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The Slow and Steady passive portfolio update: Q2 2018

The Slow & Steady portfolio is up 5.88% this quarter.

Our plucky Slow & Steady portfolio is well on the road to recovery after last quarter’s bloody nose. It’s sprung back 5.9% in three months, despite the first shots in a trade war zipping past our heads.

Once again reality defies the instinct to pounce on a pattern:

  • Last quarter’s biggest loser, Global Property, is the top performer this time. It’s up 13%!
  • The UK stock market enjoyed a nice 9.5% surge, despite the Brexit turmoil.
  • Like a golden UFO conveying cultists to paradise, the Bond Apocalypse has once again failed to materialise. Perhaps it’s timetabled by a British rail franchise?
  • Our Developed World and Global Small Cap holdings are still powering ahead as the notoriously overvalued US market defies gravity – or at least the gurus’ predictions.
  • Emerging markets are down nearly 3% this year despite being the asset class with the highest expected returns.

All of the above will change, of course, but about as predictably as a Trump press conference.

For now, here’s the blinding truth in Ultra-Dynamic-Dynamic-Dynamic Monstro-vision™:

Our portfolio is up 10.22% annualised

The Slow and Steady portfolio is Monevator’s model passive investing portfolio. It was set up at the start of 2011 with £3,000. An extra £935 is invested every quarter into a diversified set of index funds, tilted towards equities. You can read the origin story and catch up on all the previous passive portfolio posts.

Our annualised return is a that’ll-do-nicely 10.2% over seven years. I wonder how many people realize how good that is?

At that rate your money doubles every seven years. Knock off 3% for inflation and you double every decade in real terms.

Recently a good friend of mine ‘fessed that he’d been warned off investing by an ‘informed’ acquaintance who claimed low interest rates had left the stock market dead in the water. The aftershock of the Credit Crunch, an endless stream of media misery, and a decade of stagnant wages led him to believe the global economy had been clothes-lined.

How many others have missed out on double digit gains due to zero interest rate fairy tales?

The reality is we’re doing pretty well, aided and abetted by diversification. Last quarter the Slow & Steady Portfolio was down 3.1%. The FTSE All-Share was down 6.9%. We were cushioned by other markets doing less badly and our bonds bearing up.

Now our rebound is neck and neck with the FTSE despite our 30% bond safety belt. Viva global capital markets!

Before I sign off with the new transactions, my apologies for the late update this quarter. My day job got a bit out of hand these last few weeks.

New transactions

Every quarter we lay £935 at the feet of the Almighty Markets and hope they smile upon us. Our cash is divided between our seven funds according to our pre-determined asset allocation.

We use Larry Swedroe’s 5/25 rule to trigger rebalancing moves, but all’s quiet this quarter. We’re just topping up with new money as follows:

UK equity

Vanguard FTSE UK All-Share Index Trust – OCF 0.08%

Fund identifier: GB00B3X7QG63

New purchase: £56.10

Buy 0.269 units @ £208.67

Target allocation: 6%

Developed world ex-UK equities

Vanguard FTSE Developed World ex-UK Equity Index Fund – OCF 0.15%

Fund identifier: GB00B59G4Q73

New purchase: £336.60

Buy 0.972 units @ £346.27

Target allocation: 36%

Global small cap equities

Vanguard Global Small-Cap Index Fund – OCF 0.38%

Fund identifier: IE00B3X1NT05

New purchase: £65.45

Buy 0.218 units @ £300.41

Target allocation: 7%

Emerging market equities

iShares Emerging Markets Equity Index Fund D – OCF 0.24%

Fund identifier: GB00B84DY642

New purchase: £93.50

Buy 59.29 units @ £1.58

Target allocation: 10%

Global property

iShares Global Property Securities Equity Index Fund D – OCF 0.21%

Fund identifier: GB00B5BFJG71

New purchase: £65.45

Buy 31.9 units @ £2.05

Target allocation: 7%

UK gilts

Vanguard UK Government Bond Index – OCF 0.15%

Fund identifier: IE00B1S75374

New purchase: £261.80

Buy 1.599 units @ £163.74

Target allocation: 28%

UK index-linked gilts

Vanguard UK Inflation-Linked Gilt Index Fund – OCF 0.15%

Fund identifier: GB00B45Q9038

New purchase: £56.10

Buy 0.298 units @ £188.32

Target allocation: 6%

New investment = £935

Trading cost = £0

Platform fee = 0.25% per annum.

This model portfolio is notionally held with Charles Stanley Direct. 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 or tool for other good platform options. Look at flat fee brokers if your ISA portfolio is worth substantially more than £25,000. The Slow & Steady portfolio is now worth over £41,000 but the fee saving isn’t juicy enough for us to push the button on the move yet.

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.

Take it steady,
The Accumulator

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{ 68 comments… add one }
  • 1 Accidental FIRE July 17, 2018, 1:04 pm

    10.2% over ten years, not too shabby. Hopefully you won’t be looking back at those as “the golden years” and they will continue. Or at least something close.

  • 2 AAJ - clueless investor - July 17, 2018, 1:10 pm

    This is just such an excellent portfolio. It really is the benchmark for all portfolios. I think that if you have a different portfolio and different requirements it’s really worth comparing your portfolio to this to see if what you have that is different has been worth it.

    It’s also interesting to see how the UK has fallen behind the rest of the developed world. How many people have UK only portfolios? I know my FA initially set me up with a UK only portfolio.

    I am still not convinced by bonds though. No apocalypse but not beating inflation maybe?

  • 3 Matthew July 17, 2018, 1:51 pm

    I’m starting to rely on your results here because unless I take snapshots myself and calculate it every so often I dont know (and I’m lazy), my broker only tells me the gain/loss since I first bought, which also means profits crystallised by rebalancing or switching to a cheaper fund aren’t shown by my broker

    I do log in every day but only to make sure there’s enough cash to cover fees and that I havent lost it all to a tsb style computer cockup, and once they accidently gave me someone else’s money so I reported it so (hopefully) it’s less likely to happen to me

    I take a mild interest in performance but fully expect volatility and don’t put much stock in how much I have

  • 4 Oliver H July 17, 2018, 1:59 pm

    Not done proper analysis but the over weighting on the UK in the Lifestrategy is a big factor in to why they have not performed as well as this (looking at the 60 and 80).

    Funnily enough i had diverted some of my lifestrategy funds to the exact same dev world ex-uk and global small cap without actually realising it was part of this portfolio.
    I may end up abandoning lifestrategy altogether, as not living in the UK anymore it seems the UK weighting is totally unnecessary.

  • 5 dearieme July 17, 2018, 2:12 pm

    This gives a most useful insight into a passive portfolio for accumulators. Can you find a chum to do a model passive portfolio for decumulators?

  • 6 Petr July 17, 2018, 4:34 pm

    Hello. Vanguard FTSE Developed World ex-UK Equity Index Fund currently have 62.9% allocated to the US. I.e 23% of portfolio is the US stock. Of course USA is the (second?) biggest economy in the world, but what about region diversification?

  • 7 Mike July 17, 2018, 7:30 pm

    @AAJ – clueless investor –

    “I am still not convinced by bonds though. No apocalypse but not beating inflation maybe?”

    I am still 100% in equities. I too am not convinced by bonds, contrary to conventional wisdom. It feels like driving down the motorway at 70mph. Conventional wisdom says wear a seatbelt. I’ve never crashed a car, so I’ve no experience of things going wrong. But I still wear a seatbelt – so why don’t I buy bonds?

  • 8 The Investor July 17, 2018, 8:19 pm

    You might not be so concerned that bonds don’t beat inflation if the global stock market falls 30-50% and stays down there for a few years and your bonds return 10%. 🙂

    Not a prediction, not saying don’t own plenty of equities, not saying have 100% in bonds, not saying any of the things that people come back with when you make the case for diversification.

    AM saying this is why we diversify. Pays your money, takes your choice. 🙂

  • 9 Matthew July 17, 2018, 9:46 pm

    @ti – how could bonds possibly return 10%? – negative interest rates maybe?, quantitative easing maybe, or institutions forced to buy negative yielding bonds? Or flight to safety in a crash (why not flight to cash?) – all of these are fairly apocalyptic scenarios, we are due a crash, but I can only forsee rising interest rates/ tightening money supply as a possible cause, unless there are other ways we could crash?

    If I was a bondage investor i ‘d be happier with cash since I think interest rates are far more likely to rise than fall, but like you say, you never know. The downside for developed world government bonds just looks worse than the inflationary downside of cash.
    Also small cash holdings can get 4-5% with regular savers etc

    Maybe corporate/ emerging bonds actually have less overall risk than gilts when considering interest rate outlook? What has seemed safe for decades due to decreasing rates could now be very vulnerable and it’ll be a massive mindfluff to the established order of risk

  • 10 Adrian July 17, 2018, 10:11 pm

    I find it strange that there are always gloomy predictions for bonds but never the same attitude towards equities. Like this portfolio I hold government bonds because come a big market crash they are one of the few things likely to rise in value. Cash won’t. I don’t bother with corporate bonds I see them as a complete waste of time.

  • 11 Matthew July 17, 2018, 10:44 pm

    @Adrian – gov bonds would indeed rise in a market crash of either they were seen as better safety than cash or gold for private investors, or if institutions or fund managers are willing to tolerate such low/ potentially negative yields – but why would a private investor go to them in a crash? Such low rates are unprecedented and could change how gilts actually behave in a crash (as in they may not be such a preferred destination for safety) – and the interest rate risk that comes with them. But institutional habits of a flight to gilts at any price might still dominate making you right.

    Cash wouldn’t rise in a crash, true, but would in a rising interest rate environment, the only asset that does, and you can’t lose in a capital way (unless you exceed fscs protection), I think bonds need better compensation for the interest rate risk. Cash also has better liquidity that you can use to buy crashing equities, to seize the opportunity. Although I don’t condone market timing, but if you must keep a safe asset…

  • 12 dearieme July 17, 2018, 10:54 pm

    “I don’t condone market timing”: I do. Anyone who condones rebalancing a portfolio is condoning market timing, albeit of a mild rule-based variety.

  • 13 S July 17, 2018, 11:13 pm

    @ Oliver H
    Interesting point re LifeStrategy home bias. I’m in a similar situation, with one foot in and one out of the UK, and not quite sure where retirement and house purchase will finally happen. And in that situation the UK allocation of LS looks a bit much. I’m so far getting around it by holding 70% in LS80 and the rest in non-UK equity and bonds. But now thinking about switching to HSBC Global Strategy with similar fees and no UK bias.

    Regarding the discussion bonds or not: I’m a fairly novice investor so might be wrong in my thinking here. But for me the main point in bond funds in a fixed allocation fund portfolio is to offer an easy and systematic way to cash in some of the equity gains during bull runs, and then use this “cash” (bonds) to quickly shift back to equities after an inevitable stock market downturn. So in that scenario I don’t really mind if bonds return little more than inflation. I agree with Matthew that cash in high-paying savings and regular savings accounts is probably better than bonds, but I’m already using most of the available high-paying accounts for my emergency fund. And I feel that bond funds are still preferable over the currently available 2-2.5% for short-term cash where you’re already sure not to beat inflation.

  • 14 The Borderer July 18, 2018, 12:05 am

    When people talk about owning ‘bonds’, do they mean actually owning bonds, or bond funds?

    They are not the same thing at all.

    I am 25% in actual bonds, and will hold them to maturity. The current yield or price is therefore irrelevant. I know my nominal (excluding inflation) return with certainty. My risk is the issuer defaulting.

  • 15 FIREplanter July 18, 2018, 12:21 am

    How do you own actual bonds? I always thought it is easier through a bond fund.

    -FIREplanter

  • 16 Ritch July 18, 2018, 12:42 am

    If you know what it is and don’t mind sharing it, what is the Year-to-Date Total Return on this portfolio from 1/1/2018 through 6/30/2018? Thanks.

  • 17 AncientI July 18, 2018, 12:51 am

    How comes “Global Property” has done so well this quarter?

  • 18 Neverland July 18, 2018, 8:22 am

    @Fireplanter

    You can buy bonds much like you would buy shares through your broker, but not all brokers offer the service

    Its not as heavily advertised as bond funds, as there is no commission in it for the broker, just a trading charge

    It used to be that you could buy gilts at the post office counter, but that made too much sense so the service is no more

  • 19 The Borderer July 18, 2018, 8:40 am
  • 20 Oliver H July 18, 2018, 8:53 am

    @S ,

    I have a similar setup but I also have some holdings in LS20 and 40 – which I don’t think I realised had rather noticeable corporate bond holdings. For LS80, the majority of the bonds are global, yet they are hedged. I probably don’t really want the hedging as I don’t really plan to return to the UK and am more interested in my local currency.
    I also liked the appeal of life-strategy for exactly the same cash-in reason, but seeing as I am now holding multiple funds and occasionally shifting around anyway I may be served by something closer to the Slow and steady portfolio, just with overseas instead of UK bonds.
    Alternatively, I do have holdings here but trading is more expensive and additionally in the UK my money is in an ISA and I have a number of years before I have to pay on Capital Gains tax earned abroad.. so may make sense to go all high in on equity in my UK account and lower risk here – at least in the short-medium term.

  • 21 AAJ - clueless investor - July 18, 2018, 9:03 am

    @S I also think that bonds are there for locking in equity gains and then swapping to back to shares during/after a crash. I think that is a good strategy for a retail investor. As long as people realise the opportunity to make large gains, as seen in the last, with bonds is likely over.

    I thought about the above approach, and I did have some money invested in bonds funds. However, I cashed them in a year or so back when I realised I wanted something to offset a potential crash. I started buying gold instead. I like gold because it’s shiny and I’m a clueless investor 🙂

    This brings me back to my original comment. I’ll use the model portfolio as a barometer and compare when I have done with the model portfolio. I am expecting that having a high equity and small bias I’ll end up with more volatility with the potential for more gains. Time will see and I’ll be returning here for updates over the years to come.

  • 22 The Investor July 18, 2018, 9:30 am

    @The Borderer — Morning! The notion that individual bond ladders have a markedly different risk profile to individual bonds is IMHO not quite right. It’s true that if you need a certain nominal sum of money on a certain date then they reduce that risk (sequence of return risk I guess). However if you own them as broad exposure in a certain allocation in a portfolio they’re basically the same thing.

    It has to be this way really — a bond fund is just a collection of individual bonds, and if there was some great opportunity to take out risk it’d be arbitraged away. 🙂

    Unfortunately we haven’t written a specific article on this, but here’s one from A Wealth of Common Sense:

    http://awealthofcommonsense.com/2015/10/misconceptions-about-individual-bonds-vs-bond-funds/

  • 23 Matthew July 18, 2018, 9:41 am

    @aaj – as long as you can accept that locking in equity gains through rebalancing usually has a higher opportunity cost than what you gain buy buying into the crash – we are late in the cycle but the best gains sometimes come late. Rebalancing to bonds is more for reducing volatility than any bonus, although there could be more “rebalancing bonus” between something more volatile held in an etf – ie emerging markets, micro cap or commodities

  • 24 The Investor July 18, 2018, 9:44 am

    @all — I agree a slug of cash in a higher-interest account (as such things go!) makes sense as (a potentially major) part of a fixed income allocation for private investors these days. However cash and bonds are not the same and we shouldn’t drift into thinking they are.

    It’s pretty exhausting discussing all this every three months for five years; we’ve plenty of articles on the site. 🙂

    Do I expect equities to return more than gilts over 5-10-20 years? Yes. Are interest rates low? Yes. Are expected returns on bonds low? Yes (but make sure when looking back at rosier high yielding history that you’re remembering that inflation was much higher too. Real returns haven’t crashed to the same extent.)

    Does every quarter where everyone says “gilts! yuck!” and then they proceed not to crash bring us closer to the quarter where, like everything, they finally do? 😉 Yes.

    Do these factors upend the theory of diversifying across asset classes for passive investors wanting to improve their risk-adjusted returns?

    No.

    One thing people are forgetting is low bond yields to some extent are a predictor of future return expectations across the spectrum. If government bond yields are low, in theory it implies lower returns from equities.

    Now, I accept the past 10 years has been unusual and this relationship has likely to an extent broken down (I was long more optimistic than most about this bull market’s potential accordingly, e.g. see this from 2011: http://monevator.com/the-investors-2020-vision/) but the basic tenets will likely roughly hold true.

    Also what *I* happen to think about future returns is irrelevant from the perspective of passive investing. Personally I am an active investor, and currently my fixed income allocation is in cash, floating rate notes, and hedged US TIPS and short-term US treasuries. I own no gilts.

    But before anyone goes “Aha! Hypocrite!” keep in mind I recently sold an EM bond fund, I have been in and out of short-term corporate bond funds, I sometimes trade individual bonds and preference shares, and my single largest shareholding in a single company is approaching 10%. Also I am involved in the market almost every day.

    i.e. I am a very active investor, and my risk profile and returns will have little correlation with a broad 60/40 portfolio, for good or ill.

    For passive investors to say “I know I can’t beat the market with stocks but I also know better than the multi-trillion dollar bond market” is pretty odd, yet we see it day after day after day. 🙂

    Passive investing works partly because an investor is humble about what they know (and also because of low costs etc!) and invests accordingly. Mix and match that at your peril. 🙂

    p.s. About the only sign of market euphoria I currently see is this gung-ho enthusiasm for equities. Investors of only a few years vintage may not believe I used to get shouted down for suggesting buying shares in 2008 / 2009 / 2010. People HATED shares. They will again some day.

  • 25 Paul Harsley July 18, 2018, 9:52 am

    Is there a download of this spreadsheet available? I can’t figure out some of the formulas to reproduce all of the final calculations. I really like the simplicity of this portfolio and I mirror it in principle with a few differences to the exact funds.

    Thanks for the work monevator!

  • 26 The Investor July 18, 2018, 9:57 am

    i.e. I am a very active investor, and my risk profile and returns will have little correlation with a broad 60/40 portfolio, for good or ill.

    Actually, this is over-stating it. What I meant to say is I have abundant idiosyncratic risk in my portfolio, so not getting any fixed income exposure through gilts (mostly for reasons to do with the overall posture of the portfolio) is the least of my issues. 🙂

    Whereas if you’re a traditional passive investor who chooses to skip gilts because you know best, that is likely a big idiosyncratic risk factor for you, for good or ill.

    p.s. Also changed “everyone screams” to “everyone says” because I don’t mean to imply the very reasonable conversation people are having here involves screaming! Just the over-dramatizing writer in me.

  • 27 Matthew July 18, 2018, 10:57 am

    @ti – I think private investors are in a stronger position than institutions in that we, individually, can choose to avoid government bonds, it’s the regulation that forces them to buy even when at negative yields that is distorting the market, if there was a real crash in gilts if rates did shoot up (more possible from such a low base than it ever used to be) people will be so spooked that that regulation that they must buy go bonds might change.
    A rise from 0.5% rates had never happened before I think? It’d make me nervous if I held gilts.

    We are also more free with our allocations than institutions are, we don’t have to worry about tax so much (so equities make even more sense), etc

    I need enlightening about why bond yields predict equity returns? I was thinking cheap credit and supply of money was good for equities, but granted I could imagine low bond yields do imply that businesses aren’t issuing many corporate bonds to grow, but I think it’s a lot to do with government/boe interference.

    Also I think the boe would be bricking it about raising rates on all the huge mortgages out there, and gov wouldnt like more expensive gilts, but they need to get their policy lever back

  • 28 Matthew July 18, 2018, 11:28 am

    I must be wrong actually about institutions and regulation distorting the bond markets, because otherwise they wouldn’t react to rate changes as the institional demand would be constant I presume, so the bond market and any negative yields are actually the work of private investors, maybe who don’t change allocation with interest rates, sticking to habits formed from a time of higher rates, this being the case I suppose bonds would behave like they always have in a low interest rate crash, although maybe not quite so intensely because there have been some detractors.

    So it depends what you’re trying to defend against – gov bonds should rise in a pure equities crash but not save you against rates.
    And cash won’t rise in an equities crash but will hedge your bonds against rate rises

  • 29 The Investor July 18, 2018, 11:49 am

    @Matthew — There’s a lot of “thinking out loud” coming from you on the site at the moment. 🙂 That’s understandable in terms of your reaching your own conclusions, but as a site owner it’s a bit worrying to me in that I haven’t got anything like enough time currently to address all speculation etc.

    Perhaps a little less commenting and a little more reading? 🙂

    The risk-free rate (UK government bonds for our purposes) in theory underlies all valuation, via what’s called equity risk premium. See this article:

    http://monevator.com/what-is-the-equity-risk-premium/

    You might also read this article, particularly point 10 on the same subject:

    http://monevator.com/the-problem-with-low-interest-rates/

    More on bonds generally:

    http://monevator.com/tag/bonds/

    Hope that’s all of interest. 🙂

  • 30 The Investor July 18, 2018, 11:53 am

    @Matthew — If I may, there’s a fair amount of “thinking out loud” coming from you at the moment, with all kinds of speculation in the mix. That’s fair enough from your point of view, but it’s a bit exhausting to me as a blog owner because I wouldn’t want new/unsure investors to be misled by some of your comments, and very sadly I haven’t got any time to address all your points (some of which are perfectly valid/interesting to be clear 🙂 ).

    Perhaps a bit more reading and a bit less writing?

    All valuation is in theory based off what is called the equity risk premium. See this article, then Google for more:

    http://monevator.com/what-is-the-equity-risk-premium/

    You might also be interested in this article, particularly point 10 re: the above. As you can see we’re far from blind here to the risks of the low-rate era… 🙂

    http://monevator.com/the-problem-with-low-interest-rates/

    Here’s all our articles on bonds for further reading and research, if you like:

    http://monevator.com/tag/bonds/

    Hope this helps / is interesting.

  • 31 The Borderer July 18, 2018, 2:26 pm

    @TI
    As I am now in deaccumulation, to quote the wise words from either your good self or TA (I can’t remember which, but it stuck with me), “if you’ve already won the game, why keep playing?”

    So, I hold individual bonds to provide certainty.

    Because Bond funds are not valued by a price but rather a net asset value (NAV) of the underlying holdings in the portfolio, if bond prices are falling, the bond fund investor can lose some of their principal investment (NAV of the fund can fall).

    IMHO Bond funds therefore carry greater market risk than bonds because the Bond fund investor is fully exposed to the possibility of falling prices, whereas the bond investor can hold his or her bond to maturity, receive interest and receive their full principal back at maturity, assuming the issuing entity does not default. Although equally, the Bond fund investor can participate in rising prices, whereas the individual bond investor will not receive more than the principal investment (unless they sell their bond in the open market before maturity at a higher price than they purchased it).

    Now, in a period of falling interest rates, obviously bond prices should rise and the NAV of the Bond fund should equally rise – witness the bull market in bond funds. However, I see interest rates rising in the foreseeable future, hence bonds not bond funds.

    Whether my philosophy is valid for long term accumulation is maybe a different matter?

  • 32 Matthew July 18, 2018, 2:51 pm

    @ti – no worries, I don’t expect people to have time, I’m only trying to add some food for thought, thst people can take or leave, something new, and maybe protect people against underestimated risks, whilst consulting the greater knowledge of anyone here (an undeniable resource) to deal with gaps in the things I’ve read.

    I think this site appeals to more than one audience, but always will be of interest to anyone hungry for more (although I’ll try to bear other people in mind), like all the links you graciously provide – I wouldn’t have the energy myself to keep churning that out and I wouldn’t be surprised if you’re generally exhausted all round from the responsabilities. When I was first learning I personally never ventured near the comments, simply because the pages gave so much to think about, but I think you believe novices will, you have the experience I suppose. It’s hard to say whether this makes you money because a large amount of new investment might push up prices slightly

  • 33 The Investor July 18, 2018, 3:28 pm

    @The Borderer — Glad you have found some of words wise! 🙂 Just briefly as out at work and on phone, I think this is a logical fallacy, or perhaps better put a mental bucketing issue. 🙂 If you follow the links I’ve supplied or Google, they explain why.

    The benefit of individual bonds (apart from possibly very slightly lower costs) is that if you need say £10,000 in September 2023, you can buy a gilt to deliver exactly that with no risk, barring default by UK government which I consider extremely near-zero. Otherwise individual UK government bonds fall and rise like bond funds / a ‘ladder’ of bonds is the same as bond fund of equivalent constituents. As individual bonds mature they must be rolled over into new individual bonds to preserve the ladder, so you are still exposed to interest rate risk.

  • 34 The Investor July 18, 2018, 3:29 pm

    p.s. Sorry, just to add I have no problem whatsoever with your preferring to hold individual gilts and I can imagine doing it myself. But there’s no free lunch here, in my view, either from a risk or return perspective, with a collection of individual gilts vs a gilt fund, and I want to make sure other readers are aware of that. 🙂

  • 35 Anon July 18, 2018, 3:57 pm

    Plugging this portfolio into Portfolio Charts (as best I can) shows a deepest drawdown of 42% and longest of 13 years (1970). I suppose the inclusion of gold would soften that. Real CAGR since 1970 is 5.7. Not bad, if you can sit tight and weather the storms. I’d assume you’d need a decent cash buffer though.

  • 36 The Investor July 18, 2018, 4:06 pm

    @Anon — Interesting. Keep in mind this portfolio is tweaked every year to hold fewer equities and more bonds. (See the links in the box in the middle for more info). So it started riskier. A passive investor in accumulation mode wouldn’t need a cash buffer, this isn’t designed to be a portfolio for someone relying on it for spending. It’d designed to be added to every year and rebalanced along the way, according to the rules we’ve set out. 🙂

  • 37 Anon July 18, 2018, 5:05 pm

    @The Investor – fair comment. I’m always curious about how certain portfolios will fair when the SHTF. E.g., somebody like Root of Good who’s portfolio seems to climb inexorably year on year. Anyhoo…

  • 38 Mr Optimistic July 18, 2018, 7:06 pm

    I am thinking of spreading bond investments between funds and direct holding, specifically a 10year or so IL gilt. This will be money I don’t expect to need before then. Holding a direct bond is a constraint on rebalancing and liquidity I reckon, also the duration decreases each year unlike a fund which will stay fixed. Holding a real bond also limits me meddling, hopefully.

    On some platforms, direct holdings will save on fees.

    All a bit second order: as it says elsewhere on this site, asset allocation is what counts first.

  • 39 The Borderer July 18, 2018, 9:40 pm

    @TI (34)
    A very fair point. And I think the link you provided (22) makes some very valid comments.

    But, in deaccumulation, my aim is not a bond ladder, rolling bonds over as they mature, which, as you say, is basically the equivalent of a bond fund (with the added risk of default, which is much less in a fund, but with slightly lower costs).

    Rather, it provides a certainty of future cashflows that IMHO are so important in deaccumulation. With 75% of my portfolio diversified in equity, property and all the other good things :-), this provides me, at least, with a stability that helps a good nights sleep.

    All the studies I have ever read regarding diversification refer to bond funds. Do you know of any that refer to actual bond holdings?

    Maybe I will be living in interesting times? (no pun intended)

  • 40 Naeclue July 18, 2018, 9:46 pm

    I hold a gilt ladder, but don’t hold to maturity. Instead each year, when I rebalance my portfolio, I sell the short dated bond and buy a longer dated one. So much like a bond fund, but lower cost. I do pay dealing fees and lose a little on bid/ask spread, but I only trade once per year and only with a seventh of the gilt portfolio.

    There have been a few times down the years when I have been really pleased I held gilts and fully expect to be pleased again one-day.

  • 41 The Borderer July 18, 2018, 9:59 pm

    @Mr Optimistic

    Yes, Mrs B and I are planning to replace my car (120,000 miles) in 2019 – the old girl has given sterling service but needs must.

    I have a bond maturing then. My cashflow needs are met. Good night’s sleep.

  • 42 The Borderer July 18, 2018, 10:08 pm

    @all. The ‘old girl’ is the car, by the way! :-)))

  • 43 Viv July 19, 2018, 1:14 am

    Hi – very logical and helpful indeed – one question : would you know whether index funds ‘situated’ in the UK or overseas, from a tax point of view, if purchased through a UK broker ? I’m non UK and want to be careful that these don’t fall within the purview of UK inheritance taxes.

  • 44 The Borderer July 19, 2018, 8:03 am

    @TI

    Sorry to keep banging on, but this is highly relevant to the points you make. I guess I’m one of those who places a high premium on ‘control’.

    https://personal.vanguard.com/pdf/s354.pdf

  • 45 The Investor July 19, 2018, 9:08 am

    @The Borderer — Looks a well-constructed paper, cheers! Again, I’m not here to change your strategy, was just looking to highlight (as Vanguard confirms here, as you know) that it’s a (common and easily made) ‘myth’ to feel there’s a big difference between holding individual bonds and a bond fund. 🙂

    The big advantage of individual government bonds as I mentioned is matching specific cash liabilities on certain dates with specific bonds. If similarly holding individual bonds to produce a series of known cashflows stretching into the future helps you sleep at night, then all is well in the world! 🙂 There will be a cost/hassle factor to pay but sounds as you say like you’re ready to do that for the control/certainty of cash flows it gives you.

    I’ll try to write my own article about this at some point. It’s a bit counter-intuitive and I understand why people think at first glance there’s a bigger difference.

    I know you appreciate this, but I should stress for the benefit of anyone else reading that we’re talking about the highest-quality government bonds here. (E.g. UK gilts).

    If you’re a private investor holding corporate bonds individually, then there’s far more risk than with a bond fund unless you feel you’ve some edge in bond selection, due to the risk of corporate bonds defaulting and you almost inevitably having far less diversification than a typical bond fund. (In practical terms we can assume no default risk with gilts.)

  • 46 Fremantle July 19, 2018, 4:21 pm

    For critics of Lifestrategy UK domestic bias, it is worth remembering that the FTSE 100 has a multinational bias of its own due to the popularity of international companies listing here.

  • 47 Tim P July 19, 2018, 10:12 pm

    Hi. Just wanted to say thanks for the overall debate on the comments above. Quick question – I’m wanting to invest in property funds but can’t find any pros and cons of investing in direct funds or indirect funds. Advice, food for thought, etc would be appreciated. Can anyone point me towards any useful links?

  • 48 SHalp July 20, 2018, 2:37 pm

    After reading Tim Hale’s Smarter Investing, I really wanted a simple portfolio that I could just drip feed £ into monthly and collect in 10-15 years when I need it, along with the same strategy for my pension.

    The bias within the LifeStrategy (where I currently hold my funds) is something which concerns me, I’d like to reduce this and it’s noted that Vanguard Global All-Cap would do the trick. However, I still want the 80/20 split in vanguard 80.

    Do you recommend Moving my LS80 into Global All-Cap and getting a bond fund for the 20% bonds – if so which one? Or, should I keep my LS80, and just invest in the Global All-Cap also, although this would also reduce my bond allocation?

    This might be a “personal opinion” response, but it’s not addressed in the book.

  • 49 Oliver Hazan July 20, 2018, 3:07 pm

    @SHalp

    If you are drip feeding you’d likely be able to rebalance just with new money, if you went down that route. Unless there’s a crash in which case you’d likely need to sell bonds and buy equity

  • 50 Tim P July 20, 2018, 4:20 pm

    I think I may have answered my own question. Indirect REITS seem to be more, stable less risky and offer greater diversification. From my google search, I’ve not found much on the returns side of things though in terms of direct property funds vs indirect REITs.

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