How quickly things can change! Another bumper quarter for global equities has helped to chase the blues away like a glimpse of spring sun.
Our Slow & Steady model portfolio has plumped up 3.7% in the last three months. That’s on top of the 7% gain the quarter before that.
Overall, annualised returns are now back to a healthy 7%. Call it 4% after inflation. If you own an equity-heavy passive portfolio you’ll be happier still.
Here are the numbers, in Zippity-Doo-Dah-o-vision™:
The Slow & Steady portfolio is Monevator’s model passive investing portfolio. It was set up at the start of 2011 with £3,000. An extra £1,264 is invested every quarter into a diversified set of index funds, tilted towards equities. You can read the origin story and find all the previous passive portfolio posts in the Monevator vaults.
While much of Q4’s rise was accounted for by a surge in government bonds and property they’ve both subsided a little since.
Instead we’re back to the established routine: US large caps as the motor of our passive portfolio.
Our Developed World fund had approximately 50% in the US when we first invested back in 2011. Now that allocation has climbed to over 70% – a worryingly high exposure to a richly-valued stock market and an economy stoked on government stimulus.
The Investor wrote an excellent piece for Mavens on how to think through this situation, including your options for taking evasive action.
He also turned up a Larry Swedroe article on just how hot the US market would have to run to repeat the returns of the last decade.
In short: we’d need a Tech Bubble Part II to get anywhere close.
Needless to say I won’t be selling the Slow & Steady’s equity allocation to plough it 100% into an S&P 500 ETF anytime soon.
However neither am I about to advocate for a wholesale shift into a World ex-US tracker.
American idle
For one thing, the Slow & Steady portfolio is only 28% US large caps when you take the whole portfolio into account.
And even if we did dilute the Developed World fund’s US holding back down to the 50% level where we first invested, the US large cap allocation would only be reduced to 20% of the total portfolio.
Said differently – the portfolio is already adequately diversified. If Big Tech’s future returns are sub-par, a 28% to 20% shift won’t make a huge difference.
Secondly, nobody is predicting negative returns for the US. Just that the market must surely mean revert – and that some other region must surely take the lead for a while – because the S&P 500 doesn’t win every decade.
I’ve been reading predictions like this for more than a decade. Nobody can make a strong case for any other market besides, “it’s cheap.”
Mean reversion is not a physical law. It’s a pattern found in the last 100 years of data. It doesn’t mean that cheap markets can’t get cheaper.
The Russian market looked awesome value before the Ukraine War. I’m glad I didn’t bet my shirt on those stocks.
In my personal portfolio, I siphoned off cash to deploy in emerging markets and UK equities for years because they were cheap. That hasn’t worked.
It did teach me a useful lesson about trying to outwit the market though.
I can’t do it.
New transactions
Every quarter we nourish our portfolio with £1,264 of investment fertiliser. This fresh muck and brass is split between our portfolio’s seven funds, according to our predetermined asset allocation.
We rebalance using Larry Swedroe’s 5/25 rule. That hasn’t been activated this quarter, so the trades play out as follows:
UK equity
Vanguard FTSE UK All-Share Index Trust – OCF 0.06%
Fund identifier: GB00B3X7QG63
New purchase: £63.20
Buy 0.24 units @ £262.85
Target allocation: 5%
Developed world ex-UK equities
Vanguard FTSE Developed World ex-UK Equity Index Fund – OCF 0.14%
Fund identifier: GB00B59G4Q73
New purchase: £467.68
Buy 0.722 units @ £647.54
Target allocation: 37%
Global small cap equities
Vanguard Global Small-Cap Index Fund – OCF 0.29%
Fund identifier: IE00B3X1NT05
New purchase: £63.20
Buy 0.148 units @ £428.36
Target allocation: 5%
Emerging market equities
iShares Emerging Markets Equity Index Fund D – OCF 0.19%
Fund identifier: GB00B84DY642
New purchase: £101.12
Buy 53.63 units @ £1.89
Target allocation: 8%
Global property
iShares Environment & Low Carbon Tilt Real Estate Index Fund – OCF 0.18%
Fund identifier: GB00B5BFJG71
New purchase: £63.20
Buy 27.95 units @ £2.26
Target allocation: 5%
UK gilts
Vanguard UK Government Bond Index – OCF 0.12%
Fund identifier: IE00B1S75374
New purchase: £316
Buy 2.355 units @ £134.21
Target allocation: 25%
Royal London Short Duration Global Index-Linked Fund – OCF 0.27%
Fund identifier: GB00BD050F05
New purchase: £189.60
Buy 179.546 units @ £1.056
Target allocation: 15%
New investment contribution = £1,264
Trading cost = £0
Take a look at our broker comparison table for your best investment account options. InvestEngine is currently cheapest if you’re happy to invest only in ETFs. Or learn more about choosing the cheapest stocks and shares ISA for your circumstances.
Average portfolio OCF = 0.16%
If this all seems too complicated check out our best multi-asset fund picks. These include all-in-one diversified portfolios, such as the Vanguard LifeStrategy funds.
Interested in tracking your own portfolio or using the Slow & Steady investment tracking spreadsheet? Our piece on portfolio tracking shows you how.
Finally, learn more about why we think most people are best choosing passive vs active investing.
Take it steady,
The Accumulator
Many thanks @TA for the update and for all of the ongoing work in keeping this fascinating real time case study in fully diversified index tracking on the road.
“Call it 4% after inflation”: if I understand correctly the quarterly invested amount has risen with the rate of inflation each year from £750 in January 2011 to £1,264 now, which is an increase of 68.5%, or about 3.8% p.a. compounded. Would that not make the real return 3.2% p.a.?
Thanks for the update, been looking forward to it!
I have a few questions about your funds and asset allocation if you would be so kind to answer.
1) why the seperate funds for uk, developed and EM as opposed to say HSBC All World Acc?
2) what’s the view on bond duration now that interest rates / inflation battered 2022’s holdings. Longer term better placed to pick up those interest rate changes ‘IF’ it happens?
3) why linkers?
Keep it steady.
Yes, after all the gloom and doom we still make progress.
My portfolio is drifting from the Slow and Steady as I try to simplify it for my partner should I suddenly kick the bucket.
So I have switched to a global equities fund (HSBC FTSE Al World C), and dumped the separate UK holding. Got rid of the emerging markets and small cap and added some overseas Government bonds (about half my bond allocation).
So far seems to be doing about as well as the Slow and Steady portfolio.
@old_eyes @Median — Yes, we’d expect a similar passive portfolio where the equities were invested in a good global tracker to do more or less the same as the SSPP but with a little less hassle. (It rebalances for you!)
As explained many times in days of yore, the portfolio is split out (a) because cheap global trackers for UK investors weren’t so common in 2011 (IIRC) and (b) much more importantly, this is a model portfolio designed to instruct and inform.
We want to show ‘how to sausage is made’ in other words, as part of the multi-decade case study explanation for how/why passive investing works. 🙂
@Delta Hedge (#1):
Good point.
Difference between RPI (used to increase the contributions IIRC) and CPI[H] (generally taken these days to be a better measure of inflation than RPI) I would guess. Perhaps @TA can confirm?
@TI – no criticism implied. I fully understand why the portfolio is the way it is. Just commenting on my decision to try and simplify a bit, and that I don’t think I am losing much as a result. There are probably a broad range of passive portfolios that will turn in pretty much the same sort of results, and that is good news for nervous investors. That general passive strategy is pretty resilient to the specific choices you make.
Now I am older and wiser, and having to overhaul asset allocations now I am in decumulation I have started to question my penchant for having tiddly bits. Are holdings of 5% or less worth the effort ?
@Mr Optimistic
“Now I am older and wiser, and having to overhaul asset allocations now I am in decumulation I have started to question my penchant for having tiddly bits. Are holdings of 5% or less worth the effort ?”
I am trying to simplify to make it easier for my partner in the event I shuffle off first. Not completed yet, but nothing below 10% is the target. Gives me five holdings. Nearly there, and I can sort of explain what the hell is going on ;-).
Here’s a little attempt at monitoring/comparing the portfolios that tries to get more of a “landscape of recent progress” view of it.
Column 1 is CPIH.
Col. 2 is total CPIH change from the date to now. What you want to beat.
Col. 3- is a total portfolio change from date to now. (praps should show -CPIH instead of the raw nominal?)
date – CPIH – total CPIH – total LifeStrategy60A – total Slow&Steady
2019.1.1 – 106.4 – 23.40% – 38.51% – 38.74%
2020.1.1 – 108.3 – 21.24% – 19.47% – 19.13%
2021.1.1 – 109.3 – 20.13% – 11.8% – 7.14%
2022.1.1 – 114.6 – 14.57% – 1.77% – -2.58%
2023.1.1 – 124.8 – 5.21% – 14.39% – 12.79%
2024.1.1 – 130 – 1.00% – 4.41% – 3.68%
2024.4.1 – 131.3(a guess)
this is only the progress for the money invested on the given date.
so e.g. if you went all-in on S&S with ya furlough windfall you’ve
made 7.14% to date and you’re 13% behind inflation with it.
But the bigger point is to see how things are developing overall.
I know sometimes people ask about whether S&S is better than Lifestrategy,
and the articles suggest that Lifestrategy is a lazy and prob worse way to
do S&S. I think that was true before 2021. You can see here fairly well
that S&S has been hit harder and it’s still very much to be seen which one
will pull ahead in the future.
@ Delta Hedge & Al Cam
TA might have been a bit optimistic…
RPI from December 2010 to December 2023 – arguably it should be November 2010 to November 2023 because in late December the November figures would be the most recently known – is 65.9% (index figures 228.4 > 379.0). Which is 3.97% per annum compounded. So deducted from the 6.99% would give approx 3%.
Incidentally, a quick trip to the archive reveals that TA didn’t start adjusting for inflation until three years in. To compensate, he rounded up the quarterly investment to £850 instead of the calculated £827.
Interesting update thanks. I don’t feel so bad that my SIPP portfolio I recently updated has 7 ETF funds reading this!
I’ve never quite understood and sorry if this is a dim question – is this a portfolio you’re actually ploughing real cash into or a virtual model PF? If you’re putting in hard earned cash then kudos to you! Also looking at asset allocations in the table are these the target allocations? Reading the linked origin article it seems very different to what you had originally and if my mental maths is right about 60/40 stocks / bonds compared to 80 / 20. Just trying to get an overview of how and why it changed without going back and reading all the updates, lazy so and so that I am…I should go back and read.
@Curlew (#9):
CPI[H] is typically 1%PA lower than RPI.
So 3% real (if RPI corrected) or 4% real (if CPI[H] corrected) are consistent if somewhat confusing.
FWIW, eleven years ago I would have probably selected RPI as my preferred measure of inflation; today I most certainly would not!
May also be worth noting that from February 2030 the RPI will be calculated using the data and methods of CPIH.
I like the idea of having a minimum threshold of holdings of 5 or 10% as it enforces simplicity and, as people have noted, probably without much detriment to performance. It also requires a real commitment/conviction for each holding, which is also no bad thing.
For example, the argument to hold some crypto at a % equal to its market cap. That whole headache goes away as it’s too small a holding to bother with. So you can safely ignore a whole bunch of noise/admin if you implement that approach.
Xxd09 has taken it to its logical extreme I believe?
Months since last Nov have been extremely kind, seen continuous positive up ticks which is nice after the ‘going nowhere’ of past few years, and the horror show that was my spread sheet that incorporated CPIH
@BillD — It’s a model portfolio with a defined set of rules, occasionally tweaked (e.g. reducing long-dated linkers a few years ago).
Just saying, if the tech bubble scares you but you want to buy the US there’s sp400 (mid cap) and sp600 (small cap) trackers out there which I am eyeing for April 6.
@Meany (now #9):
Thanks for an interesting table.
Any thoughts as to why LS(60) has recently out-performed S&S?
Re: inflation: CPI average is 3% per year over lifetime of Slow & Steady (up to Dec 2023) using the Bank of England’s average inflation formula. RPI average is 4%. I use CPI for real return because it’s the nation’s official figure. I use RPI to upweight contributions because it seems better to over-contribute rather than under-contribute.
@ Mr Optimistic – 5% has always been my cut off but completely agree with your point about simplification. That’s come into sharper focus with more experience and in many ways is part of the learning experience that’s come from running my own portfolio over the years. That said, sometimes 5% can give you a psychological toehold in an asset and scratch the itch to “do something”. Old Eyes makes a very good point about creating a partner friendly portfolio over time.
@ BillD – this is a virtual portfolio though it’s a near relation of my actual portfolio ( that has more allocated to multi-factor funds). 80% equity share to 60% represents the derisking / lifestyling element that was built in from the start: 2% shift from equities to bonds per year.
Originally I envisaged that shift continuing over the lifetime of the portfolio. However, the build up of bond risk during the low interest rate era (plus further research into the limitations of bonds as a defensive asset) caused me to restrict the bond allocation to 40%. This article helps explain the position on bonds:
https://monevator.com/diversified-portfolio/
@ Meany – are the numbers money weighted rather than time weighted? As in you’re accounting quarterly inflows into each portfolio? I’m pretty surprised you’ve got positive figures for LifeStrategy 60 in 2022 for example. Vanguard show total return losses of -11.22% (nominal) though that’s a time weighted figure.
@ TA Many thanks for this, I always look forward to it. BTW should your quarterly gain be 2.54?
@All, wrt to simplifying the portfolio I spoke to my wife who, while very intelligent just isn’t interested. We agreed we’d put my ISA totally into VHYL. Once I turn dividend reinvestment off it’ll just deposit the dividends into our joint account together with the SP and a small DB pension. That’s our normal living expenses.
VHYL is globally diversified (being just the VWRL dividend payers) so a mild form of dividend strategy and has the added advantage of reducing US exposure from 60% to 40 (from memory) if you’re concerned about that.
My SIPP remain in HSBC FTSE World Index C with 10% GISG, 10% Gold and 10% BHMG to hopefully protect from equity shocks. We’ll have to pay tax on that, so it’s very much for things like replacing the car, new roof, etc, etc..
Hopefully it’ll all run itself.
Hi, I want to use ETFs to build my portfolio – could anyone suggest one for the global property element please?
@Brod(19) From your description of your regular income sources I’m assuming you’re a basic rate taxpayer. Are you in any danger that if you rely on your SIPP for large one-off expenditures such as replacement roof, new car etc. that you will have to pay higher rate tax on these withdrawals? If you are not currently funding your ISA, wouldn’t a more controlled withdrawal from your SIPP at basic rate in order to build up an emergency/large purchase fund in your ISA be advantageous? Or, indeed, live partly on these SIPP withdrawals and earmark the equivalent amount in your ISA for emergency/large expenditure.
@brod I’ve held both vhyl and vwrl over past 5 years and it has cost me dear. Vhyl returning 23% Vs vwrl 54%. Slightly regretting my dividend related purchases, should have just gone full xxd09 and left well alone
I think the updates on this real-world portfolio are very useful for most people as they highlight the ups and downs inherent in investing and the benefit of having a plan and sticking to it over time.
@TA #17: thanks for clarifying. It always surprises me that RPI seems consistently higher than CPI. I would (naively) expect them to converge over time, but a 1% p.a. difference for 13 years (2011-23) suggests otherwise.
@Rhino #22: dividend investing let me down too. Fortunately I confined my HYP (now liquidated) to 5% of ISA/SIPP/GIA. Reflecting back on it now, I think that there might be 5 problems with dividend investment:
1). it might not be a particularly ‘good’ expression of the value factor compared to a composite measure of P/E, P/S and maybe P/B (although intangible assets increasingly complicate book value);
2). often high dividends yields are a warning of cuts to the dividend and problems ahead for the business;
3). buy backs are a more tax efficient way to return value to shareholders;
4). a business that uses earnings yield to pay dividends, fund buy backs or make acquisitions is a business with maybe an inadequate opportunity to productively invest its own capital internally for sales and profit growth, and therefore perhaps not a great business to own a part of;
5). we never know what’s going to happen next, but at least with a cap weight tracker as high dividend stocks come and go in performance the index weights adjust eventually moving out of lower and into higher performing sectors etc. As @Indy inv 3.0 says in his own Substack, a cap weight index tracker is maybe a bit like a watered down form of momentum or trend following fund in that regard.
@ Micky – there’s some ideas in the global property section of this piece:
https://monevator.com/low-cost-index-trackers/
@ Barney – the all-powerful Monevator spreadsheet reckons 3.68% 🙂 What have you spotted? You realise The Investor docks my wages for every mistake I make? 😉
@TA the meaning of the 1.77% for LS60 in 2022 in my table is:
“if I invested £100 on 1.jan.22 how much is it worth today? Answer £101.77”
i.e. LS60A has just achieved nominal recovery from that dip whereas money put in S&S at that date is still a little underwater.
so to @Al Cam ‘s question, the shorter duration bond mix in LifeStrategy funds have not fallen as much as the pure gilts in S&S, hence
a slightly faster comeback (think VAGS vs VGVA) – and while LifeStrategy
has been hobbled by 25% of shares UK, S&S has also suffered as its property shares have taken a big hit.
Now, from here, if rates fall fast those gilts in S&S will gain fast, maybe the property shares too, so S&S will outpace LifeStrategy again.
If rates stay where they are gilts pay more than agg so S&S wins very slowly.
If rates keep getting tugged up, LifeStrategy might keep edging it.
If the US market hits a ceiling, LifeStrategy offers room for growth with
more UK shares, but S&S has the small&property diversifiers. So one is back to the question of what is the best alternative to the USA!
@Rhino – yes, it’s suboptimal but it’s simple. My wife prefers sewing beautiful clothes in her spare time to obsessing over WRs and asset allocations. And I agree.
@David V – I’m not a high roller. That income stream uses about £10k of Basic Rate band. Plenty of headroom left before I hit higher rates.
@ Meany – Very interesting. Thank you for the comparison. I’ve always meant to do this myself but haven’t gotten around to it yet. Slow & Steady is better diversified than LifeStrategy on the equity side but less so on the bond side. Ironically, I’d expect Slow & Steady’s longer duration gilts to perform better than LifeStrategy’s global aggregate bonds in a conventional slump as opposed to the stagflationary scenario we’ve experienced recently.
@TA, I certainly don’t want to see your wages docked, but an add, subtraction, and divide by, arrives at 2.54, unless Iv’e erred, in which case Mrs B will withhold this weeks copy of “The Beano”☹️
@Meany, @TA:
Thanks for the additional info.
IIRC, another notable difference is that bonds in the LS funds are hedged to the GBP. Would this have any meaningful impact over the recent past or in any of the possible future scenarios that @Meany (#26) and @TA (#28) mention?
Property trackers and ETFs have been a bit of a disaster since the pandemic. I had as much as 10% in the same one used in the SS portfolio. When it became clear which way the wind was blowing, I got out of it still with a positive real long term return as I had been invested for a long time.
This 10% is now invested in a cheap large value ETF and a small bit of it in a US small cap value ETF. Both have contributed to increase my return significantly compared to what it was when I had the property ETF.
A childhood friend of mine was less lucky. His over 80 mother had been living off a small portfolio of directly invested commercial property but was forced to sell everything during the pandemic low because all the shops and offices renting her properties defaulted and declared bankruptcy.
@Al Cam, hedging wise
Both S&S and LifeStrategy are hedged bonds, unhedged shares.
Should you hedge your shares today?
well if this year is everything rising as much as it can with no new crash,
and the BOE are forced to keep rates competitive with the USA,
then my guess is the £ is in very lightly trying-to-rise mode.
…But you know they’re desperate to drop rates to rescue housing and
help reelect Rishi etc.
Should you unhedge your bonds today?
The trade is just gilts->VUTY to get what that Finimus article suggested,
a fully unhedged position. That was a good protective
in 2022. In a classic crash @TA has study articles I think it helps
half the time. I can’t see how the £ could shoot up in any crash!
Something big has to hurt the USA much more than it hurts us somehow.
Trump doing a Truss AND Keir Unbrexiting?!
@Meany (#32):
Thanks for your thoughts.
Re: “Trump doing a Truss AND Keir Unbrexiting”
A few years ago I would have very confidently said no way, now: who knows!
@TI (#14)
I wonder whether you might want to consider further tweaking with, at last, two ‘intermediate’ maturity UK gilt funds
1) under 10 year nominals (https://www.ishares.com/uk/individual/en/products/331740/ishares-up-to-10-years-gilts-index-fund-uk)
and
2) under 10 year index linked (https://www.ishares.com/uk/individual/en/products/331738/ishares-up-to-10-years-index-linked-gilt-index-fund-uk)
The nominal one has a modified duration of just under 4, while that of the index linked one is just over 5. In each case, the modified duration is much lower than the ‘all stocks’ funds (8.5 for nominals and 18.5 for index linked).
If only someone was to generate a (preferably) developed world, government bond fund with maturities under 10 years or so (one for nominal and one for index linked) I’d finally be able to simplify (and diversify) my fixed income holdings to my satisfaction. Unless they already exist – anyone know?
@Alan S (#34)- You can reduce the duration significantly using this iShares ETF (US Treasuries 1-3 years hedged to GBP):
https://www.morningstar.co.uk/uk/etf/snapshot/snapshot.aspx?id=0P0001D4HF
As to linkers, you can use iShares TIPS 0-5 years hedged to GBP:
https://www.morningstar.co.uk/uk/etf/snapshot/snapshot.aspx?id=0P0001CW88
It will be US inflation of course, but there is a good chance that when inflation is too high over here it will be too high across the pond as well.
Tom Baker (#35 and #36),
Thank you – both good choices if shortening duration is the only goal – however, in my view, both 1 to 3 and 0 to 5 years is probably going too short for a long-term buy and hold approach since intermediates form a useful compromise between returns (which will tend to be higher for longer maturities except when the yield curve is inverted as it is now) and interest rate volatility. US research (e.g., Bengen 1994 and 1996, Cooley et al. 1998) indicates that intermediates (5 years) did better than either bills or maturities of 10 years or more. While there is currently no UK research looking at the effect of fixed income maturity, as yet unpublished work indicates that historically indices with maturities around 0 to 10, 5 to 10, or 5 to 15 years did better than either longer or shorter maturities.
ps OT: Tom Baker is my favourite Dr. Who
@ Alan S – That iShares Up to 10 Yrs Index Linked Gilt Fund is very interesting. I wasn’t aware of it but it looks good: launched 2023, low cost, shortest duration UK linker fund on the market.
The global linker fund used in the Slow & Steady portfolio is shorter duration but higher cost and less aligned to UK inflation.
The dev world equivalent of the UK linker fund is:
Amundi Global Government Inflation-Linked Bond 1-10Y UCITS ETF GBP Hedged Dist (GISG)
For dev world nominal bond funds hedged to GBP. See:
https://monevator.com/low-cost-index-trackers/
should be intermediate duration and lower than gilt equivalents.
Re: linkers – stick to shorter duration if you want to align as closely as you can to unexpected inflation. The longer the duration, the more real interest rate risk you take, the less relevant the inflation-linked component of the fund. The research you cite makes sense for nominals but the purpose of linkers in most people’s portfolios is to defend against inflation.
@ Al Cam – LifeStrategy GBP hedge only makes a difference relative to a portfolio that doesn’t hedge. Slow & Steady uses gilts and GBP hedged linker fund so we’re getting an apples to apples comparison. Obvs if you chose say a portfolio of US Treasuries and the pound fell relative to the dollar in a recession then you’re up on the deal.
More here:
https://monevator.com/are-us-treasuries-better-than-gilts-uk/
@ Barney – portfolio gain of £79,267 to £82,186 = 3.68% over the quarter. Hide your Beano!
@TA (#38).
Hadn’t seen the amundi global IL fund before – thanks for that.
I must admit as the holder of a fully inflation linked DB pension, I’ve been minded to remove linker funds from my portfolio since I’m effectively already holding a significant number , albeit indirectly, while retaining nominal bonds and cash. Having just simplified our portfolio on the equity side (down to two funds: HSBC world tracker and Vanguard small caps), I was also going to simplify the fixed income side too with the 0-10yr gilt fund being an option, but would prefer some international diversification. I think I might defer the decision to October when I next access the accounts.
Recent events have thrown up some interesting bond market responses both for both nominal and IL gilts (inflation has largely been trending down since Nigel Lawson introduced linkers). For example, while implied inflation at the short end (3yr) has gone from 3% at the end of 2020, peaked at 5.4% end of March 2022 before gradually falling to 3.9% at the end of March 2023, at the long end (20yr) it went from 3.3% to 4.0% and back to 3.5% over the same period which certainly indicates that unexpected inflation had more effect at the short than long end, as you said.
@Alan S @others — I’ve been researching this short duration iShares linker fund and it appears to be institutional only, or possibly ‘sophisticated professional investor’ aka for @Finumus.
Does anyone know different? Has anyone been able to buy it?
Thanks in advance! 🙂