Think of yourself more as a Lego enthusiast than as a scientist with molecular tweezers.

    You may well worry you need to get it ‘right’ from the start, especially if time is a pressing factor. But you only need to be in the right ball park. You can always tweak later should you need to.

    The reason optimisation is over-sold is because history rhymes but it doesn’t repeat. We’re right to think that equities will almost certainly be the drivers of future portfolio growth, and the other asset classes will broadly thrive or dive as in the past.

    But the same time-series of returns will not repeat.

    So it’s pointless spending time reverse-engineering the exact blend of assets that have been optimal for the last 50 years, or whatever.

    If the best portfolio was 79.3% US Small-Value, 6.66% long bonds, and the remainder in gold since 1971 – well, it won’t be in the future.

    But a broad-strokes asset allocation with 60-70% equities and the rest split between defensive assets is a good starting point. Then you can learn more about your personal preferences as you go, and adjust as you see fit.

    Or, better still, you put it on auto-pilot, check in twenty years later, and discover you’ve done very nicely!

    I’m sorry, I don’t half go on 🙂

    Here’s a few bits:




  • 58 Cottonsands February 11, 2023, 9:33 am

    @xxd09 thank you for clearing that up for me!

    I am 100% equities in my pension, but due to my family circumstances (and to lower stress levels generally!) I have 6 months’ living expenses in cash outside of my pension. In as high interest account as is feasible!

    My current timeframe for accessing the non pension savings is about 10-15 years (for better or worse, for school and university fees), so I would like to keep a defensive allocation. Now if I count that emergency fund as defensive, I can have a bit of bonds, but the rest will be equities.

  • 59 Steph February 11, 2023, 1:26 pm

    @Cottonsands – just a few of my thoughts for a newer investor. It is difficult when you have little knowledge in this area and don’t know where to find the best information/guidance.

    I think it is best to keep it simple really – at least to start with. As you learn more and if you actually “like” it as well, then you can add more things in and tweak it to your own thoughts/preferences – but it’s how much of your time you want to invest versus doing other things – it’s the old chesnut – do you want to “live to invest OR invest to live?” (I’m in the second camp myself as I have too much else to do.)

    Like many, I have learnt most from the internet from the many investment & financial websites and blogs like Monevator. If you have not read many Monevator past articles on such things as investing cheaply in index trackers/asset allocation/comparison of investment platforms (cheapest etc.)/cheapest index tracker funds etc./Slow & Steady portfolio among many others then I suggest you seek them out by looking through the Monevator archives on the website. The internet is a source of a great deal of information – not all of which is good but Monevator is one of the best and supports the view of passive investing for “most” investors. (There are others which you can easily find but I won’t list any as I don’t think it’s fair to do that here.)

    At first though I wouldn’t get too wrapped up in learning all the ins and outs of bonds as they can be confusing for new investors. Probably the easiest way is to just buy a bond fund which some of the Monevator articles give guidance on – that way it keeps it simple. Of course a very easy one stop shop solution is to buy a mixed asset fund, of which Vanguard Lifestrategy is probably the most known, which has both equities and bonds in a number of funds which you can choose to certain desired asset allocations like 60/40 or 80/20 etc. However it does give you a larger allocation (bias/weighting) to the UK market than a global index tracker would – which you may or may not like.

    Also seek out and read about the investing guru “Lars Kroijer” – articles on Monevator/the internet – and why as a former guy who worked in the active side of the financial industry, he believes investing cheaply via passive index trackers is the way to go for the vast majority (i.e. you will secure a better outcome.)

    In the past I have used financial advisors for personal pension and stocks ISA but personally speaking I wouldn’t use them again for love nor money. I found later, after you had taken them out, that there were high and hidden charges which eat up your returns and leave you with a few crumbs which they don’t tell you about at the time. They tend to lead you to “active” investments as they probably make more in fees/commissions. This was well in the past and it may be a bit different now but it’s not something I would choose again. Also if investing in passive index funds then why would you need an advisor – how to do that is already set out – I think they’re overrated and costly myself.

    But as everybody always says you have to read all the information you can and get as many opinions/as much guidance as you can and then weigh up for yourself what is best for you and your circumstances.

    All the best.

  • 60 Andrew F February 11, 2023, 3:51 pm

    To The Investor. I don’t really think about who writes an article on Monevator. I do treat it as a “hive mind” (as you put it). I’ll take that into account.

    In terms of what I see in the comments, it seems to me that the friction comes from both sides. If we are discussing the reader ZXSpectrum then I thought he was commenting about another reader who was very strident that anything except a 100% passive approach is stupid. As that other reader (Naeclue) recently said “if you are attracted to …. actively managed funds, etc. you are not investing intelligently”. I must admit to taking offence at that comment (hence I wrote it down). I don’t feel that my portfolio that has assets other than bonds and stocks and includes some active funds somehow makes me stupid. I think situations and objectives vary wildly.

    To The Accumulator. I’m sorry to offend you. Nonetheless, your Slow and Steady Portfolio contains nothing except stocks and bonds. No gold, no hedge funds, no property, no cash even. The bonds are only UK Gilts. From that I’ve taken that this is your recommended portfolio. I didn’t mean to say that you thought other things might be wrong but that UK bonds and global equities were sufficient. I must admit I don’t really think they are.

  • 61 The Investor February 11, 2023, 4:55 pm

    @Andrew F — Fair comment. It all got rather confused from my perspective, as I say.

    A difficulty as an owner of a site like this is you have to field thousands of comments, including from hundreds of regular readers. I’ve posted over 5,000 comments, for context, many of which have been quite lengthy or responded to several different authors.

    Naturally as such you’re held to a slightly higher standard, not least because people can detect inconsistencies etc because one has posted thousands of times over the years.

    It’s pretty much impossible to do this without annoying someone or other, or not seeming to defend the right corner, sooner or later.

    For the record I don’t endorse that comment by @Naeclue. They have made similar to me in the distant past. I understand where it’s coming from, but I don’t think it’s really appropriate for a sort of ‘pantheistic’ site like we aspire to be. It’d be fine on the Bogleheads.

    The issue with the other poster had been bubbling for a while. As I understood it, he essentially thought we shouldn’t be suggesting most readers will do best (if imperfectly) with something like a 60/40 portfolio, perhaps allied with cash or gold or whatnot as @TA has alluded to; he thought people should be investing at least some money in (largely IMHO uninvestable to ordinary people) high fee macro hedge funds and somehow we should be encouraging these people, who may have typically just learned what a global tracker fund is, to go off and investigate and put money into black box hedge fund strategies.

    I don’t think that is going to end well for 90-99% of average readers. The vast majority will pay high fees for worse performance, assuming they don’t stumble into flat out rip-offs and other opaque schemes.

    But of course it’s a totally different situation if you’re an accomplished and mathematically gifted industry insider. Your solution set is far wider.

    Moreover the same poster often said he was happy with lower returns in exchange for lower volatility, or for a higher conviction that he could meet his future spending requirements.

    Again that’s fine if you’re earning seven-figures and you don’t believe your multi-million investment portfolio has yet equipped you for early retirement. (Might have changed now, this was several years ago).

    But for the average person to achieve their financial freedom goals — on likely a magnitude smaller lifetime savings — they are going to have to take more risk and endure more volatility. They can diversify some of that away, but they are probably going to have to have by far the majority of their invested money in equities for most of their working life to achieve their ambitions.

    Anyway I have NO PROBLEM at all with those alternate views, or their applicability to how he saw his situation.

    The push back, from my perspective, was the implication as I read it that our editorial line should change accordingly. I didn’t agree, and this seemed to be taken as a criticism of alternate strategies or even the good faith of the poster concerned. It wasn’t.

    Perhaps here or there my language was clumsier than above but on the whole I continually caveated and made allowances in a way that I have to say I do not feel was always reciprocated in those exchanges.

    But equally, there is surely another side to the story and I’m fine with that. As I said I don’t want to re-litigate it!

    I just want to be clear that readers shouldn’t believe some great crushing of dissent has happened.

    I don’t invest at all passively, as I’ve repeatedly made clear for 15+ years, and as far as I’m concerned anything goes.

    That doesn’t mean I think most people will do better deviating from a passive path. I don’t. I think they’ll do worse in the main.

    I have banned a handful of posters over 17 years for disruptive/aggressively repeating some investing hobbyhorse on virtually every post (one active-ish and one uber-passive from memory, conveniently). That definitely wasn’t the case here.

    All these things can be true at once. 🙂

  • 62 Steph February 11, 2023, 4:56 pm

    @TA – thanks once again. No I don’t think you go on at all – I’m very appreciative of all the time you, and everyone at Monevator, put into this and for your experience and wise words. It’s most helpful to us all.

    @xxdo9 – it’s interesting to read how it’s going for an already retired investor. I have read before that you said a passive strategy of just cash/bonds/equities has largely worked out okay for you so far?

    Don’t answer this if you would rather not – but if you don’t mind me asking – since you retired and started relying on your investments, have you gone through any pretty bad/rough periods when you spent through all/most of your cash or had to sell off bonds (or worse still any equities) in poor market conditions and whether bonds did mostly work and help you weather a storm most of time (possibly not last year though!)

    It’s just helpful and an insight for many newer investors to appreciate how a passive investing strategy has worked out for others in a real life situation and gives people confidence (although I know what works for one person may not for another with different circumstances and living through a different period in time, obviously.)

    I’m not asking for any “figures” at all by the way or in depth analysis – just a general assessment of how you think it’s gone for you over the years and any hiccups/anything you would do differently in hindsight – although I know it also depends on what other incomes you may have had such as pensions/sidelines/other income which would support your investments during that time.

    All the best and I hope it continues to work for you as well as it has to date.

  • 63 The Investor February 11, 2023, 6:17 pm

    @Andrew F — P.S. I don’t think I made my point about replying to thousands of comments clear. An issue this brings up is that I may have had perhaps 10-50 interactions with an individual poster, whereas even a dedicated reader might only have read half of them and remembered perhaps a couple.

    In one of those ultimately-banning situations I mentioned in the early years of the blog, a couple of readers pushed back because any individual comment looked reasonable. But I had read (literally) hundreds of comments by this person, and 30 years on the Internet has taught me the hard way where go-nowhere discussion (if not outright trolling) ends up. So I made my whimsical despotic decision.

    The case we’re discussing wasn’t like that at all. I’d enjoyed hundreds of comments from the person concerned, and learned a lot. But it was maybe a slight factor at the end, judging by some of the feedback received.

    But, again, I obviously have my biases and self-justifying tendencies like any human, and no doubt I put a foot wrong here or there. Who knows, it’s Internet discussion, as I say. Sadly, it happens.

  • 64 xxd09 February 11, 2023, 8:36 pm

    Steph -thanks for your enquiry
    I have indeed been only in 3 index funds-a FTSE AllShare,Dev World ex U.K. and a Global Bond hedged to the Pound + 2 years living expenses Cash Account -for many years
    Now 23 years retired (aged 76) so probably home and dry?
    I use Total Return so sell some Equities or some Bonds or bit of both to annually top up the Cash Account
    (In practice I have mainly sold Equities-over the years as you would expect-they are the growth part of your portfolio)
    Always had a conservative portfolio -30-35% equities only
    All investments in tax free wrappers SIPPs and ISAs
    A constant withdrawal rate of 3.5-3.8 % has been maintained
    All depends of course on the size of your pot and your ability to live within your means
    Bonds have been down this year unusually but they never go down like equities
    Perhaps the last 20 years have been especially good for investors and Armageddon is round the corner but it’s unlikely
    I don’t see me altering anything much now at this late stage-simple for the kids to manage as I go ga ?

  • 65 Steph February 12, 2023, 4:52 pm

    @xxdo9 – Thanks very much for your kind reply.

    Well it certainly sounds like it’s worked out fine for you over the years – as you said you mainly sold out equities for your cash pot, so they must have done their job well for you which is nice and you have maintained a good withdrawal rate over that time. So I can see why there’s no need for you to be altering anything – if it’s working no need to fix it!

    You have also been retired some time as you retired fairly young, which back then, around the millenium, would have been less common than it is nowadays so proven itself for you.

    As I said it is helpful for those of us “yet to retire”/”near to retire” particularly, to see how it has worked out for other retirees and the approach taken – rather than just reading the theory about it.

    I would much prefer to keep it simple like you have – with just a few index funds as long as it would weather “most” storms – as I’m sure others would who also aren’t investment hobbyists and can’t dedicate the time to more involved strategies.

    Saying that, I’m not that keen on the all-in-one funds solution though, like say Vanguard LS as they all seem to have some issues such as home bias (or some contain other stuff you don’t want) so like you I would rather go with a Global tracker and bond fund as they are also cheaper as well. (I know you could shave a bit more off with regional trackers but too much faffing for my liking. Would rather save my time.)

    I notice you use a Dev. World tracker excl. UK so I assume you don’t favour investing in emerging markets. I didn’t as in the past thought they were more risk, and in an old style personal pension I used to have (took out around 1990) I stayed well away from them. However nowadays the advice seems much different.

    As you say the last year has been bad. And as you say bad times could be here for some time – as lot of commentators saying the US market may suffer a decade of lost returns, but who knows? But quite worrying all the same, particularly as the US market makes up over 61% of global MSCI trackers.

    I think I’m going gaga already – I think it’s since I started to transfer old pensions to SIPP’s and cash savings/ISA’s to investments – a bit over a year ago!

    I hope that it continues to go as well for you as it has in the past – best wishes. Steph

  • 66 xxd09 February 12, 2023, 6:56 pm

    Just a small addendum
    When I retired Life Strategy /Target Retirement funds were not available so used the available OIECs -never saw enough reasons to change them(Home bias of Vanguard LS funds for instance a no no for me)
    Re Emerging Markets -didn’t mind leaving them out at the time as it would have meant another fund for perhaps minimal gain
    If I was starting now possibly would think about a World Equity Index fund that included Emerging Markets -probably this sort of fund is available now

  • 67 Mark C February 12, 2023, 7:09 pm

    Hi @TA

    I note that the later charts in the piece were in relation to years when UK equities were down. As I suspect that a number of readers are invested in global equities as opposed to UK equities, do you know if the results would be the same / similar if we (you) had looked at years when global equities were down?


  • 68 Steph February 12, 2023, 9:39 pm

    @xxdo9 – thanks for explaining that. All makes good sense.

    I hope you didn’t mind my asking these questions. It’s just I had seen some of your postings on other Monevator articles – many of which I have been reading lately (difficult not to get side tracked though with all sorts of different but useful articles!) – about how you have done it simply just using 3 funds and had been a retiree for a few years. So for all us “wannabe soon” retirees who would prefer the simple/stress free path, there is no better person to ask.

    Thank you very much for taking your time to do it.
    Wishing you all the best,

  • 69 The Accumulator February 13, 2023, 12:55 pm

    @ Mark C – It’s a good question – yes, the results would be very similar if we looked at global equities instead of UK equities. The defensive asset class performance would be identical of course, and UK equities are highly correlated with global equities so the up/down years are more or less identical.

    There can be a reasonable difference in degree. For instance, the MSCI World delivered a -17% real annual return in 2022, whereas the FTSE All-Share notched -8%.

    Publicly available data for a world index only stretches back to the beginning of 1970 whereas good UK total returns data stretches back almost two centuries. (I’ve just discovered a new source that gets us back to 1825).

    I think the UK data is a useful counterpoint to US equities (the other more famous source of long-term equity data) because it illustrates a less rosy path – one that’s probably too optimistic to rely upon even for US investors.

    @ Steph – Emerging Markets is the perfect illustration of why simplicity can be a virtue in and of itself. I invested in Emerging Markets on diversification grounds and, yes, hoping that the higher risk would lead to higher reward. During my investing lifetime, Emerging Markets have certainly delivered on the risk side, no problem. As for the higher reward, not so much. They’ve been a drag. Am I bitter? Absolutely 😉

    I haven’t got shot of Emerging Markets though because I still believe the thesis is right. As you mention, the US could be the next market that disappoints for years on end. It could easily be that Emerging Markets are the star performer for the next decades. Investing is full of switchbacks that make fools of us all.
    We’ll see what happens, but I don’t think Emerging Markets are a necessary component of anyone’s portfolio except as part of a global equities tracker package.

    @ Andrew F – No offence taken. It’s important to me to set the record straight though. As TI alludes, others have claimed we believe in some kind of ‘one true path’ but that isn’t so. We do believe that most people will probably be better off with a passive investing strategy but even then I’m on the record as using the occasional active fund to access certain asset classes (there’s an active fund in the Slow and Steady portfolio).

    Asset allocation should be personalised according to each individual’s circumstances, objectives, tolerances and capacities. My mum for example does not want to be mucking about rebalancing – hence it’s the simplest LifeStrategy fund for her – no gold, though she’s a big cash fan!

    The Slow and Steady portfolio is only meant as a demonstration of a passive portfolio. It’s intended to have broad based application but not as the last word on anything.

    It doesn’t include gold because that’s only available in ETF form. When the Slow & Steady portfolio was set up, ETFs were less suitable for beginners, so I kept them out. BTW, the portfolio does include property, and global index-linked bonds, so it’s more diversified than you suggest. Hedge funds, no – as TI covers above.

    Given how times have changed, there’s a strong argument for updating the Slow and Steady with a slug of gold. ETFs are much easier for new investors to integrate from the off now.

    But coming full circle – every portfolio is a trade-off between three strategic considerations: growth, defence, and manageable complexity.

    The palette of core asset classes really is as simple as the primary colours but the mix of holdings you consider sufficient to achieve your aims can only be a personal decision. If there’s a silver thread running through Monevator then it’s that.

  • 70 Ade February 15, 2023, 5:09 pm

    Sorry if this is a bit off topic, but have you ever written a piece or have an opinion on Covered Call Options ETFs? I wonder if they could be an other alternative tool in the ‘defensive’ box for deaccumulation? Global X Nasdaq 100 Covered Call UCITS ETF USD Distributing ISIN IE00BM8R0J59, Ticker QYLP (GBP) and QYLD (USD) has recently listed on the LSE. I’m trying to work out the value and risks of adding it to the mix.

  • 71 Sparschwein February 15, 2023, 9:54 pm

    @Ade – I’m all for seeking new and hopefully better ways to hedge. But I’m sceptical of simplistic options strategies.

    The benchmark CBOE NASDAQ 100 BuyWrite V2 Index lost >20% in the Covid crash and again last year. So the strategy is not so “conservative”.
    I’d wager you will see better risk and return from 2/3 in a basic NASDAQ ETF and 1/3 in cash.

    From my own research and discussing this with a friend who is a finance pro, simple hedging with options is just too expensive for the long-term.
    It may be possible to make such hedging work with a more sophisticated approach. Would be interesting to read Monevator’s take on this.

  • 72 Ade February 17, 2023, 5:56 pm

    @Sparschwein thanks for taking the time to reply.

    I’m sure you are right; this probably fits right in the ‘expensive junk’ category referenced earlier. An active strategy that requires certain conditions and timing to make it work. This review certainly has a negative view of it http://www.optimizedportfolio.com/qyld/ (apologies for external linking).

    I should stop looking under rocks for (fool’s!) gold. I think I’m just getting a little twitchier as I prepare to move from accumulation to deaccumulation and from theory into practice – more K.I.S.S. mentality required.

  • 73 Sparschwein February 18, 2023, 3:33 pm

    @Ade – thanks for the link. This is a very sensible analysis. It hits the nail on the head. It’s fine that covered calls give up some of the upside, that’s part of the deal when hedging risk. The problem is that this approach gives weak downside protection. It is a buffer against moderate market drops (I don’t care much about) but hardly any protection in a major crash.
    You’ll want the opposite profile from a defensive asset.

    I didn’t mean to discourage you from looking for new ways. I think that’s exactly what we need to do. Much of the received wisdom in DYI investor circles is based on hindsight bias and recency bias. The investing environment has fundamentally changed with the return of inflation.
    The difficult part is to find the useful pieces among all the expensive junk that’s being marketed.

  • 74 Calum February 28, 2023, 3:19 pm

    Thanks for the article.

    Something I often wonder is if I should be including the cash in my “cash cushion” (6 months net salary) as part of my FI portfolio? I’m leaning towards no as I wouldn’t rebalance my portfolio by reducing my cash cushion. Interested in your thoughts though.

  • 75 Ball March 13, 2023, 7:21 pm

    When faced with uncertainty, investors should focus on the things they can control.

    Research tells us that trying to outguess the market by holding on to cash, or gold, with the expectation of future yield increases may not help you achieve your long-term goals.

    Accept the markets for what they are, avoid reacting and focus on your long-term goals.

    Investors who maintain appropriate asset allocations, even after increases in bond yields, may have a more rewarding investment experience in the long run.

  • 76 Andy March 13, 2023, 7:46 pm

    The Investor,

    Gold is the last thing you should be investing in. In fact, it is much more volatile than stocks. Stick with bonds.

  • 77 The Investor March 13, 2023, 8:07 pm

    @Andy — I didn’t write this article but regardless, your two word sentence doesn’t really do justice to the complexity of this decision. Volatility isn’t everything. Diversification over time is important, as is how much you personally weight higher long-run returns vs smaller drawdowns vs ‘black swan’ style protection. Cheers!

  • 78 Andy March 13, 2023, 8:25 pm

    The Investor,

    Since 1977, US stocks have had 10 losing years. Intermediate US government bonds have had 6 losing years. How many calendar-year losses has gold experienced?

  • 79 The Accumulator March 14, 2023, 1:20 pm

    @ Andy – earning higher *risk adjusted* returns by combining volatile assets with low correlations (and positive long-term returns) is the essence of portfolio diversification and modern portfolio theory.

    In other words, you reduce volatility per unit of return by combining assets with low correlations into a single portfolio i.e. the whole is greater than the sum of the parts.

    You’re right that gold is low return and high volatility (though not quite as volatile as equities). That’s not a good look in isolation. However, the value of gold lies as an additional layer of diversification in a portfolio dominated by equities and bonds. In that case, gold shines due to its *tendency* to deliver when equities and bonds fail.

    In the UK experience that’s primarily – though not exclusively – occurred during inflationary episodes such as post WW1, the 1970s, and 2022.

    I don’t think of gold as a vital asset to own but there’s a strong argument for maintaining an allocation of 5 – 10%, especially if you’re a decumulator.

  • 80 The Accumulator March 14, 2023, 1:25 pm

    @ Calum – sorry I missed your question from a while back. I don’t include my emergency fund as part of my portfolio and I completely agree with your logic on the assumption that your cash cushion fulfils the same role i.e. the money is reserved purely for disaster scenarios when I need liquid funds pronto!

    I do have another slice of (non-emergency) cash as part of my asset allocation though, and so that’s included as part of the portfolio in the usual way.

  • 81 Jane March 14, 2023, 2:49 pm

    Gold has experienced 19 calendar year declines since 1977. US stocks, by comparison, had just 10 calendar year declines. Almost half these losses for gold were 10% or more. So much for stability!

    Whilst I agree that gold sometimes rises during years when stocks fall, you are never going to know in advance when that will be.

    Have ever wondered when financial “experts” start recommending gold? That’s right, after stocks already fallen.

    In 2008, gold was on every experts lips, AFTER US stocks fell 37 percent during the financial crisis. Even while stocks began to recover, many people still wanted gold. Experts said 2010 and beyond would be horrible for stocks, invest in gold. From 2009-2018, US stocks soared about 250 percent, thrashing the return on gold, and cash.

    I recommend a maintaining a consistent diversified portfolio of stocks and bonds over the fear and greed distractions of gold and cash.

  • 82 The Accumulator March 14, 2023, 3:48 pm

    No one is claiming gold is stable. The claim is that gold can have a positive impact on the volatility / return characteristics of your portfolio as a whole, over time. Can you address that?

    Arbitrarily, picking dates out of thin air and making partial comparisons misses the point.

    Why 1977? Why US stocks and not World stocks? Are you quoting nominal or real returns? GBP or USD? Why calendar declines of any given value? Why not deepest drawdown? Why not calendar declines when equities also fall?

    I’m no gold bug but I do like to follow the evidence. For a good, holistic account of gold’s potential role in a portfolio try:



    As I guess you know, US stocks not only thrashed gold and cash after 2008 but bonds too, and most other equities.

    So why aren’t you advocating 100% US stocks if the only thing that matters is returns after 2008?

    As you point out, diversification matters too. That’s why gold has a role.

  • 83 Jane March 14, 2023, 4:41 pm

    I am sorry you feel evidence over the last 46 years is too arbitrary and short-term.

    Long-term, gold looks even worse. one dollar invested in gold in 1801, it would have grown to just $101 by August 7, 2020. In contrast, a dollar invested in U.S. stocks would have grown to $28.42 million.

    Gold still hasn’t beaten inflation since hitting peaks in January 1980 and August 2011.

    That doesn’t mean it won’t. Gold could continue to rise for another year or two. But it could also plunge tomorrow. Unfortunately, you can’t time its moves. You may dream of jumping in before it rises and jumping out before it falls.

    I understand completely that you and investor may be thinking, “I’ve seen the charts, this time will be different.” But those those are dangerous words, delusional or romantic.

  • 84 The Accumulator March 14, 2023, 6:08 pm

    Jane, the way you’re using the evidence is arbitrary.

    For example, why does your case against gold hinge on the fact that it doesn’t keep up with US stocks yet you do not apply the same criteria to bonds?

    The reason is that diversification isn’t about (can’t be about) just picking a sheaf of highly correlated assets.

    It’s about understanding the strategic role each asset class can play in your portfolio.

    I note that you’ve refused to engage on that point.

    But you do keep invoking a market-timing straw man. I haven’t made a market-timing case for gold. Why do you imply that I have?

    Finally, if I look at gold returns from the date you picked – Jan 1980 (the start of its 20-year bear market) then the GBP real return is 1% annualised (up to year end 2022).

    Real annualised return (GBP) 1970-2022 is 3.61% (the post-dollar peg era).

    From 1900 – 2022 its 0.82%. That bears comparison with gilts over the same period: 0.91%. Again, that’s a real annualised return in GBP.

  • 85 The Investor March 14, 2023, 6:56 pm

    I feel there’s a conversation going on here re: gold about two different aims, and two different resultant portfolios.

    If you want the highest chance of maximum returns over the long-term and you believe you are resistant to drawdowns then rolling the dice on 100% equities is probably the way to go. As long as you’re globally diversified and communism doesn’t break out globally you’ll probably do okay.

    If you want a smoother ride / higher *risk adjusted* returns then adding extra assets to the portfolio will be beneficial. Definitely bonds. Possibly other things like cash, gold, commodities, trend following hedge funds etc.

    Often conflict about investing comes down to two people talking about different aims. 🙂

  • 86 Phil March 14, 2023, 8:51 pm

    Sorry to gatecrash the party. The fact of the matter is gold deserves no place in anyone’s portfolio anyway, as it is not even a legitimate investment. It has no cash-flow producing assets.

    Gold could be considered a commodity, with its limited utility in industrial production. It can be collectible. But these are not what drive the demand for gold. Gold is primarily used by people who buy it, and hope to see it later on.

    It is not an inflation hedge either. Due to its real-price volatility, gold had not been a good inflation hedge over the short or long-term either

    Gold may very well be a very long-run inflation hedge. However, the long-run may be longer than accumulator’s lifetime!

    As accumulator and investor have suggested, inflation hedging is probably one reason people buy gold. People also buy it as a supposed safe haven, hoping it will do well when everything else is doing poorly. As stated above, this is occasionally the case.

    However, even when this is the case, it is not worth the bother because of its poor expected returns. It barely maintains its real after inflation value and it is too volatile anyway. In fact, it is more volatile than stocks and delivers lower returns. A bit of a lose lose. What’s the point?

    While having some gold in your portfolio may be better than being 100% stocks some of the time, the point is there is a significant opportunity cost to this, and that is bonds. Bonds have higher returns and higher risk-adjusted returns than gold.

    You are always going to be better off having bonds than gold. By replacing any of your bond allocation with bonds, you are effectively losing money.

    Gold produces no cash flow and has no real expected return.

    Cash has no place in your portfolio either. Cash is for an emergency fund and saving for short term goals (less than 5 years) only.

    The best way to diversify your portfolio is the invest in bonds. It seems bonds are enough after all!

  • 87 The Accumulator March 15, 2023, 12:25 am

    “You are always going to be better off having bonds than gold. By replacing any of your bond allocation with bonds, you are effectively losing money.”

    Go back to the third chart above and you can see numerous occasions when gold outperformed bonds.

    Gold’s real annualised return since 1900: 0.82% vs gilt’s 0.91%.
    Gold’s real annualised return since 1970: 3.61% vs gilt’s 3.78%.

    There’s very little in it!

    Check out the UK’s biggest bond crash. Bonds took 62 years to breakeven:

    The evidence shows that any asset can fail you and fail for years on end.

    Owning some gold reduces your risk of being caught out by an event that smashes equities and bonds simultaneously.

    Assertions like: “gold deserves no place in anyone’s portfolio” aren’t supported by the evidence.

    Neither does the evidence tell me I absolutely must own gold. But I can see its uses and there have been several historic drawdowns when I’d have clearly been better off owning some gold.

    I don’t believe you can predict those events in advance so I’m not advocating a market-timing strategy. Neither do I argue gold is an inflation hedge. It’s not. It’s low correlation with equities and bonds means that it has sometimes outperformed during inflationary episodes. And deflationary times as well – witness gold’s excellent performance during the Global Financial Crisis and the early years of the Great Depression.

  • 88 Tony March 15, 2023, 12:05 pm

    I have been listening to this argument with some amusement. I call it the “mattress factor”. When bonds have both gone down, people say “invest in gold, look it didn’t go down and they did”. Neither did the money stuffed into your mattress or simply sitting in your current account. Does really make either of them a great long-term solution?

    As has been established, long-term gold doesn’t make any money, some people really think it does. That is one thing

    However, there are examples where gold moves up and down a lot. So it was often one of those things, it’s a bit like a mattress, when people lose money in the bond market or when the bond market drops, I shouldn’t say when they lose money because you only lose when you’ve sold, but after the bond market drops, many people sell bonds and stuff money into mattresses and things like gold. They really shouldn’t, but gold often moves in inversely to riskier asset classes. That’s what make them seem so appealing at that moment. Often when riskier asset classes rise, gold dips a little bit.

    One of the interesting things that Harry Browne, when he created the permanent portfolio, he looked at taking a portfolio whereby you have the stock market exposure, cash, short term bonds, story long-term bonds and gold and roughly rebalancing that once a year.

    So a quarter in gold, a quarter in long-term bonds, a quarter in equities, and then a quarter in cash or more pragmatically a short-term bond market index. It reduces volatility, it does reduce volatility, but long-term, it won’t enhance returns. When you’re looking at all of the back tests and you go through rolling 10 year periods, it’s just another portfolio. So, okay. It might be more or less volatile, but again, it doesn’t have a history of outperforming something really simple like 60% equities and 40% bonds. So if for people it helps to calm their nerves, and I have seen some financial advisors and bloggers like this one say, “You know what? Follow this model just to keep you calm.” I can see that it has some benefit for some, just as long as they understand that it doesn’t help their long term results as an investor. And remember that investing is a long term game, not a short term one.

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