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 [1] 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 [2] 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 [3] and catch up on all the previous passive portfolio posts here [4].
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:
[5]
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 [6].
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 [7] 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 [8] 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 [9] 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 [10] and even Robert Shiller – he of Shiller P/E – thinks UK equities look reasonable [11].
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 [12].
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 [13] 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 [14] 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 [15]. 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 [16] 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 [17].
Take it steady,
The Accumulator