The second update of the Slow and Steady passive portfolio takes place against a backdrop of global doom and gloom. Eurozone ministers fiddle while Athens burns and the talking heads ponder every scenario – from default to default plus meltdown of the financial system (part two).
Where does all this brouhaha leave our battered lazy portfolio? Roughly where it started!
The portfolio was set up at the start of the year with £3,000 and an extra £750 is invested every quarter into a diversified set of index funds, heavily tilted towards equities.
Missed an update? Catch up on all the previous passive portfolio posts.
The results are in
The portfolio has ticked up 0.85% since launch for a whopping cash gain of £31.96. That’s £14.12 earned in the last three months. Sweet dreams are made of this.
Since last time:
- The US fund remains in the black but has lost nearly half of its initial gains1 as America’s recovery runs out of puff and growth figures are revised down.
- Meanwhile, Europe continues to motor ahead, despite everything – maybe the doom-mongers have been exaggerating?
- The FTSE is bumping along going nowhere fast, which feels about right. Still, we’ve had the VAT rise, the onset of George Osborne’s austerity measures and carnage on the High Street since the last update, so we’re getting off lightly.
- Japan was the big laggard last time, post-Tsunami. It’s still down but slowly recovering.
- The Pacific continues to edge down. This fund is dominated by Australia so could be feeling the slowdown in commodities and the rises in interest rates.
- UK Gilts gain as fear stalks the land. Our bond holding registered the portfolio’s second biggest loss last time, but has swung around to notch the highest gain this quarter. Its performance this quarter is a shining example of bonds as buoyancy aid, shielding the portfolio from equity volatility.
- Emerging markets are now the biggest drag on the portfolio as overheating takes the steam out of Chinese growth.
Whatever the causes, we’re talking about dips and gains that amount to a few pounds. Despite the red-hot newswires, the market remains flat.
Still, it’s a long-term game for passive investors – we’re relying on low costs, diversification and the risk premium to reward us in the future. Perhaps the far-distant future of foil suits the way we’re going.
New purchases
Time to throw in another £750 of our carefully husbanded cash and rebalance the portfolio as follows:
UK equity
HSBC FTSE All Share Index – TER 0.27%
Fund identifier: GB0000438233
New purchase: £153.02
Buy 43.0690 units @ 355.3p
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: £218.76
Buy 113.8771 units @ 192.1p
Target allocation: 27.5%
European equities excluding UK
HSBC European Index – TER 0.37%
Fund identifier: GB0000469071
New purchase: £87.35
Buy 16.6858 units @ 523.5p
Target allocation: 12.5%
Japanese equities
HSBC Japan Index – TER 0.28%
Fund identifier: GB0000150374
New purchase: £33.47
Buy 53.2813 units @ 62.81p
Target allocation: 5%
Pacific equities excluding Japan
HSBC Pacific Index – TER 0.37%
Fund identifier: GB0000150713
New purchase: £38.63
Buy 15.708 units @ 245.9p
Target allocation: 5%
Emerging market equities
Legal & General Global Emerging Markets Index Fund – TER 0.99%
Fund identifier: GB00B4MBFN60
New purchase: £84.25
Buy 162.9317 units @ 51.71p
Target allocation: 10%
UK Gilts
L&G All Stocks Gilt Index Trust: TER 0.25%
Fund identifier: GB0002051406
New purchase: £134.51
Buy 83.9663 units @ 160.2p
Target allocation: 20%
Total cost = £749.99
Cash = 1p
Total cash = 5p
Trading cost = £0
We rebalance to target allocations every quarter using new contributions. It’s a no-brainer as our plain ol’ index funds don’t incur trading costs.
Take it steady,
The Accumulator
- Note, I’m talking cash returns since the last update. I’m not referring to the gain/loss percentage since purchase. Same goes for all the other funds. [↩]
I know you’re not meant to look at index funds that way, but the constituents of the FTSE EU x UK (PDF) on which that HSBC fund is based (PDF) includes some fine (if not always ethical) companies and is over 50% based in Germany, Switzerland and France. The initial oh no, Europe, reach for my gun to eliminate Greek and now Portugese riff-raff isn’t the worry I thought it would be – these two make up 2% of the index. More worrying is the 17% allocated to Spain and Italy.
I’ve very seriously tempted to add some of this and consider this both a contrarian and a diversification win. The yield-TER of about 2% is not devastatingly exciting but not too bad. Heads-up much appreciated.
I hold these funds in my portfolio, although not so well balanced. I find that my real difficulty is being passive, especially in the face of rewards for being active. So when the HSBC Japan index took a dive of -11% due to the catastrophic events, it was too hard to sit on my hands and do nothing. I added to my holding and the gains as the index has risen over the last month have cancelled out the loss as things stand now in the Japan part of my portfolio. It’s a clear reward for timing the contrarian investment. OK, you could say it’s a risk taken as there was a possibility (however small in my mind) of the index falling further. But I suppose my point is that, having taken the risk and it having paid off, there’s a tangible reinforcement of my behaviour. Perhaps making me more likely to take risks again in future?
I have read Tim Hale’s Smarter Investing and understand the rationale for not trying to time the market, but when there are these very unusual events it takes a lot of nerve to stick to pure passive investing and not jump in.
I think this looks like a great portfolio, and studies show (time and time again) that rebalanced, low cost indexed portfolios like these will beat the vast majority of professional investors.
Half retired said something wise here:
“I find that my real difficulty is being passive, especially in the face of rewards for being active. So when the HSBC Japan index took a dive of -11% due to the catastrophic events, it was too hard to sit on my hands and do nothing. I added to my holding and the gains as the index has risen over the last month”
I’m not sure if I would call adding to a losing index (active investing). Perhaps it is, but I see it more as rebalancing.
Congrats on a fine post. And congrats to HalfRetired for making such a wise move. Even if the Japanese markets were still at their low level, I would call your move wise, for the long term.
Great Suggestions!
What would be the best between iii and H&L to build an ISA portfolio like this? Both seem well recommended, but I am not sure about relative costs (and cost of buying/selling ISA funds).
@ Ermine – I absolutely think it’s a good idea to know what’s in the index funds you own. Though I think the worry is less about what default means for Greece or Portugal in isolation as to the potential effects of contagion. Some predictions read like a financial 28 Days Later.
@ Halfretired – I like Andrew’s spin on your move. And indeed, most passive commentators warn against selling low and buying high – the natural human instincts. You’ve performed a nice, contrarian manoeuvre with by buying low and going against the herd. Still, I’d love to hear from someone one day who grabbed a falling knife and got their fingers chopped off. I’m interested in your name. Are you living in semi-somnolent bliss due to astute saving and investing in the past?
@ Paul – iii is less costly than H&L for this kind of portfolio.
I’m a newbie to investing and worked hard to come up with a diversified portfolio only to find yours a month or so later. My portfolio looks very similar to this one with a few exceptions.
I took a more “hands-on” approach regarding Northern America and diversified into three funds;
I hold a higher percentage in Pacific;
My UK percentage is lower; and
I included global small caps.
My allocation:
HSBC Amercian Index Retail 10%
HSBC FTSE All Share Index 15%
HSBC Japan Index 5%
HSBC Pacific Index 10%
iShares Emerging Markets 15%
Powershares EQQQ 10%
iShares S&P Smallcap 600 7.5%
HSBC European Index 12.5%
L&G All Stocks Gilt Index Trust 10%
IP Global Smaller Companies Acc 5%
Hopefully, this allocation won’t let me down in the long-run but will allow me to feel like I’m taking a little bit of a risk in the short-term.
Hi LBC,
That’s pretty gung-ho! You could consider Vanguard’s Global Small Cap fund if you want an index fund solution. I wonder why your US small cap fund is larger than your global holding. There will be US small caps in the global fund too.
The Powershares fund is US large cap which replicates your HSBC American fund except that EQQQ covers the Nasdaq 100 – an index that comes in for a lot of flak due to its eccentric ruleset.
I guess you’re aware that the Pacific fund is mostly Australia, South Korea and Hong Kong?
Hi TA,
Just a bit curious (naive perhaps) with regards your comment on iii being cheaper than H-L for this portfolio, I’m currently running a tracker portfolio with H-L.
Are you able to quickly detail the costs and explain why this is the case? Apologies if you have already and I have missed this.
MikeB
Hi Accumulator,
My portfolio usually stays the same save for Powershares and IP. I used to hold iShares Brazil and iShares South Africa I sold those and bought Powershares EQQ because I liked the tech bias, and IP because I was looking for some global small cap to include. I plan to sell those two after a year and pick two other ETFs and so on.
Now that you mention it, it is crazy to have more exposure to US small cap than global. I didn’t know the Nasdaq rules were eccentric to be honest – I’m off to do much more research after this.
I hold these in an ISA with Selftrade who unfortunately still don’t offer Vanguard. I was thinking about moving my funds to somewhere that did sell Vanguard but I paid into the ISA already.
Thanks for the advice.
@ Mike B – it will depend on what you hold and how you operate, but H-L have an ISA annual management charge, iii don’t, H-L trading fees tended to be more expensive last time I looked, depending on which tiered rate you ended up paying, and H-L surcharge some index funds. Look out for this subscript on their funds list: ¹ Additional annual charge of 0.5% + VAT is applied to this fund when held in the Vantage ISA and SIPP (capped at £200 + VAT per account). This additional charge is not accounted for in the Total Expense Ratio quoted above.
You mention that the above funds can all be purchased with iii. However, I failed to find the L&G All Stocks Gilt Index Trust on their website. Once you register with iii do you have access to a different website/full list of funds/investments available?
For some reason it’s become a nightmare to find since the site redesign. If you type in the fund’s mex code LGGTA in the home page search box then you’ll come up trumps.