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Our Slow and Steady passive portfolio

This is no easy time to be a passive investor. Sluggishness and sloth are on the run, hounded by the January urge to FIX EVERYTHING NOW! Gym membership is soaring, joggers are pounding the streets, and the magazines are touting 10 easy steps to a faster, fitter, slimmer you.

Well, you won’t find any of that nonsense here. Instead, let’s kick back down a gear with the world debut of the Slow & Steady passive investment portfolio.

Every journey begins with the first step

The Slow & Steady portfolio is a model portfolio for Monevator that aims to illustrate how new private investors can overcome some of the difficulties associated with passive investing in the UK. In particular, we’ll use the portfolio to offer clear strategies for investing relatively modest sums without incurring injurious costs.

I’ll report back periodically on the portfolio’s performance, and hopefully it will develop into a useful long-term project.

Note: This is just an exercise. It’s no more than my own response to the practicalities of passive investing in the UK, according to the assumptions laid out below. The Slow & Steady portfolio is not intended as a real-world solution to any individual’s investing needs (including mine). You can see an archive of all the posts in this model portfolio series, including the latest updates.

The assumptions

No model portfolio would be complete without a set of assumptions to make it dance. Here are mine:

  • Time horizon: 20 years.
  • Initial contribution: £3,000 lump sum.
  • Regular contribution: £750 per quarter.
  • Investment vehicle: Index funds only. No trading fees incurred. ETF/Vanguard trading fees are prohibitive at this level of contribution.
  • Fund selection: Index funds are chosen on the basis of availability to UK retail investors on an execution-only basis. The cost of the portfolio will be kept as low as possible by choosing funds with the lowest Total Expense Ratio (TER) available without paying trading fees.

Each fund will track a benchmark index that is appropriate to its role in the portfolio’s overall asset allocation.

  • Asset allocation: The portfolio will not cover every asset class due to its relatively small size and the lack of suitable tracker products available. The core of the portfolio is invested in UK equities and developed world equities.

The Developed World ex-UK allocation is split into four separate funds because a single, suitable fund is not available. Further explanation here.

Emerging markets are included for additional geographic diversification and as an expected returns booster. UK Gilts should help to diversify the equity risk inherent in the portfolio.

The 80% allocation to equity should be considered aggressive and is a reflection of the long time horizon and my personal risk tolerance. The allocation to equity will be adjusted as the time horizon shrinks.

  • Rebalancing: the portfolio will be roughly rebalanced to the target asset allocations whenever new money is added.
  • Tax: The portfolio is assumed to be held in a tax-sheltered stocks and shares ISA. Fund ISAs from Interactive Investor are fee-free.
  • Dividends: All funds chosen are accumulation funds. Accumulation funds automatically reinvest dividends back into the fund (in contrast to income funds which distribute dividends back to the investor).
  • Performance: I shall report back on the portfolio’s performance once per quarter.

The Slow & Steady passive portfolio

Here’s the portfolio mix that these goals and assumptions have delivered:

UK equity: 20%

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

Initial purchase: £600
Buy 173.31 units @ 346.20p

Developed World ex UK equity: 50%

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

North American equity: 27.5%

HSBC American Index – TER 0.28%
Fund identifier: GB0000470418

Initial purchase: £825
Buy 439.77 units @ 187.6p

European equity ex UK: 12.5%

HSBC European Index – TER 0.37%
Fund identifier: GB0000469071

Initial purchase: £375
Buy 77.4154 units @ 484.4p

Japanese equity: 5%

HSBC Japan Index – TER 0.28%
Fund identifier: GB0000150374

Initial purchase: £150
Buy 222.7171 units @ 67.35p

Pacific equity ex Japan: 5%

HSBC Pacific Index – TER 0.37%
Fund identifier: GB0000150713

Initial purchase: £150
Buy 60.88 units @ 246.4p

Emerging market equity: 10%

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

Initial purchase: £300
Buy 557.7245 units @ 53.79p

UK gilts: 20%

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

Initial purchase: £600
Buy 379.03 units @ 158.3p

Total fund purchases: 7

Total cost: £3,000

Trading cost: £0

Right, that’s all there is to the Slow & Steady portfolio for now. We’ll check back in a few months time to see how things are going.

Take it steady,

The Accumulator

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{ 64 comments… add one }
  • 49 john November 22, 2013, 3:43 pm

    Accy & Jimbo,

    What about Vanguard’s FTSE All World ETF at .25% instead of your FTSE All Share and International ex-UK combos?

    I was looking to offset 70% of equity with 30% of iShares Global Inflation-Linked Bonds ETF (.25%) so long as it’s Sterling hedged.

    I’m sure that will cover me most ways going forward at the most cost effective way.

    Also one query on trading, do you factor the trading percentage as a percentage of the overall funds worth i.e 2 trades of £600 at £1.50 is .5% but as a percentage of a fund that is 4800 that .125% right?
    So if that continues, for instance, under the jurisdiction of Charles Stanley I make that out as a total annual charge of .625% initially, with that figure coming down as, hopefully, the value of the fund goes up?

  • 50 Mike Rodent March 29, 2017, 1:34 pm

    I am very interested in your site and the advice on it.

    Thanks for giving this specific fund recommendation advice (of lot of tracker investing advice is rather unspecific). Over the past year I have moved several £100 000s from cash (and property) into mainly (90% of them) passive funds, most of them US Index trackers, essentially the usual suspects: HSBC US Index, Vantage S&P 500, etc. At this stage I have several confusions as a newbie passive investor: 1) why would I want to invest in Japan or China or emerging markets? I can understand investing in USD-, £- (were it not for Brexit) or €-held stock. But Far East indices seem to go all over the place, as do their currencies… and I’m never going to want to live in that part of the world… 2) for me one of the BIGGEST PROBLEMS EVER is identifying the funds people are talking about: you actually quote the “Fund identifier” (aka ISIN) ref no. above. Most “recommenders” don’t … and it’s a huge source of confusion (for me) because so many funds have incredibly similar names but turn out to be as different as chalk and cheese.

    My biggest puzzle at the moment is how to diversify my passive investing without putting much in the UK or the Far East. Europe might be OK … maybe EU funds might even be quite cheap at the mo with concerns over Brexit effects. What do you think about diversification into trackers pertaining to a particular geographical + non-geographical sector? Eg. US financial funds index, or US tech funds index, if one exists?

  • 51 Mike Rodent March 29, 2017, 7:45 pm

    Hello Accumulator…

    Thought I’d take a look at this: HSBC European Index ISIN: GB0000469071. (Incidentally Cavendish told me it’s “not available to buy in an ISA any more as it is the old style bundled fund so you would have to use the new clean version of the fund if you want to use the HSBC European Index Fund”, which is ISIN GB00B80QGH28… I wonder what they mean by “clean”: it’s the same manager and fund size…).

    My question is: how do we ascertain that a fund like this is indeed a “tracker”. Just because of the word “index” in the name, and the low charges? When I look here (http://www.morningstar.co.uk/uk/funds/snapshot/snapshot.aspx?id=F00000OOB2) it’s actually quite confusing as to what it does: “The fund seeks to provide long term capital growth by matching the return of the FTSE Developed Europe excluding UK index. The fund seeks to invest in companies that make up the FTSE Developed Europe excluding UK index.” This suggests quite a bit of active “picking and mixing”… do you delve into this question of what constitutes a tracker anywhere on your site?

  • 52 The Accumulator April 2, 2017, 8:55 pm

    Hi Mike, re: your question about diversification, this piece is probably the most succinct and rational explanation of passive global diversification I’ve ever read: http://monevator.com/why-a-total-world-equity-index-tracker-is-the-only-index-fund-you-need/

    Everything I’ve read about industrial sectors leads me to believe that they’re not a good idea because you’re not rewarded for the concentration risk you take.

    Here’s a piece on naming conventions: http://monevator.com/fund-names-explained/

    Basically, if a fund has the word index in its name then you are usually in business. If the factsheet says it seeks to match the return of a certain index then you can rest easy, it’s an index fund.

    Clean funds – in olden days, um before about 2012, you could buy funds that included broker or IFA commissions within their management charge. The financial intermediaries could then pretend their services were free although really they got their payment via the backdoor from the fund – this was ‘dirty’. Now all funds you can buy are ‘clean’. Clean in the sense that you can see what they charge you for their services, while the intermediary – broker or IFA – is obligated to tell you what they charge. So it’s all out in the open, smelling fresh.

  • 53 Marnix Volckaert November 20, 2018, 10:20 am

    Hi Accumulator,

    with a risk of asking something that you have explained somewhere in detail without me finding it, I have a beginner question about your quarterly reporting: how do you compute these numbers given that you are adding to the portfolio every quarter? I have a similar portfolio and accumulating strategy, and wish to produce the kind of quarterly reports you make. But by simply looking at the value of each fund every quarter, most of the ‘gain’ comes from buying more, not from fund performance. So when you say ‘value last quarter’, do you mean the value of that fund as if you had already owned x shares of it at that time, even though you only bought up to x in this quarter?
    Have you already explained somewhere how to create these kind of reports, or would you be able to explain it a bit more? Perhaps it is of use to people starting out with similar slow and steady portfolios…
    Thanks!

  • 54 The Investor November 20, 2018, 11:07 am

    @Marnix — You’re quite right — new additions of money have to be accounted for if return figures are to be correctly calculated! If I recall correctly @TA does it with software. I prefer to do get under the bonnet for myself to do it the way fund managers and others do, by ‘unitizing’ my portfolio.

    It’s a bit of fuss to set the initial spreadsheet up but very easy to maintain after that, and allows direct comparison with similarly tracked funds (e.g. Pretty much all published fund data is unitized).

    Here’s a primer:

    http://monevator.com/how-to-unitize-your-portfolio/

  • 55 Marnix Volckaert November 20, 2018, 12:16 pm

    @The Investor, thanks for the pointer about unitizing a portfolio, very helpful! It’s funny you decribe setting up the spreadsheat as a bit of fuss, because it sounds like something I’d enjoy doing coming saturday night, haha. Such is the life of a mid 30’s investing nerd with wife and kid… 😉

  • 56 The Investor November 20, 2018, 1:49 pm

    @Marnix — In that case I strongly recommend it! Much better than relying on a black box solution, you see all the money going in and out and get a real feel for the snowball as it starts to grow. Also makes it easier to track your savings (new money in) and any money you take out in a separate sheet over the years, so you can see over time how much your net savings is driving your overall wealth growth versus your investment returns — and possibly course correct if required.

  • 57 The Accumulator November 29, 2018, 1:11 pm

    @ Marnix – to create an annualised return that is money weighted I use Excel’s XIRR function. Unitised returns (which I don’t use) are time-weighted. i.e. all time periods are weighted equally, irrespective of how much money is invested when. A money-weighted return does not attempt to eliminate the effect of contributions and withdrawals: on the contrary, it specifically adjusts for them. Time periods in which more money is invested have more of an impact on the overall return than equivalent time periods in which less money is invested.

    Some good pieces here on XIRR:

    http://whitecoatinvestor.com/how-to-calculate-your-return-the-excel-xirr-function/

    https://onedrive.live.com/view.aspx?cid=826E19AB9B5B8CE9&resid=826e19ab9b5b8ce9%21137&wacqt=sharedby&app=Excel

    http://www.experiglot.com/2006/10/17/how-to-use-xirr-in-excel-to-calculate-annualized-returns/

    Or, there are some links to ready-built portfolio tracking software and spreadsheets in the portfolio tracking section of this piece:http://monevator.com/financial-calculators-and-tools/

    To answer your original question: Value Last Quarter is value of funds including any new money invested last quarter.

    Value This Quarter is then the % change in value of funds just before I invest new money this quarter.

  • 58 The Investor November 29, 2018, 1:11 pm

    Note: The above comment was from The Accumulator, who is having trouble posting today. I will change the author attribute ASAP! 🙂

  • 59 Craig Graham February 10, 2019, 7:39 pm

    Thank you for your ongoing work in finding the best value funds out there. I would put forward an alternative to the Vanguard Lifestrategy Funds (0.22% charges) using Blackrock Consensus Funds. Neither are strictly speaking passive funds (as you pointed out) but both pretty accurately track various global equity indices. Blackrock Consensus 100 is available at a headline rate of 0.24%, but through HL (where my employer pension sits) there is a loyalty bonus (in the form of units) which reduces the net ongoing charge to 0.11% – half that of Vanguard. This seems to be available to all but of course broker charges need to be taken into account. Geographic distribution and asset allocation looks very similar to Vanguard 100.

    Interestingly, HL also offer Blackrock Consensus 85 at 0.09% – BUT surprisingly the geographic asset allocation differs considerably from Consensus 100 with a much greater UK weighting – so I have ignored that one.

    So, I combine Consesus 100 with Vanguard Global Bond Index at 0.15%, resulting in what I think is a well diversified and cheap portfolio. I’m probably missing exposure to smaller companies but its a pretty easy 2 fund approach. I hope this may be of some interest to your readers. Keep up the invaluable work.

  • 60 The Accumulator February 14, 2019, 10:00 pm

    Thanks Craig, it makes sense to take advantage of those HL discounts when your employer pension is with them. I’ve always been put off by the Consensus funds remit to change asset allocation at the drop of a hat – though I wonder if they ever actually do?

    There are some other fund-of-fund options too, including a interesting looking one from Fidelity. I’ll take another look at them soon now I’m back on the blog trail.

  • 61 Samuel Pike May 26, 2019, 12:32 pm

    Thank you for this, I look forward to reading the entire series. I have a beginner’s question though…

    Am I right in thinking that, whilst is is possible to have multiple ISA funds, it is only possible to contribute to one cash ISA and one S&S ISA per tax year?

    If that is right, how are you able to open and contribute to 7 simultaneously? Is this where the platforms come in to play (TD direct and / or iWeb) ?

    Many thanks in advance,
    Sam

  • 62 The Accumulator May 26, 2019, 1:11 pm

    Hi Sam, yes one S&S ISA per tax year. You can have as many funds as you like within a single ISA. There’s a good description of the rules here: https://www.moneyadviceservice.org.uk/en/articles/stocks-and-shares-isas

  • 63 Matthew Layton May 28, 2019, 10:54 am

    Hi, thanks for your articles – the series sounds great and I’m interested in starting. I’m aware this started in 2011 and things have changed a lot since then. My question is what funds would you start with as of now (I’m 8500 to invest now and 1000 to invest quarterly and 20 year term). Common sense tells me to start from the most recent quarterly post, but is the asset allocation I should use different to what is currently on there (since the values are higher after 8 years of investing and 12 years left of term). Thanks

  • 64 The Accumulator June 2, 2019, 4:48 pm

    Hi Matthew, the asset allocation on the latest article stands up. You could start with a simpler portfolio though, see this piece for more ideas:

    https://monevator.com/asset-allocation-types/

    Also, re: equities/bond split:

    https://monevator.com/how-to-estimate-your-risk-tolerance/

    https://monevator.com/asset-allocation-construct/

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