It’s been a slow and steady quarter for the Slow & Steady portfolio. Our model passive investing loadout has risen just 1% over the last three months.
Still, we’ve now had three quarters of growth on the trot – and that has certainly put the colour back into our assets.
Here are the numbers, in Right-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.
Last quarter’s gainers:
- Emerging markets: 5.4%
- UK equity: 3.7%
- Developed World, ex-UK: 2.5%. (The US led the charge, Europe barely stirred, and Japan was a dead weight)
Downers? Global small cap and global property both lost almost 3% each, while UK gilts slipped back 1%.
At least government bonds are up 4% on a one-year view. Their performance has been a horror show across the portfolio’s 13 years of existence though, thanks mostly to their 2022 rout.
America the beautiful
The recovery in the S&S over the past year has been decidedly lop-sided. It’s been driven mostly by our Developed World fund, where performance has leant heavily on a chunky US engine.
The US component is up around 27%. The UK, Europe, Japan, and Emerging markets have only returned about 13%.
Quite a gap – and enough to make you wish you had the gift of clairvoyance.
Don’t look back
Blame summer whimsy, but I’ve done something you should never do. I’ve gone back to the portfolio’s original members1 to check on their performance.
It’s a form of mental torture. Like any act of hindsight it invites you to imagine a parallel reality where you were an all-knowing genius who could divine the best course in advance.
Below are our starter funds’ cumulative nominal returns from January 2011 until now – absent all our rebalancing, drip-fed contributions, and the asset allocation changes we made along the way:
ETF data and charts from JustETF. Returns include dividends but not inflation.
Yee haw! Don’t mind me, I’m lying in the gutter staring at the stars (and stripes). La! La! La! America!
Bigger and better
Just how exceptional has America been? I find it easier to gauge performance using annualised returns:
- US: 14.9%
- Europe: 7.4%
- Japan: 6.8%
- UK 6.2%
- Pacific ex Japan 5.3%
- Emerging markets 3%
- Gilts 1.5%
Remember: the average historical return for equities is 8% while government bonds have weighed in at 4%. (Those are nominal returns, before fund fees).
By this light every asset has been sub-par over the life of the Slow & Steady except the US. It alone has dragged the overall portfolio return up to a respectable level. Gilts and emerging markets have actually lost money, assuming average inflation of 3%.
Just think about how China has grown since 2011 – yet emerging markets have been terrible. Buying into the obvious growth story does not necessarily translate into shareholder profits.
Something to keep in mind if you’re tempted by an AI-focussed ETF today.
Crystal balls
Now let’s really twist the knife and revisit every asset class I might have plausibly chosen back in 2011:
I did consider a tech holding at the time. But it felt like the sector was already covered by the US – and later the World tracker. All true, and yet the 100% tech fund still delivered a thumping annualised return of 20%, compared to ‘just’ 14.8% for the US and 11.6% for the MSCI World.
Tech was another obvious growth story back in 2011. Everyone was hot for Facebook. But there were also lots of warnings that the sector was overvalued and outsized returns could prove hard to realise.
As things played out the warnings proved prescient for China, but not for tech.
Oh well. To be honest I wouldn’t have allocated more than an additional 5% to tech anyway, given its presence in the core US fund.
Key tech-away
Beyond the top three funds – all driven by Big Tech – everything else in the historical Could, Shoulda, Woulda rearview mirror was an also-ran.
Cash is the worst performer with an annualised return of 0.81%. That makes it a massive loser after 3% inflation.
Funnily enough, the 2.65% brought home by index-linked gilts means they’re doing a reasonable job of tracking long-term inflation – after negative yields and fund fees have taken a bite.
Linkers also tracked well ahead of gilts over this period.
Commodity returns were awful. Just 1.82% vs a nominal historical average of 7.5%.
Gold’s 5.4% annualised initially feels like nothing special but is actually spectacular in comparison to the other defensive asset classes on the menu.
Remember though, the point of defensive asset classes is less their long-term returns – though we still want those to be positive – and more what they do when equities sputter.
On the growth side, commercial property (5.6%) and the high-yielding Global Select Dividends were pretty ‘meh’ compared to a vanilla global tracker.
What does this prove?
If you went all-in on the Nasdaq over a decade ago and ditched this diversification nonsense then congratulations.
Did you just get lucky? On the equity side, there were good reasons in 2011 not to overweight the US – or even the tech sector. They were punts I certainly wasn’t qualified to make.
Lars Kroijer summed up the dilemma in his excellent post Why a total world equity index tracker is the only index fund you need, writing:
If you are overweight or underweight one country compared to its fraction of the world equity markets, then you are effectively saying that a dollar invested in the underweight country is less clever/informed than a dollar invested in the country that you allocate more to.
You would therefore be claiming to see an advantage from allocating differently from how the multi-trillion dollar international financial markets have allocated.
But you are not in a position to do that unless you have edge.
And we agreed we don’t have edge…
Everything I’ve learned about investing in the intervening years only confirms the wisdom of Lars’ words.
It’s fun to look back for hindsight wisdom sometimes.
But it’s more sensible to look forward with humility.
New transactions
Every quarter we throw £1,264 of fresh meat at the market wolves and hope they roll over and let us tickle their tums. Our stake/steak 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 0.232 units @ £272.59
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 0.705 units @ £663.53
Target allocation: 37%
Global small cap equities
Vanguard Global Small-Cap Index Fund – OCF 0.29%
Fund identifier: IE00B3X1NT05
New purchase: £63.20
Buy 0.152 units @ £416.84
Target allocation: 5%
Emerging market equities
iShares Emerging Markets Equity Index Fund D – OCF 0.19%
Fund identifier: GB00B84DY642
New purchase: £101.12
Buy 50.883 units @ £1.98
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 28.757 units @ £2.20
Target allocation: 5%
UK gilts
Vanguard UK Government Bond Index – OCF 0.12%
Fund identifier: IE00B1S75374
New purchase: £316
Buy 2.384 units @ £132.55
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
Dividends reinvested: £64.15 (Buy another 60.75 units)
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%
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Take it steady,
The Accumulator
- I’ve looked at the same sub-asset classes though not the same funds we used. That’s because it’s much easier to chart on justETF than Morningstar. As a sanity check I’ve also sampled the original funds. The results are much the same. [↩]
Thanks for this – really interesting. I’m afraid, after 8 years of managing my SIPP and attempting to be balanced, I lost all hope with bonds and ditched them all in my latest review (together with min 13% losses), relying on a small amount in a money markets ETF and the 5-15% of cash and bonds in most of my other ETFs to provide some kind of protection against fluctuation. While I’m a good 13 years from any hope of FIRE, I want to maximise exposure to any increases. And seeing as bonds have not been behaving in a predictable inverse relationship with S&Ss for a while now and I find them too complex to predict their return anyway, so I’d prefer to use short term money markets to at least know what return I’ll get (which is still 5%+ and basically the minimum growth I need for my portfolio). Be interested to here how other people have reacted to the collapse in bonds too.
Thanks @TA.
Also on tech trackers the IITU ETF (iShares S&P 500 Information Technology sector UCITS ETF) worth a look.
20% p.a. for thirteen and a half years is 11.7x (nominal total) return over the period!
Easy to forget that for a time in both 2012 and again in 2022 there were many informed voices saying that, in effect, big tech was ‘over’ (and, in particular, FB/Meta was being written off).
One has to remember also that only part of the US mega cap tech outperformance was down to multiple expansion. There’s also been a really quite impressive expansion of the bottom line earnings.
In some ways the terrible performance of commodities (UC15 ETF in your chart) might make it more attractive under a mean reversion thesis because commodities – unlike equities – are not tied to any earnings yield. Like gold, they move to their own tune.
That may make their dismal return since 2011 more likely to reverse in future than the poor performance by EM and ex US developed market equities.
Just a thought.
Of course, I know nothing about what comes next; but nether does anyone else 😉
Commodities were at a peak in 2011 generated by post-financial crisis enthusiasm – but if you’d started five years later in 2016 the category would have been one of the best performers in the portfolio. They have certainly proved their worth since 2021 during a period of rampant inflation and the bond rout, but it seems unlikely that future returns in the short term will be as strong.
An illustration of how most (but not all) asset categories eventually have their day in the sun, and why the starting point matters when assessing longer-term returns.
Re “Why a total world equity index tracker is the only index fund you need”…
This is a newbie question, I guess, but if one were convinced by Lars’ reasoning and also liked the idea of simplifying one’s portfolio, would it be a bad idea to switch the equity portion to a single global tracker in one go? In practice this would involve selling 3 trackers (UK, EM, Dev World ex UK) that are probably ~5% overweighting UK/EM. Or is it not worth it, given transaction costs and the risks of being out of the market (albeit briefly)?
For beginners to all this, it’s genuinely very helpful to see an example portfolio like this and how to manage it. This blog is such a useful resource and it really is much appreciated.
Sorry if this has been covered before but I’m curious if you think there’s any advantage/disadvantage to doing quarterly investments versus regular monthly ones?
I assume it’s partly driven by you then only having to write an update every quarter for the series but seems like there’s some advantage to the flexibility it gives you with how much you’d invest in each fund – which you maybe wouldn’t have if you had set up automated regular monthly investments?
@Paraquat – just a few of my thoughts. I’m with you I don’t bother with bonds either (well apart from I did invest a very small amount (10K) in an active managed fund a few years back which had upto 35% in bonds. It did absolute rubbish from the start and sold it at a loss earlier this year but apart from that had no bonds and not sold anything else at a loss either).
I was thinking about bonds before, just for the safety not the returns, but for me I wouldn’t have held any percentage (like 40%). I feel would be too big but might have held a number of calculated years spending that I could draw on. But then 2022 happened and they didn’t even do the job they were meant to so never bothered in the end. I also can’t help but feel the drag they would have on my portfolio so in the long run would I really be any better? Obviously the dreaded scenario is a major long term crash but I do hold cash for a number of years in mainly shorter term cash savings accounts (easy access/notice/some fixed with differing maturities) and make sure I get top payers. The longest is an 18 month with Nationwide pays 5.5% but usually do not fix for more than a year (just that this one was a good rate). Whilst you can still get good rates, well above inflation, then why not. And don’t have to pay dealing fees/mess about selling bonds and faff of rebalancing bonds/equities either – just top up cash as necessary.
Don’t work now (but am not at normal retirement age) so do rely on drawing some/topping up cash although I do have some income at moment which covers bills/food – so basic living expenses covered anyway at the moment. At minute portfolio is just for other stuff like major expenses/luxuries so in event of a major downturn I could cut spending on these anyhow.
Prefer to keep it simpler, although I wouldn’t say really simple as have number of brokers/fund managers in case of failure. Also wish I’d put more into pensions when younger but it’s the old case of didn’t want to tie a lot money up till older in case I needed it (but didn’t and now wish I had). Being mainly self employed I never had work pension just personal pension but moved to SIPPs now as fees were outrageous. But they are fairly small amounts anyway. Wish I also had more in ISAs but only used to mainly use cash ISAs until a few years ago. Now most are transferred to S&S ISAs which have done pretty well – much better than their cash versions which you would expect.
So have most money in GIA/trading accounts (unfortunately) and this is the biggest pain I find with them being taxable. I don’t think I will ever get all into tax sheltered unless I start spending a lot more but can’t see that as I’ve always been a frugal saver type rather than a spender. I find the tax returns every year fairly time consuming – something I could do without – especially now trying to withdraw from these without incurring too much CG tax with hardly any CGT allowance now – just that measly £3k, it’s impossible – just trying to get £22880 from them each year to transfer to ISA/SIPP accounts is impossible – as I can only fund SIPP with £2880/year when not working – and it may yet get worse if they fiddle with CGT tax rates/allowances any more. So like is stressed all the time on here, my advice to anybody would be to use tax sheltered SIPPs/ISAs to the max possible.
Also I changed my taxable accounts all to pay out Income rather than Accumulation version so easier when it comes to tax returns. I wouldn’t do drip feeding of small amounts into same funds (not that I would now anyway) otherwise that becomes a nightmare with tax calculations. I also prefer to only use ETFs in non-taxable so don’t have to bother with all the faff and tax implications of these as well.
Invest mainly in global/dev world trackers – but not religiously passive as hold some EM and UK but not to the % should be across a pure passive portfolio. I am overweight US growth and well underweight small caps but as this article says many experts have been saying to reduce US exposure since 2011 or before but on it continues nevertheless………… I was invested in a global tech fund until earlier this year but sold it out – now wish I hadn’t. I know can’t continue this way forever but with the march of AI now who knows?? Portfolio has done well, apart from end 2021 and 2022 like everybody – wouldn’t like to think if I sold it all out what CGT bill would be. I know my large US exposure is too high but when it’s doing what it’s doing at present, compared to the purely passive S&S portfolio for example, then just can’t face selling some out/shooting myself in the foot and ending up with a likely big CGT bill in the process but who knows? All I do know is that if I had been invested purely passively I would be well down on where I am currently. Not saying it’s right as it is a gamble but would you bet against US in the long run?
@Paraquat I also have not had much success with bonds and now just keep some short term gilts and money market funds for near term spending. I have however added some trend funds in the past year to my portfolio as they have the ability to give you some upside when equity markets turn down. They should give you some positive return when equities are up as well so in my eyes they seem quite attractive. Not as secure as bonds but should provide a better overall return over the long term whilst being uncorrelated with equities and hence diversifying. Am principally using the Winton trend fund – there was a recent Monevator article on trend funds if they are of interest.
The poor performance of emerging market equities is due to the low weighting of the Indian stock market in these funds. Just look at the returns of Xtrackers X MSCI INDIA SWAP (XCX5)
Here’s somebody warning us the Nasdaq was getting pricey 14 months ago:
https://seekingalpha.com/article/4605937-qqq-etf-most-expensive-since-2008
Now the P/E is up to about 34 – or about 45 in his “up it by 30% to compensate for the 5% base rate” system!
@ Paraquat – I totally understand where you’re coming from re: bonds after 2022. It was a shocking loss. That said, gov bonds did twice as well as cash over the last 13 years as the second chart shows. And I think that’s the issue with cash: for all its stability, its long-term returns are poor, and you’re likely to be leaving money on the table by making it your defensive mainstay over bonds.
Plus, cash won’t spike in a stock market crash, it’ll stay flat. I personally remain diversified across both assets. Both entail risk, it’s just the risk of cash is of the boiling frog variety.
@ Faustus – couldn’t agree more.
@ Delta Hedge – It’s interesting, disinflationary conditions set in from the GFC on and commodities wilt in those conditions. Inflation returns and commodities soar. Essentially they’ve suffered a massive bear market when many of us came of age as investors and now we’re extremely wary. Same thing is clearly happening for people burned by bonds in 2022. What happens when the next big stock market crash occurs?
@ Trinity – I’d say holding a global tracker is worth it in exchange for the convenience. The main reason for holding separates in the S&S is so I can talk about the moving parts.
For Monevator’s decumulation portfolio, I’ve chosen global equity trackers so I can focus more on the defensive allocation’s moving parts, which can’t be held as separates.
@ Alex9 – thank you for those kind comments. You’re right, the quarterly drip-feed came about purely because I write about the portfolio on a quarterly basis. That said, you might invest quarterly if you want to accumulate a large enough contribution to offset a high dealing charge. I always try to keep my dealing costs at 0.5% or less of the value of my contribution.
The downside (aside from uninvested cash) is forgoing the discipline of “paying yourself first” and “sticking to the plan” when money is debited from your bank account then automatically invested without interference from the ol’ monkey brain.
I used to tilt my investments towards the UK and emerging markets because they were cheap vs the US and I expected them to mean revert. Still waiting…
Thanks @Jon. Really appreciate the fulsome response and to hear how you’re managing without bonds. Ideally I’d hold more in cash in ISAs etc too but I don’t have the spare income for this yet. Will definitely bear in mind how much simpler ISAs are when it comes to tax returns when I near retirement!
Thanks @ChuckieB for referring me to the trend funds article. Wow, it was like reading another language for much of it! But I think I got the gist and will definitely add one to my watchlist to see how it behaves and think about adding one in future.
Thanks for the reply @The Accumulator. Maybe I’ve read your charts wrong, but it looks like your iShares Core UK Gilts returned 24% since 2011, so double cash at nearly 12%. But that’s still less than 2% per annum – far less than the 5.2% on offer in the short term money markets. Am I missing something?
@paraquat (#11)
“Thanks for the reply @The Accumulator. Maybe I’ve read your charts wrong, but it looks like your iShares Core UK Gilts returned 24% since 2011, so double cash at nearly 12%. But that’s still less than 2% per annum – far less than the 5.2% on offer in the short term money markets. Am I missing something?”
Yes, perhaps. At the moment, short term fixed income (whether cash or gilts) has a higher yield than longer term fixed income. If/when the base rate comes down then the yields/interest rates on STMMF and cash accounts (whether easy access or fixed) will also come down. Since markets usually like to get more yield for a longer holding period (since that carries more risk), the yields on bonds may (or may not) stay the same or come down less. Taking an active approach to fixed income management (heaven forbid) would see a shortening of duration when rates are expected to go up and vice versa (although, sadly, I’ve never managed to work out how to predict changes in rates!).
It is worth remembering that it is not too long ago when STMMF had returns of less than 0.5% and some were barely covering their fees and that 1.5% on a one year fixed savings account was pretty good.
For disclosure, I should also note that a large proportion of our fixed income is in cash accounts.
One has the option of UK Treasury Bills instead of (1) Bonds, (2) Money Market funds, (3) Cash ISA’s and (4) Cash deposit accounts.
UK Treasury Bills yield tax free if held within ISA account (courtesy of Freetrade).
@Paraquat — You write:
You could not get 5.2% on cash / short-term money throughout that period from 2011. Yields on cash were near-zero and bonds not much better. Real yields on index-linked gilts at the end of the period were negative.
None of this was normal.
In contrast today you can get 4%+ yield to maturity on a ten-year gilt. Which is a good sign, incidentally, that 5.2%+ on cash isn’t likely to last. The market expects lower rates in the future. (If it didn’t, then one could borrow at c.4% and buy cash at c.5% and pocket the difference risklessly. But in fact there’s a big risk / implication that future rates will be <4% accordingly.)
If I may, I think people on this thread are looking at bonds through a very recent lens, and forgetting we're at the tail end of one of the worst bond crashes of all-time.
Yes, bond returns have been terrible of late. But the time to not-own bonds was 2-3 years ago.
We warned of this risk then and earlier, though I would also concede that we prevaricated like everyone else about saying passive investors shouldn't own bonds (and rather stressed short duration) not least because this situation had prevailed for the best part of decade.
For a walkthrough of the clear risks, see this post from 2020:
https://monevator.com/bond-prices/
As things turned out, for most of the decade up to 2022 (and earlier) bonds were excellent performers. Instead of people saying they’d “not had much luck with bonds” I imagine many would be saying “bonds have been excellent diversifiers and return generators in my portfolio” in 2020.
e.g. See the following post for the nice returns for bonds up to 2019:
https://monevator.com/10-year-retrospective-the-bond-apocalypse-that-wasnt/
I’m not saying anyone HAS to own bonds. (I never say anyone has to do ANYTHING, especially not strangers on the Internet) And indeed, while I screwed up a *lot* in my investing in 2022/2023, fortunately owning bonds in non-trivial size was not one of the ways I did so. I hadn’t held bonds in any size/for long for a decade before 2022 and I too often favour cash, especially for private investors who can rate-tart around to get the very best offers.
However I’m an incredibly active investor, perhaps to my detriment as well as gain, I’ll tell you at the end of my life. 😉
In contrast passive investors market timing out of bonds *after* a historic bond crash that has left intermediate bonds on a YTM of 4% and even index-linked bonds offering a positive and risk-less real return might want to think twice about going down this path for the long-term.
As I wrote in 2022, the lesson from the bond rout isn’t that bonds are bad, it’s that price/yield matters:
https://monevator.com/bonds-are-bad/
Yields today are a world away from where they were before the crash.
The 4%+ you can lock-in for the next decade with a ten-year gilt today may or may not look good in ten years’ time. But it’s going to leave you nearly 50% up on your money (if you bought and held to maturity) not down.
That’s maths! 🙂
@Meany #9 and the SeekingAlpha piece (by ‘Diesel’): The crucial caveat from the piece, which IMO should be carved in foot high stone characters is: “there is no perfect way to value stocks. Neither is there a method on which all investors agree. If this was the case markets wouldn’t be so volatile day to day. There are many different models and theories as to how to calculate a stock’s perfect value”.
Diesel makes a credible case, and the logic is somewhat persuasive but…..
– If I had been given a pound for every credible and persuasive stock index valuation model that I’ve read over my investing life which pointed in different directions, then I’d be a target by now for the Resolution Foundation’s Wealth Tax proposals.
– Having a credible, internally cohesive, logical and persuasive valuation model only gets it to the launchpad, not to liftoff.
– As the market’s evidently not paying attention to Diesel’s reasoning (yet..) might there be something which Mr Market thinks it knows or is assuming which Diesel doesn’t? Perhaps Mr Market thinks that Nasdaq earnings are not going to start falling and/or (one or more of) there’s not going to be a US recession, interest rates and inflation are coming down, momentum alone might carry the index higher still (so why fight it?)
– If those possibilities are what Mr Market is (collectively) assuming, then of course Diesel could be right, and Mr Market wrong; but why should we think that it is more likely that Mr Market, with its thousands of professional participants, is the one who is wrong? That could be that case, but it is not necessarily so.
– As Diesel notes: “Since the beginning of the year, QQQ is up 25% without any pullbacks, corrections or meaningful dips. There hasn’t even been any profit-taking yet. It’s been going up in a straight line and we aren’t even done with half of the year yet”. Is it possible that Mr Market has realised something that Diesel has not? Worth pondering.
FWIW, David Stevenson writing yesterday also thinks that the US market is at a turning point, and likely one which is not for the better; but he does acknowledge the huge level of uncertainty and the very distinct possibility that the indexes just keep rising:
https://open.substack.com/pub/davidstevenson/p/monday-macro-a-juncture-approaches
Just another way……
Aged 78-21 yrs rtd
Still 35/59/6- no changes ie 3 funds only
Portfolio 6% off the high of Sep 2021-graph appears to be going upward again so far!
Maintained required withdrawal rate
Of course it’s all very personal-I seemed to have saved enough,have a “sensible” withdrawal rate ,live reasonably frugally and have a very low cost (0.29 basis points) low maintenance seven figure portfolio
Bit boring but I like to sleep at night and do other things than tinker with my investments
For instance politics is very interesting at the moment in Scotland,Britain and France………
xxd09
I’m surprised at the negative bond views here. With a small total pot, I can see how you might make use of cash and high interest accounts, or be all in on equities. But once you get some way into the 6 figures it becomes infeasible. The point isn’t the “long run” as another commenter suggests, but your ability to stomach the short term churn of the market. I have 40% of a 7 figure portfolio in bonds and I’m glad I learned the discipline back when it was 5 figures.
Thanks @The Investor and @Alan S. Useful context and longer term perspective. Always forget the power of compound interest, no matter how seemingly small the %!
When bonds were yielding virtually nothing and index linked gilts had a negative real yield, the risk reward versus cash was poor. It made sense to hold cash. Now that both nominal and real yield for gilts are positive it’s a much more nuanced debate. Cash is yielding higher amounts but (a) it’s hard to find find somewhere sensible that can deposit large amounts (b) the headline rate will go down if rates go down (c) you pay tax. In contrast, the capital gain on gilts is tax free.
The US bond market is in one of its longest bear markets in history – a wealth of common sense covered this recently.
No idea on the future but it feels ditching bonds now unless there are other reasons seems a bit like looking in the rear view mirror.
I hold individual Gilts paying >4% largely tax free and index linked $TIPS for full disclosure.
@ Seeking Fire – do you hold TIPS directly (and if so how?) or through a fund?
For those who wish to follow a largely passive approach to bond maturity in retirement one obvious question is “what is the best maturity to hold?”
A (not peer reviewed) paper addressing this question for historical (1900 to date) safe withdrawal rates in the UK can be found at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4742456
In summary, “By ranking the performance of the sectors [funds/ETFs] for each historical retirement, it was found that intermediate maturities (in particular, the 5 to 10 years, under 10 years, and 5 to 15 years sectors) generally had the best overall performance, while long (over 15 years) and short (3 month bills and under 5 year gilts) maturities tended to have the worst.”
The results for the UK were also similar where a dynamic withdrawal strategy was used (see https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4827947) instead of a constant inflation adjusted withdrawal approach. Interestingly, this second paper found a large difference in the ‘optimum’ maturity for the UK (funds holding gilts with maturities of 0 to 15 or 5 to 15 years) and the US (funds holding US treasuries with maturities of 1 to 5 year or 1 to 3 years) that nicely illustrates that results that come out of US data are not always applicable to the UK.
One other important practical difference between the US and the UK is the availability of bond funds covering different ranges of maturity. For instance, while FTSE define various indices (including 5 to 15 year, 5 to 10 year, etc.) not all of them have been implemented in an actual fund. For example, AFAIK, currently only 0 to 5 year, 0 to 10 year, over 15 year, and all stocks gilt funds are commonly available. Of course it is possible to approximate an intermediate fund by holding both a short and longer maturity fund.
For full disclosure, please note that I am the author of the two papers cited.
@SF (#19)
“When bonds were yielding virtually nothing and index linked gilts had a negative real yield, the risk reward versus cash was poor. It made sense to hold cash.”
Interestingly, if you had bought a 5 year inflation linked gilt back in 2019, you would have got a real yield of -2.63%. Given that CPI went from about 107.9 to 132.7 over those 5 years, on a rough calculation, £1k of ILG would have matured worth £1076. [very speedy EDIT: using RPI, the amount would have been £1168 instead]
If, instead, you had placed the money in a series of 1 year fixed rate cash accounts, the best rates would have been 2.0, 1.1, 0.9, 2.6, and 5.4, sourced from archived money tips emails on moneysavingexpert) you would have turned £1k into £1125.
The Royal London STMMF returned just under 1.9% (annualised) over the last 5 years. So, £1k invested would have turned into £1097.
In other words, in raw terms cash/MMF won out over that period (although there are a number of assumptions in all of this).
Of course, as you said, tax considerations might make a difference.
Like some others my experience of bonds has been unfavourable.
Don’t just mean 2022 but whenever I have held them I have only been disappointed and some have been the only funds I have ever sold at a loss.
This is not just over the short term either as I am not a particularly young investor. I started a traditional personal pension in 1990 and then a stakeholder a few years later (when introduced I think in 2001 – due to lower charges) with the same company and then another stakeholder with another company also. Transferred them into SIPPs in 2022. So the first one I held for around 32 years, the others for about 21 years.
I got a written yearly pension statement sent on their performance but was pretty disappointed with them all much of the time. One thing with the first traditional pension was the amount, which I was not really aware of, that was being taken in backdoor charges/commissions that were not really highlighted (even when I asked the advisor) – not just the annual management charge but others. But what I also noticed from the limited fund choices I had available to me in those and from the ones I chose (based on discussions with the financial advisor from those companies) was that generally what they termed the “managed funds” and which I chose – so that is the multi-asset funds with a mixture of bonds/equities (as there were no other pure bond funds available to me) much of the time performed worse whilst the North American fund tended to usually be the best and definitely was over the long term with a far larger amount accumulated. There wasn’t a global tracker available but there were a couple of UK trackers in most of them which usually had pretty mediocre/dull performance. The property fund, which I also chose, usually did poorly on the whole/long term also. I was also talked into putting into the “with profits” fund in my first pension which later was said were poor – I think the “with profits” bit only applied for the pension company and not for the clients as I didn’t see much from it! Okay so all the funds obviously had bad years but they all tended to do poorly including the managed fund – I can’t say that it looked like it was providing any worthwhile protection in those times.
So in the end when I came to my senses in 2022 and switched into SIPPs – that was obvs a bad year for everything but since, and when invested mainly in global tracker equity funds, they have done well – much better than previously but still early days although wish I had done it sooner.
So this has coloured my long term feeling now about bonds. Also I think some of the talk about various crashes scares younger investors who are way off retirement, into holding too much in bonds when they could gain more from equities (although I can appreciate some don’t have any stomach for volatility).
For instance, most of the finance blogs I have read (not just Monevator – pretty much all) talk about the long term crash in Japan, the way back 1914-25 crash in Austria of -96% and such like. But who invests just in Austria or Japan or for that matter even us UK investors re: the 70’s crash – just in the UK even? So just talking about the worst in isolation can’t be right?
As this site often emphasizes, passive investing is best for the majority and so what I think would be more helpful, for most, and is often not the case, would be to highlight the bad bear markets and how they affected the GLOBAL portfolio and for HOW LONG it endured then we would be really informed (as I don’t really know the answer to this) – as this is where the majority hold most of their portfolio – in globally diversified equities (although some may be more weighted towards developed world maybe – or other small divergences – not everybody is purely passive). Then the majority of us could decide for ourselves how to position based on a global portfolio and not just by how much the market crashed but for how long – as if not a long term one, I could personally ride most out if I really had to .
As I said I don’t think that information highlighting the worst crashes in one particular country/region (and some from the year dot when there were particular world events that caused it and probably not likely to replicate) is that helpful to most – seems a bit scaremongery to me – like “you should hold bonds or this is what might happen to you” when it is based on something that hardly anybody in the real world is likely to do i.e. invest their lot in Japan or whatever (NB: as I said not just talking about Monevator here – I have only read some of your posts but have read other sites and info on internet as well).
I mean if world leaders are that foolish to involve us in a modern day world war (which has been talked up in the media lately) with Russia/China/North Korea versus the West then our portfolio crashing will likely be the least of our problems anyhow.
@JPGR – ishares fund – medium duration.
Naeclue has previously said he (I think Naeclue is a he) sees no reason to hold $TIPS, which I have some sympathy for. I hold them as (a) part of liquidity (b) diversification away from the £ – you have this through global index investing of course. Nonetheless I’ve retained out of a view that the $ bond bear market will end soon and I’m happy not to be overly exposed to the £ when I factor in all my other exposure.
More generally, it is worth asking those who invest in equities passively through buying a global tracker but not through bonds whether you are suffering from cognitive dissonance – why equities and not bonds? There seems to me to be a good argument just to buy a global tracker, a UK or a Global bond fund and hold cash reserves. I don’t though. I like the fact individual gilts are CGT free which if you hold low coupon ones is useful.
Rather agree with previous post
A global equity index tracker and a global bond index tracker hedged to the pound arranged in an asset allocation of your choice plus a couple of years living expenses in cash are all most investors need and would be hard to beat over the long term
The asset allocation is the variable-100% equity for youths and morphing over time to a good % of bonds when a reasonable pot been saved and retirement approaches
Factors under the investors direct control-save as much as you can ,live frugally and keep costs down
Simple and manageable by most amateur investors and probably beats most other investment plans
xxd09
@SF (#24)
There are some fundamental differences between equity index funds and bond index funds.
Equity index funds (typically) rank the securities by cap value where the cap value represents the market estimate of the ‘value’ of the company.
Bond index funds also (typically) rank the securities by cap value, but here the cap value is a complex mix of the market perception of the country issuing the debt and the various governments deciding on how much debt to issue. The amount of debt in issue and the quality of that debt is not necessarily linked.
Secondly, the duration of the bond fund (assuming it is not constrained in maturity range – AFAIK, global ones come in two flavours, ‘all’ and ‘short’) is largely determined by the issuing governments. Taking the UK ‘All stocks’ index as an example, the duration has ranged from about 5 or 6 years in the 1970s to nearly 13 years in 2020 before falling to about 9 now. This represents a significant change in the risk/volatility and was determined by both yield (higher yields -> lower duration) and the maturity profile of gilts issued by the treasury.
What I would like is a global government bond index constrained to exclude long maturities (greater than 10-15 years or so) and investment grade or above. Maybe one exists, but I’ve not found it. In the absence, then a pair of global funds (short and ‘all’) the combined duration of which can be controlled or a constrained UK gilt fund will probably do – although this assumes that the UK government will not default in the next (for me) 40 years or so.
@Delta Hedge (15) thanks – nice link.
It’s certainly possible that QQQ remains the
world’s premier growth index for the next 20 years and an ideal
choice for people wanting to boost their investment path.
Can’t imagine anything globally useful somehow evade being
poached and cultivated in the land of the free.
But that PE: well, are you sure there are loads of plausible ways for
the nvidia price to be justified or corrected without too much collateral?
@ Alan S – thank you for the links to your papers they look very interesting and I look forward to reading them when I get a mo.
Global bond ETF IGLH has an effective duration of 7. Admittedly it does contain long bonds but it’s duration sat in your favoured intermediate range even before the interest rise IIRC.
Your quick ‘n’ dirty linker vs MMF calculation is interesting too. I’d count that as a win for holding index-linked gilts given the upside of holding cash is limited while the downside of a major inflation shock is unconstrained.
@ Jezza – you make a really interesting point about how relevant country-specific “worst crash ever” posts are versus the global portfolio. Please allow me to explain why I think they’re valuable:
The World portfolio was 70% UK / US combined until 1970. Obviously now it’s dominated by the US. The US has had an exceptionally benign run, but even old Blighty sits near the top of the table of historical outcomes.
World portfolio data isn’t publicly available before 1970 but it wouldn’t look that different from the UK experience anyway in GBP terms.
Most of the material I see on the internet draws upon the historical US experience. Worse, it majors upon the last 50 years at most – a period which soft-soaped investors with exceptional performance relative to the half century before.
In sum, I think newbie investors are encouraged to think that they can’t lose with stocks, so long as they don’t flip out during a few down years.
For all the talk of “risk”, it’s really hard to know what that actually feels like when you haven’t experienced a high double-digit loss, or been underwater for five years, ten years…
And there’s no reason to believe that holding the World portfolio protects us from those kind of shocks. Sure, it’s better diversified than putting every egg into a single basket but it’s not immune to disaster. All it would take is the US taking a wrong turn. And that needn’t mean WWIII.
Japan and France suffered multi-decade bear markets due to an almighty bubble and anti-market government policy respectively. Perhaps all it would take in the US is a Trump presidency, a decisive turn against globalisation, an irrevocable schism between Red and Blue?
The World portfolio does not reveal the full panoply of plausible outcomes which is why I think country-specific case studies are a valuable corrective to viewing the future through rose-tinted spectacles.
Thanks TA.
Lars Kroijer’s article was a massive influence on me. I bought Vanguard’s all world ETF and never looked back. Worked out great 😀
However I’ve changed in the past couple years. I read his book, and realised that I did have edge after all. Being a communist, I knew how the US functions as an imperial metropole – and looked back at performance since the collapse of the USSR. Suffice it to say I believe the US dominance will continue, and we won’t be allowed to profit in any competitive imperialists to the same extent (China, Russia, India). Unless the UK or the EU went imperialist, and I don’t see that happening. So I switched to the S&P 500 and haven’t looked back.
The other is through studying wealth management. I appreciate market beta now, and particularly tech. I don’t see tech as a better sector persay, but simply having greater beat (e.g. Amazon = 1.25) means more return for more risk: good for longer term goals. So I invest in a world tech ETF to harvest greater beta.
I also made and use a volatility prediction model, as it’s the “other free lunch” of investing, to allocate a % to a leveraged ETF. It’s only mostly theoretical for now, as the platform fee puts me off allocating more. But when I reach a target level in my SIPP I’ll increase the allocation to my target leverage (currently x1.4).
Apologies for the run-on comment, but I was also influenced by a comment Lars makes throughout his book:
“If you have edge, use it and get rich”.
The Plain Bagel also said:
“Investments only do as well as you let them”.
I also discovered Trading212, and read the comments on some pies. What I read shocked me. People holding shares for 1 week and panicking they went down. Or thanking the pie author for a 1 week rise.
I realised that the safety-first investing advice was aimed at the get-rich-quick types, and also at old folk, who have more money to throw around. I learnt that I was being too cautious, that I’d over-learned from such advice (I am a naturally cautious person). I’ve subsequently done a couple of no-no’s: taken large positions on single stocks, which in both cases worked out well.
I know that two is not a trend, that outcome bias is real. I still believe that indexing is almost always the ideal. But I’ve come to appreciate just how much there is to investing beyond world funds. I’m open to deviating, but expect such free money opportunites only every 3-5 years.
I’m still feeling a bit smug for dumping all my bond allocation in mid-2020 for Commodity ETFs.
Now though all my previous bond and commodity allocation is in Trend Following funds because I’m lazy.
Yields may be attractive now on bonds, but I don’t know if that will help much in a (future) very high inflationary environment ?
(A couple of the defensive ITs I hold do have some short term bonds, which I’m OK with).
The exception to putting all my previous commodity allocation into Trend Following funds is Gold & Silver of course…
“Income is perceived as much more important than Wealth “ -so true
However having thought that apparent conundrum through many years ago I have used a Total Withdrawal policy for 21 years of retirement without out any problems
It’s so much simpler ,cheaper,easier to manage and understand for the less financially/mathematically able investor -most of us?
(Admittedly running 3 index funds only makes life very straightforward-not for every investor)
One withdrawal/trade (ie selling a required number of fund units) once a year to top up a cash account-one reclaim of tax online if required and that’s it
Hopefully your ISAs can carry most of the withdrawal load -withdrawals are tax free
Worked so far with not to long to go now(aged 78)
xxd09
Assuming the model portfolio started back at the beginning of 2011 and has basically remained at 60/40 more or less? Well, I just took a look at Vanguard Lifestrategy 60 Acc since inception of June 2011 and the annualised return there is 7.12%! 6.89% v 7.12% shows just how good and hard to beat these Vanguard multi asset funds are. Have I missed anything?
@ Lenahan – I think you’re right, a diversified one-stop portfolio is hard to beat. A small point I’d make is that the annualised return quoted for the Slow & Steady is money-weighted – that is the later periods (when more money is invested in the portfolio) count for more than earlier periods.
The annualised number that funds report is time-weighted – that is it weights all time periods equally and ignores cash flowing in and out of the portfolio.
As I look at it today, VG 60 has an annualised return since inception of 7%. The S&S equivalent number is 7.1%. Though it had an 80% equity allocation in the beginning and took 1o years to lifestyle that down to 60%.
Despite my pedantry, I think your point remains: there’s nothing in it.
I probably should report the time-weighted figure as well as the money-weighted one.
https://monevator.com/portfolio-tracking-how-to-track-your-investments-using-a-money-weighted-return/
https://monevator.com/how-to-unitize-your-portfolio/
Personally, I would like to see some of these excellent multi asset funds from the big players, in ETF format for the yearly rebalancing simplicity with other investments.
What is Lars Kroijer doing these days? His videos and last entries date from a couple of years back.