What caught my eye this week.

All of us know that a calendar year is an arbitrary period over which to measure non-astronomical progress. That’s true whether you’re looking at an expanding portfolio or a shrinking waistline. Or, worse, the opposite!

Yet 90% of us do it anyway.

Far be it from me to take the high ground here. Not when one of my favourite rituals of the quiet New Year is resetting my return tracking spreadsheet.

I love pressure washing the slate clean. Percentages gained and lost and my benchmarks are zeroed. So too is the chunky annual expense tally that’s racked up by my naughty active style.

I try to be happy that my transaction taxes pay for a new nurse somewhere, and resolve to do better.

I also resolve to eat less fried food, and to read more books and fewer Tweets.

We’ll see.

Money for nothing

If tracking annual returns is illogical, forecasting them is insanity.

Yet plenty of well-paid professionals do that, too.

As a financial media junkie, this time of the year sees me digest a hotpot of forecasts from everyone from hedge fund managers and market strategists to bank interns.

They aim to pin the tail on a donkey, by predicting where the world’s biggest stock market indices will sit in exactly 12 months.

Such precision is, of course, errant nonsense.

Nobody knows where the market will be tomorrow, next month, or in a year. Most market prediction methods don’t predict much of anything. Animal spirits loom large – not to mention pandemics caught from animals.

True, over the very long-term GDP growth and stock markets are related in healthy economies. Prices of assets ultimately follow earnings. The price you pay affects the returns you get, so valuation does matter.

But ‘ultimately’ is doing a lot of heavy lifting there. Think decades.

Short-term, anything can happen. For example, consider how the immense contraction in GDP in early 2020 foreshadowed a boom in shares. Nobody saw that coming. Just saying the world wasn’t ending felt contrarian enough.

Still, I’ve also mellowed about these market forecasts. It helps that wider scrutiny via the Internet means fewer people take these horoscopes as gospel nowadays.

Most market mystics just slap roughly 10% on to wherever the stock market sat at the end of the year just passed and call it job done. And in truth that’s about as good a guess as any.

There are more important things to be cross about than pragmatism.

Sultans of swing

Where the pundits do spin stories to justify their +10% forecast – beyond it being an (optimistic) historical near-norm, twiddled for inflation – you can also get an insight into what’s driving the big money.

It’s similar to how some stock pickers start with a company’s market cap, then work back to see what assumptions are being made about its earnings and growth. You can do the same with these wider prognostications.

In an era where people are flipping blockchain-ed JPGs of cartoon monkeys for millions of dollars on a daily basis, thinking about how the stock market might move over a long 12-month period – and why – seems almost sagely.

Right now investors seem to foresee rates rising, but at a moderate pace. Real yields are expected to remain low, historically-speaking. Quantitative tightening (yep, it’s a thing) should eventually drain some liquidity from the system, but it’s thought more normal economic conditions will pick up the slack. Crucially, inflation isn’t expected to run hot indefinitely.

That summary might not sound like anything to scare the horses. But it’s already been enough to crash the highly-rated ‘disruptive’ growth stocks that boomed during the pandemic.

As Michael Batnick points out:

The story that best encapsulates investor enthusiasm for growth stocks was when Zoom’s market cap crossed ExxonMobil [XOM], which traces its roots back to 1870.

When Zoom went public in 2019, XOM was 21x the size. And then, for one brief moment during the pandemic, Zoom took the lead. After the recent growth crash, Exxon is now 5.5x larger. Order has been restored to the galaxy.

Multiple compression has done a number on these stocks. The median price to sales ratio for ARKK names peaked in February at 33 (Zoom got up to 120) and is now down to 10.5.

So much for the highest-fliers. If anything they’re starting to look more like buys than sells to my spidey senses, if you’ve a long enough time horizon.

Your latest trick

A question mark also hangs over what we used to call ‘bond proxies’ in the old days. (You know, those ancient times before March 2020).

These are the high-quality, slower growers like Nestle and Diageo. The sort of companies beloved of star fund managers Nick Train and Terry Smith.

Shares in many such firms have been stagnant for a while but – especially outside of the UK – their valuations remain largely unattractive on a historical basis. Yet the same financial modeling that sees higher yields compressing racy tech stocks should also imply lower multiples for these chocolate makers and whiskey merchants, albeit not to the same degree. I’m watching these companies very closely for clues.

Then finally we have the value stocks – banks, miners, energy firms and the like.

The presumption is rising rates, inflation, and economic growth are good for these because future higher earnings aren’t so valuable as they are in a low-growth, low-yield world. Hence the market sees more rotation into such companies.

For what it’s worth (nothing) I’m not so sure. A lot of assumptions underpin that trade. I find it hard to be confident of an economic boom, with Covid still raging a year on from vaccine euphoria. I believe too that supply chains and consumers alike are getting better at dealing with the pandemic’s impacts. That’s one reason I don’t see high inflation persisting.

Brothers in arms

It’s possible – especially in European markets, which has less of a growth and tech focus – that money could continue to rotate from one kind of company and into another, and the market still head higher.

Individual fund manager or factor returns could crater, depending on style. But index investors might barely feel a flesh wound.

So will the market go up in 2022? Your guess is as good as mine.

Instead of an unsatisfactory answer, a better question: which market?

This graph from Visual Capitalist illustrates a wide variety of moves across asset classes in 2021:

That’s from the perspective of a US investor, but the message is universal.

Diversification potentially gives you more leg-ups and safety ropes in an uncertain future. Whereas betting on just UK value shares or US software-as-a-service or whatnot – or even only shares or cash – is exactly that. A gamble.

If you want more soothsaying for the year ahead, try Saxo Bank’s annual outrageous predictions. They’re tongue-in-cheek, and interesting.

Happy 2022!

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Periodically, I’ll get a stock market-related communication from my co-blogger The Investor that sounds like he’s in the midst of a depth charge scene from Das Boot.

It’ll go something like this:

“Schnell! Schnell!” I’ll hear down the Monevator speaking tubes.

Or perhaps it could be: “Sell! Sell!”

“We’re going down!”

“Financial Independence under attack!”

I imagine The Investor in his control room, bathed in emergency light red. Market sonar pinging, portfolio pressure gauge spinning, shares getting crushed. 

Valiantly The Investor tries to contain the hull breaches, as volatility rocks his boat and reality floods in.  

Das Boot on the other foot

Me? I take it all as my cue to “Dive! Dive! Dive!” my psychological Nautilus.

Iron-clad against stock market news and cruising fathoms below the turmoil, there is comfort in the darkness. 

The occasional morsel of information floats down from above. A rotting carcass picked up by my searchlights – already too stale to divert me from my course.

When at last I do surface – days or weeks later – the market seas are generally calm. 

And so it is today, as I inspect the Slow & Steady portfolio nets after the recent alarm… while The Investor hangs his sodden undies out to dry on the deck.

Sorry. That’s an image you can’t quite unsee.

Net gains

Despite a winter battering by Omicron waves – with The Investor’s growth stocks apparently being hit by a shrinking gun – our Slow & Steady portfolio is up over 4% on the quarter and a remarkable 10% for the year. 

That’s on top of last year’s 14% gain.

And it builds on 2019’s 16%. 

I keep pinching myself, but I’m not dreaming. 

The Slow & Steady portfolio is Monevator’s model passive investing portfolio. It was set up at the start of 2011 with £3,000. An extra £1,055 is invested every quarter into a diversified set of index funds, tilted towards equities. You can read the origin story and find all the previous passive portfolio posts tucked away in the Monevator vaults.

So which of our passive lobster pots landed the biggest catch this time?

• Global Property: up 28.3% in 2021 and 9.3% annualised over the seven years we’ve been invested in this asset class.
• Developed World ex-UK: up 22.3% in 2021 and 15% annualised over the 11-year lifespan of the portfolio. 
• UK FTSE All-Share: up 18.3% in 2021 and 7.4% over 11 years.
• Global Small Cap: up 16.7% in 2021 and 13.8% over seven years.
• Inflation-Linked Bonds: up 4.7% in 2021 and 16.3% over seven years.1
• Emerging Markets: up 0.36% in 2021 and 7.8% over 11 years.
• UK Government Bonds: -5.6% in 2021 but up 0.2% over the 11 years.

Note: these are nominal gains. Subtract inflation for the real return. 

Steaming ahead

The 28% annual gain from global property in 2021 versus near-zero from Emerging Markets reminds us again of the importance of diversifying our equities. 

It was impossible to know when we started this portfolio in 2011 that we could have just invested the lot in the S&P 500 and left it at that. 

In an alternate universe US equities might have spent the last decade turning in the sort of deeply average returns we’ve had from the FTSE All-Share. 

Indeed we may yet enter that alternate universe if the current valuation levels of the S&P 500 (levels last seen en route to the dotcom bust) fulfill the latest prophecies of poor expected returns to come from US large caps. 

If so, it’s plausible that our US-heavy Developed World fund will then trail in the wake of our other equity holdings in the decade to come. 

Or maybe the entire equity asset class will take a pounding and we’ll be left clinging to bonds like a buoyancy aid?

Nobody can ever perfectly see the future through the gloom.

Steady as she goes

For that reason I’m very happy to now rebalance away from our Developed World fund; it has drifted away from its 37% asset allocation anchorage to comprise over 41% of the portfolio.

Our rules dictate we’ll take some of those profits and invest them back into bonds – the ‘buy low’ asset class after a very poor year. 

There’s some light rebalancing to be done with the other equity funds, too. Their proceeds will help pump emerging markets back up to its 8% target allocation. 

We’ll also increase our inflation-linked bond allocation by 2%, at the expense of gilts.

We do this because we’re gradually shifting the portfolio’s defensive assets to a 50:50 split. We hold index-linked bonds for inflation protection and conventional UK gilts for recession resistance. 

Finally, with our annual rebalance and asset allocation review complete, it’s time to calculate the increase in our investment contributions in line with inflation.

Inflation adjustments

RPI inflation was a shocking 7.1% this year according to the Office for National Statistics. (The CPIH rate was 4.6%). We increase our contribution by RPI every year to maintain our purchasing power.

It means we’ll invest £1,055 per quarter in 2022. That’s up from £985 in 2021 and just £750 back in 2011.

New transactions

Our contribution is split between seven funds, as per our predetermined asset allocation. As discussed above, we also rebalance every year.

These are our trades:

UK equity

Vanguard FTSE UK All-Share Index Trust – OCF 0.06%

Fund identifier: GB00B3X7QG63

Rebalancing sale: £196.79

Sell 0.843 units @ £233.56

Target allocation: 5%

Developed world ex-UK equities

Vanguard FTSE Developed World ex-UK Equity Index Fund – OCF 0.14%

Fund identifier: GB00B59G4Q73

Rebalancing sale: £2,536.24

Sell 4.626 units @ £548.30

Target allocation: 37%

Global small cap equities

Vanguard Global Small-Cap Index Fund – OCF 0.29%

Fund identifier: IE00B3X1NT05

Rebalancing sale: £154.30

Sell 0.378 units @ £407.67

Target allocation: 5%

Emerging market equities

iShares Emerging Markets Equity Index Fund D – OCF 0.19%

Fund identifier: GB00B84DY642

New purchase: £585.92

Buy 304.061 units @ £1.93

Target allocation: 8%

Global property

iShares Global Property Securities Equity Index Fund D – OCF 0.17%

Fund identifier: GB00B5BFJG71

Rebalancing sale: £534.90

Sell 203.615 units @ £2.63

Target allocation: 5%

UK gilts

Vanguard UK Government Bond Index – OCF 0.12%

Fund identifier: IE00B1S75374

New purchase: £1,928.10

Buy 10.616 units @ £181.62

Target allocation: 29%

Global inflation-linked bonds

Royal London Short Duration Global Index-Linked Fund – OCF 0.27%

Fund identifier: GB00BD050F05

New purchase: £1,963.20

Buy 1731.214 units @ £1.13

Plus reinvested dividends: £87.83

Target allocation: 11%

New investment = £1,055

Trading cost = £0

Platform fee = 0.35% per annum.

This model portfolio is notionally held with Fidelity. Take a look at our online broker table for cheaper platform options if you use a different mix of funds. Consider a flat-fee broker if your ISA portfolio is worth substantially more than £25,000.

Average portfolio OCF = 0.16%

If all this seems too much like hard work then you can buy a diversified portfolio using an all-in-one fund such as Vanguard’s LifeStrategy series.

Interested in tracking your own portfolio or using the Slow & Steady investment tracking spreadsheet? This piece on portfolio tracking shows you how.

Take it steady,

The Accumulator

1. Much of that gain stems from when we were invested in longer-dated UK index-linked bonds until April 2019. [↩]

What caught my eye this week.

Here we are at the end of 2020 2021 – sorry, pandemic brain – and the final Monevator missive of the year.

And what a ride it was!

Remember the meme stock madness? The SPAC boom? The crypto-mania and the pixel painting that sold for millions?

The restaurants reopening and seeing your first menu for six months?

Party-gate, and our GOAT Prime Minister – greatest that is if you’re under-three-years old or you grew up in a Banana Republic?

The past 12 months had the lot.

Luckily reader Tim P. has inspired me to dodge the bullet of pontificating too much about 2021, or getting predictions about 2022 wrong.

He requested last-minute investing book ideas for Christmas presents.

And who am I to forego the chance to embed some Amazon affiliate links?

Those 2,632-word articles on the minutia of withdrawal rates don’t write themselves, you know.

Last Christmas

We’ve just been through the weirdest string of short-terms strung together for 24 months that most of us can remember.

And for investors they proved again the value of taking a long-term view.

However you called the big picture, the markets demonstrated themselves to be short-term confounding machines. Again.

Maybe you thought we’d see an economic depression as a novel virus swept around the world?

Or did you foresee the house price boom that actually resulted?

Maybe you predicted an almighty rally in US stocks – even on top of the past ten years of gains and sky-high valuations?

Or did you suppose instead that an insurgency into the White House would rattle US investors?

Perhaps you predicted a fourth or fifth or sixth wave of the virus? Maybe you guessed the UK government would try to renege on its feeble Brexit deal before the ink was barely dry on it?

Maybe, but even the go-nowhere UK market still went up in 2021.

Freedom

Trying to turn these headlines into profits is a hobby for masochists.

Day-trading is a buzz but a soft drug habit would probably be healthier. Most who try fail to add value. They just make themselves poorer.

Active investors should raise their time horizon, and then double it again.

Passive investors, as ever, would do best to tune out the noise and run their portfolio on rails.

Trust me, in 2021 owning index funds beat betting on interest rate rises or the whims of Reddit board readers.

Have you seen the S&P 500?

Bad boys

All of which is to say (note the seamless transition) that we should be trading less and doing nothing with our portfolios more.

Here are a few investing books to save you – or a loved one – from getting RSI by smashing the refresh button on your share dealing app.

A good book for a totally new investor

Keep things simple by giving a copy of Ben Carlson and Robin Powell’s new book, Invest Your Way To Financial Freedom. Both me and my co-blogger did what they say on the tin in our different ways. It’s not easy, but it is simple.

Why it might have helped in 2021: A well-constructed global portfolio serenely glided higher through bond sell-off fears, market churn, and endless worries about over-valuation. A win.

A book for those who think they know better

I suspect Morgan Housel is our most featured writer in Weekend Reading and for good reason. The Psychology of Money distills a decade of his distilling down centuries of lessons about money into one easy read.

Why it helped: Big picture, everything was rosy in a well-diversified portfolio in 2021. Yet there were still countless ways to lose money. It’s all about behaviour, as Housel will explain.

Next steps for your meme stock trading niece or nephew

The Art of Execution remains my go-to gift for active investors. Plenty of investing books will (claim to) tell you how to find superior share ideas. This is about the only one that explores what to do with them.

Why it helped: By luck – or thanks to reading this book – I sold my accidentally-owned Gamestop shares at the top. Kerching!

Indexing stalwarts

For many years we’ve recommended either Lars Kroijer’s Investing Demystified or Tim Hale’s Smarter Investing as complete guides for would-be passive investors. Both books have their problems (I find the latter a slog, personally, though my co-blogger adores it) but for UK readers they’re still hard to beat. If you can put up with stuff about American taxes, you could try The Bogleheads Guide to Investing instead.

Why they helped in 2021: I had a stellar 2020 as an active investor but despite a lot of effort I’ve badly lagged my benchmarks this year. If you’re not doing this because you love it, pick up the market’s return in the time it takes to do a lateral flow test and then head out to do something else instead.

What book to get for The Accumulator

Easy, I bought him Robin Wrigglesworth’s new history of the index fund, Trillions, after he suggested he had better things to do than to read it. The freedom to chase cows wasn’t gifted to us without a fight, The Accumulator!

Why read it in 2021? Index funds continue to take a greater share of the world’s assets, thanks to their low cost and consistent results. Yet they generate few headlines, due to them being crushingly boring. This book helps a bit, by revealing the personalities behind the fund fact sheets.

What to give if you want to give like The Accumulator

Also easy, because The Accumulator kindly sent me two books by financial historian Adam Tooze – The Deluge and Crashed. They cover two economic maelstroms nearly 100 years apart. I haven’t read them yet, but Christmas gift etiquette demands I have to say they’re amazing anyway.

Why they helped in 2021: Those who fail to learn from history are doomed to repeat it, as George Santayana possibly said. Only now with emojis.

Books off our beat

A lovely thing that happened to me this year is I finally got back into reading for pleasure. Here are five of my recent random reads I’d recommend:

• Analogia – Pattern-matching earlier innovation to our doom from AI.

• Project Hail Mary – Feel-good sci-fi thriller from the The Martian man.

• Titan – Not a moon, but the life of John D. Rockefeller by Ron Chernow. Rockefeller makes today’s 0.0001%-ers look like strivers, but it turns out he was just as eccentric. Also I cracked up every time the narrator intoned about his ‘powerful side-whiskers’, like he’s describing an alpha hamster.

• The House of Morgan – Another by Chernow (it’s a phase) and at more than 34 hours on Audible a great value history of banking.

• Piranesi – Reading and writing can take you anywhere.

In praise of Audible

While we’re talking books, a quick plug for listening to them.

These days I’d be consuming books like a Neanderthal if I wasn’t able to ‘read’ half of them on the move via the Audible app.

We all know it’s hard to get through a book with our Internet-addled attention spans.

But personally I also find it ever-harder to sit around when I could be on my feet and doing something.

A sedentary life is a shorter, unhealthier one. Time is running out, and if I’m going to reduce my lifespan, I’d prefer it was by doing something racier or tastier than reading Tim Hale.

Happily, I’ve found Amazon’s Audible membership service an easy way to keep my book digestion regular.

I’m too stingy to forego the monthly credit that my membership buys – and I’m too tight not to get my money’s worth from anything I’ve bought.

Are you that kind of crazy? Try Audible with a free trial.

Freedom

Lastly on books, I might as well come clean and admit it now looks like the Monevator book may never see the light of day.

We’ve had it 95% written for a couple of years. But both The Accumulator and I have repeatedly failed to get it finished and out there. Self-publishing it properly involves an ordeal that Reset author David Sawyer has warned me could be a multi-month full-time job in itself.

We both fear such inordinate effort for an uncertain return. We’d truly love to ship 200 copies to our most faithful readers. But what if that was it?

Perhaps we’re being pessimistic – blame the short winter days.

More likely I’ve read too much about sunk cost fallacy to continue.

We’ll certainly publish the text someday, if only chopped up into articles, so do subscribe to our emails. We may turn some of it into PDF downloads, too.

Wake me up before you go-go

On that rather anti-climactic note I’ll slap on a smile and thank you for reading in 2021. We hope you stick around for 2022!

Despite the book debacle the experiments continue at Monevator Towers, so watch this space.

The crazy market isn’t going anywhere, after all.

Stay safe, have a great break, and enjoy the bumper link-fest below. See you in January!

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