Sometimes you just need a little bit of inspiration. A template that you can adapt and make your own. That’s what these investment portfolio examples provide.
I’ve chosen them because each offers a different perspective on asset allocation that you can customise to suit your personal financial objectives, circumstances, and temperament.
The truth is there is no one portfolio to rule them all. Whichever load-out ‘won’ the last decade or three is unlikely to top the podium in the future.
Instead of dwelling on yesterday’s winners, this selection of model investment portfolios enables you to answer the question: “what does a rational, diversified asset allocation look like?”
The trick is to pick one that chimes with your attitude to risk, time horizon, and tolerance for complexity. From there, you can mould it around your situation as you gain in confidence and experience.
As ever we’ve created our investment portfolio examples with ETFs and index funds because we believe that a passive investing strategy is the best investment approach for most people.
We’ve also included shortcuts with each to a comparable portfolio on the low-cost InvestEngine platform, as an illustration.1
Note these are affiliate links. InvestEngine is currently offering a £25 welcome bonus when you sign up using our link. Also, if you set up a savings plan to regularly autoinvest with InvestEngine before 31 August, you’ll be in with a chance of winning £1,000 (Ts&Cs apply). You don’t have to sign up to see the investment portfolio examples. Remember that when investing, your capital is at risk.
Okay, let’s get stuck in!
Harry Markowitz Portfolio
| Asset class | Index tracker | OCF |
| 50% Developed world | Amundi Prime Global ETF (PRWU) | 0.05% |
| 50% Medium bonds | Invesco UK Gilts (GLTA) | 0.06% |
This easy-as-it-gets portfolio is based on the tale of how the father of Modern Portfolio Theory solved his own asset allocation dilemma. Unable to decide, Harry Markowitz simply split his money 50/50 between the two most important asset classes: equities and government bonds.
The Markowitz portfolio is particular suitable for first-timers who don’t know how they’ll react to market volatility. A 50% equity allocation is conservative enough that you’re unlikely to be frightened off shares for life if you’re whacked by a big crash early on.
Later, you can adjust your allocation in line with your risk tolerance when you know better how well you cope with turbulence.
From here, you can easily move up the gears to a classic 60/40 portfolio, or even more gung-ho allocations if you discover you’d sell your grandmother to buy more shares in a market meltdown.
Whatever you decide, investing doesn’t have to be more complicated than this. Developed World equities offer ample stock market diversification and growth potential, while government bonds are the keystone defensive asset class.
- See the Harry Markowitz portfolio at InvestEngine.
Lost in translation
Stateside writers typically recommend US stocks and government bonds. For UK investors this better translates to Developed World equities and gilts. For even greater diversification you can substitute global equities and global government bonds hedged to the pound. You’ll find trackers that fulfill that brief below. Finally, when we say bonds, we always mean government bonds with one exception: the total bond fund in the Income Investing Portfolio includes some corporate debt.
David Swensen’s Ivy League Portfolio
| Asset class | Index tracker | OCF |
| 30% Developed world | Amundi Prime Global ETF (PRWU) | 0.05% |
| 15% UK equities |
Vanguard FTSE UK All Share2 |
0.6% |
| 5% Emerging markets | Amundi Prime Emerging Markets ETF (PRAM) | 0.1% |
| 20% Global property | Amundi ETF FTSE EPRA/NAREIT Global ETF (EPRA) | 0.24% |
| 15% Medium bonds | Invesco UK Gilts (GLTA) | 0.06% |
| 15% Short global index-linked bonds | Lyxor Core Global Inflation-Linked 1-10Y Bond ETF (GISG) | 0.22% |
The famed Yale endowment fund manager came up with this portfolio for passive investors in his superb investing book Unconventional Success.3
Swensen’s model investment portfolio is much better diversified than Markowitz’s but that doesn’t always work to your advantage. UK equities, emerging markets, and property have endured a tough 15 years or so versus the developed world.
Perhaps that trend will mean revert – but there are no guarantees.
Also notice the common portfolio trope of splitting your bond allocation 50/50 between nominal bonds and their index-linked cousins. The nominals typically do better in a recession but get battered by soaring inflation. Meanwhile index-linked bonds have anti-inflation features built in.
Finally, 15% in UK equities looks chunky now our home stock market represents less than 5% of global market capitalisation. You could just as well decide to reallocate an extra 10% to developed world equities, and keep just 5% in Blighty.
- See the David Swensen Portfolio at InvestEngine.
Tim Hale Smarter Portfolio: global
| Asset class | ETF name | OCF |
| 27% Developed world | Amundi Prime Global ETF (PRWU) | 0.05% |
| 21% Global multifactor | 0.5% | |
| 6% Emerging markets | Amundi Prime Emerging Markets ETF (PRAM) | 0.1% |
| 6% Global property | Amundi ETF FTSE EPRA/NAREIT Global ETF (EPRA) | 0.24% |
| 20% Medium global bonds £ hedged | Amundi Index JP Morgan GBI Global Govies (GOVG) | 0.15% |
| 20% Short global index-linked bonds | Lyxor Core Global Inflation-Linked 1-10Y Bond ETF (GISG) | 0.22% |
This portfolio is adapted from the British wealth manager’s excellent UK-focussed investment book, Smarter Investing.
The standout feature is the global multi-factor allocation, which nods to Hale’s belief in the value and small cap risk factors. These amount to informed bets on particular types of high-risk stocks that have historically outperformed the broader market over the long-run.
Hale’s tilt to the risk factors is grounded in strong evidence but it also comes with an advisory health warning. That’s because they’ve underperformed a straightforward developed world tracker for well over a decade now.
Perhaps patience will prove a virtue. But it’s worth remembering that the market can make a mockery of the best ideas. Moreover, the supposed benefits of complexity often prove illusory and there is nothing wrong with keeping things simple.
- See the Tim Hale Global Portfolio at InvestEngine.
Harry Browne’s Permanent Portfolio
| Asset class | Index tracker | OCF |
| 25% Developed world | Amundi Prime Global ETF (PRWU) | 0.05% |
| 25% Long bonds | Vanguard UK Long-Duration Gilt4 | 0.12% |
| 25% Gold | Amundi Physical Gold (GLDA) | 0.11% |
| 25% Cash | Lyxor Smart Overnight Return (CSH2) | 0.07% |
The Permanent Portfolio does something very different from the other investment portfolio examples. It deliberately underweights equities and focuses on suppressing the volatility that makes conventional portfolios such a rollercoaster.
That’s achieved via the large allocations to long bonds, gold, and cash. They guard your flanks against a panoply of economic threats:
- Long bonds and cash ward off deflation and recessions.
- Gold is meant to withstand high and unexpected inflation (although its record in this respect is patchy).
- Equities are your growth engine as usual.
The Permanent Portfolio has a well-established track record and historically it has protected investors from the worst slumps (relative to conventional asset allocations).
That’s because the assets enjoy low correlations – they tend to behave quite differently from each other, so can cover for each other’s weaknesses – and also because the portfolio allocates an uncommonly small percentage to equities.
But the price you pay is lower expected long-term returns because the portfolio’s growth engine is under-powered.
That makes the Permanent Portfolio best suited to wealth preservers and the acutely risk-averse.
Note, we’ve used a money market fund in place of cash, but high-interest savings accounts will do just as nicely.
- See the Permanent Portfolio at InvestEngine.
Ray Dalio All Weather Portfolio
| Asset class | Index tracker | OCF |
| 30% Developed world | Amundi Prime Global ETF (PRWU) | 0.05% |
| 40% Long bonds | SPDR Bloomberg Barclays 15+ Year Gilt (GLTL) | 0.15% |
| 15% Medium bonds | Invesco UK Gilts (GLTA) | 0.06% |
| 7.5% Broad commodities | UBS CMCI Composite SF (UC15) | 0.34% |
| 7.5% Gold | Amundi Physical Gold (GLDA) | 0.11% |
The All Weather portfolio is another of the investment portfolio examples that prioritises stability over booming returns.
Conceived by the Bridgewater hedge fund founder, Ray Dalio, it’s an evolution of Harry Browne’s insight: choose a carefully balanced set of uncorrelated assets so that something should always be working in your portfolio, regardless of the economic conditions.
The inclusion of commodities is the most notable difference.
Commodities are a strong diversifier that offer decent long-term returns and act as a partial inflation hedge. But they can also spend years underwater, so don’t invest in them without doing your research.
Long bonds are similarly a great equity diversifier and not for the faint-hearted. They’re particularly vulnerable when inflation and rising interest rates bite. Dig into these pieces on bond durations, yields, and prices for the lowdown.
Inflation-repelling index-linked bonds are an obvious All Weather addition, but they’re not officially featured. Personally I’d add a slug by paring back the long bond allocation.
Overall, this is another wealth-preservation portfolio, but only if you can see past the individual performances of its components.
The All Weather combines an extremely volatile mix of asset classes that gel because they should counterbalance each other over time.
The obverse is something in this portfolio will almost always be causing you pain. So you have to be able to view the portfolio holistically, or else you’ll resent it like carrying around a big umbrella on a sunny day.
- See the Ray Dalio All Weather Portfolio at InvestEngine.
A decumulator’s ‘Ready For Anything’ Portfolio
| Asset class | Index tracker | OCF |
| 60% Global equities | HSBC FTSE All-World Index Fund C5 | 0.13% |
| 10% Medium bonds | Invesco UK Gilts (GLTA) | 0.06% |
| 10% Short global index-linked bonds | Lyxor Core Global Inflation-Linked 1-10Y Bond ETF (GISG) | 0.2% |
| 10% Broad commodities | UBS CMCI Composite SF (UC15) | 0.34% |
| 10% Cash | Lyxor Smart Overnight Return (CSH2) | 0.07% |
This is my own take on a diversified portfolio suitable for an early retiree who needs a strong equity allocation to achieve their sustainable withdrawal rate. The diversifiers are chosen to diminish the threat of sequence of returns risk.
The medium-term bonds defend against downturns, without the eye-bleed inflation risk of their longer-dated cousins.
Broad commodities and index-linked bonds do their best to deal with the inflation monster. We’ve previously explained why we’d plump for global inflation-linked bond trackers over their UK equivalents.
Cash is there as an all-round workhorse providing for immediate liquidity and moderate recession protection. It’s also less vulnerable to inflation than medium bonds.
Potential tweaks? If you’re a fan of gold then you could swap it in for half or all of the portfolio’s broad commodities exposure.
- See the Decumulation Portfolio at InvestEngine.
Income Investing Portfolio
| Asset class | Index tracker | OCF |
| 50% Global high yield |
Vanguard FTSE All World High Dividend (VHYG) |
0.29% |
| 20% UK high yield |
Vanguard FTSE UK Equity Income6 |
0.14% |
| 30% Total global bonds |
Amundi Index Global Aggregate 500M (AGHG) |
0.08% |
Income investing is a popular retirement strategy that swerves the risk of running out of money by leaving your capital untouched. Living expenses are funded purely from dividends and interest.
It sounds wonderful but the downside is you need a very large portfolio to generate enough income, even if you choose high-yielding dividend funds – as we’ve done for this load-out.
- See the Income Investing Portfolio at InvestEngine.
The SUV Portfolio
| Asset class | Index tracker | OCF |
| 15% UK equities | Vanguard FTSE UK All Share7 | 0.06% |
| 15% Developed world ex UK | Vanguard FTSE Dev World ex-UK Equity8 | 0.14% |
| 10% Property | iShares UK Property ETF (IUKP) | 0.4% |
| 30% Short global index-linked bonds | Lyxor Core Global Inflation-Linked 1-10Y Bond ETF (GISG) | 0.22% |
| 30% Short bonds | L&G UK Gilt 0-5 Year ETF (UKG5) | 0.06% |
Another of my creations, this 60% bond-weighted portfolio downgrades volatile equities in favour of the greater crash protection of fixed income.
Your portfolio could sensibly look something like this if you’re at or near-retirement. Essentially, you’ve hit your number, won the game, and don’t need to take big risks with your wealth anymore.
A solid slug in equities still offers some growth however, while the enlarged UK position reduces currency risk.
Also notice the short bond selection that acts more like cash and limits the portfolio’s susceptibility to inflation and rising interest rates.
The trade-off is short bonds don’t bounce as high as medium- or long-term bonds when stocks cave in.
- See the SUV Portfolio at InvestEngine.
Investment portfolio examples: key takeaways
An important principle underlying the investment portfolio examples is that there’s more than one way to cut the cake.
A retiree relying on their portfolio to pay the bills for the rest of their life has very different needs to a 20-something investor who can make good capital losses with pay rises to come.
Even then, while it’s commonly assumed young people can afford to take big and hairy investing risks, that entirely depends on an individual’s ability to remain calm when their stocks are being shredded by the market wood-chipper. In reality, not everyone sees that as the buying opportunity of a lifetime.
Meanwhile the investment psychology of a retiree living off a chunky defined benefits pension who’s managing an investment portfolio for fun money and legacy may have more in common with 100% equity flyboys than a normal decumulator.
So take the time to think about who you are and what you’re trying to achieve. If you don’t know yet, then the Markowitz portfolio is a great place to start.
Beyond that, we’ve tried to keep our investment portfolio example’s manageable. No more than six funds max. But note that the miracle of capitalism means you can actually diversify perfectly well with a single product, if you choose a multi-asset fund.
Please note that these investment portfolio examples are not investment advice, a recommendation, or an inducement to buy or sell financial instruments. If you’re unsure of the risk or suitability of an investment, seek advice from an independent financial adviser.
Build upon the basics
When considering your plan, remember that each asset class should play a strategic role in your portfolio.
In the broadest terms that means:
- Global equities for growth grunt
- Nominal government bonds protect against recessions and crashes
- Index-linked bonds step in when unexpected inflation runs riot
- Commodities and gold provide some inflation protection, but are really held to guard against scenarios when equities and bonds face-plant simultaneously
Fees matter so our product picks are typically the lowest-cost index funds or ETFs available.
That isn’t to say you can’t do better. Here are thoughts on how you might go about selecting:
Prepare to go live
If you’re struggling to push the button and finally invest for real, fear not. It happened to me and many better investors besides. You are not alone.
Focus on the right process and you won’t go far wrong:
- Sign up to a low-cost investing platform
- Automate your investing
- Drip-feed your money into the market
- Use your tax shelters
- Rebalance your holdings to control risk
- Take less risk as you get older or have achieved your objectives. Don’t get greedy!
- Learn how to manage your investment portfolio
I wish you the very best of luck. I well remember the flutters of excitement and nerves that accompanied my first jump off the investing diving board.
Investing has changed my life for the better and I sincerely hope it does the same for you.
Finally if you’re a Monevator veteran for whom these investment portfolio examples have been more a familiar ramble than wide-eyed adventure, then why not forward this article to a friend or family member who needs to get started?
Take it steady,
The Accumulator
Note: InvestEngine (UK) Limited is Authorised and Regulated by the Financial Conduct Authority, [FRN 801128].
- Equivalent index trackers are chosen when InvestEngine doesn’t stock the article’s suggested fund. [↩]
- GB00B3X7QG63 [↩]
- Swensen’s original US version featured 30% domestic equities and 15% developed world. That makes sense if you’re American because the US stock market is well-diversified. UK investors should flip these allocations around. [↩]
- GB00B4M89245 [↩]
- GB00BMJJJF91 [↩]
- GB00B59G4H82 [↩]
- GB00B3X7QG63 [↩]
- GB00B59G4Q73 [↩]
OK, I’ll bite. Why is it called the “SUV” Portfolio?
Great article thanks.
It’s a shame that Tim Hale’s book/model is 10 years old now.
I emailed him a couple of years ago to ask if he planned to reissue. He was kind enough to reply, but sadly he is not.
@Valiant – you’re in luck. Apparently a 4th edition is on the way (says August on Amazon but just ‘2023’ on the Albion site).
@Tetromino : Happy Days!
As a 31 year old with a house and family I am sticking 25% in my DC plus 15% employer match in 80% large and mid cap global equities and 20% in small-cap global equities. Two funds as I wanted small cap exposure but all equities. 30+ years till retirements!
Thanks @TA.
My portfolio is pretty stable (and sort of the same as your Slow and Steady), but listing the alternatives and their reasoning is making me check I am still happy with the allocation.
Also gradually trying to minimise the number of entities, so that whichever poor sod has to deal with this after I am gone can understand the plan. As different versions of index-funds pop up during the build phase, I have more investments than are comfortable.
@Valiant — As @Tetromino says there’s a new edition out in a couple of weeks (see: https://amzn.to/3YfLsPu) and @TA has already had a look.
We may well be doing a review soon! 🙂
@David C #1
“…greater crash protection…“?
Spot on Curlew
Possibly worth noting that:
“Prof. Markowitz did originally set his portfolio up with the most basic possible split of 50/50 between stocks and bonds. He did not, however, leave it that way. As he explained in a 2009 Q&A with the Journal of Investment Consulting: ….”
See TA’s “tale” link above for the rest of relevant details at: https://jasonzweig.com/what-harry-markowitz-meant/
Fab piece @TA and a really useful update & addition to an earlier Monevator piece on model allocations that I remember from some years back. I really like the Ready for Anything and All Weather portfolios. They’re very different to each other but both are exceptionally well thought through, respectively for a decumulator in FIRE and for the cautious wealth preserver. For the former portfolio, if you upped global equities from 60% to 80% and halved the other allocations from 10% each to 5% then I wonder if the expected returns (based upon history) would be nearly those of a 100% equity allocation but with better Sharpe and Sortino ratios? That might suit a fairly aggressive accumulator who didn’t quite want to go all in global equities. The only one I don’t like is the income investing portfolio, but that’s just an emotional reaction on my part based upon my own disappointment in a small HYP in GIA (which I’m running down now in order to fund ISA contributions). Even there, it was the Vanguard funds – including the AW high dividend one that you’ve chosen – which did the least badly. I still wince a little when I look at the Wisdom Tree UK Equity Income ETF, which I hold and which frankly has been hammered. Should have stuck to Vanguard there.
Compared to Monevators excellent Best global tracker funds – how to choose, AMUNDI PRIME GLOBAL – UCITS ETF DR U appears for have only 2.5 years history according to morningstar, does deviate a bit from the MSCI index (by up to 7+%), but then I think it tracks a different index – the solactive one I think.
@Acumulator – Another great article thank you for all the effort you guys put in and share.
I had a similar thought to @Time like infinity wondering if the Ready for anything portfolio could have equities increased however wondered if 70% equities made much difference.
Also wondered how the Ready for anything portfolio would have compared against a multi asset like VLS60. Past history is not much use for the future investing but just curious. I’m not a fan of the VLS UK bias so interested to know if this would of been theorically better or worse than the RFA diversifiers over any length of time. Example: would the RFA have potentially been less volatile but provided similar returns to VLS60 over a measurable period (eg 5 years or more)? Thanks again.
@ TLI – I’ve just tried your 80/5/5/5/5 idea using justETF’s portfolio function.
The Ready For Anything portfolio: 10.6% annualised / 13.1% vol
100% All World: 12% annualised / 14.6% vol
Nominal returns. Timeframe: 22/05/2012 – 01/08/2023
That’s the longest timeframe I can get for a representative combo of ETFs. It’s not clear to me how justETF’s portfolio tool handles rebalancing.
XGIG steps in as the global index-linker. All World is IMID.
Just had a quick look at a couple of key moments of volatility:
All-World’s lowest point in 2022 is -13.6% vs -8% for RFA portfolio (this is 60/10/10/10/10 version).
Same again during coronavirus crash:
All World -27% vs -17% RFA
Commodities weren’t doing us many favours during that episode. Gold would have been much better.
@ Bal – Ready For Anything vs Vanguard LifeStrategy 60:
RFA cumulative nominal return: 160% vs 115% VLS
Timeframe: 22/05/2012 – 01/08/2023
Again RFA is less volatile. VGLS max drawdown in 2022 is -15% vs -8% for RFA. VGLS max drawdown during coronavirus crash: -18% vs -17% RFA. Nothing in that one really.
Pushing up to 70% equities would mean a bit more return and a bit more volatility.
9.8% annualised return / 12.3% vol
60% equities:
8.9% annualised return / 11.4% vol
Timeframe: 22/05/2012 – 01/08/2023
Many thanks @TA. I like the reduction in the max 2022 drawdown from 13.6% with AW to 8% with RFA!
Hi @TA,
the Ready for Anything portfolio is pretty similar to mine. My fiddling… err… considered research has led me from long-ish term bonds to intermediate US Treasuries to 20% in GIST/GISG in November ’21, just before inflation made it’s unwelcome re-appearance. With 15% Gold (for tail events), that protected me well in the ’22 tantrum. In nominal terms, at least. After your series on equities, I’m considering moving half of GISG/GIST to commodity funds as my state and small DB pension start paying out. But currently I need the bonds to maybe spend down in RE. That would leave me 25% in Gold and commodities.
As you emphasise throughout the site, choosing a portfolio is very personal. My number 1 selection criteria was to minimise depth and length of drawdowns. I’m not too fussed about daily volatility, but years and years of being underwater would be trying for me so I’m happy to forego a little possible performance for more stability. Going from 60% equities (actually 65%) to 70% or 80% for me has a minor benefit of marginally higher potential returns for a significantly bigger cost of volatility and drawdowns. Again, for me.
The other thing I’d mention when constructing a portfolio, it’s not how you feel about individual assets, e.g. Gold with 0% real return, but their role in the Portfolio (Equities are for returns, short-term inflation linked bonds for stability and inflation protected return of capital, cash for emergencies and feeling good and Gold for when all else is failing)
Very timely article as we are getting ready to pull the trigger and so I’m getting the ship in order.
This echoes with me “or have achieved your objectives. Don’t get greedy!”
As I’m sorting out the pull trigger rebalance as it more weighted to equities 80:20, don’t get greedy, don’t get greedy the gilts/bonds/cash are there as a damper I keep telling myself………
Last few posts resonate with me. I’m 7-8 years away from FI but 95% equities so still carrying substantial risk, although my FI date isn’t a hard stop for RE. I am planning on rebalancing though contributions into a more balanced portfolio such as RFA.
Although I believe the diversification of investments to be the best approach, I’m finding my perception is I’m choosing a slower path. Somehow I’m finding myself trying to justify going hell for leather towards FI in equities.
Just put a couple of those portfolios into InvestEngine to potential trial them ahead of big decisions. It is frustrating how platforms don’t necessarily offer the lowest cost ETF and the next best can be significantly more in OCF e.g.0.13% HSBC vs 0.20% iShares/SSAC in the RFA portfolio.
I guess its unrealistic to expect the free trading platforms to offer us everything but I like InvestEngine’s portfolio features and am considering it for managing my GIA post TFLS crystallisation. Even more attractive if they eventually offer SIPP albeit at a charge.
So for an RFA portfolio probably still benefit to finding the HSBC All World on another platform unless I’m missing something?
@Rosario depends on your personal attitude to risk and what FI means to you i.e. do you then immediately trigger RE or is it more of a security blanket e.g. in likelihood you might still work a few more years to mitigate any market drawdowns. I’m FI by my definition but have yet to trigger the RE part partially because of new incentives to save more into pension and partially to build further buffer against inflation
@Rosario @BBBobbins:
FWIW, I am now over 6.5 years RE and recently started my DB pension – around four years ahead of my baseline plan at retirement. I have always used a floor and upside approach; so carried a relatively large amount of non-equities into retirement.
A key reason I started my DB earlier than originally planned was that I had somewhat over-estimated what ‘enough’ was. I am far from alone in making this “mistake”; but we are all somewhat unique too.
@Al Cam #19 Just to clarify are you saying you overestimated what you needed to have in the pot outside of DB and thus have more than enough and are drawing DB simply to get the benefit of more years from your DB scheme?
Rather than the more general risk scenario where people have to draw a reduced DB earlier because they’ve run out of “bridge” before DB commencement age?
It’s all kinda moot for me as I’ve never had a DB although a legacy DC scheme has recently converted a portion related to the Reference Scheme Test (a safety net for contracted out pensions) into a DB payable at scheme retirement age. The element of annuity income I feel is useful as a floor and to be honest for the sums involved it wasn’t worth paying for an IFA opinion/certification to keep the principal as DC.
@BBBobbins (#20):
It largely stems from over-estimating the annual amount we needed to live on; and not fully appreciating the intent of sub-diving this into ‘essential’ and ‘discretionary’ spend.
This also means I somewhat over-estimated what I needed to have [by way of Flooring] in the Pot outside the DB scheme.
For a variety of reasons I then decided to take my DB early once it provided enough to cover, at least, the ‘essentials’ . Which means I have ended up with even more floor assets in the Pot outside the DB scheme.
That is, I really needed less annual flooring for less years in the Gap from RE to starting my DB; a two-fold effect (or double-positive if you prefer).
Over estimating ‘essentials’ prior to pulling the plug is not apparently that unusual. On reflection, I was very conservative – but perhaps it is better to be wrong this way rather than under-estimating!
Hope this clarifies sufficiently?
@BBBobbins, @Al Cam
I like the floor and upside approach. It does tie with my attitude to risk (fairly risk tolerant) and what I think my approach to FI is. I’ve a young family so would certainly like to cut back on my fairly demanding job. That’s most likely to be a move to project to project work (full time for 9-10 months of the year) rather than full time less hours or part time. I’m not fixated on activating the RE immediately. Also as much as I’ve embraced semi-frugality during my FI journey if I’m really honest I would like to loosen that up a little, especially as the kids grow up.
Thank you for answering @TA – much appreciated. I prefer a 70/30 split so it’s good to know it’s pretty much equal in give on return / vol if equities are increased a bit. Also the figures showing the RFA being a potential improvement over VLS is very interesting. Thanks again for another great read.
@Rosario,
You may find recent work by Pfau and Murguía on what they call the RISA matrix interesting, see for example: https://www.kitces.com/blog/risa-framework-retirement-income-planning-client-preferences-total-return-strategy-risk-tolerance/
I am sure it is possible to over-do frugality, but in my experience some habits are hard to kick.
Lastly, best of luck with re-shaping your work/life balance.
Hi @TI,
I submitted a comment but it seems to have gotten lost. When I press the browser back button and re-submit it says I’ve already submitted that comment. No biggie, but maybe it’s in your Spam folder?
@Brod — Yes, just restored. Having manually checked north of 3,000 spammed comments over the past 72 hours I hadn’t gotten around to it this morning yet. Sod’s law! 😉
Sorry for the fuss, the mystery continues. (Yours was the only legit one in spam!)
Just another question on cash. Is there any particular advantage as a generality in having cash in a fund such as the Lyxor overnight cited over holding cash on deposit personally? Or does is simply aim to synthesize deposit rates
I appreciate that where your capital is within a wrapper such as a SIPP or ISA then you may not be able to hold cash appropriately. Or that having it in a fund may make for easier automated rebalancing on appropriate platforms.
@BBBobbins — Morning! 🙂 I’d suggest reading the post below on money market dunds and the reader comments that follow it too:
https://monevator.com/money-market-funds/
@Al Cam
Thanks for the link. Really interesting article that links well with this topic.
Understanding some of the drivers which sit behind the choices are helpful in formulating exactly where I sit on that spectrum.
Also some interesting side points / theories such as whether net worth drives approach or whether underlying personality drives net worth and the investment approach is just another symptom of that. Personally I’d say the a combination of the two but more the latter.
As far as my own situation, semi-frugality suits at the moment. I’m very fortunate that my career, location, background and friendship groups have allowed me to build a comfortable life and still have headroom to invest without feeling like I’m missing out. Having a young family restricts spending in many ways (childcare costs aside) and I also see my investments as a kind of spending (on freedom and security) so I’m happy for that to continue for a good while yet.
@The Investor
Thanks. Think I possibly missed that or only skimmed it as I think I was on holiday at the time. More of a “if you have to” option that a proactive GIA move then.
@TA Thanks for creating this post. I’ve spent a couple of days properly digesting it.
To my mind, the comments you make in the key takeaways section are probably more important than the sample portfolios themselves. In particular, understanding one’s situation and how this is likely to affect your future financial path should greatly inform your optimal portfolio; Al Cam’s comment (#20) concerning ‘enough’ emphasises one facet of this.
Good article, gets to the point quickly. The great diversity in portfolios tells you nobody has a crystal ball, which is one of the most important lessons for investors.
@ Curlew – agreed. How you get there is less important than getting there.
@ Ben – spot on. It’s easy to forget how often people are right for the wrong reasons and wrong for the right reasons.
@ Brod – that’s great self-knowledge. I can imagine cursing a 15% gold holding for years on end but if it comes through when you need it then it’s worth its weight…
The Kindle Edition of Smarter Investing: Simpler Decisions for Better Results 4th Edition by Tim Hale is available now on Amazon but not the printed version yet.
I have been working on finalising my asset allocation for my forthcoming retirement. Curious about one thing, perhaps a silly question. I normally keep a couple of years of spending money in cash ISAs as a safety net and intend to do this going forward. In my head, this is separate from my main SIPP and ISA equity and bond investments. So when we look at something like Harry Browne’s and RFA portfolios for example which both hold cash. (25% and 10% respectively. Do you consider this cash as part of your investment pot i.e. in addition to any safety net cash. Or is the safety net cash this 25% and 10%. Hope you can follow my question. Would be interested in learning how others think about this. As an aside, how ever I model different asset allocations (using things like portfoliovisualizer.com/), I struggle to better the Harry Browne for CGAR and low volatility. It does seem to work.
I share Mr H’s uncertainty about how to view cash, with an added niggle related to rebalancing. People talk about holding a cash allocation (either a percentage or “X years living expenses”) to meet spending needs without having to sell equities in a crash, but then if you do have a crash you’re going to wind up selling equities cheap to restore the cash allocation or you’re going to have to make an active decision to abandon your rebalancing strategy “for a while”, which doesn’t feel quite right either. Or does it all come out in the wash mathematically (i.e. you’re spending your cash pot, but the market is whittling down your equity allocation to match, and maybe your bonds too)?
#35, #36
I suspect it’s just variants of cash buffer conservatism and there is no hard and fast answer. The 3/6 months living expenses really comes AIUI from the accumulation phase of life so you’re not forced into a drawdown should you e.g. lose a job or have a short term life event. Once you are actually in drawdown you perhaps don’t need such a buffer and maybe 1/2 months will do plus a plan on how to replenish which would be from your overall portfolio. My inclination is to leave that short term buffer out of the portfolio proper then rebalance/drawdown according to my chosen strategy. In practice if I drawdown once a quarter there might be times my short term cash is 4 months and hopefully never less than 1 month, but I hope I will plan my drawdowns conservatively so there is always more in the tank if needed at the next drawdown.
As an example if I have an overall portfolio of 1000 with 100 in cash, maybe I draw say 40 per annum, but only 4 of it comes from my “cash” part of the portfolio. If I draw the 40 from my cash portfolio then I’m downweighting the cash. Maybe that’s ok if I intend to rebalance when equities are up but I don’t have the the benefit of a long cycle and I may lack firepower when equities are down. It’s certainly a more “active” portfolio strategy.
@ Mr H – My approach is to consider 1 years worth of spending cash plus any cash kept as emergency fund separate from portfolio. Any cash beyond that counts towards the cash allocation of my portfolio.
David C – If you have a £100k portfolio split 50:50 between equities and cash… then equities crash 50%. You’ve now got a £75k portfolio: 25k equities, 50k cash or 1/3 equities:2/3 cash. If you rebalance now then you’ll use cash to restore equities. Rebalancing won’t require you to sell more equities.
Bucket strategies that require X years in cash normally include another rule such as don’t sell equities when they’re down. So in a long-lasting bear recession you would potentially exhaust your cash bucket before resorting to selling equities.
There isn’t really an aggressive growth portfolio here for the 20 something with a long timeline. But looking at the comments I’m not sure many people that age are reading this blog
@TA.
Have you ever considered looking at Trend Following funds as a valid fixed allocation segment for a portfolio? (like in Chris Cole’s Dragon Portfolio)
I’ve actually use this instead of a bond allocation now (from beginning of 2022, so worked out well so far).
In my SIPP/ISA am using Winton & Montlake Dunn UCITS funds (not wholly satisfactory due to watered down volatility and the fees compared to the institutional funds).
An introduction to replacing the bond slug in a trad. 60/40 with Trend Following funds to get lower volatility and drawdowns can be seen here:
https://www.toptradersunplugged.com/how-to-invest-with-the-best-the-case-for-increasing-allocations-towards-globally-diversified-systematic-trend-following-ctas/
@Neverland #40: Maybe, but these are illustrative portfolios to be tweaked to requirements & Hale (21% multifactor) & RFA come closest, with sizeable equity loadings. In fairness to TA, it’s hard (impossible?) to cater to all cohorts and demographics with fixed allocations & the piece looks specifically at fixed allocation ETF options. IMHO Vanguard’s Target Date Retirement funds might work for younger investors with a long time to benefit from risk asset exposure but with sequence of returns risk mitigation towards the end. NB: for Hale portfolio, there’s now cheaper multifactor options than FSWD ETF. IIRC entry starts at 0.25% p a.
@Algernond #41: very interesting. Thank you. I’ll be checking that fund out.
Great article especially now updated with the IE links
On the deaccumulation example I wondered if there was a reason why the cheaper BCOG wasn’t suggested for the commodity allocation.
I also would love people’s thoughts on how to adjust this if:
You have some final salary pension ( I think bond proxy so can afford to up equity %)
And if you already have some bonds – I have uk short, uk inflation and global agg ( hedged ) – all at big losses would you hold for now or sell and rebuy if you like this mix ( eg the I did’nt know about the global inflation linked option)
Thanks all
Thanks for this timely update.
Your original Lazy Portfolios post and Tim Hales’ book help me set up my own version of an “all weather” portfolio, although it’s probably about time to review the allocations to ensure they’re still right for me.
@ Paul Knight – Cheers! This post explains my commodities choice:
https://monevator.com/best-commodities-etf/
Here’s a piece about the problem with UK index-linked gilt funds:
https://monevator.com/why-uk-inflation-linked-funds-may-not-protect-you-against-inflation/
Helps explain why they took such big losses in 2022.
@ Weenie – That’s great. Have you stuck with the same portfolio all this time or tweaked it along the way?
@TA
In Tim Hale Smarter Portfolio you have used
iShares Edge MSCI World Multifactor (FSWD) OCF 0.5%.
Why not JP Morgan Global Equity Multi-Factor UCITS ETF(JPLG) with cheaper OCF 0.2%?
https://am.jpmorgan.com/gb/en/asset-management/adv/products/jpm-global-equity-multi-factor-ucits-etf-usd-acc-ie00bjrcll96
Thanks
Echoing @Neverland – it’s a great post but I would have liked to have seen a 100% equity portfolio for anyone (not just the young) who:
– is more than 10 years from likely retirement age; and
– crucially, has genuinely internalised the fact that equity markets are volatile in the short term but much less so over a 10+ years horizon.
It’s a bugbear of mine that all writers about investment start from the position that investors will inevitably panic at the first sign of market turmoil. To me that’s largely a result of the media’s short term focus – you very rarely see a piece in the personal finance columns explaining historical investment returns over a 10, 20, 30 year investment period, for instance. A properly educated investor should be able to ride out short term market volatility. Of course, only the individual can decide whether they’re in that category.
@c-strong. Clearly I’m not a “properly educated investor”. I would point out that if I’d been 100% invested in the S&P index (no fees) between 2000 and now, my portfolio would be only 59% of my actual portfolio value. My unitized returns would be less than 50% of my actual returns (with fees). That’s a period of well over 20 years.
I don’t think it’s a matter of a “proper” education. It’s a matter of properly understanding your objectives. Hence why we all need different portfolios. For some, a 100% equity portfolio (but which one?) is correct. For many, a 100% portfolio (even with 10 year+ time horizon and sufficient risk tolerance) is not correct. The above portfolios are just some stylized examples.
@Zx #48: They are each just stylised examples, and they’re certainly not beyond criticism or improvement, but please do always bear in mind here that we’ve each got practically limited degrees of freedom. No investor can achieve their goals using pathways which just aren’t practically open to them personally. In this regard, I do not seriously doubt that there is a small subset of sophisticated, market neutral, macro strategy funds (maybe several out of 10,000 odd hedge funds overall) which have had, and which may continue to have, a substantial, enduring ‘edge’ (both in actualised performance; and in the underlying quantity, coverage and quality of their data, in their superior computational analysis and logistics of trade execution and in their use of and retention of talent). Whilst those several funds have been objectively ‘better’ (in terms of their net returns and risk control, as compared to the universe of investments out there); among all of the investors worldwide (probably over a billion people, if you include those with equivalents of DC pensions, 401Ks, ISAs etc.) only a very miniscule number can actually access those several funds. We’re talking about hundreds of, or at most thousands of, accredited UHNW investors or even just (as with Medallion or BCM now) the senior employees of those several funds themselves. So, being realistic, you can’t fairly judge the choice by many people to bear, in some form or another, 100% equity volatility risk by an alternative objectively preferred option which is only actually available (in practice) to perhaps just 0.0001% of all investors.
@TLI. You are missing the point. Equities generally produce the highest total returns over the long-term. The problem is the “generally” and the “long-term”. Those Japanese investors from the early 90s are still waiting.
I still come back to the view that the optimal passive portfolio is the one that meets those long-term objectives with the minimum risk of failure. This idea that everyone only has one objective – to maximize returns – just isn’t true.
What exactly is the portfolio hedging? How much path dependency do their forward liabilities have? What time horizon can you really lock away capital for? Do you expect potential liabilities to appear that might change that assumption and force early liquidation? This is a hard problem. So, people instead focus on the easy stuff like which equity fund, reducing taxes and fees. They put the cart in front of the horse.
Realistically, say a 3% real return over the next 20-30 years would meet someone’s objective. Would it be rational to for them invest in portfolio that might return 5% real (say 100% equities) but with 10-20% risk of ruin? Or is more logical just to buy an annuity offering a CPI-linked 3%+? Or perhaps 50% in the annuity and 50% in equities? Or even a mulit-asset portfolio with a number of asset classes to achieve better returns but a lower risk of ruin (given diversification). Even if you went for 100% equities, then surely at a minimum you should be selling the probability of real returns >3% to buy downside protection.
The objective must drive portfolio construction. Not total return, return-risk, fees, taxes etc. The objective. What is the portfolio hedging? What is the efficacy of the hedge? The variety of portfolios should reflect the variety of objectives.
@ZXSpectrum48K #48: on your first paragraph – IIRC you’re a fixed income investment professional, so I’m not sure your portfolio’s performance is very relevant to these standardised portfolios :). Certainly a basic 60/40 S&P500 / US Treasuries buy and hold portfolio with annual rebalancing has not outperformed a 100% S&P500 portfolio over that time period. The purpose of adding bonds is not to outperform in any case, as you know.
On your second paragraph – I agree, but I think a 100% equities portfolio should be included on the list, if for no other reason than to discuss its pros and cons. As it stands we have a lot of variations on the balanced diet – where’s the caveman/red meat version? If @TA is going to include the Permanent Portfolio at (nearly) one extreme, he should include 100% equities at the other in my view.
Surely a 100% equities pf is simply 100% PRWU, or HSBC FTSE All World, or VLS100? Chuck in some extra EM, UK or S&P if that floats your boat. The pros and cons of all the above are discussed in detail in the recent ‘Best global tracker funds – how to choose’ post + comments, among others.
Excellent points @Martin T #52.
Yes, we’ve had a least a triple treat on the global equities side in the last year or so with the best ETF for All World equities from @TA only very recently, @Finimus covering the cheapest All Countries equity ETF combo, and this June 2022 piece by @TA on the Vanguard Life Strategy options, including VLS100:
https://monevator.com/vanguard-lifestrategy/
Be useful though to have something on the Vanguard Target Date Retirement funds as they have a glide path to retirement which might address some of @ZX’s concerns above on risk management as they pare down equities and increase allocation to bonds on the way into retirement and then slightly increases equities in the latter retirement period.
@ZX I’m always fascinated by your take on this, which is very distinctive. Sometimes it seems just a little too abstract really to grasp. I’d love it if your gardening leave (and @TI) permitted you to expound further in a guest article?
A few thoughts:
1. Unless saving for something specific, such as school fees, house deposit etc, I suspect most people start investing with a vague notion that it’s better over the long term than saving – which hardly amounts to a clear objective. I guess this may be why various ‘glidepath’ or ‘life-styling’ features are common in pension funds.
2. I suspect most investors secretly hope to do a better than expected, so will tend to be attracted to ‘get rich quick’ promises. At the same time, they tend to minimise the risk of disaster (financial or otherwise) happening to them.
3. It’s very difficult, even well into middle age (as I am), to conceptualise what life will be like in the future, what I will need, or what liabilities I may incur, even before unexpected life events – divorce, serious illness, early bereavement, redundancy, or the numerous ‘challenges’ our grown up children present us with! And all this before considering the flip flop of government ‘policy’. This makes setting a clear objective, as you describe, somewhat difficult.
@TLI — You write:
Et voila! https://monevator.com/vanguard-target-retirement-funds/
Like so much probably due an update I suppose. 🙂
Super thank you @TI 🙂 I’d forgotten about that one. This site is the Aladdin’s cave of investment wisdom and our own Library of Alexandria for FIRE know how.
@c-strong. Of course, 100% equities is a valid portfolio choice but then so is 0% if annuities or linkers do the job. An article like this though isn’t really helping if you choose a polar benchmark (like 100% of anything). It would be a very short article though!
Personally, I reject the idea that anyone with a 10-year+ time horizon should be 100% in equities if they are “properly educated”. In my investing journey from 2000, 100% S&P index would have been worth 93% a decade later (72% in real terms). Compare to 156% in cash, 210% in 10y+ USTs, 198% in commodities. It was 2021 when US equities finally outperformed a 60:40 portfolio.
Now, the 2000s is a nasty example for US equities. History though is littered with nasty decades, in some cases much longer, for equities (or any asset class). Diversification is not just for those who have low risk tolerance. It can lead to better outcomes over any sensible time frame (10-20 years).
@ J Hudson – I prefer FSWD’s combination of factors: small, value, quality, momentum vs JPLG’s value, quality, momentum. Small value has historically outperformed large value.
That said, JPLG has slightly edged FSWD over the 4 years since JPLG launched. And it’s less than half the price so I can see why you’d choose it over FSWD.
@TA, @J Hudson.
Seems that JPLG has more of a smaller bias. It’s largest holdings are 0.3%, whereas FSWD has FB, Apple, Exxon, MSFT, Cisco, Walmart all above 2% each…
Mind you, both of them only appear to go down to ‘mid-cap’ size.
USSC & ZPRX are ‘small-cap’ value (one US, the other Europe).
@TA #58 (following on from @Algernond #59 on Euro Small Cap Val with ZPRX): if exposure to both the Value and the Small Cap premia / anomalies / risk factors are desired, then an alternative to either a multi factor ETF which adjusts separate factor weights or to one which just holds a static mix of different factors would be to instead go for a factor ETF which actually combines factors. At the moment both of EM and Europe are cheap (in terms of P/E, P/B & P/S) compared to the Developed World and the US respectively. So I’d suggest something like Wisdom Tree EM Small Cap Divi ETF (DGSE), with a OCF of 0.54%, to go alongside ZPRX (OCF 0.3%). I also understand that both size and value are currently relatively cheap compared to their historical averages in terms of P/Es and as also compared to the P/E for the whole of global market.
I love this line from @ZX #50, “The objective must drive portfolio construction. Not total return, return-risk, fees, taxes etc. The objective.”
I have to remind myself to try and translate the many interesting articles and ideas in relation to my own objective, and where I am along the timeline to said goal. Working back from the objective has always been my preferred way to tackle any ‘problem’. Great article and comments as ever – thanks.
FWIW, I concur with both @c-strong #47 & 51 and @ZX #48, 50 & 57; & don’t think that ZX, c-strong & I actually disagree. I’d also prefer working back from objectives. But we’ve different perspectives from our different circumstances / practicalities. If you’re given an objective in the army, then how you approach it will be different if you’ve got the SAS at your disposal as compared to only having Dad’s Army.
Taking your analogy forward a bit further if I may…
If building wealth to provide a certain level of income is the objective, I suspect the same trade-offs regarding likely success apply to all.
Meaning, if the current portfolio is looking too Dad’s Army to deliver the target income objective (without taking on more risk of failure).
Recruiting more soldiers equates to saving more, moving along the line to a SAS fighting force.
I realise this is probably too simplistic and verging on silly, but the more I think and learn about this ‘problem’ the harsh reality is the brute force of saving more and lowering the drawdown rate is the most effective ‘solution’.
@Ade #63: A further simple but hard approach, which also has a substantial likelihood of success, is to just invest for a lot longer. Putting £9k p.a. for a child into their stocks and shares JISA each year from the ages of 0 to 18, and the child then holding on to it untouched until they reach 70, could, at an average 5% real return p.a. with all the income reinvested (being the average real return with dividends for global equities for the entire period since 1900), end up being worth £3 mm (at constant purchasing power) at the end of those 70 years. One very long wait indeed, but what a reward for patience.
@TA
The portfolio is largely the same, with a few small tweaks to the percentages of allocation over the years.
One change I did make a couple of years ago however was switching some (though not all) of my bonds to defensive investment trusts. Not entirely certain it was the right decision (e.g. should I have switched all of the bonds, should I have gotten some gold instead?). I feel mostly comfortable with it so will see.
Another really useful analysis – Thank you.
I remain puzzled that retirees are advised to increase their bond allocation because they cushion the portfolio and are less volatile than equities. Just looking Morningstar data for shares Core UK Gilt ETF (IGLT): 3yr SD 10.2%; 3yr mean return -11%. Vanguard UK Long Duration Gilt fund: 3yr SD 17.1%; 3 yr mean return -18.8%. Compare these to Vanguard FTSE Developed World etc (VHVE): 3yr SD 12.5%; 3yr mean return +13.2%.
As a recent retiree with hopefully 20+years to fund, I prefer a full, diversified equity portfolio with a rolling 5 years of forecast expenditure in cash (currently earning 5-6%) so I’m not a forced seller of equities. Granted cash at 6% is eroded by inflation but at least it is not losing value. Have I missed something in the role of bonds – they don’t seem to have provided ‘crash protection’?
@ JCB
“As a recent retiree with hopefully 20+years to fund, I prefer a full, diversified equity portfolio with a rolling 5 years of forecast expenditure in cash (currently earning 5-6%) so I’m not a forced seller of equities”.
I’m in the same position, and I have extracted 4 years’ worth of spending in cash and gilts. So far so good. But what is the plan (your plan) to keep the 5 years of cash buffer rolling? Selling a year’s worth of spend of equities each year?
Thanks
V
@ JCB – Cheers, I’m glad it helped. In bonds defence, they suffered a historically bad return during that time period. One of the worst on record. That can happen to any asset class. So the last 3 years doesn’t really reflect the long-term potential of government bonds.
Zooming out a bit, gilt volatility since 1900 is 12% versus equity volatility of around 20%.
It also matters that gilts have low correlations to equities so when equities crash the diversifying potential of government bonds tends to come to the fore. Though not always.
Cash doesn’t spike during recessions, it stays flat, so doesn’t offer the same crash protection. Long-term returns are lower than bonds and cash has had negative returns after inflation every year since 2008 (as measured by the treasury bill rate). OTH, cash is less volatile and I do agree it has a place in a retiree’s portfolio.
I’ve tried to provide a more rounded picture of the performance of traditional portfolio diversifiers here. To a fair extent it supports your decision to keep a slug in cash, but it also shows that bonds help too.
https://monevator.com/diversified-portfolio/
Bottom line is that no asset class always works so I’ve come to the conclusion that diversification is the best defence I can buy.
@TA: 100% equities because of higher returns since 1900 over most rolling 20 year periods; but with no constitutional aversion to bonds/other diversifiers, and only avoiding bonds in previous decade because of view that shares may or may not have become ‘overvalued’ (CAPE etc) but, if they were, then bonds must have become more severely so (i.e. in some sense bonds had become riskier than equities, contrary to longer run position). [So, had no actual views on whether or not equities were overvalued, and have no views on that now; but was confident that, in the event that shares were overvalued, bonds would have then to be relatively more overvalued still]
With 2022 bond crash now re-evaluating position, and considering whether or not to allocate a slug out of shares and into bonds.
As part of this, starting to think around some of the rules of thumb for sizing bond allocation, and how they could be adapted and improved to safeguard against having too much in bonds, i.e. trying to avoid future overexposure to too richly valued bonds that won’t cushion equity volatility. This is what have come up with so far for a 2 asset global equities/higher quality (intermediate or long AAA-AA) global government bond allocation:
Portfolio bond allocation % =
1. Overarching cap (all circumstances) of 50% max. Rules below subject to this cap.
2. Age plus (or minus) 10 or 20 for higher (or lower) than average risk aversion.
3. Is % allocation figure generated after steps 1. and 2. greater or less than 10x the portfolio bonds’ weighted average yield to maturity?
a). If greater, reduce bond allocation % to 10x the portfolio bonds’ weighted average yield to maturity figure.
b). If lower, don’t adjust.
NB: A negative weighted average yield to maturity figure, therefore, results in a nil bond allocation.
4. Rebalance annually.
Disadvantages include that no matter how old or cautious a person is they’d never have less than 50% in shares, or more than 50% in bonds. Clearly this would not to everyone’s taste. A possible advantage is that step 3. keeps the bond allocation % in line with the weighted average yield and, therefore, hopefully preserves some semblance of risk to reward if bond yields tumble and prices rise. It tries to guard against what had gone ‘wrong’, if you will, with bond yields by the end of the 2009-2021 (or, depending upon the length of one’s perspective, the 1981-2021) bond mega rally.
Wondering if you and/or readers had any thoughts on any of this?
@TA: Thanks for the response and the link to your excellent Diversified Portfolio article. I’m in the capital preservation phase of my life, and your article reminded me of the importance of the range of defensive options (and that 2022 was exceptional for bonds), so they’re back on my consideration set.
@Valiant: I do sell assets from my growth portfolio to maintain my rolling 5 year of ‘safety assets’ (cash). It’s a pragmatic approach. My goal is a 4% real return from my growth assets. If that portfolio return is negative in a year, then I don’t sell anything and my ‘safety assets’ could go down to 4 or even 3 years forecast expenditure (as recently). In a year when my growth pot delivers say 2% real, I might transfer 50% of forecast expenditure, or if it returns above 4%, then I will increase the amount I ‘transfer’ into my safety pot. If you are interested in a detailed explanation of this approach check out Don Ezra https://donezra.com/151-detailed-explanation-of-my-personal-decumulation-approach/ . Hope that helps.
@ JCB – cheers! And thank you for sharing the link to your methodology.
@ TLI – very interesting. Your yield idea seems like a nice ‘buy low, sell high’ mechanism. Do you envisage applying it annually? I’d like to run that rule through some SWR simulations and see how it holds up versus, say, McClung’s dynamic withdrawal strategy: https://monevator.com/dynamic-asset-allocation-and-withdrawal-in-retirement/
When the rule caused you to sell bonds would you reallocate to cash or equities?
Intriguingly, from 1870, UK government bond yields only made it past the 5% yield mark from 1960 – 2002 (and now of course).
I’m much more sanguine about holding bonds now the ZIRP era has passed and yields have returned to something like ‘normality’. Previously, the dilemma hinged on balancing the need for diversification versus the probability that low yield bonds constituted “return free risk” as Buffett put it. Bonds seem much less risky now the bubble has burst – assuming the 1970’s stagflation danger has waned.
Personally, I wouldn’t want to hold more than 40% bonds in retirement no matter how old I am – based on historical SWR sims of global equity / UK bond portfolios: https://monevator.com/how-to-choose-an-swr-for-your-isa-and-your-pension-to-hit-financial-independence-fast/
Currently, I actually hold 30% bonds and 10% cash.
@The Accumulator: thanks for the reminder about Prime Harvesting.
@JCB, thank for the explanation and the link to the Don Ezra write-up: very interesting.
Many thanks @TA for your v. thoughtful and kind response. In answer to the 2 queries: intending for annual rebalancing (on the first trading day in January, as normally still on leave after Christmas, but back home); and moving into equities from bonds if applying the rules mean reducing the percentage bond allocation.
Global equities will be an ACWI tracking (unhedged) fund or ETF with low OCF and small spread.
Not a fan of cash (or CBs) in portfolios. On cash: I learnt my lessons the hard way in GFC when I idiotically sold out of shares in March 2008, in panic after Bear Stearns (which looked to me at the time like it was going to be another Credit-Anstalt 1931 situation), fully intending to buy back in (hopefully at lower prices) ASAP, but only to end up paralysed by fear and unable to do so until 2013, by which time I was then paying higher prices, with essentially no income from cash holdings in between. Experience marked me. I’m now averse to holding anything but min. levels of cash (to meet platform fees) within portfolio. [Of course, still have the obligatory cash buffer (emergency fund) outside portfolio (savings accounts and Premium Bonds)]. On CBs (esp. HY debt): don’t like them as they have many of the disadvantages of equities with few of the advantages of high quality government debt in terms of volatility smoothing/negative correlations.
It seems strange to think that less than 3 years ago many trillions of government debt world wide was on negative yields, and buyers here were happily paying up for minus 3% yields on UK linkers. The bond crash was a long time coming and, whilst I am somewhat sceptical of trying to apply valuation metric analysis to equities as an asset class, it did seem in the very long run up to 2022 that bonds prices might, at least in part, be more plausibly explained by such analysis.
Im very much on a learning curve with investing and finding this site a fantastic resource. I like the idea of the Harry Markowitz portfolio as I know very little and the idea of not needing anything more complicated appeals a lot.
I just had a look at performance of the two funds over a 5 year period and one seemed to be up 11% and the other (the gilts one), down 26%.
If I have the figures right what would the benefit be over just keeping cash? I appreciate its value decreases with inflation but there would be no risk in the value going down.
Thanks a lot
@ Peekay – gilts suffered an unusual and historically bad loss in 2022 but equities did not, so bonds look particularly back over this period. Comparisons over time periods of even five years are of extremely limited value as asset class returns tend to be highly variable in the short-run. For example, an asset could be in bubble territory for five-years but that information wouldn’t tell you it could repeat the trick for the next five.
This piece offers a longer-term view:
https://monevator.com/diversified-portfolio/
Over time, high-quality government bond returns have been higher than cash. Their behaviour also tends to be more complementary in a two asset-class portfolio.
Good luck with your investing journey! I’m very glad you’re finding the site useful as you figure things out.
HSBC FTSE All-World Index Fund C is not an ETF ?, wonder what would be the best ETF replacement Invesco?
For those pondering entrusting their hard won wealth to asset allocation models and recalling common truisms like “all models are wrong but some are useful”, here’s one more to ponder when weighing up the respective merits of ‘passive’ index tracking asset allocation models against ‘active’ share picking or fund managers: “Models are not a floor on performance, but rather a ceiling from which experts detract”.
Hi @The Accumulator – do you think GISG aligns more to Tims recommendation that if you can’t find a short index linked bond fund/ETF, instead go 30% + 10% between global government bonds fund and index linked global government bonds fund?
I was proposing my Defensive/Water allocation of:
15% IGLH
15% IGLT
10% GISG
To compliment a Engine/Whiskey composition of:
48% VWRP
6% WLDS
6% HPRO
There don’t appear to be any shorter dated global government bonds ETFs unfortunately.
Now I need to read up on any risks with holding a Luxembourg domiciled ETF!
@cm258: Effective durations are currently (most recent data I can find from end June to end July) approximately:
IGLH: ~7 years
IGLT: ~8 years
GISG: ~5 years
At a ratio of 3:3:2 (15%:15%:10%) that’s circa a 7 years’ weighted average effective duration across the 3 bond ETFs at the proposed allocations, so very roughly a blended 7% price sensitivity per 1% interest rate / interest rate expectation change. Is that what you were after on the government bond side?
That’s very helpful, thank you. I think GISG having an effective duration of 5 years is the answer I’m after.
Are there any complexities with holding a Luxembourg domiciled ETF in an ISA for UK investors, do you know?
I’m not an expert, and you’ll have to do your own research and not rely on anything I say (which is just sourced off of the Internet); but I think probably not in either an ISA or a SIPP but I believe if Luxembourg ETFs are held in a General Investment Account then they may be subject to a 30% withholding tax on both dividends and interest from US companies and US bonds, whereas Irish-domiciled ETFs may benefit from a reduced 15% withholding tax due to a favorable tax treaty with the US.
So, while Luxembourg funds might have lower fees, the tax implications could make them less attractive compared to Irish-domiciled ETFs.
Again though, you’ll have to do your own research and then take appropriate advice from someone who, unlike me, actually knows what they’re taking about.
Apologies, I’ve just realised, thinking this through, that this issue would also affect Luxembourg ETFs held in an ISA too.
Investments held in an ISA are generally exempt from UK taxes on income and capital gains. This includes Luxembourg-domiciled ETFs, meaning that any UK sourced income or gains from these investments would not be subject to UK tax as long as they remain within the ISA wrapper.
However, non-UK taxes, such as US withholding taxes on dividends and interest, may still apply, but of course these do not affect the tax-free status of the ISA in the UK.
For SIPPs the position for US withholding taxes may be more complicated, and you may want to check out @Finumus’ “Investment costs: how low can we go” piece on Monevator on 4th May 2023, which covered this.
As always, do your own research though, and don’t rely upon an pseudonymous poster on the Internet.
I’ve devised these portfolios based on the book, and am implementing these within my ISA and SIPP. Keen to get others thoughts! If only I could message Mr. Hale himself!
Portfolio 60 for my ISA
Return Engine
36% VWRP – Developed & emerging global equities
9% IWFV – Developed value
9% WDLS – Developed small cap
6% HPRO – Global commercial property
Defense Mix
15% IGLT – Intermediate UK government bonds
15% IGLH – Intermediate developed government bonds
10% Royal London Short Duration Index Linked fund – Global Inflation-Linked bonds
Portfolio 80 for my ISA
Return Engine
48% SSAC – Developed & emerging global equities
12% IWFV – Developed value
12% WDLS – Developed small cap
8% HPRO – Global commercial property
Defense Mix
7.5% VGOV – Intermediate UK government bonds
7.5% IGLH – Intermediate developed government bonds
5% Royal London Short Duration Index Linked fund – Global Inflation-Linked bonds
A change: the value tilt is being achieved via UBS FTSE RAFI Developed 1000 Index fund as opposed to the iShares ETF.
I don’t think the MSCI World Enhanced Value index that the ETF tracks, is at all what Hale intended. It says “The weight of each sector in this index is equated with the weight of that sector in the MSCI World”. Which isn’t really achieving the desires outcome.
The FTSE RAFI Developed 1000 on the other hand, states “Consequently the indices are less prone to excessive concentration arising from market fads, which can result in over-exposure to individual companies, sectors or countries”.
The constituents of the latter look very different to the former, and it is this Hale suggests as a risk factor.