Our plucky Slow & Steady portfolio is well on the road to recovery after last quarter’s bloody nose. It’s sprung back 5.9% in three months, despite the first shots in a trade war zipping past our heads.

Once again reality defies the instinct to pounce on a pattern:

• Last quarter’s biggest loser, Global Property, is the top performer this time. It’s up 13%!

• The UK stock market enjoyed a nice 9.5% surge, despite the Brexit turmoil.

• Like a golden UFO conveying cultists to paradise, the Bond Apocalypse has once again failed to materialise. Perhaps it’s timetabled by a British rail franchise?

• Our Developed World and Global Small Cap holdings are still powering ahead as the notoriously overvalued US market defies gravity – or at least the gurus’ predictions.

• Emerging markets are down nearly 3% this year despite being the asset class with the highest expected returns.

All of the above will change, of course, but about as predictably as a Trump press conference.

For now, here’s the blinding truth in Ultra-Dynamic-Dynamic-Dynamic Monstro-vision™:

The Slow and Steady portfolio is Monevator’s model passive investing portfolio. It was set up at the start of 2011 with £3,000. An extra £935 is invested every quarter into a diversified set of index funds, tilted towards equities. You can read the origin story and catch up on all the previous passive portfolio posts.

Our annualised return is a that’ll-do-nicely 10.2% over seven years. I wonder how many people realize how good that is?

At that rate your money doubles every seven years. Knock off 3% for inflation and you double every decade in real terms.

Recently a good friend of mine ‘fessed that he’d been warned off investing by an ‘informed’ acquaintance who claimed low interest rates had left the stock market dead in the water. The aftershock of the Credit Crunch, an endless stream of media misery, and a decade of stagnant wages led him to believe the global economy had been clothes-lined.

How many others have missed out on double digit gains due to zero interest rate fairy tales?

The reality is we’re doing pretty well, aided and abetted by diversification. Last quarter the Slow & Steady Portfolio was down 3.1%. The FTSE All-Share was down 6.9%. We were cushioned by other markets doing less badly and our bonds bearing up.

Now our rebound is neck and neck with the FTSE despite our 30% bond safety belt. Viva global capital markets!

Before I sign off with the new transactions, my apologies for the late update this quarter. My day job got a bit out of hand these last few weeks.

New transactions

Every quarter we lay £935 at the feet of the Almighty Markets and hope they smile upon us. Our cash is divided between our seven funds according to our pre-determined asset allocation.

We use Larry Swedroe’s 5/25 rule to trigger rebalancing moves, but all’s quiet this quarter. We’re just topping up with new money as follows:

UK equity

Vanguard FTSE UK All-Share Index Trust – OCF 0.08%

Fund identifier: GB00B3X7QG63

New purchase: £56.10

Buy 0.269 units @ £208.67

Target allocation: 6%

Developed world ex-UK equities

Vanguard FTSE Developed World ex-UK Equity Index Fund – OCF 0.15%

Fund identifier: GB00B59G4Q73

New purchase: £336.60

Buy 0.972 units @ £346.27

Target allocation: 36%

Global small cap equities

Vanguard Global Small-Cap Index Fund – OCF 0.38%

Fund identifier: IE00B3X1NT05

New purchase: £65.45

Buy 0.218 units @ £300.41

Target allocation: 7%

Emerging market equities

iShares Emerging Markets Equity Index Fund D – OCF 0.24%

Fund identifier: GB00B84DY642

New purchase: £93.50

Buy 59.29 units @ £1.58

Target allocation: 10%

Global property

iShares Global Property Securities Equity Index Fund D – OCF 0.21%

Fund identifier: GB00B5BFJG71

New purchase: £65.45

Buy 31.9 units @ £2.05

Target allocation: 7%

UK gilts

Vanguard UK Government Bond Index – OCF 0.15%

Fund identifier: IE00B1S75374

New purchase: £261.80

Buy 1.599 units @ £163.74

Target allocation: 28%

UK index-linked gilts

Vanguard UK Inflation-Linked Gilt Index Fund – OCF 0.15%

Fund identifier: GB00B45Q9038

New purchase: £56.10

Buy 0.298 units @ £188.32

Target allocation: 6%

New investment = £935

Trading cost = £0

Platform fee = 0.25% per annum.

This model portfolio is notionally held with Charles Stanley Direct. You can use that company’s monthly investment option to invest from £50 per fund. Just cancel the option after you’ve traded if you don’t want to make the same investment next month.

Take a look at our online broker table or tool for other good platform options. Look at flat fee brokers if your ISA portfolio is worth substantially more than £25,000. The Slow & Steady portfolio is now worth over £41,000 but the fee saving isn’t juicy enough for us to push the button on the move yet.

Average portfolio OCF = 0.17%

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

Take it steady,
The Accumulator

What caught my eye this week.

New research from Scottish Friendly makes dispiriting reading for anyone who has spent a decade trying to teach people about investing.

(*Looks around room* “Who me? No no, I was in it for the Brexit banter.” *Shuffles away*)

It seems that having surveyed 2,000 UK savers, the life assurance giant has discovered half of us are afflicted by what it calls ‘investophobia’.

Scottish Friendly says:

• Inflation is currently running at 2.4% yet the best easy-access cash savings rate available is 1.33%.

• Almost two-thirds (66%) of savers are aware that interest rates on savings accounts are less than the current rate of inflation.

• Despite that, more than half (53%) of UK savers say they wouldn’t consider investing in stocks and shares.

• Almost half (49%) say fear of potential losses is the main reason holding them back.

A decade ago, many web explorers who wandered into Monevator Mansions had sworn off shares forever. We seldom see such people anymore.

Ten years into a bull market, we – and often many of you, in the comments – are mostly reminding visitors that bonds, cash, and property still have a place in their portfolios, let alone that it’s not a great idea to go all-in on, say, tech stocks or emerging markets.

Yet out there in the wider world, the majority still wouldn’t touch a share with a barge pole.

Small mercies

Messing about with the tools at Portfolio Charts suggests that a UK saver who kept all their money in cash would have seen an average annual real return of about 1.6% since 1970. Standard deviation was 4%.

Remember ‘real’ means these are inflation-adjusted returns. Cash can lose you money when inflation is higher than the interest rate you’re paid. The tool suggests that happened in 31% of the years.

So what happens if we take a stiff drink and put a modest 20% allocation into global shares, while still keeping the rest in cash?

Mostly good things. The average real return rises to 2.6%. Standard deviation is only modestly higher at 5.1%. And the number of money losing periods actually fall from 31% to 27%, despite the inclusion of risky shares.

That difference between a 1.6% average real return versus 2.6% isn’t much on paper, but it’s significant over time.

A compound interest calculation reveals:

• Over 30 years, a 1.6% return turns £100,000 into £160,000 on a real money basis.1

• A 2.6% return takes your wealth to £216,000 over the same period. That’s a significantly better result, with only a little more volatility and fewer outright losing years.

Of course you and I know that on a 30-year basis, having 80% of your money in cash is very sub-optimal.

• For the record, a simple 60/40-style portfolio split between global equities and intermediate UK government bonds chalked up an average annual real return of 5.3%, albeit with much higher volatility. That’s good enough to turn £100,000 into £471,000 in real terms.

Adding other asset classes can tweak the return profile further.

Here’s one I did earlier

So yes, agreed, having just 20% of your money in shares is far from perfect.

But remember, we’re not look for a home run here – we’re just looking at getting people off a terrible first base with their 0% allocation to the stock market.

And here simple – if sub-optimal – strategies can make a big difference.

I’ve mentioned before that I’ve often started friends investing with a 50/50 allocation split between shares and cash. (Now I’d probably favour a Vanguard Lifestrategy 60/40, unless they really insisted on seeing and cuddling the cash).

Nobody around here is going to suggest having 50% of your investment in cash is ideal. But I’ve seen it change lives.

For instance, a friend of mine – who was running a persistent overdraft when I first met her – agreed to try something similar to this and to start investing back in 2002 or 2003.

To supplement her work pensions held elsewhere, she began direct debiting money from her paycheck every month, splitting it between savings and an ISA stuffed with index funds.

At some point around the financial crisis she meddled without telling me, diverting some equity money into more expensive self-styled ethical funds. But besides that moment of madness/enthusiasm, she basically ignored the portfolio. She only rarely increased the contributions. Most annual statements went unread into a bottom drawer.

She still enjoyed a good result. In fact a couple of years ago she called to thank me for getting her started.

This painless strategy had compounded over 15 years into a significant six-figure sum – a deposit for her first flat, in fact!

I’ve visited her new family’s home in London, and it’s lovely.

The only way is up

Perfect can be the enemy of the good, as my old dad used to tell me. I wouldn’t attempt to turn anyone into The Accumulator overnight.

Know somebody terrified of shares? Try to get them to set up a direct debit to put say £100 – or whatever is a small but meaningful sum for them – into a global tracker every month.

Chances are after a few years they’ll catch the bug and lose their fear. Then they’re off!

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1. i.e. The spending power of £1 remains the same. [↩]

What caught my eye this week.

A few years ago the Financial Times published an article about students and money that caught fire and went viral.

I can’t even remember whether the gist was eat fewer avocados or mount the barricades and challenge the system. But I did notice it seemed to lead to a change in editorial tone.

Perhaps it was a coincidence or a staff change, but the personal finance section (which I’ve been reading since I was a 20-something myself) definitely took a lurch to the sympathetic. A cynic might say the FT was chasing new traffic it hadn’t known was there. I suspect it realized even its uniquely affluent young readership felt under the cosh.

Now, I know not every Monevator reader of a certain age has made that leap.

However personally I do believe – financially-speaking – that it’s tougher now for most aspirational young people than for many decades.

No, not tougher than it was for a miner’s son wanting to follow his father down the pit in the Valleys in the early 1980s – nobody is claiming that.

But far harder for an averagely studious young person to achieve averagely good grades and get a middle-of-the-road job and end up with a house and 2.4 kids on anything like an average street in an average town.

And at the end of the day, for most people for right or wrong that’s what it’s all about (including virtually all those older folk who say “let them eat rent!”)

Money saving experts

Anyway, all that’s a long-winded way of saying that the FT’s Millennial Thrift special this week has lots of tips on saving money, many with a digital dint.

Some even work if you’re an old lag like me. Especially as there’s a London slant.

Go check out all the tips at the Financial Times [search result], and if you’ve got any that aren’t mentioned then feel free to add them in the comments below.

(Let’s only have a couple of obligatory sarcastic Viz knock-off tips please! 😉 )

As to whether saving £8 on a movie ticket or getting a cheap pizza is a sustainable solution to homes priced at 20-times local earnings… well that’s a debate for another day.

Oh yes: Come on England!

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