≡ Menu

The Slow and Steady passive portfolio update: Q3 2016

The portfolio is up 27.31% year to date.

The early Autumn heatwave is hotting up the Slow and Steady portfolio as much as the jumpy squirrels in my garden. Should we bask awhile in the good times or should we scurry – gathering more acorns to guard against the inevitable chill ahead?

Okay, let’s bask. After last quarter’s Brexit bounce put us up 10% in three months, we’ve popped on a further 7% since July. It’s lucky the forecasters aren’t paid by results.

The Slow and Steady portfolio is Monevator’s model passive investing portfolio. It was set up at the start of 2011 with £3,000 and an extra £880 is invested every quarter into a diversified set of index funds, heavily tilted towards equities. You can read the origin story and catch up on all the previous passive portfolio posts here.

The Slow and Steady is up 22% in 2016, and 27% in the last 12 months. I don’t know how your personal portfolios look, but if you’ve enjoyed similar gains and have tucked away a substantial amount then you’ll have noticed a surprising swelling in your wealth.

Over a longer timeframe the Slow and Steady portfolio is trimmed back to 13% annualised over three years, and 11.5% annualised since we gunned its engines at the start of 2011. Still, that will do nicely!

Here’s the portfolio latest in spreadsheet-o-vision:

Slow & Steady portfolio tracker, Q3 2016

It’s adding up. Our portfolio has swollen 44% since 2011. We’ve put in a notional £20,770, versus its current worth of £29,992.

We’re not doing anything clever here. Nothing out of character. We’re just rigorously sticking to a standard passive investing strategy.

The important thing is that we patiently plough our corn into a strategic allocation of funds and don’t chase performance.

This year’s best performer is emerging markets; up 33% in 2016. Last year, emerging markets stank the house out – down over 12% – easily our worst performer of 2015.

It’s interesting to note that inflation-linked gilts are our second best performer of the year, and were second worst last year. I’m not trying to claim this is a significant pattern but I am drawing attention to the sheer futility of flinging money at the hottest funds of the moment.

Our linkers have also performed quite differently from conventional gilts over the last few months – growing over 12% versus 2%. Does the market think the latest BOE interest rate cut has likely staved off recession but heralds a greater possibility of future inflation?

Also noteworthy is that the average maturity of the bonds in our linker gilt fund is near 25 years. That’s the stuff of long-term bond funds, which means this holding is highly sensitive to interest rate rises.

Its duration is 23 and that tells us the value of the fund will fall by 23% for every 1% that market interest rates (not BOE ones) rise. The same is true in reverse – the fund will grow in value for every 1% cut in market interest rates.

Given index-linked gilt yields are well into negative territory, it’s worth considering the limited upside of the asset class versus the potential for downside.

Linkers are the best defence against unexpected inflation but short-term bond funds are a decent alternative that balance inflation protection versus interest rate risk.

About that chill

Lots of gloomy commentators in the US are preaching dark times ahead for equities as growth keeps pushing valuation measures like the Shiller P/E Ratio to dizzy heights.

Investors haven’t earned these returns they say. Growth is disconnected from the fundamentals they say.

Remember they’re talking about the US market. Most of the rest of the world looks quite cheap and even Robert Shiller – he of Shiller P/E – thinks UK equities look reasonable.

Only about 25% or so of the Slow and Steady portfolio is invested in the States. And The Investor and I were fighting running battles against DIY pundits claiming the US was overvalued four years ago. You’d have missed out on muchos return if you’d listened to the alarmists back then.

Investing 25% in the world’s global superpower is no overcommitment and I’m not in the least bit worried about it. The US market could defy predictions for years to come and I could shoot off both feet trying to dodge the wrong bullets. Should the US falter then we’re diversified enough to cope.

Still, if you feel otherwise, there are techniques to help you gently trim the sails.

New transactions

Every quarter we plunge another £880 into the market’s inky depths. Our cash is divided between our seven funds according to our asset allocation.

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

UK equity

Vanguard FTSE UK All-Share Index Trust – OCF 0.08%
Fund identifier: GB00B3X7QG63

New purchase: £70.40
Buy 0.405 units @ £173.77

Target allocation: 8%

Developed world ex-UK equities

Vanguard FTSE Developed World ex-UK Equity Index Fund – OCF 0.15%
Fund identifier: GB00B59G4Q73

New purchase: £334.40
Buy 1.222 units @ £273.57

Target allocation: 38%

Global small cap equities

Vanguard Global Small-Cap Index Fund – OCF 0.38%
Fund identifier: IE00B3X1NT05

New purchase: £61.60
Buy 0.264 units @ £233.55

Target allocation: 7%

Emerging market equities

BlackRock Emerging Markets Equity Tracker Fund D – OCF 0.25%
Fund identifier: GB00B84DY642

New purchase: £88
Buy 66.768 units @ £1.32

Target allocation: 10%

Global property

BlackRock Global Property Securities Equity Tracker Fund D – OCF 0.23%
Fund identifier: GB00B5BFJG71

New purchase: £61.60
Buy 31.333 units @ £1.97

Target allocation: 7%

UK gilts

Vanguard UK Government Bond Index – OCF 0.15%
Fund identifier: IE00B1S75374

New purchase: £132
Buy 0.795 units @ £166.13

Target allocation: 15%

UK index-linked gilts

Vanguard UK Inflation-Linked Gilt Index Fund – OCF 0.15%
Fund identifier: GB00B45Q9038

New purchase: £132
Buy 0.681 units @ £193.77

Target allocation: 15%

New investment = £880

Trading cost = £0

Platform fee = 0.25% per annum.

This model portfolio is notionally held with Charles Stanley Direct. 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 for other good platform options. Look at flat fee brokers if your portfolio is worth substantially more than £20,000.

Average portfolio OCF = 0.17%

If all this seems too much like hard work then you can buy a diversified portfolio using an all-in-one fund such as Vanguard’s LifeStrategy series.

Take it steady,
The Accumulator

Receive my articles for free in your inbox. Type your email and press submit:

{ 76 comments… add one }
  • 1 Gregory October 4, 2016, 9:58 am

    Regarding the dividend yield and E/P the S&P 500 doesn’t seem expensive compared to 10-Year Treasury Notes but other markets are cheaper.

  • 2 Gregory October 4, 2016, 10:04 am

    I will never understand the home country bias in a passive portfolio.

  • 3 Scott October 4, 2016, 10:44 am

    @Gregory – I’ve accidentally become home-biased, as I invested new money on a few occasions when UK took a dip in the past few years, and the rest of world (esp. US) looked expensive at the time (you may justifiably argue this isn’t the action of a passive investor, who should have stuck rigidly to some pre-determined allocation.)
    Some commentators (e.g. Robert Shiller, as mentioned above) still think the UK looks good value, so it’s hard to go against this and put new money into (possibly) more expensive assets. On the other hand, I don’t want to become more biased to UK, so where to invest?

  • 4 Gregory October 4, 2016, 11:27 am

    I agree UK is cheap (P/B; CAPE 10; dividend, etc.) so it is reasonable to invest more in it but this is not the aim of the passive portfolios. By the way You can buy curreny hedged ETFs too https://www.ishares.com/uk/individual/en/products/etf-product-list#!type=emeaIshares&tab=overview&view=grouped&fst=50569

  • 5 The Rhino October 4, 2016, 12:21 pm

    @TA – congratulations on steaming ahead with the S&S – stellar returns!

    was there ever an article that outlined the equivalent portfolio but built from ETFs?

  • 6 Geo October 4, 2016, 5:07 pm

    I wonder how the Vanguard Lifestrategy equivalent performed over the same period. In no way to degrade the worthiness of the wonderful ‘slow and steady’ – just curious.

  • 7 Fat but fun October 4, 2016, 5:38 pm

    I am also basking in the success of unearned profits. I feel I might be getting a nosebleed however and wonder if any of your other readers are also thinking about taking some money off the table – perhaps all the gain of the past 12 months.

  • 8 The Accumulator October 4, 2016, 6:27 pm

    @ Geo – I would expect it to be very similar on a 80:20 basis. Right now, I expect the S&S is ahead due to linkers, global property and small caps being on a tear. But it’s the luck of the draw really. Over greater lengths of time I’d expect the S&S to edge it due to the small caps, but that’s only an expectation not a certainty, and not worth the extra effort for many.

    @ Rhino – I’ve not done the ETF version but it would be something like:

    VEVE – Dev World (or XWXU if you wanted to exclude UK, but expensive!)
    WOSC – Global Small Cap
    VFEM – Emerging Markets
    HPRD – Global Property
    VGOV – Conventional Gilts
    GILI – Linkers
    I’d seriously consider carving a chunk out of both the Gilt funds and buying short-term gilts using IGLS or SPDR’s 1-5 year Gilt ETF.
    The biggest problem is there’s no FTSE All-Share tracker since iShares closed theirs a couple of years back.
    I’d use a mix of Vanguard’s FTSE 250 and FTSE 100 ETFs. Actually, I’d just use the index fund but I’m doggedly trying to stick to ETFs here.

  • 9 zxspectrum48k October 4, 2016, 7:39 pm

    On the gilts might it be more efficient to switch from the generic Vanguard gilt index (YTM 0.7%, duration 12.2) to a longer-duration gilt index (say VUKLDGA YTM 1.2%, duration 20.2)? A duration-neutral switch takes out significant cash which can be re-allocated to other funds, while preserving the same exposure to a parallel shift in the curve. You don’t drop yield; in fact you pick up 3bp. My thought is that gilts aren’t there for the yield or a proxy for cash. Gilts are essentially protection against another round of deflation or a crisis, so it’s all about capital gains/losses. If you can obtain the same protection for less cash out then it’s a cheaper option albeit clearly at the expense of an exposure to a steepening of 15s/30s gilt curve. A long-duration fixed coupon fund is also a better match duration-wise for the index-linked fund.

  • 10 Algernond October 4, 2016, 9:42 pm

    @TA – SPDR has an FTSE all-share ETF (FTAL), but the TER is 0.2%, which seems a bit pricey when comparing to the Vanguard & iShares FTSE 100 ETFs…

  • 11 The Rhino October 5, 2016, 10:14 am

    @TA thanks for that, I think there was something in the latest edition of hale about special consideration of gilts given the current circumstances, need to see if i can get hold of a copy to reread. But like spectrum says (amongst the incomprehensible bits), perhaps its not about making the most but losing the least.. always easy to forget that.

  • 12 Dave October 5, 2016, 10:24 am

    One thing I’ve been thinking about is using some of my UK index linked gilt allocation into a global index linked allocation. One of the main reasons is because L&G have a suitable fund of global index linked bonds of a much shorter duration than the UK version, and which is hedged back to GBP. I’d be interested to hear anyone’s opinions on this.

  • 13 Bellabeck October 5, 2016, 10:53 am

    Thanks for ETF suggestions. At the risk of showing my woeful ignorance what difference is there between index and ETF – take for example the Vanguard FTSE Developed World ex UK Equitey Index Acc (from S&S portfolio) and Vanguard FTSE Developed World ETF, VEVE (apart from inclusion of UK in the latter that is)?

  • 14 The Rhino October 5, 2016, 11:14 am
  • 15 magneto October 5, 2016, 11:35 am

    @Gregory (re Home Bias)
    Looking at PE or CAPE in terms of trying to gauge which geographical regions are best value can be a problematic exercise.
    As we know higher growth stocks tend to command higher PEs, and so it can be for countries. What growths do we pencil in for the respective countries?

    Was surprised by some data seen the other day; which indicated minimum portfolio stock volatility achieved with UK/International at the 50% region, which may explain why similar allocations are seen in some professionally managed portfolios. But then minimum volatility does not seem a necessarily desirable goal with Stocks?
    The S&S with UK Stocks at 7.4% of portfolio, equates to about 12% of Stocks being UK; versus the global weighting to UK at about 8%.

    @Fat but fun (any readers thinking about taking some money off the table?)
    If it helps (which it probably doesn’t!), we have been selling Stocks for some months.
    Not because we have an opinion on the markets and what the future may bring for them, but because we have an Investment Plan, which is dictating such sales. The effect of such sales to date curiously has been to leave ‘more money on the Stock-Table’, than at previous sales, but a lower proportion of Total Portfolio Assets.

  • 16 Fremantle October 5, 2016, 12:01 pm

    @The Rhino

    Hale prefers short dated index linked gilts, but unfortunately index tracking funds and ETFs tend to track the entire market, so have longer average durations and increased volatility. He suggests looking at active funds for short dated index linked government bonds.

    I’ve debated myself on this, but in the end stayed passive with global inflation linked bonds through

    L&G Global Inflation Linked Bond Index I (OCF 0.27% / average duration ~11 years)
    db X-trackers iBoxx Global Inflation Linked ETF GBP (OCF 0.25% / average duration ~11-12 years)

    I looked at Fidelity Global Inflation Linked Bond Y GBP Hedged, but thought it was too expensive at 0.51% OCF, but with an average duration of ~4 years.

  • 17 Fat but fun October 5, 2016, 12:02 pm

    Thanks Magneto. Given I am 48 and my SIPP pot is c£800k as a result of the ill gotten gains of the past year in the various stock markets, I have an eye on the £1m ceiling set by the UK Government. Not sure I want to take on unnecessary risk only for extra gains to taxed.

    This morning I have moved £80k from Europe Ex. UK into Vanguard Lifestyle 60% Equity and £45k of Blackrock Far East tracker to cash.

    Research begins on how to make a slow glide to the SIPP ceiling without too much equity or bond risk.

  • 18 The Rhino October 5, 2016, 12:35 pm

    @FM – +1 for the info..

  • 19 Geo October 5, 2016, 12:35 pm

    I had a quick look to see if i could find what Vanguard 80/20 did since 2011. Over 5 years to October it says 87.18%. However this is the based on an original investment 5 years ago, not a total return of regular investments over 5 years, so not really comparable at all and best to ignore!

  • 20 William III October 5, 2016, 1:58 pm

    Agreed, everything in the UK looks cheap at the moment. Including the PM.

  • 21 The Accumulator October 5, 2016, 2:08 pm

    @ Dave – I’d say that is a very sound plan and a switch I’ll strongly consider for the Slow & Steady portfolio in time for the next instalment.

    @ Fremantle – thanks for those!

    @ Rhino – Just to add to Fremantle’s Hale comments, he essentially advocated going shorter across the board. He used to advocate long bonds but has dropped that now.

    @ Zx – can you unpack that for us a little? You mentioned a duration neutral switch but your suggested change is to a longer duration fund. That’s going to be more volatile and vulnerable to interest rate rises. In current circumstances, you could get pounded if inflation takes off. Although I agree with you that, bonds are there to protect in a crisis, they’re also meant to provide stability. Central Banks have tilted the board so heavily one way that going long for a little extra yield seems foolhardy.

  • 22 SemiPassive October 5, 2016, 7:06 pm

    So Tim Hale is in favour of short dated gilts now (like Lars)? I’m pondering locking in gains on IGLT (iShares core gilt ETF, although nowhere near as long duration as INXG) and switching to IGLS instead, or even just leaving it as cash within my SIPP…
    Also wondering if the Bank of England dropping the base rate to 0.1% in the next couple of months might give IGLT one last lift.

  • 23 The Investor October 5, 2016, 7:54 pm

    Hmm, with my active hat on, I think hedged index-linked global government bonds can be interesting diversifiers. But I’m not sure I’d go down the route for a passive portfolio. (I haven’t given it a massive amount of thought, so don’t take this as anything definitive!)

    My reasoning is this.

    Index-linked government bonds are there to give you near-risk-free inflation protection. That’s their role. But (a) global inflation is not the same as local (i.e. UK) inflation. Of course there will be trends, but rates can vary all over the globe. And (b) hedging out currency risk takes away an additional ability of your asset to respond to (some kinds of) inflation shocks via currency moves.

    You can see that in fact with these hedged global index-linked bonds.

    Whereas UK index-linked bonds have surged since Brexit, presumably at least *partly* because the market now expects higher inflation down the line as a result of the weaker currency, these hedged IL-bonds haven’t moved anything like so much. They’re 60%+ in US IL bonds and they’re hedged to currency so that’s hardly surprising, but is getting exposure to the pace of US inflation via such hedged global bond funds really a swap for what IL-bonds are traditionally doing in a UK passive investors portfolio?

    In contrast, unhedged overseas bond allocations have risen strongly, as the £ has fallen. True that’s just the currency effect of the weaker £, but you will presumably ultimately spend your overseas bond allocation buying UK-sourced stuff in your UK currency.

    So the higher inflation expectations caused by the weaker £ have been offset to some extent by your unhedged overseas bond allocation rising in value, and thus giving you more spending power when translated back into £.

    Obviously this is all swings and roundabouts, will be reversed if the £ strengthens (but that will presumably happen in conjunction with lowering inflation expectations) and assuming uncompensated currency risk is not anything like getting the ‘true’ inflation-protected from a true UK IL government bond. But you’re not getting that anyway with global IL bonds — you’re getting global inflation protection (two-thirds of which is US inflation protection…)

    I understand that UK IL government bonds look absurdly expensive, especially over the long duration. No argument there. But are passive investors meant to be making such calls?

    If you want to fiddle, maybe there’s an argument for just putting a (smaller) slug in say a US index-linked government bond fund/ETF and taking the currency risk if you want seemingly better value inflation protection, then dialing down duration as others have said in your UK fixed income gilts, and finally keeping a (smaller) slug of IL-gilts, with a view to rebalancing if/when they fall off a cliff.

    (Remember, something is always going badly in a properly diversified portfolio. 🙂 )

    Just my two pence, after two glasses of red.

  • 24 The Accumulator October 5, 2016, 8:49 pm

    Damn, that’ll teach me to write impulsive comments under time pressure. Yes, The Investor is right. Apologies. Global developed world bonds hedged to sterling are plausible as you’d expect most dev world nominal bonds to respond in much the same way in a crisis, but global linkers not so much.
    From memory Hale didn’t have any recommendations on even an active short duration linker gilt fund. I’d need to double-check to be absolutely sure though.
    Personally I’d go for shorter-duration conventional gilts using the ETFs mentioned in my earlier comment and rein in the linkers.
    Finally, I would say passive investors can legitimately make these calls in certain circumstances without feeling like greasy market-timers. If you pinned back your allocation to US stocks as the market hit p/e 30, p/e 40 and p/e 45 (as during the tech bubble) then I think that’s a reasonable thing to do.
    I’d like to think if I was a passive investor in 1989 I might have done something about my Japanese allocation.
    Obviously, you can open Pandora’s Box with this kind of thinking but we don’t have to blindly walk off a cliff either. See the overbalancing section of this piece for some pros and cons: http://monevator.com/market-up-should-i-sell/

  • 25 john October 6, 2016, 8:59 am

    @zxspectrum48k – if I understand correctly you’re saying a smaller position in a longer duration bond fund should achieve the same goal whilst freeing up cash (so long as your goal is not a glorified way of storing cash in the first place). This sounds interesting and the same logic can be applied to stocks. If, in the very long term, small caps, value stocks, EM (high beta) are thought of as levered bets on equities, then they too make sense as a means of freeing up cash. Min vol funds are of course the opposite and tie up cash unnecessarily.

  • 26 SemiPassive October 6, 2016, 9:02 am

    Just checking out latest data on IGLS (0-5 year gilts) on ishares website and Weighted Average YTM is 0.13% vs a TER of 0.2%. Almost guaranteed nominal loss. Also there is still the prospect of short term capital losses even with that duration, for example its gone up roughly 2.5% pa for the last couple of years so could equally drop, although not as much as longer duration ETFs obviously.

  • 27 Dan October 6, 2016, 12:51 pm

    TA, I’d be grateful if you could clarify something. You mention an 11.5% annualised return since 2011, and a 44% growth since 2011. But if you’ve made 11.5% compound annual return since the start of 2011, by my reckoning you should have nearly doubled your money by now (about 90% growth) – or am I missing something?

  • 28 TT October 6, 2016, 1:21 pm

    My Boring Passive Portfolio, with no home bias, is up 22% for 2016 and 28% for 12 months for equities, and 20%/24% when I throw in 40% fixed assets. In other words not Boring, much as your portfolio hasn’t been Steady or Slow, at least in terms of returns. Something is wrong when my P2P returns are watering down the rest of the portfolio. I feel no glee or comfort in such numbers, they are disturbing and disarming when I realise they could have gone the other way. I want a nice moderated YoY return profile, I shudder to think at the volatility of active investor returns, 2016 enticing active investors in for a bruising 2017 fall.

    To counter such wild manoeuvres, I manage my expectations with a simple Spreadsheet model I concocted years ago. Growth of 5% pa, plus inflation. I (conservatively?) use that anticipated current value for net worth calculations rather than what my platform tells me I am worth.

  • 29 The Investor October 6, 2016, 2:24 pm

    @Dan — You’ve raised the thorny issue of performance tracking, which you’ll see has been debated at length in the comments to many previous Slow and Steady Updates. 🙂

    Remember the fund has been getting new cash every quarter, in all kinds of market conditions. The 44% gain is the total return on all this invested capital. The annualized return can be thought of as how a notional £1 invested at the start of the portfolio’s life would have grown over the portfolio’s life.

    You might want to read my article on unitizing your portfolio. You could also read all the comments for a flavour of the debate about how best to track your returns. It’s a big subject! 🙂

  • 30 The Rhino October 6, 2016, 2:38 pm

    @TT – if boring is also simple would you mind disclosing the constituents of your portfolio. For reciprocity mine is about as boring and simple as they come, i.e. vanguard LS60. I’m looking to branch out into ETF land though so scouting for ideas..

  • 31 TT October 6, 2016, 4:00 pm

    @Rhino,

    My 60% equities is very similar to the “Tim Hale 4 (2nd ed)” portfolio w/o home bias, comprised 27% all world equities (Vanguard FTSE UK All Share plus Vanguard FTSE Dev World ex-UK), 9% world value (Vanguard Global Value Factor ETF, switched from VHYL earlier this year, so not pure passive), 9% small companies (Vanguard Global Small Cap Index plus Ishares MSCI UK Small Cap UCITS ETF, the uk bias is historical, not adding to anymore and should sell), 7.5% emerging markets (Vanguard Emerging Markets ETF), 7.5% property (Blackrock Tracker) OCR c0.18%. Note: I wouldn’t bother with anything other than a LSx0 or VWRL unless significantly into 6 figures, and I see their 12m/ytd figures are about the same as mine. The 40% fixed isn’t worth going into due to personal circumstances/constraints. I’ve not taken the full ETF plunge yet.

  • 32 CyclingHedgie October 6, 2016, 5:07 pm

    There is no ‘UK based stuff’ since we import pretty much everything. So asset prices which are just higher in GBP terms won’t buy you any more stuff when you come to buy it, it’ll be more expensive. Would be best to think of portfolio returns / allocations in some sort of currency neutral way. IMF Special Drawing Rights (XDR)?

  • 33 The Accumulator October 6, 2016, 6:24 pm

    @ John – your kinda talking about the Larry [Swedroe] portfolio: https://www.bogleheads.org/forum/viewtopic.php?t=169285

    Except in his case he takes more risk on the equity side (US small cap value and emerging markets) so he can allocate more assets to less risky bonds (0-5 year US gov bonds).

    The idea being that you get the same return for less volatility.

    Your take on it (and possibly zx’s) is amping up both ends – more return, more volatility. Ballsy and then some! 😉

    @ TT – for a minute there I thought you were being optimistic with your 5% expected return given 40% bonds but I assume you got to that number after accounting for higher expected growth from value, small cap, emerging market holdings?
    I’d expect more like 3% from a straight dev world 60:40 portfolio of the LifeStrategy kind.

  • 34 Naeclue October 6, 2016, 7:08 pm

    @SemiPassive, instead of buying a short dated gilts fund, create your own. Buy 4, 5, 6 year gilts then each year, when you rebalance, sell the 3 year and buy a 6. If your allocation to gilts was £12,000 and annual trading costs £24, that is equivalent to 0.2% per year, the same ongoing cost as a IGLS. Holding 3 gilts cuts your loss on the spread to a third compared with owning just 1 gilt.

    Gilts have the same issuer, identical credit risk and are very efficiently priced. This means you gain nothing from diversification through an ETF, other than potentially higher costs.

  • 35 Dan October 6, 2016, 8:49 pm

    Thanks TI. I’d been thinking about it the wrong way, as the return on a lump sum rather than a stream of payments.

    Your article on unitising a portfolio is excellent and has been very useful for me in helping me to track my returns better, compare to benchmarks etc.

    Keep up the good work!

  • 36 puggy October 6, 2016, 8:57 pm

    Hello, I’m looking for some thoughts about whether the Slow and Steady portfolio would be good for a lump sum (approx £140k I recently inherited), in a world in which I’m assuming sterling is on a long decline. I’m new to investing and slightly terrified, but currently that cash is sitting in savings accounts and being murdered by the collapse in sterling!

    I do also have around £35k in stocks and shares ISAs. Thanks for any feedback, I’m currently wandering around the many excellent articles on this site..

  • 37 Scott October 7, 2016, 10:02 am

    @puggy – whilst the bloggers aren’t in a position to ‘recommend’ their notional portfolio, something along these lines should be suitable for most passive investors.
    I’d suggest that when starting out you don’t need to include some of the less mainstream elements such as property or small cap (or even emerging market) funds, and instead stick to an all world (or world ex UK, and separate uk) funds for the equity part of your portfolio, and UK gilt funds for the fixed income part.
    You first need to decide on an equity/bond ratio that suits your investing needs.
    You also need to be happy to tie that money up for the long term – at some point markets will have a big fall and your investment may be worth less than you started with. How would you feel if you saw 30, 40, 50% wiped off your portfolio next year?

  • 38 The Rhino October 7, 2016, 10:09 am

    @TT – thanks for that – i am sorely tempted with the VWRL only approach for my foray into ETFs. So simple it hurts. Would be nice to have something that throws off a bit of income.

  • 39 puggy October 7, 2016, 10:31 am

    @Scott
    thanks for the reply :). Yes, I’m looking at this as a long-term investment – I know that all you can do is make statistically good decisions and learn to live with the variance. A 50% fall would feel bad, but I’ve played poker long enough to know that you can’t second-guess your decisions.

    Am I misunderstanding the impact of a falling pound though? I was presuming this would make cash or peer to peer lending lose against any equity/bond portfolio (variance notwithstanding). Is that right though?

  • 40 Mroptimistic October 7, 2016, 10:33 am

    I looked at the slow and steady portfolio and wondered why there were two holdings, world minus UK plus a holding in the UK. Why not just buy the world including UK I mused. In doing that I saw the world weightings with the US above 50% and the UK around 8% with France on 3%. There was some talk a while back about world etfs with GDP weightings rather than free float. Did that ever get anywhere?

  • 41 Bellabeck October 7, 2016, 10:59 am

    @puggy. I agree with Scott’s comments. I think that starting out a Vanguard Life Strategy would be a good option, you need decide on your level of risk and then sit tight; do nothing. For myself, I have gone with LS60. I do also supplement with some property trackers/REITS, and a few Investment Trusts for a bit of gearing advantage but when I started managing my SIPP 18 months ago I kept it simple.

  • 42 The Rhino October 7, 2016, 11:48 am

    @BB – what ITs did you go for?

  • 43 Mroptimistic October 7, 2016, 11:50 am

    Ah, just found a blog from 2015 which tells me not to bother!

  • 44 Bellabeck October 7, 2016, 1:01 pm

    @TheRhino. I went for Diverse Income Trust, TR Property plus Pantheon International for a private equity diversification (but each one only 2% of portfolio or less). I am still debating with myself about Law Debenture…

  • 45 hyperhypo October 7, 2016, 4:40 pm

    I’m about , commence on my own S&S variant , or a Vanguard Target 2020 , or a VLS 60 to start….i’m in process of firming up which , although my inclination is to be able to do the sums to vary the current S&S to (presently, 60/40 ) going towards 50/50 in four yearchtime when i stop contributing to my DC scheme …which is just about to chan60/ge to a SIPP and thus give me access to the Vanguard , Blackrock Trackers.
    Given my 60/40 starting position, i figure something like:
    Emerging Markets 8%
    Property 7%
    World Dev 30%
    UK 8%
    Global Small 7%
    UK Gilt 20%
    UK linked Gilt 20%

    ….one question i havew rebalancing …in a couple of years time i’ll want to build up a cash fund in the SIPP , as plan to drawdown heavily from age 61 – 62 until a DB scheme starts at 63.
    If e.g my assets are at 50/50 at age 61, is it sensible to give the entire contents a “haircut” to realise the cash, or some other balancing mechanism. I guess my asking these questions is in line with the attraction of the Vanguard Target 2020 at present , although my preference is to learn ropes sufficiently to DIY.

  • 46 zxspectrum48k October 7, 2016, 8:51 pm

    TA: A duration-neutral switch from VANUGSA into VUKLDGA (in the ratio of say 1 to 0.6) does not add risk (at least to a parallel shift of the curve). Given the relative durations (12.2 and 20.2, respectively) this preserves the overall duration of the portfolio (i.e 1*12.2 = 0.6*20.2) but takes out 40% cash (left in a term depo say). It’s true that 30y bonds have a higher yield vol than say 10y bonds, but empirically a 5-year regression of the the two funds shows a beta of 1.67 (R^2 96%), exactly the ratio of durations. The long-duration fund has more convexity (30y gilts have 4x the convexity of 10y); this “gamma” offsets the higher yield vol by increasing your exposure in a bull flattening but decreasing your exposure in a bear steepening.

    The other point is that a bond allocation is normally risk-weighted (so a function of duration) rather than cash. By having 15% in nominal gilts (portfolio duration 1.83) but 15% in linkers (portfolio duration 3.45), the S&S portfolio is overweight linkers vs. nominals. Surely a passive allocation to bonds would have the same portfolio duration or is it because the S&S portfolio favours linkers over fixed-rate bonds? It’s been a great call since inflation breakevens have rocketed higher in 3Q16.

  • 47 Passive Investor October 8, 2016, 9:03 am

    @ The Investor. @ Acc. Just a huge thanks for the brief comment about Linkers. I bought quite a lot when N S & I withdrew index linked savings certs. They’ve had a great run obviously. But you prompted me to do something research and I simply hadn’t realised how long the already long durations had become or the fact that their price is being driven by pension fund needs (not a broadly free market) or the the implications that near zero interest rates have for their interest rate sensitivity. They do seem to be a catastrophe waiting to happen for anyone with an investment horizon of 10-15 years. I have taken the opportunity to sell up and move into 1-5 year bond funds with an average duration of 2-3 years. A close call for me I think, many thanks indeed.
    PS I agree with @Acc that taking a strategic call as above isn’t a market-timing active decision. It’s a recognition that the extreme macro-economic and regulatory (wrt pension funds) conditions have changed the behaviour of Linkers to make them completely unsuitable for private investors who want to hedge against inflation (rather than take a bet on long-term interest rates)

  • 48 magneto October 8, 2016, 11:13 am

    @ Passive Investor

    Maybe we need three categories of investors :-
    + Passive
    + Intelligent
    + Active
    Where the soubriquet ‘market timing’ comes in, would be in the eyes of the beholder.

    @ hyperhypo
    “in a couple of years time i’ll want to build up a cash fund in the SIPP , as plan to drawdown heavily from age 61 – 62 ”

    If you had cash today, would you then be happy to invest/expose it to market fluctuations for such a short period? Essentially this portion of the portfolio is a short-term investment?

  • 49 The Investor October 8, 2016, 12:00 pm

    @magento — You realise you’re just reinventing the wheel? Don’t you think generation after generation of investor has described themselves as “intelligent” with their market timing, tactical asset allocation, and other active exploits?

    A recent study in the US by Morningstar found that NOT ONE of the 57 professionally managed tactical asset allocation funds studied in the US outperformed a simple index fund.

    (Unfortunately the original study by Morningstar is now behind a paywall, but Bogleheads has a recap here: https://www.bogleheads.org/forum/viewtopic.php?t=198559)

  • 50 @algernond October 8, 2016, 3:30 pm

    @Passive Investor
    Is the ‘catastrophe waiting to happen for anyone with an investment horizon of 10-15 years’ specific to British linkers only do you thing? I am wondering about international linkers ETF (XGIG).

  • 51 Passive Investor October 8, 2016, 3:51 pm

    @algernond. As is clear from the above I am not a professionally trained financial professional but I am a have 25 years of investment mistakes behind me. As mentioned above international inflation protected bonds don’t protect against UK inflation. They carry exchange rate risk and it’s hard for me to see their place in a UK portfolio. The easiest rule of thumb is to hold bonds with a duration less than your investment horizon. In this case you are buying a known predictable stream of cash flows and short-term losses in capital don’t matter as they will be made good when the bond expires. I had previously been reassured by the long duration of Linkers because under ‘normal’ conditions their value responds more to UNEXPECTED inflation than intetest rate rises. But now I see a triple whammy of even more extended duration, of prices assuming 3% inflation and the near certainty that any future gains from unexpected inflation above 3% will be countered by capital losses due to interest rate rises. My general view is more or less with William Bernstein and Tim Hale who recommend short duration high quality bonds as the fixed income component of a portfolio.

  • 52 magneto October 8, 2016, 4:03 pm

    @ TI

    “@magento — You realise you’re just reinventing the wheel? Don’t you think generation after generation of investor has described themselves as “intelligent” with their market timing, tactical asset allocation, and other active exploits? ”

    Not me guv!
    See Ben Graham and Wm Bernstein!

  • 53 The Investor October 8, 2016, 4:09 pm

    @magneto — I’m well aware of their use of the word “intelligent”, and have books by both on my shelf, including “The Intelligent Investor”.

    That is why I said “reinventing the wheel”, as well as the fact the you are advocating successful tactical asset allocation despite being an individual who doesn’t seem to understand some of the investing basics (no personal offense meant, it’s just a comment on previous discussions we’ve had) and has basically no reason to think you or anyone else could do better than the entire class of professional tactical asset allocators who have failed to successfully tactically allocate.

    Just so you’re aware I’m close to the point where I’m going to delete misleading posts of yours rather than reply to them, because I haven’t got time to explain the same thing over and over, and I don’t want other readers being misled. Again, nothing personal, it’s just a reflection of my time commitments and educational aims for this site.

    All the best.

  • 54 magneto October 8, 2016, 6:35 pm

    The ire/problem arising may be due to the at least two meanings of the I word.
    When used here it is specifically intended to mean :-
    “(of a device) able to vary it’s state or action in response to varying situations and past experience.”

    It is not a derogatory term for any alternative!
    REPEAT
    It is not a derogatory term for any alternative!

    All the alternatives can be equally I….. in their aims and practices.
    Horror struck to be lumped in with the TAAs!

    The series of articles relating to the present low interest rates are particularly promising and will be followed most closely.
    And do keep up the occasional active topic.
    The recent one on REITs stirred us sufficiently to take some action!

  • 55 hyperhypo October 9, 2016, 8:29 pm

    @magneto…..my question re. cash within my sipp was musing how to prepare for a period …4 years hence perhaps …when i’d want to draw exclusively on the sipp to provide living expenses in advance of a DB scheme commencing…
    .and i was wondering how / when to commence creating the cash to draw upon, concurrent with questions of asset allocation within my imminent new scheme (company scheme transfer to SIPP) …my bearing in mind the notion of keeping two year’s cash expenses. As presently have no cash buffer at all.

  • 56 magneto October 10, 2016, 10:30 am

    @ hyperhypo

    “my bearing in mind the notion of keeping two year’s cash expenses. As presently have no cash buffer at all.” hh

    This monevator link on emergency funds may help :-

    http://monevator.com/its-an-emergency-fund/

    There may well other articles on this subject, to which others might suggest.

  • 57 hyperhypo October 10, 2016, 11:23 am

    @magneto…..my question re. cash within my sipp was musing how to prepare for a period …4 years hence perhaps …when i’d want to draw exclusively on the sipp to provide living expenses in advance of a DB scheme commencing…
    .and i was wondering how / when to commence creating the cash to draw upon, concurrent with questions of asset allocation within my imminent new scheme (company scheme transfer to SIPP) …my bearing in mind the notion of keeping two year’s cash expenses. As presently have no cash buffer at all. I have a blank canvass which to dispose of nearly 5 years of aggressive pension saving , yet becalmed on a sea of choice….

  • 58 puggy October 11, 2016, 10:59 am

    Just a quick question about brokers:

    I went with iii, and put in some order requests over the weekend. They are still sitting there as ‘active’, i.e. unactioned. Is it normal for it to take days to buy a fund?? I’m uncomfortable having my cash just sitting with iii and not knowing when they will actually complete the purchases..

  • 59 Fat but fun October 11, 2016, 11:07 am

    @Puggy. Have the same issue with HL & Vanguard. Part of the delay is due to paperwork catching up with trades. Your trade may have already been executed.

  • 60 puggy October 11, 2016, 11:09 am

    Ah ok – thanks for the info 🙂 I’m new to this, so I naively thought it would be almost instant…

    cheers!

  • 61 Scott October 11, 2016, 11:32 am

    @puggy. I’m also with iii – In my experience (and I might have got the timings slightly wrong on this) if you place a fund order on a working day, the order will be processed at the start of the following working day (based on previous end of day price for the fund) and iii then take until after the END of the next working day to display the transaction. If a non-working day intrudes then this will delay things further.

  • 62 puggy October 11, 2016, 11:48 am

    @Scott – thanks, that’s reassuring at least. Maybe it will teach my some patience 🙂

  • 63 magneto October 12, 2016, 10:59 am

    @ hyperhypo

    Only suggestions :-

    Try leafing through the monevator articles library to see if anything suits.

    Tim Hale’s book ‘Smarter Investing’ esp section 3.1 might prompt some thoughts.

    If looking for multiple investors’ input/discussions around a specific problem, then there are such forums as the US Passive Forum ‘bogleheads.com’, and perhaps others for that type of wider debate.

    Good Luck

  • 64 hyperhypo October 17, 2016, 9:25 pm

    @magneto ….thank you for your encouragement.
    I’ve deployed my resources thus:

    47% VLS60,
    47% VLS40
    6% Blackrock Global property
    whilst i draw breath.

    This seems a fair starting position, given my age and experience…

  • 65 PassivelyPassiveInvestor October 31, 2016, 6:17 pm

    Been following this blog for ages, as an example of what to do with the cash I wanted to save for the kids. Whilst I find it interesting, I’m so passive, I’d rather read up what cleverer people than me think about what they should do (i.e. you) and just take the risk in following that great advice. Plus its like joining along on the ride.

    I’m currently with Charles Stanley and this is the first month I’ve actually managed to reach the split % across the board (as I started only last year) but I see that CSD say I have to trade a minimum of £100 in any particular fund as a top up (this is after the % minimum to invest IN the fund I mean).

    So am I looking in the wrong area? How do you top up with £61.60 in Global Property for instance? (the allocation you’ve decided on this quarter)

    Many thanks!

  • 66 The Accumulator November 4, 2016, 6:20 pm

    Hi, you can set up a minimum monthly payment with CSD from £50. Just give ’em a call if you’re having problems.

  • 67 puggy November 4, 2016, 6:50 pm

    BTW, is anyone worrying about the possible effect of a Trump victory? I see predictions of 10-15% slump in a lot of funds. Are any of you trying to hedge, and if so, how?

    thanks!

  • 68 oldie November 18, 2016, 6:20 pm

    I am sure you are aware of this report but nevertheless, see link below.
    Welcome info. for “passives”.

    http://m.citywire.co.uk/money/fca-best-buy-and-rated-funds-fail-to-beat-market/a971879

  • 69 The Accumulator November 18, 2016, 7:03 pm

    Thanks for the tip-off Oldie!

  • 70 Mike November 21, 2016, 4:36 pm

    Do you know why the Vanguard FTSE INDEX Fund is only rated as 2 Stars?

  • 71 The Accumulator November 22, 2016, 10:46 pm
  • 72 Kayvaan December 8, 2016, 10:03 pm

    Great site and great series. My question is how would you balance the portfolio if you had a longer time frame, say a 30 year SIPP?

    I’d imagine you’d bring the bonds back down to where you started at 20% (or lower?) and redistribute that to the developed world and UK equity funds, as that’s where you’ve stripped over the last couple years.

    Am I close?
    Asking for a friend 😉
    Thanks!

  • 73 The Accumulator January 3, 2017, 5:19 pm

    Hi Kayvaan,

    I think the bond allocation is more a function of risk tolerance than time. These pieces attempt to sum up practical ways that an investor can get a handle on risk tolerance:

    http://monevator.com/what-you-need-to-know-about-risk-tolerance/

    http://monevator.com/how-to-estimate-your-risk-tolerance/

    If I stripped back bonds further though I probably wouldn’t push up the UK holding as I’m on a mission to cut out home bias and the UK market is only worth 5 – 6% of the market.

    I’d probably look to diversify more: property up to 10%, global small cap up to 10%, emerging markets up to 15% of equity allocation. Small cap and emerging markets are highly volatile asset classes though, so what’s right for me may well not be right for your friend.

    Also, see this rethink on UK linkers: http://monevator.com/why-uk-inflation-linked-funds-may-not-protect-you-against-inflation/

    Sorry it took me so long to reply!

  • 74 Marianne January 4, 2017, 11:32 am

    Hi, I have a lump sum that I am thinking of investing in a Vanguard LifeStrategy Accumulation fund (as don’t know enough yet to confidently do something like the above), but is there a best day/time to invest the lump sum? Best wishes and happy new year!!

  • 75 Kayvaan January 16, 2017, 12:42 am

    Accumulator,

    No worries! This whole website is brilliant and you do a great service, you don’t owe me anything! Your detailed reply is very appreciated.

    Thanks again

  • 76 Kieren February 17, 2017, 6:01 pm

    Great Blog/Website – have found it really informative.
    In terms of the spreadsheet you are using to keep track of your investments. Where are you sourcing the Asset Class Annualised Performance figure from?
    Are you calculating it or is it a standard number?
    Could you give a bit more of an explanation around it. I have googled it and think I get the principle but would be interested in how you re using it.
    Thanks

Leave a Comment