The Slow and Steady passive portfolio update: Q2 2020

I do have the feeling that theres so much correlation between most indicies you could essentially hold something like small caps and still effectively be exposed to FAANGS and EM because everything moves mostly in step and one index is like an amplified version of another. If things are perfectly priced for their risk it wouldn’t really matter what you buy as such, just choosing where on the risk spectrum you want to be.

Because when people up their risk, they buy everything at once in the same ratios, and when they sell they sell in the same ratios

I suppose also we already have EM exposure through the activities of mega caps, and its right to hold both to get the appropriate exposure, so EM could be a larger part of the world than its own market cap would imply

Interesting update once again – thanks for your continued efforts! 🙂

One thing I find curious is this fixation people have with gains and losses expressed as percentages, and how the gain % must be exponentially larger as loss % goes up. As if the percentage being bigger is a psychological hurdle.

Similarly I once read someone panicking in a forum that “if your portfolio suffers a 90% loss, you need a 900% gain to get back to where you were!!” – as if that 900% was somehow a shocking number in itself (as if the loss of 9/10ths of your portfolio wasn’t bad enough).

It’s just a ratio, ultimately. If my portfolio shrinks at a ratio of 9:10 (or a 10% loss), then I need a ratio of 10:9 to get back to where I was. If you express it that way, you lose the added hyperbole that gain %s seem to carry.

Or maybe percentages are a better way of looking at the investing world and the increased difficulty gains have versus losses. 🙂

Over on the Bogleheads forum -the home of John Bogles followers -the success of index investing and buy and hold forever has been so good that all they can accuse each other is of laziness
ie once the indexes of equities/bonds/cash have been chosen
The Asset Allocation set
The Investment Plan written down
There literally is nothing else to do
This is of course an impossible position for most investors /human beings to maintain
It takes real knowledge and self discipline to leave investments alone and not meddle.
But if you can do it as is shown above success awaits( and a good retirement!)
xxd09

For those who like to be catatonic, the Lifestrategy 80 is up just over 2% in 12 months, but down nearly 3% since end of December. LS60 has actually done better – up more over 12 months, down less.

I have a feeling my rebalancing strategy will call for sinking this year’s ISA allowance into the FTSE250. I knew there was a reason I was putting it off…;-)

“it seemed probable to me that my income prospects were permanently impaired. I partially justified diverting a large percentage of my earnings into the capital markets as a way of offsetting a dark future for somebody who’s chance to break into the 1% had likely passed.”

Amen to that.

@vanguard – indeed, especially in drawdown, but for me I think that will be a £ amount rather than a %, I don’t mind volatility during accumulation and I gather that although you can have a rebalancing bonus it’s usually more about risk control because bull runs sufficiently long – so at the mo just keep the cash emergency fund & equity investment. I don’t actually want to ever retire until forced to (I can sleep when I’m dead, like to be useful), but I actually feel safer in the long term by diversifying my income as quickly as possible (health issues etc) – and I don’t really have anything better to do with my savings, it feels like a productive thing to be part of the engine of capitalism to drive development, better than giving to charity

I’ve been rereading some of the older posts linked to this portfolio, and following the recent discussions about bonds.

You decided to ditch the inflation-linked gilt fund from the model portfolio, because of its long duration as I understand it. If you had a longer time horizon – perhaps 25 years – do you think you would have stuck with the gilt linker? My understanding was that duration should normally match the time horizon – but maybe I’m wrong about all that.

I also have another, possibly naive question, about the bond allocation. I read people talking about pulling out of funds with a longer duration, because of the interest rate risk. Again, I understand that if the duration exceeds the time horizon.

But doesn’t this raise the same market-timing problems that would arise with equities – i.e., if the problem is that interest rates are very low and might rise, other people will have realised this and it will be priced in. So that there is no point trying to second-guess? Or do people feel this is less of a problem with bonds?

@ Haphazard – essentially you are correct that bond duration should match time horizon. There comes a point though in every passive investor’s life where it may serve them well to look at the balance of risks. By way of analogy: imagine in 1989-90, you’re invested in a Japanese equity tracker. The P/E ratio has hit 60, many multiples of its historical average, Japanese shares are gobbling up an outsized portion of the global stock market… do we accept that we have no edge, that there is nothing we should do because we’re ‘passive’, who are we to second guess the wisdom of global capital? Or is it a bubble? Or at least a highly risky situation where it may be prudent to scale back your allocation to Japanese equities due to unusual market conditions.

There are techniques for dealing with this using a rules-based approach such as over-balancing. Essentially you shift your allocation by some pre-determined amount in ratio with the market moves. No guarantee it’ll work, but it can make sense.

Back to bonds: we’re in a historically extreme situation. Interest rates through floor / looking glass. QE pumping like we’re at an all-night rave. That loads up the risk for long bonds. My over-balancing solution was to be more cautious. Not try to outguess the market – there are long bonds in the intermediate gilts fund – but to prune back the risk exposure. It’s interesting to note that so far that’s been dead wrong. Returns would look better at the current time if we were just rocking long bonds. There’s a long way to go yet though.

@ Moongazer and C-Strong – I think clawing your way back from a big loss is a tough psychological hill to climb. Especially in a world where we can check in on our portfolio at the touch of a button and see that it’s still down. Year in, year out.

I agree that being familiar with the nature of market crashes is important for every investor. Know your enemy! One of the problems is that often drawdowns are presented too optimistically. For example, some sources don’t show how long it took the market to bounce back in real terms, after inflation. ERN wrote a good piece on how long it can take:
https://earlyretirementnow.com/2019/10/30/who-is-afraid-of-a-bear-market/

Wade Pfau showed that it took the UK stock market 10 years to recover from the 1973-74 crash. Down 71% in 1973, it wasn’t above water again until 1983:
http://wpfau.blogspot.com/2014/01/greatest-hits.html?m=1

@ Dawn – well done. Good to know you held on when tested.

@ Vanguardfan – haha. I know how you feel.

@ The Accumulator – I’m always interested to see the performance of The Slow and Steady portfolio. It fascinates me that my own, different portfolio has had a very similar performance to yours over the last six months. It almost seems to be the case that if you have a defined process for contructing an index-based, low cost portfolio, don’t tweak it too often, follow the process and rebalance occasionally, the details don’t matter that much!

With regard to the Japan scenario, I allocate the equity components of my portfolio between the USA, Europe ex UK, Japan, Pacific ex Japan and UK based on the GDP of each area. This is implemented via Vanguard funds using VG Dev World ex UK as a core holding. This is to avoid over-exposure to any individual area which is experiencing some kind of bubble. It requires a bit more effort to do this and I obviously have to check the VG Dev World ex UK geographic allocations but its an approach with which I’m comfortable. Having said all that, I wish I’d over-rebalanced during the depths of the plunge! I haven’t made any adjustment so far because of Covid-related plunging economies but may well schedule a review for January 2021 when some of the dust has settled.

Re bonds and investment horizons, there is a very interesting discussion over on Bogleheads at https://www.bogleheads.org/forum/viewtopic.php?t=259330 .

@AnAdmirer
I’d assume the 8.99% annualised return is calculated using the method described here:
https://monevator.com/how-to-unitize-your-portfolio/

Personally, I track returns using the CAGR instead. Not what’s recommended here, but it works for me. I’d rather compare against mortgage rates and cash savings rates than against other funds. Based on my (possibly questionable!) sums, the slow&steady CAGR is 8.16%, which is in the same ball-park as 8.52% and 8.99%. Close enough for me.

My own CAGR is much lower at a bit under 5%. A heavier UK weighting brings it down, but I didn’t know much about diversification when I started out…

@David Yes, do it now. The sooner you stop paying those hideous fees the better for your expected returns.

It’s only really the US market that has bounced all the way back, most other markets are still down, substantially so in the case of Japan and the UK, so don’t look overvalued. And most active funds are in love with US tech (sweeping generalisation I know) so are probably at least as exposed to the US market as a global tracker.

Your tacit assumption is that active funds are better able to deal with volatile markets, but studies have generally shown this not to be the case.

@ AnAdmirer & Adam – I don’t use unitisation as that’s a time-weighted return i.e. all time periods are weighted equally, irrespective of how much money is invested when. It attempts to eliminate the effect of cash flows into or out of the portfolio. It’s the method used by mutual funds when preparing their published performance reports.

I use XIRR which is a better way to determine your personal return. It’s a money-weighted return that specifically adjusts for the portfolio impact of contributions and withdrawals. Time periods in which more money is invested have more of an impact on the overall return than equivalent time periods in which less money is invested. For this reason it can differ substantially from the time-weighted rate of return when large cash flows occur during volatile periods.

There’s a good explanation of XIRR here: http://whitecoatinvestor.com/how-to-calculate-your-return-the-excel-xirr-function/

The 8.99% return is an annualised return which is the same as CAGR.

In case of clumsy data entry, I also track the portfolio on Morningstar’s Portfolio Manager. It shows a 9% annualised return using its money-weighted method. Effectively same as 8.99% bar some difference in rounding somewhere.

@ Haphazard – yes, if the BOE threw QE into reverse then you could expect bond prices to fall and market interest rates to rise. Price falls would be unlikely to happen evenly across all bonds, and how steep they would be is an open-ended question. Some fairly counter-intuitive behaviour could follow depending on how it was done and how the market weighted the other economic factors in play.

There’s a couple of pieces here you might find helpful:

https://monevator.com/should-you-invest-in-short-or-long-term-government-bonds/

https://monevator.com/bond-prices/

@ David: this might help you with another part of the puzzle:
https://monevator.com/how-to-estimate-your-risk-tolerance/

@TA
Thanks for the explanation and the XIRR info. Will check that out and see how it differs from the method I’ve been using. Will be good to learn what I need to fix!

I wanted to hear views on holding gold in your portfolio ? I recently opened a stocks and shares isa with the money I had set aside for holidays and social activities . I thought the timing was perfect to test out the asset allocation I had in my head for my draw down pension with a relatively small sum compared to my pension and see how it reacted during a difficult investment period . I struggle with bonds as a defensive asset . I have currently 5% holding in gold 20% in bonds and the rest across three global equity portfolios . I don’t have a timescale for holding these would be min 5 years or much longer and won’t sell at a loss . Thoughts on holding gold as it seems to be a better buffer than bonds albeit not typical market

@The Accumulator – last time I checked the VG Dev World Ex-UK had about 65% US exposure. Of the equities within my portfolio, I have 41% US exposure, 33% Europe, 13% Asia/Pacific ex-Japan, 11% Japan and 2% UK. So I’m underweight US compared to VG Dev World ex-UK which was a deliberate decision based on allocation via GDP very roughly.

I’ve had approximately this split within overseas equities since May 2017 but I used to have much more UK exposure which I reduced to a minimum in 2019.

I rebalanced (very belatedly, unfortunately!) in early May maintaining the same geographic allocations.

Obviously, also possible to make the allocation by Shiller P/E or some other metric or combination of metrics. I could have included Emerging Markets but I’m more comfortable with lower volatility.

With regard to overseas equities, I may have to (or perhaps should) hedge against the possibility of the UK economy making an unexpectedly strong and rapid recovery and acquiring safe haven status!

Finally, as an old bloke, I do compare my returns with VG LS40, VG LS60 and HSBC Global Strategy Balanced (and Cautious) with a view to simplifying life as my faculties decline still further.

@The Accumulator,
I think I’ll eventually go for full-on simplification of my ISA down to no more than 3 or 4 investment vehicles. I’ll probably look at VG LS40/60, HSBC Global Strategy and similar vehicles possibly splitting between management groups and for a bit of diversification. I will also consider as an alternative just one global equity fund (or ETF) and a global hedged bond fund. The advantage of the first approach is that I can probably forget about it in my dotage whereas the second works best with periodic rebalancing.
But you’ve prompted me to step back and ask myself fundamental questions about what my objectives are and note aspects of my ISA portfolio which reflect tactical switches made within the last few years because of B*t and the global geopolitical environment and which should be reversed in the near future. I’m retired and in a lucky position and, for me, the objectives of the ISA portfolio are:

a) To provide a degree of inflation protection with relatively low volatility
b) To provide financial back-up in case of a DB pension going belly up then into PPF and then PPF folding!
c) To provide a bit of fun and interest

I’ve also realised that I need to look at all of my savings rather than my ISA in isolation because I’ve been guilty of compartmentalisation. The biggest investment risk to me is that the UK makes a remarkable recovery with resurgent sterling, rising stock market, inflation and interest rates. I therefore need to increase my UK equity exposure from its current minimal level, hedge some of my overseas equities and make a fairly substantial switch from bonds to equities. I’m in no hurry and will put this in on my January 2021 to-do list!
I’m still expecting that new contributions to ISAs cease to be permitted within the next few years but a) like @The Investor wrt to a property sell-off, I’ve been predicting that for years and b) I’ve no plans to add much to my ISA.

@Al Cam,
VWRL and Global Bond Index Fund – Hedged Accumulation – Vanguard. And I might be tempted to introduced a hedged global equity fund/ETF too. But that is not advice. Do your own research. People’s ages, circumstances, needs and temperament vary hugely and all these factors should feed into investment planning.
I’m not a sophisticated investor and have dabbled with limited success for decades until the last 7-8 years. The difference recently has resulted from reading this blog, low-cost index products being available and understanding the importance of asset allocation. When I started, we had 5% front-end charges and 1.5% annual charges: if you switched funds too often you’d be wiped out by the front-end charges.
I’m not trying to live up to my name! No offence intended.

@Al Cam. I like the HSBC global strategy funds, you could look at the ‘ dynamic’ one. The small print says they hedge their bond funds. Also this avoids the home bias in the vanguardLS funds.

Thanks C-Strong, Ruby and TA – replies much appreciated!

@shaun, I personally work it as a percentage of the whole lot.
I.e. 10% emerging markets would be £1000.

Re: Global World Equity funds, I use FIDELITY INDEX WORLD CLASS P, OCF of 0.12%

Hi AfroLatino, you can have accumulation and distribution versions of Vanguard’s Global All Cap Fund and the accumulation version of VWRL is VWRP.

Thanks Onedrew for your response but do not think VWRP is available on Vanguard Investor’s platform as at yet.

Thank you xxdo9 and AfroLatino. Had been looking at opening ISA and SIPP on Vanguard platform. Disappointing and surprising.
My gf was recently quoted 2% as an un-indexed annuity rate, she’s too healthy to get more, so we are looking at circa 3% for VHYL which, while suboptimal from a performance point of view, at least means she has a bigger income, keeps ownership of the pot and has a measure of inflation proofing.

@AfroLatino – I don’t think there’s any reason not to use the VG Global All-Cap fund if you prefer. Most total world trackers will give you much the same results. You’re not missing a trick if you don’t slice and dice using more granular funds. It can be counter-productive to have the extra control both from a psychological and a performance POV.

The reason I maintain the split in the Slow & Steady is to show how a portfolio works which is harder to do with an all-in-one like a LifeStrategy fund, or even a two-fund portfolio. Nonetheless, I think you’re every bit as likely to do well with an all-in-one.

Hi Accumulator,

Thank you for this very helpful post. I’m very much a beginner and I’ve found this blog invaluable. Considering this portfolio, would you recommend starting with a Vanguard S&S ISA or is a HL S&S ISA better Initially I was looking at HL due to the variety of funds and simplicity but there are also lots of recommendations for Vanguard due to the lower fees.

Hi Accumulator,
Thank you for your reply. Cavendish is one I have had a look at, but I found fewer recommendations so I wasn’t sure how reputable they are?

I’m only just learning about investment so I’m more interested in index tracking funds rather than ETFs or actively managed funds and my plan is to start with £100-200 a month (not per fund) initially until I gain a bit more experience. Do you think a Cavendish ISA would suffice or is it better to open an ISA with HL in case I want to dabble in shares in the future? Do the OCF for the same index trackers differ much between brokers? Also, I wasn’t sure whether your recommendation of a minimum of £50 per month was per month or per fund per month. I’m sorry for all the questions, I’m still learning so I appreciate your time a lot!