I have been in a state of shock since the Brexit [1] vote. Urgently consuming the latest news and opinion like a soap opera compulsive.
- Who’s in charge?
- What’s the plan?
- What does this mean for our society?
Answers: It changes by the day. There isn’t one. Who knows?
When uncertainty abounds, instinct takes over. What’s the threat? Who’s the enemy? How bad can it get? Should I get outta here?
Can someone please tell me what’s going on?
Explanations abound. It’s rich versus poor. Old versus young. Metropolitans versus provincials. The informed versus the ignorant.
One thing’s for sure, our political elite aren’t ones to let a good crisis go to waste. They’re setting about each other like competitors in a new and deadly Olympic biathlon. It’s the 400m hurdles followed by a Wild West shoot-out.
My best hope is that we don’t just leave it to the remains of the top tier to repaint the playing field to suit their game. When society’s dividing lines are thrown into stark relief, the best thing we can do is cross them.
We need to understand why those on the other side think the way they do. We need to stand against hate. We need to be more engaged and involved than we have been. We need to spend more time with people who don’t think like us. Few of us are as informed as we thought we were.
Recrimination or retreat from what’s happened or trying to roll it back with second referendums can only deepen the divide that weakens us.
And now for some investing
Our doughty passive portfolio has been an island of calm amid the uncertainty. In fact, if you own a globally diversified portfolio you were probably as relieved as I was.
Everything went up:
[2]
The Slow & Steady portfolio is Monevator’s model passive investing [3] portfolio. It was set up at the start of 2011 with £3,000 and an extra £880 is invested every quarter into a diversified set of index funds, heavily tilted towards equities. You can read the origin story [4] and catch up on all the previous passive portfolio posts here [5].
Our bond funds swung first to the rescue, and our standard issue UK government bonds put on 2.8% in the week since the vote.
UK inflation-linked government bonds did even better, up 3.8%.
But they were the laggards. Our overseas equities took us even higher:
- Developed world ex UK up 6.1%
- Emerging markets up 7.8%
- Global property up 8.5%
But what’s this – even the UK’s FTSE All-Share ticked up 6.2%?
Maybe the world isn’t ending, after all.
Sure, UK equities have hardly covered themselves in glory through 2016 so far. They’re up 5.4% while the portfolio as a whole is up 14.5%. The gift of diversification just keeps on giving.
Our bonds compensate for the uncertainty in our domestic market, and the falling pound is partially offset by global assets valued in rising foreign currencies.
I’ve already noticed a couple of items being more expensive in the shops, but my portfolio acts as a natural hedge against my declining purchasing power.
Is this an argument for doing nothing?
Definitely not. It’s just we’ve already made the right moves. Our passive portfolio is a solid, all-terrain vehicle – well capable of dealing with uneven ground like this.
I’m not saying it’s indestructible or can’t get bogged down in quicksand. But because it’s built from parts sourced from around the globe, it does a good job of absorbing domestic shocks.
Brexit is a timely reminder that any one country can be tipped into turmoil. Our global outlook spreads that risk. If your job is tied to the prospects of UK-focused companies, a globally diversified position furthermore acts as a partial hedge against any misfortune you might face when recession stalks the land. And should the shock waves ripple out across the globe, our strong position in the US (about a quarter of the portfolio) takes advantage of the US dollar’s tendency to appreciate when global markets recede.
Meanwhile, our anti-inflation, index-linked bonds will respond well if UK inflation rises and hurts our UK equities and nominal bonds.
You could tinker with your asset allocation in the light of Brexit, but why?
Nobody knows how this is going to play out, and the impact will take years to unfold. This is probably one of the reasons why markets bungeed back up after June 24.
‘Positioning’ yourself in the face of such uncertainty is like letting a monkey pilot a spaceship.
The best you can do is adjust to defend against specific, personal risks. For example, if you’re particularly vulnerable to rising inflation then up-weighting your cache of inflation-linked bonds is justifiable.
Personally, I am going to make one change with my own finances.
I’ve been slowly building my emergency fund over the last few years. It now equals six months worth of expenses should both Mrs Accumulator and I be axed simultaneously. I was about to redirect those funds into equities as part of my drive for financial independence [6], but I think I’ll leave things as they are.
There’s no harm in plumping up the cash cushion given the odds have just shortened on a recession.
New transactions
Every quarter we push another £880 into the market’s slot. Our cash is divided between our seven funds according to our asset allocation.
We use Larry Swedroe’s 5/25 rule [7] to trigger rebalancing moves, but all’s quiet this quarter. So we’re just topping up with new money as follows:
UK equity
Vanguard FTSE UK All-Share Index Trust – OCF [8] 0.08%
Fund identifier: GB00B3X7QG63
New purchase: £70.40
Buy 0.432 units @ £163.12
Target allocation: 8%
Developed world ex-UK equities
Vanguard FTSE Developed World ex-UK Equity Index Fund – OCF 0.15%
Fund identifier: GB00B59G4Q73
New purchase: £334.40
Buy 1.311 units @ £255.13
Target allocation: 38%
Global small cap equities
Vanguard Global Small-Cap Index Fund – OCF 0.38%
Fund identifier: IE00B3X1NT05
New purchase: £61.60
Buy 0.287 units @ £214.75
Target allocation: 7%
Emerging market equities
BlackRock Emerging Markets Equity Tracker Fund D – OCF 0.25%
Fund identifier: GB00B84DY642
New purchase: £88
Buy 73.272 units @ £1.20
Target allocation: 10%
Global property
BlackRock Global Property Securities Equity Tracker Fund D – OCF 0.23%
Fund identifier: GB00B5BFJG71
New purchase: £61.60
Buy 32.489 units @ £1.90
Target allocation: 7%
UK gilts
Vanguard UK Government Bond Index – OCF 0.15%
Fund identifier: IE00B1S75374
New purchase: £132
Buy 0.811 units @ £162.83
Target allocation: 15%
UK index-linked gilts
Vanguard UK Inflation-Linked Gilt Index Fund – OCF 0.15%
Fund identifier: GB00B45Q9038
New purchase: £132
Buy 0.765 units @ £172.57
Target allocation: 15%
New investment = £880
Trading cost = £0
Platform fee = 0.25% per annum.
This model portfolio is notionally held with Charles Stanley Direct [9]. You can use that company’s monthly investment option to invest from £50 per fund. Just cancel the option after you’ve traded if you don’t want to make the same investment next month.
Take a look at our online broker table [10] for other good platform options. Favour flat fee brokers if your portfolio is worth substantially more than £20,000.
Average portfolio OCF = 0.17%
If all this seems too much like hard work then you can buy a diversified portfolio using an all-in-one fund such as Vanguard’s LifeStrategy series [11].
Take it steady,
The Accumulator