The Slow and Steady portfolio is back with another update! And this quarter’s progress has been both slow and steady.
We’ve inched forward another 2% over the last few months – Europe and UK equities holding us down like concrete boots, while the US stock market and Government bonds have been our buoyancy aids.
The Slow and Steady portfolio is Monevator’s model passive investing [1] portfolio. It was set up at the start of 2011 with £3,000. An extra £8501 [2] is invested every quarter into a diversified set of index funds, heavily tilted towards equities.
You can read the origin story [3] and catch up on all the previous passive portfolio posts here [4].
In terms of raw numbers, our portfolio has made just over £300 since our last Slow and Steady portfolio update [5]. We’re now up over 20% overall, with an annualised return of 6.7%.
Here’s the portfolio lowdown in spreadsheet-o-vision:
[6]This snapshot is a correction of the original piece. (Click to make bigger).
The inevitable correction
The galloping bull market of the last five years is naturally causing a lot of jitters.
- Is our luck about to run out?
- Should we assume crash positions?
- If global markets are overvalued is it time to stop investing in equities?
Much of the nervousness stems from the seemingly universal law that what goes up must come down. The question is when?
For a scientific-sounding answer, many pundits reach for valuation measures like the P/E ratio [7] and CAPE [8]. If CAPE is any guide then the US is more than 50% overvalued right now.
But is CAPE any guide? A Vanguard study found that CAPE has previously only explained 40% [9] of the variance in future returns over 10 years.
Now, 40% is pretty stellar in comparison to other metrics Vanguard looked at, but it still leaves us with more unknowns than Donald Rumsfeld.
Meanwhile, CAPE’s predictive power over the course of one year plunges to less than 10%.
According to financial researcher Michael Kitces, CAPE’s peak correlation [10] with real returns occurs over an 18-year horizon.
That’s no basis at all for deciding to abandon your asset allocation [11].
Steady on
The desire to do something is driven by our human instinct to control the uncontrollable. But believing we can predict the future is an illusion. Any change we make could damage our prospects as much as help. It’s a crap shoot.
Remember, as ordinary Joes and Josephines, we have no information that is not available to every other investor in the world.
High valuation levels, the end of QE, geopolitical strife – it’s all on everybody’s TV screen.
What drives the market’s next move will be new information as yet unknown. We won’t be the first responders, so far better to stick to the plan and rely on long-term growth to lift us clear of short-term difficulties.
Consider too that the UK doesn’t look overvalued [12] according to CAPE, and nor does most of the rest of the world.
The US accounts for 25% of the Slow and Steady portfolio. Even a nightmare 50% plummet in the US would only knock us back 12.5%.
Obviously nothing happens in isolation, but the point is this is a diversified portfolio that doesn’t stand or fall purely on the fortunes of one market.
Furthermore we already have an inbuilt mechanism to take the edge off overheating markets.
It’s called rebalancing [13].
Incoming
Enough of the mental anguish, let’s get on with counting the spoils.
The British Government paid £21.93 interest into our bond fund last quarter. More loose change than life-changing.
Rather than blow it on pies, we’re automatically reinvesting our windfall using an accumulation [14] fund.
New transactions
Every quarter we propel another £8502 [15] into the financial cosmos – hoping that one day our little pound probes will take us to a new world where the rat race does not exist.
We use Larry Swedroe’s 5/25 rule [16] to trigger rebalancing moves. We haven’t breached any of our thresholds this quarter, so there’s no need to trim any funds.
All that remains then is to split our cash in line with our asset allocation [17] strategy:
UK equity
Vanguard FTSE U.K. Equity Index Fund – OCF [18] 0.08%
Fund identifier: GB00B59G4893
New purchase: £127.50
Buy 0.66 units @ £192.64
Target allocation: 15%
Developed World ex UK equities
Split between four funds covering North America, Europe, the developed Pacific and Japan3 [19].
Target allocation (across the following four funds): 49%
North American equities
BlackRock US Equity Tracker Fund D – OCF 0.17%
Fund identifier: GB00B5VRGY09
New purchase: £212.50
Buy 146.45 units @ £1.45
Target allocation: 25%
European equities excluding UK
BlackRock Continental European Equity Tracker Fund D – OCF 0.18%
Fund identifier: GB00B83MH186
New purchase: £102
Buy 62.73 units @ £1.63
Target allocation: 12%
Japanese equities
BlackRock Japan Equity Tracker Fund D – OCF 0.17%
Fund identifier: GB00B6QQ9X96
New purchase: £51
Buy 38.84 units @ £1.31
Target allocation: 6%
Pacific equities excluding Japan
BlackRock Pacific ex Japan Equity Tracker Fund D – OCF 0.19%
Fund identifier: GB00B849FB47
New purchase: £51
Buy 23.63 units @ £2.15
Target allocation: 6%
Emerging market equities
BlackRock Emerging Markets Equity Tracker Fund D – OCF 0.26%
Fund identifier: GB00B84DY642
New purchase: £85
Buy 75.62 units @ £1.12
Target allocation: 10%
UK Gilts
Vanguard UK Government Bond Index – OCF 0.15%
Fund identifier: IE00B1S75374
New purchase: £221
Buy 1.63 units @ £135.67
Target allocation: 26%
New investment = £850
Trading cost = £0
Platform fee = 0.25% per annum
This model portfolio is notionally held with Charles Stanley Direct [20]. You can use its 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 [21] for other good platform options. Look at flat fee brokers if your portfolio is worth substantially more than £20,000.
Average portfolio OCF = 0.16%
If all this seems too much like hard work then you can instead buy a diversified portfolio using an all-in-one fund such as Vanguard’s LifeStrategy series [22].
Also note, there are currently cheaper, similar index trackers that can be used to build this portfolio. The existing Slow & Steady funds are competitive enough that it’s not worthwhile switching immediately. We can afford to wait [5]for the competition to settle down.
If you’re a new investor, though, then do compare the Vanguard and Fidelity index fund range against the BlackRock components.
Take it steady,
The Accumulator
- The Slow & Steady portfolio is virtual. It’s a model portfolio designed for discussion and to show how a passive portfolio might operate and perform on a small scale. [↩ [27]]
- The Slow & Steady portfolio is virtual. It’s a model portfolio designed for discussion and to show how a passive portfolio might operate and perform on a small scale. [↩ [28]]
- You can simplify the portfolio by choosing the do-it-all Vanguard FTSE Developed World Ex-UK Equity index fund instead of the four separates. [↩ [29]]