This has been emotional. A bear market has torn into our passive portfolio for the first time since we set it up in 2011. Many of us will not have invested through anything this scary before, and the world and his 24-hour newsfeed keeps telling us that this is even worse than 2008.
Given we’ve just experienced the fastest 30% decline [1] on record, how has the Slow & Steady (S&S) portfolio fared since the glory days [2] of January?
The bad
The FTSE All-Share is down around 30% in three months.
Same for Global Property and Global Small Caps. Brutal.
The S&S portfolio itself is down around 11%.
That is a blessing by comparison. That’s the difference between a terrifying plunge and a nasty but bearable shock.
Sure, this isn’t over. But the value of the portfolio is approximately the same as it was in July 2019 [3]. We’ve lost nine months but this is no time to lose our heads [4].
We’re in it for the long haul.
The good
The portfolio itself is still up since we started. We’ve made a 6.7% annualised return since 2011. Let’s call it 4.7% after inflation.
In other words, we’re close to the historical average return [5] of equities, despite additionally carrying government bonds since the beginning.
Our high-quality government bonds have so far played the diversifying asset allocation role [6] in the downturn that we’d expect them to:
- Our conventional UK government bonds have inflated like a crash bag.
- Our index-linked bonds have had the decency not to drop like a stone unlike all our equities. Linkers don’t act as a safe haven [7] in a deflationary recession, but at least they’re only down 0.19%.
The prices of all our equity funds are down. We’ve got 11 years until we (notionally) tap into this portfolio, so we’re going to buy more.
Our January annual rebalance [8] made us sell nearly £2,000 in equities when they were flying high. We bought more than £1,500 in conventional UK government bonds that have appreciated since.
Time to reverse that trade. Buy low, sell high. It’s a cliche. It still works.
Here are the numbers in Fear&Loathing-o-vision:
[9]
The Slow and Steady portfolio is Monevator’s model passive investing [10] portfolio. It was set up at the start of 2011 with £3,000. An extra £976 is invested every quarter into a diversified set of index funds, tilted towards equities. You can read the origin story [11] and catch up on all the previous passive portfolio posts [12].
What next?
The stress is palpable as the corona crisis [13] unfolds. Speculation is rampant.
I’ve heard that:
- Physical retail is finished.
- Physical retail is needed more than ever as you need to be a member of The Royal Family to get a delivery slot in an emergency.
- Big tech is going to tighten its grip on our lives.
- Big tech is going to be regulated to pieces.
- We’ll bounce back in a few years.
- We’re sliding into The Great Depression V 2.0.
That’s a craps table of commentary – but a key benefit of passive investing [10] is that it stops you placing your chips on all the wrong squares.
Passive investing has you playing the percentages. Stick to the system and you’ll get more right than you get wrong. You play like The House. Relying on the balance of probabilities to tip in your favour.
Eventually… eventually…
Critically, you don’t overthink it. You stay robot [14]. Acting more like an algorithm than a human. That’s a very good thing in a volatile situation.
So we’re going to keep to our plan. We’ll put our cash to work through pound-cost averaging [15] as usual. We’ll rebalance out of pricey bonds and into cheaper equites. Both techniques give us the potential to make our personal recovery look more V-shaped than seems possible for the economy right now. This piece on buying in a crisis [16] explains how it works.
I wouldn’t blame you if you don’t want to do it. If I was living off my portfolio right now, then I wouldn’t rebalance into equities. I’d want those bonds to keep the lights on for the next several years.
But if you’ve already sold and are sitting in cash on the sidelines, what’s your plan? How will you maintain your purchasing power many years from now?
Who knows when we’ll hit the market bottom. You can’t touch it, or taste it, or smell it.
Passive investing means you don’t have to. It’ll make you do roughly the right thing and comes with special padded constraints so you can’t knee-jerk all over the place.
Nobody you know has a better plan.
Rebalancing into the storm
We rebalance using threshold rebalancing [17]. If market movements push your asset allocation beyond certain trigger points then you rebalance.
Weirdly none of our equity allocations fell enough to force our hand, but our conventional bond allocation ballooned from 31% to near 38%. That trips the switch and now we’re rebalancing every asset back to target.
That means selling £3,000 worth of bonds and throwing in our regular £976 in cash to buy up equities. This sort of move should pay off in the long run (unless you think the end is nigh) and it’ll make you feel like a nerveless ninja.
These are our trades:
UK equity
Vanguard FTSE UK All-Share Index Trust – OCF [18] 0.06%
Fund identifier: GB00B3X7QG63
Rebalancing buy: £537.49
Buy 3.431 units @ £156.66
Target allocation: 5%
Developed world ex-UK equities
Vanguard FTSE Developed World ex-UK Equity Index Fund – OCF 0.14%
Fund identifier: GB00B59G4Q73
Rebalancing buy: £1823.54
Buy 5.628 units @ £324.03
Target allocation: 37%
Global small cap equities
Vanguard Global Small-Cap Index Fund – OCF 0.29%
Fund identifier: IE00B3X1NT05
Rebalancing buy: £676.13
Buy 3.087 units @ £218.99
Target allocation: 6%
Emerging market equities
iShares Emerging Markets Equity Index Fund D – OCF 0.17%
Fund identifier: GB00B84DY642
Rebalancing buy: £572.30
Buy 414.41 units @ £1.38
Target allocation: 9%
Global property
iShares Global Property Securities Equity Index Fund D – OCF 0.18%
Fund identifier: GB00B5BFJG71
Rebalancing buy: £540.53
Buy 327.991 units @ £1.65
Target allocation: 5%
UK gilts
Vanguard UK Government Bond Index – OCF 0.12%
Fund identifier: IE00B1S75374
Rebalancing sale: £2,832.63
Sell 14.921 units @ £189.84
Target allocation: 31%
Global inflation-linked bonds [19]
Royal London Short Duration Global Index-Linked Fund – OCF 0.27%
Fund identifier: GB00BD050F05
Rebalancing sale: £341.36
Sell 325.72 units @ £1.05
Target allocation: 7%
New investment = £976
Trading cost = £0
Platform fee = 0.25% per annum.
This model portfolio is notionally held with Cavendish Online. Take a look at our online broker table [20] for other good platform options. Look at flat-fee brokers if your ISA portfolio is worth substantially more than £25,000.
Average portfolio OCF = 0.15%
If all this seems too much like hard work then you can buy a diversified portfolio using an all-in-one fund [21] such as Vanguard’s LifeStrategy series [22].
Take it steady,
The Accumulator