A question from a reader about ‘bed and breakfasting’ – and she’s not talking about English muffins versus the continental options:

Dear Monevator,

I have an old investing book/bible that tells me I should be bed & breakfasting my shares to reduce taxes. Is this possible in the era of Airbnb? (Just joking!) Seriously what is bed and breakfasting shares? Is it still even legal as I don’t think you’ve written about it?

Yours,

A. Reader

Dear reader! So-called bed and breakfasting was a now-defunct method to help you reduce capital gains tax on shares (CGT).

In the olden days – when mitigating taxes was mostly a sport for retired stockbrokers in the Home Counties – you would sell a fund or tranche of shares you owned one day to realise a capital gain – ideally for less than your annual CGT allowance – and then buy back the same fund or shares the next day.

Doing so reset your cost base. Which, in turn, defused the future capital gains tax liability you were building up when your fund or shares rose in value.

What a wheeze!

People typically did their bed and breakfasting at the end of the tax year. They’d sell on the last day of the tax year and then buy back the next day.

Bed and breakfasting enabled you to make use of your annual CGT allowance without losing exposure to an investment that you presumably wanted to keep. (Since you only sold it to defuse the CGT).

No more bed and breakfasting CGT

Bed and breakfasting was a simple operation. But it cunningly helped prevent moderately-sized gains from becoming liable for tax by defusing a portion of the gains each year.

Alas the whole scheme long ago went the way of paying urchins to sweep your chimney. Bed and breakfasting was crippled by tighter rules about when you can repurchase the same asset if the disposal is to count as a taxable sale.

In short: nowadays you can’t just sell and buy back the next day to defuse CGT.

Instead you must leave a 30-day period between buying and selling the same assets. Any less and you haven’t crystalised the CGT gain from HMRC’s perspective.

Thirty days! That’s not so much bed and breakfasting as bed and hibernating!

During those four and a bit weeks, of course, the value of your investment will fluctuate. So you could miss out on gains. (Or losses…)

What’s more, the CGT allowance has been cut and cut again in recent years. This means there’s much less headroom for defusing gains anyway.

On the other hand, we do enjoy a generous £20,000 annual ISA allowance.

And ISAs are entirely impervious to tax, which means that over the years you can build up a chunky tax shelter to hold your assets inside and never worry about CGT anyway.

Alternatives to bed and breakfasting to reduce CGT liabilities

If you do still hold assets in general investment accounts – i.e. outside of ISAs and pensions – then there are other options to bed and breakfasting, which exploit the same general idea of using up your CGT allowance to defuse gains.

They are not perfect swaps, but you could:

• Bed and ISA: You can sell a fund or shares you hold outside of an ISA and then put the money you raise into your ISA. Within the ISA you can repurchase exactly the same assets if you want to. From then on it can grow without concern for the taxman, like anything else in an ISA. The 30-day rule doesn’t count with respect to these ISA purchases. The obvious snag is your annual ISA allowance is limited in size. That restricts how much bed-and-ISA-ing you can do in a particular year.

• Bed and SIPP, bed and spreadbet, and so on: You can apply the same principle of Bed and ISA to other investment vehicles that give you the same exposure but do not violate the 30-day rule. But be careful not to let ‘the tax tail wag the dog’, as they say. (For example, money put into a SIPP can’t come out until you draw your pension. Meanwhile spreadbetting to avoid CGT has lots of risks for the unwary).

• Bed and spousing: Married couples and civil partners can keep an investment in the family when crystalising a gain by having one partner sell the asset, and the other party simultaneously buy it back under their own name in their own account.

• Give and take: Legally sanctified couples can also look into gifting each other assets. Such gifts are made at cost – rather than market value as would otherwise be the case. Swapping assets like this can be handy if one spouse is likely to have some capital gains tax allowance to spare or if they pay a lower tax rate. They may still face a taxable gain when selling the assets, but they could pay less tax when they do so than the other partner would. (I should confess that as a lonely misanthrope irrepressible singleton, I’ve only ever read about these arcane ceremonies).

• Bed hopping: There’s nothing to stop you selling one asset to use up your allowance and then buying something similar but different with the proceeds. You could sell your shares in big oil firm Shell, say, and then buy shares in BP. Obviously you’re now invested in a different company, but you’ll still retain exposure to an oil major. Another example would be to sell an actively managed emerging markets fund and then buy an emerging market tracker. You can even swap global tracker funds from different management houses. (The latter is a slightly grey area. Perhaps choose funds that track different global indices for a belt-and-braces approach.)

• Bed down for a month: You could sell shares that you’ve made a good gain on, and then roll the proceeds into an index tracker. After 30 days you could sell some of the tracker to fund a repurchase of the original shares if they still looked good value.

Keep records of all these trades in case you need to report them to HMRC.

Worth doing, but better avoided

There’s a cost to churning your portfolio like this, and it’s not just heartburn.

Share dealing fees may be low – or even zero – these days. But stamp duty of 0.5% on most share purchases will make a dent into your capital. There are bid/offer spreads, too.

What’s more, if you plan on doing a return trip after 30 days then that’s going to double your costs again. (You could just sit in cash. But then you risk the market moving against you.)

Again, it’s always best to invest in an ISA or pension where possible. This keeps your investments shielded from CGT entirely. Start young and you can build up a substantial ISA portfolio, while annual pension contributions can currently be up to £60,000, if you earn enough. Though who knows how long before the politicians meddle with pensions again.

Some people do still have big portfolios outside of tax shelters. Maybe they’re rich, or they’re obsessed with investing. Or perhaps a lump sum like an inheritance overwhelmed their limited annual allowances.

If that’s you, then the methods I’ve talked about above are worth doing to prevent taxes eating up your returns in the future.

Conventional equity / bond portfolio splits did not acquit themselves well during the cost-of-living crisis. When the enemies at the gate were fast-rising interest rates and inflation, standard portfolios looked like a suit of armour missing its faceplate – nominally effective but with a glaring weak spot.

If only someone would invent the faceplate.

Well as it happens, somebody already has.

The All-Weather portfolio integrates a fuller spectrum of defences – including assets with a better record against the withering winds of inflation. (Hmm, smooth metaphor mixology – Ed).

We’ll examine the long-term track record of the All-Weather portfolio in a minute. But first we need to ask…

What is the All-Weather portfolio?

The All-Weather portfolio was popularised by Ray Dalio, the founder of the Bridgewater hedge fund behemoth.

The portfolio is configured to contain downside risk by including a variety of asset classes such that the portfolio as a whole is capable of performing regardless of the macroeconomic conditions.

Bridgewater identified the weather conditions that investors should prepare for as:

• Economic growth
• Economic slowdown
• Inflation
• Deflation

Those scenarios and their asset class countermeasures combine to present an investment model:

The model’s four quadrants represent the main economic environments that we’re likely to pass through during our investing journey.

Pack a raincoat and a sunhat

Each quadrant is staffed with the asset class(es) most likely to positively respond to its conditions:

Left-hand upper quadrant: Rising demand and low inflation is the economic equivalent of glorious sunshine. Fast-growing equities is the ready-to-wear investment outfit for this type of weather.

Left-hand lower quadrant: Falling demand and low inflation (or even deflation) means we’re in for a market storm. Shelter beneath a sturdy umbrella fashioned from bonds and cash.

Right-hand upper quadrant: We’re sweltering as rising demand and high inflation overheats the economy. Commodities are well-adapted to these conditions, even though they can feel ridiculous at other times – like wearing a giant sombrero to a board meeting.

Right-hand lower quadrant: Stagflationary intervals of falling demand and high inflation call for a coat of inflation-linked bonds. The UK’s own index-linked gilts were issued from 1981 partly to restore confidence in governmental fiscal responsibility after the stagflationary 1970s.

Imagine you find yourself invested during one of these four seasons at any given time. The model reveals which asset class is suited to each circumstance.

However even Bridgewater concedes it can’t consistently forecast shifts in economic weather fronts. Hence the All-Weather portfolio hedges uncertainty, by taking a position in each useful asset class.

Granted, this is a very simple model and asset classes aren’t guaranteed to respond according to type. Yet the empirical data shows that the strategy is relatively weather-proof over the long-term.

We’ll dig into the specific asset allocation recommended by Dalio’s portfolio in a moment, but first we need to acknowledge some caveats.

Caveat acknowledgements

Inflation-linked bonds are only certain to hedge against inflation in the short-term if you hold them to maturity. You can’t do that with linker funds, but you can with individual index-linked gilts. See our post on building an index-linked gilt ladder.

Gold is sometimes placed in the right-hand quadrants because it has a reputation as an inflation hedge. This is a myth. See our post on whether gold is a good investment.

As it happens, gold still earns its place in the All-Weather portfolio due to its lack of correlation with equities and bonds. In asset allocation terms, gold is like that Swiss Army knife tool whose original purpose is a mystery, but which often comes in handy all the same.

The Ray Dalio All-Weather portfolio: asset allocation

A passive investing version of the All-Weather portfolio could be structured like this:

• 30% equities
• 40% long-term government bonds
• 15% medium-term bonds
• 7.5% commodities
• 7.5% gold

You may be shocked by the idea of holding 55% in bonds. The Ray Dalio portfolio is designed like this because it’s informed by the principle of risk parity, which aims to better balance risk exposure across its different building blocks.

For example, a stock-heavy portfolio loadout – an 80/20 split or even the 60/40 portfolio – is making a big bet on the performance of equities. That’s obviously fine so long as equities perform. But if you live through a multi-decade stock market depression then you have a problem.

Meanwhile, the overwhelming bulk of such a portfolio’s risk exposure (as measured by volatility) is stored in its large equity allocation. When stocks plunge the portfolio does too, because it doesn’t pack enough bonds to offset the equity downdraught.

The risk-parity approach tries to solve this issue by attempting to equalise the amount of risk associated with each asset allocation.

We’ll see clearly in a moment that this strategy works – but there is a price to pay.

Why no inflation-linked bonds?

If inflation-linked bonds are so great at combating inflation why don’t they feature in the All-Weather portfolio?

The short answer is that the portfolio was conceived in the US before TIPs existed. (TIPs – Treasury Inflation Protected Securities – are the American equivalent of the UK’s index-linked gilts).

Bridgewater acknowledges that inflation-linked bonds are an important part of the All-Weather strategy. However the investment community hasn’t updated on that fact.

It’s a strange instance of cultural inertia – a bit like the Japanese devotion to fax machines. We’ll look at a version of the All-Weather portfolio that does include index-linked gilts in the second part of this mini-series.

All-Weather portfolio drawdowns

Alright, let’s check that the All-Weather portfolio works as advertised. Is it less volatile than conventional portfolios when the market blows a gale?

This drawdown chart shows us how the All-Weather portfolio performs vs 100% equities and the 60/40 portfolio during every market setback from World War 2 onwards:

Data from Summerhaven1, BCOM TR, JST Macrohistory2, British Government Securities Database, The London Bullion Market Association, Measuring Worth and FTSE Russell. July 2024.

Not reliving your personal worst nightmare in the stock market when you scan the graph above? We’re using annual returns, which can blunt the extreme edges of bear markets compared to monthly peak-to-trough measurements. (Sadly, monthly data isn’t publicly available for gilts pre-1998.)

You easily notice though that the deepest declines still look like jagged ravines  – and that conventional portfolios fall much further than the All-Weather.

Navigating stock market hurricanes

100% equity portfolios in particular aren’t for widows, orphans, or those with a dicky ticker.

For example, during the UK G.O.A.T. crash of 1972-1974, the All-Weather portfolio ‘only’ dropped -28% compared to -60% for the 60/40 and a mind-bending -72% for 100% equities.

Investing returns sidebar – All returns quoted are inflation-adjusted, GBP total returns (including dividends and interest). Fees are not included. The timeframe is the longest period that we have investable commodities data for. Equities are UK, because world data is not publicly accessible before 1970. The long-term historical gilt index is dominated by long-dated maturities. Separate data is not available for intermediates. Thus the All-Weather fixed income allocation here is 40% long bonds and 15% money market/cash. Portfolios are rebalanced annually.

Most extraordinary were the Dotcom bust and the Global Financial Crisis (GFC). While conventional portfolios heaped misery on their investors, All-Weather owners were asking “bovvered?” with a shrug.

Here’s the steepest loss each portfolio bore during those market tempests:

Portfolio	Dotcom Bust	GFC
All-Weather	-5.8%	-3.4%
100% equities	-38.6%	-32.1%
60/40	-17.8%	-14.5%

Those were two almighty crashes. The largest of the 21st Century so far! Yet the dip registered by the All-Weather portfolio would barely give you butterflies, never mind sleepless nights.

Casting our eyes back to the drawdown chart cum investing slasher flick above, we can also see that the All-Weather portfolio merely performed much the same as the 60/40 on some other occasions.

Typically this happened when bonds were crunched harder than equities and the performance of the All-Weather’s minor asset classes didn’t compensate.

The most significant of these incidents was in the late 1950s and during the 2022 bond crash.

Overall though, the All-Weather delivers on its promise of relatively smooth sailing.

See these 1934-2023 volatility figures:

Portfolio	Volatility
All-Weather	9%
100% equities	20.6%
60/40	14.8%

Nice – but remember this stability has been bought by loading up on bonds and cash. And that must have cost a fair wedge of return, right?

Right…

All-Weather portfolio historical performance

Here’s the total return growth chart:

Inevitably, the All-Weather’s two-stroke equity engine leaves it underpowered versus normie portfolios.

A table of cumulative and annualised returns tells the story:

Portfolio	£1 grows to…	Annualised return
All-Weather	£15	3.1%
100% equities	£119	5.5%
60/40	£34	4%

And there’s the rub. Tricking the portfolio out with gold and commodities doesn’t circumvent the usual risk/reward trade-off (though other figures do show it’s far superior to a 30/70 equity/bond split). The dampening of drama on the downside means a lack of fireworks on the upside.

That said, if you like your returns risk-adjusted then the All-Weather delivers:

Portfolio	Sharpe ratio
All-Weather	0.34
100% equities	0.26
60/40	0.27

The Sharpe ratio is a measure of risk vs reward. The higher your Sharpe ratio, the better your risk-adjusted returns. In other words, the more return you get per unit of risk, as measured by volatility3.

By that measure the All-Weather portfolio offers more growth in exchange for the pain it causes. In contrast there’s scarcely any difference between the 60/40 portfolio versus 100% equities.

Which essentially means that UK government bonds have not been a great risk-reducer historically – much less so than in the US experience – as we pointed out when we wrote: Why a diversified portfolio needs more than bonds.

Should you choose an All-Weather portfolio?

If you hate market turmoil or your focus is on holding on to what wealth you have, then Dalio’s brainchild looks like an excellent choice.

I’ve often wondered how I’d cope if I had to face a rout on the scale of 1972-74. The All-Weather portfolio would reduce my odds of ever being blasted like that.

But if you need more growth than the All-Weather offers then you’ll have to overclock your equities and accept the consequences. It’s that, extend your time horizon, or increase your contributions.

The undeniable downside of the All-Weather approach is this lack of equity oomph. That means it’s not ideal for young investors hoping for lift-off or for accumulators still far from their investing destination.

If that’s you then choose a more conventional portfolio, so long as you’re prepared to accept the risks.

How to build an All-Weather portfolio

Asset class	ETF
Developed world*	Amundi Prime Global (PRWU)
Long bonds	SPDR Bloomberg Barclays 15+ Year Gilt (GLTL)
Short inflation-linked bonds**	Amundi Core Global Inflation-Linked 1-10Y Bond (GISG)
Broad commodities***	UBS CMCI Composite SF (UC15)
Gold	Invesco Physical Gold A (SGLP)
Money market	Lyxor Smart Overnight Return ETF (CSH2)

*Use a global tracker fund to include emerging markets diversification.
**See comments above about using individual linkers to hedge inflation. If that’s too time-consuming then opt for a short-duration global inflation-linked bond fund hedged to GBP.
***Broad commodity ETFs diversify across commodities futures and are the right choice to replicate the asset class.

The ETFs I’ve listed in the table are just suggestions to get you started. They’re good but not intrinsically better than other choices you could make.

In truth, index trackers are like tins of soup: much of a muchness. For more options see our low-cost index funds article.

I wouldn’t use an intermediate gilt fund to replicated the original All-Weather’s 15% fixed income allocation. US intermediates are typically much shorter in duration and therefore less volatile than their UK counterparts. A money market, or short linker, or short nominal gilt fund can fill this slot.

Indeed the various options – plus material differences between the US and UK markets – might imply there’s some cunning asset allocation tweak that can squeeze a bit more juice out of the All-Weather portfolio for British investors.

We’ll investigate that in part two.

Take it steady,

The Accumulator

1. Bhardwaj, Geetesh and Janardanan, Rajkumar and Rouwenhorst, K. Geert, The First Commodity Futures Index of 1933, Journal of Commodity Markets, 2020. [↩]
2. 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. [↩]
3. i.e. annualised standard deviation [↩]

What caught my eye this week.

Everyone knows that meetings are the bane of office life. The only people who love them are the genetically bossy, the work-shy, or the lovelorn office junior who has a crush on an attendee from another department.

Anyone who gets paid to produce some kind of measurable output resents being pulled away from getting on with it. Especially when they’re being pulled away by those whose job amounts to telling them to get on with it.

Meanwhile actual bosses with actual power prefer to be somewhere else making actual decisions. Or at least enjoying a business lunch.

At best meetings are a necessary evil. At worst they’re scaffolding that helps to enable the nonsense and doublespeak that pervades modern corporations.

Presetting the agenda

The most dreadful meeting I ever sat though turned into one of those soul-destroying Kakfa-esque Hall of Mirrors.

It was worse because I liked this employer and I was early enough into the job to still believe the guff.

Titter if you like, but I was looking forward to a two-day brainstorming session to ‘reset’ our aims and ‘imagine’ the future of our division.

A senior out-of-town senior manager would even be joining us to give our conclusions the official seal.

And you know what? For the first one and a half days the meeting wasn’t bad at all. Ideas flowed with the coffee. Special boxes of doughnuts and sandwiches pepped up our energy levels. Hitherto quiet employees spoke up, and they were heard. Long-standing grievances were put on notice. And sensible – even aspirational – goals were tallied on a huge whiteboard.

But then, for the final afternoon session, things turned – to my innocent mind – surreal.

The out-of-town manager was no longer mostly listening and offering a nod or a word of facilitation.

Instead he took charge to make sure that our ideas became deliverable targets.

“So what I think we’re saying is…” he began, before listing a bunch of stuff that nobody had said at all.

Nothing much was to change – we’d apparently agreed – except that our revenue goal was up 25% and we should do more spam-style mass-marketing.

Naive numpty that I was, I couldn’t believe it. I’d been totally suckered in, and I was now dismayed.

“Don’t worry,” quipped an older hand at the team-building drink session afterwards. “They’ve done this loads of times – but nothing will come of it.”

It reminds me again why I blew up my corporate career.

Meting out the pain

Derek Thompson in The Atlantic (read via MSN) has a great piece out this week on what he calls the ‘industrial-meeting’ complex. Give it a read to feel seen for your own meeting agonies (or to feel grateful to be missing out on it.)

Thompson writes:

Altogether, the meeting-industrial complex has grown to the point that communications has eclipsed creativity as the central skill of modern work.

Last year, another Microsoft study found that the typical worker using its software spent 57% of their time ‘communicating’—that is, in meetings, email, and chat—versus 43% of their time ‘creating’ documents, spreadsheets, presentations, and the like.

Today, knowledge work is, quantitatively speaking, less about creating new things than it is about talking about those things.

I guess the one bright note is that Artificial Intelligence will find it hard to sit for hours in an excessively air-conditioned office, trying to mentally plan a summer break while two colleagues argue about who is really responsible for upgrading the office firewall, and wondering if anyone will notice if you snag that last oversized chocolate chip cookie. There might be jobs left for us yet.

Have a great weekend. Especially if you’re playing for England!

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