A short hallelujah to the weather, followed by some choice reading from around the web.

Incredibly, it’s sunny in London. What a difference it makes after all the snow, slush, and arctic blasts of what seemed a six-month winter.

Like health, you can’t really buy the weather. Yes, you can buy an aspirin, and yes you can emigrate to Australia. But you can’t dial up the sun on demand like a Domino’s pizza.

One quick way of re-appreciating your good fortune, weather-wise, is to visit a loved one in hospital. A person who can’t leave, ‘ideally’ (as in ideally for this experiment to work, not for your unfortunate acquaintance).

I’ve noticed long-term hospital residents often stare out of the windows when it’s sunny. Or at other times they turn their back on it, and seem unable to bear what they can’t enjoy. The more fortunate are wheeled to sit in some sunny spot besides the bins and the smokers on crutches, to feel the warmth on their skin. It’s a foreign holiday for them.

The incurable and the dying seem to inhabit windowless, weather-less rooms – I’ve seen this more than once in NHS hospitals. Perhaps there are logistical reasons. Perhaps it’s cruel. Or perhaps it’s some long ago learned wisdom about how best to let go.

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It’s time for the first trading update of the official Monevator, passive, model portfolio: The Slow and Steady portfolio.

The portfolio invests purely in index funds. The first purchases were made on December 31, 2010, with an initial lump sum of £3,000.

Another £750 of regular contributions are drip-fed in every quarter, and the latest purchases were made on April 1. An auspicious day if ever there was one.

In its first three months of life, the portfolio has inched up 0.59%, which amounts to a cash gain of £17.84. Who ever said passive investing isn’t a shortcut to fabulous wealth?

Actually, this move to profit is quite a turnaround, because I took a sneaky peek at the portfolio a few weeks ago, and it was haemorrhaging like an undercover cop in a Tarantino movie.

Events, dear boy, events

The markets were on something of a tear at year-end when we fed our initial lump sum into the financial wood-chipper. Since then we’ve been battered by bad news:

• UK economic contraction in the final quarter of 2010.
• Fears of overheating emerging markets.
• Devastating floods in Australia.
• Triple catastrophe in Japan – quake, tsunami, nuclear crisis.
• Middle East uprising – the wisdom of the crowds writ large, but bad for short-term economic stability.

The upshot is that the Japanese fund has been hammered, the emerging markets have dipped too and the Australian-dominated Pacific fund has been dragged down in their wake.

The countervailing bright spot is the European fund, perhaps benefitting from belief in Franco-German determination to defend the Euro.

Scores on the doors

Here’s how the individual funds have fared over the last three months:

What does all this tell us? Absolutely nothing of significance.

It’s fun to think about the trends and events that may have buffeted our funds over the last three months, but over a 20-year time horizon we’re relying on diversification, low cost funds and the efficiency of the markets to ensure we come out ahead. There’s nothing for it but to stick to the plan.

New purchases

Our quarterly £750 injection buys:

UK equity

HSBC FTSE All Share Index – TER 0.27%
Fund identifier: GB0000438233

New purchase: £146.47
Buy 41.812 units @ 350.3p

Target allocation: 20%

Developed World ex UK equities

Split between four funds covering North America, Europe, the developed Pacific and Japan.

Target allocation (across the following four funds): 50%

North American equities

HSBC American Index – TER 0.28%
Fund identifier: GB0000470418

New purchase: £191.81
Buy 99.899 units @ 192p

Target allocation: 27.5%

European equities excluding UK

HSBC European Index – TER 0.37%
Fund identifier: GB0000469071

New purchase: £77.79
Buy 15.316 units @ 507.9p

Target allocation: 12.5%

Japanese equities

HSBC Japan Index – TER 0.28%
Fund identifier: GB0000150374

New purchase: £52.04
Buy 85.008 units @ 61.22p

Target allocation: 5%

Pacific equities excluding Japan

HSBC Pacific Index – TER 0.37%
Fund identifier: GB0000150713

New purchase: £38.84
Buy 15.813 units @ 245.6p

Target allocation: 5%

Emerging market equities

Legal & General Global Emerging Markets Index Fund – TER 0.99%
Fund identifier: GB00B4MBFN60

New purchase: £82.25
Buy 155.746 units @ 52.81p

Target allocation: 10%

UK Gilts

L&G All Stocks Gilt Index Trust: TER 0.25%
Fund identifier: GB0002051406

New purchase: £160.77
Buy 102.793 units @ 156.4p

Target allocation: 20%

Total cost = £749.97

Cash = 3p (Woot!)

Trading cost = £0

Remember the portfolio is rebalanced to its target allocations with the new money: a relatively straightforward task at this early stage. There are also no trading costs to worry about with the index funds used.

Take it steady,

The Accumulator

My musings, then some good reads from the web.

Something remarkable has happened. The UK consumer has finally woken up to the financial crisis, the public deficit, spending cuts, and tax rises.

Now I’m not saying there’s been no pain in the UK in the past three years. Jobs have certainly been lost, and some have already seen the loss of publicly-funded benefits and perks. And it’s easy to forget here in London that house prices more nationally have actually fallen about 20% – in a sustained way – in some areas such as the North and Wales.

But in general, the UK consumer has been remarkably resilient.

When I wrote early last year about how the UK was booming, I was thinking mainly about our export economy — the rapid upswing in manufacturing and a recovering financial sector. I admit I didn’t appreciate the extent to which lower mortgage payments meant that far from struggling, the great majority of UK households had even more money to spend.

Theoretically, that is still the case. But something seems to have changed with the VAT rise that came in at the start of the year – perhaps abetted by the arctic snow that closed down UK high street for Christmas. Having gotten out of the spending habit for six weeks, the UK consumer may be going cold turkey.

Retailer after retailer has been reporting plunging sales, with Dixons, Mothercare, and John Lewis the latest to stumble back to command with a bloodied casualty report in hand. One analyst says today in the FT:

“This is the worst I can remember seeing in about 30 years. Since the middle of January more or less, retail has fallen off the edge of a cliff.”

Reasons abound. Beyond that VAT rise, there’s the shocking statistic that real disposable incomes in the UK have fallen for the first time in 30 years. And good luck boosting your salary by getting another job:

News that staff turnover has hit a five-year low is hardly surprising when you consider the state of the UK labour market. People with household bills to pay are not going to leave their jobs until they have a decent job to go to.

Unemployment is rising, public spending cuts are on their way, and those companies which are increasing output are simply increasing overtime rather than hire new people.

The other shoe to drop, as our American cousins inexplicably say, could be renewed pressure on house prices, with the Bank of England warning that loan defaults are rising:

The Bank predicts the total number of mortgage defaults will rise during the next three months as fears intensify that the cost of living will remain high and interest rates will rise.

In its Credit Conditions Survey, it suggested that lenders were concerned about “the potential impact of increases in interest rates on default rates”.

Now I am not one of those bloggers who regularly writes doom and gloom stories. In fact, I’ll admit to being surprised by how quickly the UK consumer seems to have turned. After a while, you start to wonder if the bell really tolls for the Spend Now, Pay Never population.

House prices plunged in the US and unemployment soared, but not here. Ireland’s ridiculous credit boom and four-fold increase in house prices took it to the edge, but London prices are now nearly back to the peak. Other poster children of the good times like Iceland and Spain have also clearly suffered. Only the UK and Australia seem to have escaped the hangover.

In Australia’s case, that’s not hard to understand: the country is stuffed full of resources in the middle of a commodity surge, and the population is relatively small.

But the UK has dwindling natural resources in the North Sea, and while its main driver of growth – the financial sector – got back on its feet faster than any predicted, it’s still not close to covering over the gaping hole its collapse left in the nation’s finances.

No, I think the average UK citizen has simply willed away a worse slump. After well over a decade without a recession and with huge swathes of the population made heady by soaring house prices and easier money from the public purse, they didn’t think it could happen here – and for several years that self-belief has been self-fulfilling.

It’s probably too soon to be sure the chickens have come home to roost. Much of the pain in the spending cuts is pushed out into the future (such as changes to retirement ages, and shifts to the inflation measures used), and I’m doubtful whether most people are aware of them. And while taxes are rising and curbs to easy money like child benefits for the middle classes and over-generous housing benefit – not to mention persistent inflation – is now clipping consumers’ spending power, interest rates are still low, which is acting like a daily soothing infusion of morphine into a sickly patient.

From an investing standpoint, one thing I’d urge is you don’t take the UK stock market to be a proxy for the UK economy. Around three-quarters of the earnings of the FTSE 100 are generated overseas, and the rest of the world is doing fine. Having swallowed some painful medicine via a proper house price crash, even the US is finally on the mend – a recovering consumer appetite there could keep company earnings headed higher for years.

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