The previous thrilling installment of our model portfolio saw us undertake some major asset allocation surgery – diversifying into global property, inflation retardant government bonds, and fruity small caps.

How has that worked out?

Well, none too shabbily. The property fund is up nearly 9% on the quarter, the small caps are up over 9% (outstripping our other equity holdings, as you might hope during good times) and even our index-linked bonds posted a 3.44% gain.

In fact every single asset has soared, with the rising dollar acting like a thermal under the wings of much of our overseas allocation. (As the dollar advances so does the value of our US assets).

Here’s the portfolio latest in glorious spreadsheet-o-vision:

It’s been an exceptionally benign quarter, as the tree rings of our portfolio show a growth spurt of over 6%.

That means our portfolio is up £4,800 and 31% from year zero.

The Slow & Steady portfolio is Monevator’s model passive investing portfolio. It was set up at the start of 2011 with £3,000 and an extra £870 is invested every quarter into a diversified set of index funds, heavily tilted towards equities. You can read the origin story and catch up on all the previous passive portfolio posts here.

Easy money

These are the times when it’s easy to be an investor – when everything you touch turns up trumps.

Just looking at the numbers releases feelgood juice. I can feel the indestructibility chemicals bathing my ego.

Which definitely makes this a good time to keep myself on edge by reading a doomster post or two about wildly overvalued markets.

Things have gone so well for so long that we’re in danger of losing touch with the feelings of loss and despair handed out by the market in 2008. It’s starting to feel like it happened to someone else.

Recently my mum inquired about how well her portfolio was doing. I was reluctant to say. I don’t want her to get used to the idea that equities only go up.

I try to think of it like some crazy game show. The money isn’t mine until I bank it. The earlier I bank it the less likely I am to hit the jackpot. Taking losses is as big a part of the game as enjoying the high rolls. Except losing is much more painful, so don’t overreach yourself.

Rebalancing is a good way to take a little risk off the table if you’ve been riding your luck for a while.

It’s worth mentioning that I don’t know how this new version of the Slow & Steady portfolio stacks up against the previous version. I make it my business not to know. The decision is made and there’s nothing more pointless than buyer’s remorse. I’m not going to torture myself with alternative histories.

Even if this new version has its nose in front then it may not stay there. And the difference will be slight.

In any case, there’s an infinite number of portfolios that are doing better and worse. I didn’t choose any of them.

This is the one I did choose and the underlying strategy is sound. That will do me.

In other news we’ve earned £12.99 in interest income from our UK Government bond fund. We celebrate by automatically reinvesting it back into our accumulation funds – adding a few extra ice crystals to our burgeoning snowball.

New transactions

Every quarter we sink another £870 into the market’s whirlpool. Our cash is divided between our seven funds according to our asset allocation.

We use Larry Swedroe’s 5/25 rule to trigger rebalancing moves, but all’s quiet this quarter. So 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: £87
Buy 0.537 units @ £162.04

Target allocation: 10%

Developed world ex-UK equities

Vanguard FTSE Developed World ex-UK Equity Index Fund – OCF 0.15%
Fund identifier: GB00B59G4Q73

New purchase: £330.60
Buy 1.424 units @ £232.15

Target allocation: 38%

Global small cap equities

Vanguard Global Small-Cap Index Fund – OCF 0.38%
Fund identifier: IE00B3X1NT05

New purchase: £60.90
Buy 0.311 units @ £195.99

Target allocation: 7%

Emerging market equities

BlackRock Emerging Markets Equity Tracker Fund D – OCF 0.27%
Fund identifier: GB00B84DY642

New purchase: £87
Buy 71.078 units @ £1.22

Target allocation: 10%

Global property

BlackRock Global Property Securities Equity Tracker Fund D – OCF 0.23%
Fund identifier: GB00B5BFJG71

New purchase: £60.90
Buy 37.202 units @ £1.64

Target allocation: 7%

UK gilts

Vanguard UK Government Bond Index – OCF 0.15%
Fund identifier: IE00B1S75374

New purchase: £121.80
Buy 0.824 units @ £147.79

Target allocation: 14%

UK index-linked gilts

Vanguard UK Inflation-Linked Gilt Index Fund – OCF 0.15%
Fund identifier: GB00B45Q9038

New purchase: £121.80
Buy 0.788 units @ £154.67

Target allocation: 14%

New investment = £870

Trading cost = £0

Platform fee = 0.25% per annum

This model portfolio is notionally held with Charles Stanley Direct. You can use its 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 for other good platform options. Look at flat fee brokers if your portfolio is worth substantially more than £20,000.

Average portfolio OCF = 0.18%

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

Take it steady,

The Accumulator

Good reads from around the Web.

I don’t know about you, but the new iShares Exponential Technologies ETF has a sort of end-of-days feel to it to me.

Are investors really clamouring to put money into a basket of stocks exposed to:

“…robotics, artificial intelligence, machine learning, nanotechnology, bioinformatics, sensor technology, financial services innovation, energy and environmental systems, neurosciences and of course, medical sciences…”

…?

The ETF amassed $600m assets in just a couple of days – more than enough to propel it clear of the ETF dead pool for now.

That seems a little frenzied, certainly. But according to ETF.com nearly all of the initial money came from the firm of the ETF’s promoter, Ric Edelman.

And Edelman has only invested a relatively small 4% of Assets Under Management into his brainchild.

So perhaps not quite DotCom 2.0… yet.

Not your father’s ETF investing

It’s worth remembering all these bespoke ETFs when contemplating the growing popularity of exchange traded funds, as illustrated in this graph from MorningStar:

Source: MorningStar

Conventional index funds and ETFs are both taking market share, sure.

But the explosion of ETFs is particularly marked in the sector-based category.

And this demand comes from active investors who are holding baskets like the Exponential Technologies ETF in place of shares in individual companies.

Or perhaps that should be “trading” rather than holding – because ETFs are also widely employed by hedge funds and the like to dial their exposure up and down on a dime.

It’s all why Vanguard’s Jack Bogle is skeptical about ETFs, of course. Bogle believes they are a gateway drug into active investing.

But most of Wall Street and The City isn’t concerned about what’s right for investors – more about what they can sell investors.

Not for nothing was posterchild Goldman Sachs described as:

“a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”

Indeed, Goldman created the new Exponential Technology ETF, along with iShares owner BlackRock.

And why shouldn’t it? Financial engineering is part of Goldman Sachs’ job.

But it’s our job to decide the best way for us to invest our own money – which for the majority will be to ignore the whole hullabaloo and invest passively instead.

Big bucks for ETF wizards

That said… if you can’t beat them, maybe you could join them?

No, no, I don’t mean becoming a silly active investor chasing rainbows. We know most attempts at active investing fail to beat the market.

I mean getting a job dreaming up your own weird and wacky ETFs.

There’s a “battle for ETF brains” going on, reports the FT [Search result]:

Mutual fund shops are on the hunt for people with a track record of building products and relationships in the exchange traded fund market and are likely paying big bucks for that know-how.

Tempting!

I’ve actually got my own idea for an ETF. It would be a sort of world equity index tracker fund, that simply holds as many stock market-listed companies from across the globe as possible while also keeping costs low.

[continue reading…]

I assume every investment I make could leave me with nothing.

I don’t expect it – in the case of cash and UK gilts I think it’s extremely unlikely – but I don’t bank on 100% guarantees.

Apparently sensible people complain on TV watchdog shows about losing all their money on corked wine funds or punts on plots of greenbelt land or timeshare apartments without plumbing or an airport within 50 miles.

And we who-know-better feel sorry for them…

…but we also snicker a bit at their gullibility.

Didn’t they see the risks?

Wasn’t it obviously a gamble?

Well, yes. Yet you still see supposedly sophisticated investors calling for criminal investigations when any old high stakes blue sky penny share goes bust.

Or retired people on Radio 4 admitting they lost half their net worth when their shares in RBS or Barclays went into the dunk tank in the financial crisis.

Very often such people were employees at the companies during their working lives.

They’d never normally dream of putting so much money into one company. But their familiarity with its logo and the office wallpaper of yesteryear makes them contemptuous of the risks today.

I even see smart passive investors putting all their money into one fund, or one broker, or into the hands of one adviser.

Sure the risks of something going wrong seem tiny.

Yes your money should be ring-fenced, segregated, held in your own name if everything is properly in order.

But why take the risk that it isn’t?

Every investment can fail you

When I buy individual shares, I assume the company can go bust – even if it is one of the largest companies in the world.

But my prudent paranoia goes much further than that.

Here are just a few examples of how seemingly safe and widely-used financial products could conceivably damage your wealth:

• Stock markets can and will crash. (Obviously… but people seemed to forget it during the last crash).

• Inflation can devastate long-term bond returns. (Obviously… but people today are buying German 30-year bonds yielding 0.65%).

• ETF providers could get into trouble, putting ETF investments into jeopardy at worst, or at least disrupting their smooth trade.

• Banks who are not members of your country’s compensation scheme can go bust or suffer a bank run.

• Investment companies can perpetuate fraud, from dipping their hands in the till right up to a Madoff-style Ponzi scheme.

• Banks and other financial companies can fail, with knock-on consequences for the investment products they stand behind.

• Electronic brokers or registrars could get into difficulties or suffer some form of collapse that destroys or renders inaccessible a record of who owns what.

• Ring-fenced assets might not have been properly – legally – ring-fenced.

• Safeguards against these or other failures can break or be unable to deliver. Or – more likely – there can be big delays in getting restitution.

• Insurance schemes set up to compensate you can run out of money.

• You may not even be as well-protected as you thought because that harmless-sounding ETF you bought was actually domiciled overseas.

• Cash under the mattress can be stolen.

• A government could appropriate the money in government-backed bank accounts, or default on repaying its own bonds, or make holding gold illegal.

• Your country’s currency could be devalued, so that even though your nominal net worth remains the same, your wealth is diminished compared to your overseas peers.

• Your country could suffer an economic collapse, even if the rest of the world chugs along fine.

• The communists could take over and outlaw all private property.

Clearly some of these events are far more likely than others – most are very unlikely – and there are some real Black Swans in there.

(Good luck guarding against a revolution that starts in Surbiton!)

But it’s vital to consider all risks – however vanishingly remote – in order to appreciate the potential value of the safeguards against them.

How then can we protect our wealth?

Everything from portfolio diversification and investing overseas to dividing your cash savings between different banks are sensible steps towards protecting your wealth.

I use a few different stock brokers, for instance, and have cash in several different bank accounts.

However I know I am running risks.

I only have a paper share certificate in one company (a non-listed one). Everything else is held electronically with online brokers in nominee accounts.

If the electronic record system collapsed for some reason, my share investments could be in peril.

I have also held synthetic ETFs in the past – and would do so again in moderation – despite the risks of synthetic ETFs versus physical ones.

Indeed I have very few physical or real-world assets.

I don’t even own my own home – the one kind of asset that almost all flavours of government tend to treat more reverentially than they do ‘fat cat’ assets like shares, bonds, and cash (at least until you reach genuine fat cat levels and your house has a front lawn they can really park their tanks upon).

I do have a pitifully small amount of gold tucked away in a vault, but despite my best intentions I haven’t added to it.

I think there is a case too for keeping a few gold coins or similar fungible assets somewhere secure near to hand that you can access in a crisis.

Don’t be a loser

Ultimately, you have to be pragmatic and live in the real world.

Accept that every time you invest, you take a risk with your money.

Do all you can to minimize those risks. Work through the alternatives. Spread your wealth around. Look for antifragile opportunities. And banish the word ‘guaranteed’ from your mind.

If you do all that then hopefully we’ll never have to hear on the radio how you lost the lot, never have to sigh, and never have to feel guilty for snickering at your foolishness.