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The Slow and Steady passive portfolio update: Q3 2018

The Slow and Steady passive portfolio update: Q3 2018 post image

Since when do tortoises move sideways? In the three month’s following our last Slow & Steady check-in, we’ve made our least dramatic gain ever.

Our passive portfolio is up £313. Or 0.74% on last quarter.

Hey, it’s better than a punch on the schnoz.

Emerging markets are having a tough year, as are our government bonds. UK equities aren’t looking too chipper either, for some reason… The rest of the world is doing just fine, though, especially the US.

Here’s the view through our Unaugmented Reality Spread-sheeto Goggles™:

Our portfolio is up 9.91% annualised.

The Slow and Steady portfolio is Monevator’s model passive investing portfolio. It was set up at the start of 2011 with £3,000. An extra £935 is invested every quarter into a diversified set of index funds, tilted towards equities. You can read the origin story and catch up on all the previous passive portfolio posts.

Since we last spoke, there’s been lots of fanfare celebrating the longest bull market in history.

And also why it isn’t the longest bull market in history.

Confused? Is the end nigh? Either way, equity valuations are high. Okay, US equity valuations are high. Many other regions look fine. Just make sure you’re not overexposed to Belgium and Denmark.


Ben Carlson of A Wealth Of Common Sense fame wrote a great post that encapsulates why high valuations are worrying.  Yet worrying about it is as useful as sacrificing goats to save the harvest.

It’s true that high valuations have historically been associated with poor returns over the subsequent ten to 15 years. You can expect a median annualised return of 2.2% from US equities for the next decade and a half, according to Star Capital’s financial archeology1. But expectations are not certainties. History shows the average return has ranged from 7.9% to -2.2% per year during similar periods when valuations have been frothy like a McFlurry in the mush.

Other researchers are equally or even more pessimistic. The average US return could be -0.6% over the next ten years according to the expected return chart of fund shop Research Affiliates2.

So are we like Wile E. Coyote after he’s run out of road and just before he looks down?

Perhaps, but Ben Carlson’s post also quotes research concluding that you can do precious little with valuation information.

Valuations can warn you of hazards ahead. They can’t help you swerve them.

Achtung! Achtung!

You may have heard of asset allocation strategies that adjust for market valuations. For example Ben Graham, mentor of Warren Buffett, suggested trimming equities when they seem expensive.

You could look to go to 25:75 equities:bonds when valuations are high, 50:50 when markets are fair value, and 75:25 when equities are a bargain.

Taking action like that might make you feel more in control. There’s every chance it won’t achieve much though, according to investing luminaries Cliff Asness, Antti Ilmanen, and Thomas Maloney of AQR.

Their paper did show that a simple valuation timing strategy edged a buy-and-hold strategy from 1900-2015. But it hasn’t worked for the last 60 years. The result was a draw from 1958-2015. And that’s before counting the higher costs of timing.

Here’s what AQR says about using valuation as a timing signal:

Valuations can drift higher or lower for years or decades, making it difficult to categorize the current market confidently as “cheap” or “expensive” without hindsight calibration, and therefore it is difficult to profit from such categorizations.

There are also reasons to believe that measures of valuation such as Shiller’s Cyclically Adjusted PE Ratio (CAPE) may no longer hold sway.

As AQR comments:

There may have been a structural change that keeps real yields low and inflation moderate for at least another five to ten years – perhaps a slowdown in equilibrium growth rate or a secular private sector deleveraging following decades of rising leverage. Or larger saving pools and investors’ better access to global capital markets at lower costs may have sustainably reduced the real returns investors require on asset class premia, and we’ll never see a reversal.

We simply do not know.

If they don’t know, then I don’t know. Especially when plenty of other credible sources also advise caution on using CAPE to tame the bull or the bear. See these posts from Larry Swedroe and Early Retirement Now (ERN).

As Big ERN says:

If you think that today’s CAPE of 31.3 is high, would you have sold equities back in the 1990s at a CAPE level of 31.3?

That would have been in June 1997 when the S&P 500 stood at 885 points. The S&P had another 79% to go before the peak (dividends reinvested).

The best valuation metrics have historically explained only about 40% of returns anyway, according to Vanguard.

Remember, too, we’ve been here before in this not-so-long bull market. For example, you might want to review a post by The Investor from June 2014. He also found many pundits warning the US market was over-valued – but he suggested passive investors sit on their hands.

The US market is up around 50% since then.

Inaction stations

So what to do? The main reason today’s post is a link-fest is because I wanted to put plenty of quality information at your fingertips – in case, like me, you’re prone to wondering when change must come.

And after reviewing it, I can’t award myself a meddle.

If you, on the other hand, must be master of your fate, then investigate overbalancing. It is a crude valuation timing strategy but a relatively benign one.

In the face of a world beyond our control, humility is a good answer. If you don’t like that answer, then diversification is the other good one.

The Slow & Steady portfolio is around 29% in US equities right now. If they flounder then we’ll look to fairly-valued Europe, the UK, and the Emerging Markets to carry on regardless.

New transactions

Every quarter we toss £935 down the bowling alley of global capitalism, hoping not to end up in the gutter. Our cash is divided between our seven funds according to our pre-determined asset allocation.

We use Larry Swedroe’s 5/25 rule to trigger rebalancing moves, but all’s quiet this quarter. 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: £56.10

Buy 0.272 units @ £206.27

Target allocation: 6%

Developed world ex-UK equities

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

Fund identifier: GB00B59G4Q73

New purchase: £336.60

Buy 0.931 units @ £361.18

Target allocation: 36%

Global small cap equities

Vanguard Global Small-Cap Index Fund – OCF 0.38%

Fund identifier: IE00B3X1NT05

New purchase: £65.45

Buy 0.214 units @ £305.81

Target allocation: 7%

Emerging market equities

iShares Emerging Markets Equity Index Fund D – OCF 0.25%

Fund identifier: GB00B84DY642

New purchase: £93.50

Buy 60.24 units @ £1.55

Target allocation: 10%

Global property

iShares Global Property Securities Equity Index Fund D – OCF 0.22%

Fund identifier: GB00B5BFJG71

New purchase: £65.45

Buy 32.21 units @ £2.03

Target allocation: 7%

UK gilts

Vanguard UK Government Bond Index – OCF 0.15%

Fund identifier: IE00B1S75374

New purchase: £261.80

Buy 1.633 units @ £160.29

Target allocation: 28%

UK index-linked gilts

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

Fund identifier: GB00B45Q9038

New purchase: £56.10

Buy 0.304 units @ £184.76

Target allocation: 6%

New investment = £935

Trading cost = £0

Platform fee = 0.25% per annum.

This model portfolio is notionally held with Cavendish Online. Take a look at our online broker table or tool for other good platform options. Look at flat fee brokers if your ISA portfolio is worth substantially more than £25,000. The Slow & Steady portfolio is now worth over £41,000 but the fee saving isn’t juicy enough for us to push the button on the move yet.

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

  1. Scroll down to the second chart. Which distribution of returns followed on comparable valuations over 15 years? []
  2. Click on Equities in the left-hand column > Expand all > Scroll down to US Large and US Small – the expected return appears in the chart, followed by the volatility number e.g. -0.6%, 12.8% []

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{ 34 comments… add one }
  • 1 dean October 2, 2018, 12:44 pm

    can I ask when did we move to Cavendish from CS? must have missed that and was it worth moving with the costs involved?
    must keep up at the back

  • 2 Fremantle October 2, 2018, 1:30 pm

    Gilts and index-linked gilts have performed poorly – a case for global with a short duration bias perhaps.

    Pound fluctuations are playing merry hell. Converted to USD my similarly passive but fully global is still burbling along at 6% annualised. Not so good against the euro however.

  • 3 AncientI October 2, 2018, 7:21 pm

    im still 30% cash in my portfolio and struggling to know where to put it. Ill probably be dumping some in Terry Smiths new investment trust but its difficult to force myself to buy equities at all time highs. Everyday I see people talking about the “pending crash” in global stocks and that makes me extra cautious.

    I might punt on chinese stocks a bit as they have been aggressively sold off due to trumps threats and the whole trade war thing may blow over.

  • 4 Peter October 2, 2018, 9:45 pm

    “Warren Buffet”, the most famous fictitious investor ever, makes an appearance.
    My war on bad spelling continues.

  • 5 YoungFIGuy October 2, 2018, 11:54 pm

    I always look forward to the S&S updates. Thanks TA.

    Thank you also for the commentary. I find it amusing how quickly people forget how rocky the Longest Bull Market In History(TM) has been. From the 2011/12 ‘double-dip recession’ and Euro Crisis through to the rollercoaster 2015 and 2016- Brexit shenanigans, it has not been all plain sailing as some revisionists would have you believe.

    It’s also great to see Big ERN get a plug, he runs an excellent blog (when he’s not off galavanting the globe!)

    On a final note, I too use the Swedroe’s 5/25 rule. This was the first time in two years that I’ve done my Autumn rebalance. Which, as you mention in the piece, was into suffering Emerging Markets and Gilts.

  • 6 The Accumulator October 3, 2018, 6:02 pm

    @ Dean – just this issue! Charles Stanley upped their fees a month or so ago.

    @ Fremantle – this portfolio is meant to hold fast, not jump into a different asset class at the first sign of trouble 😉 Seriously though, I’m fairly agnostic about global bonds hedged to the £ versus gilts. Having weighed the arguments, I personally favour gilts as a UK investor but I wouldn’t die in a ditch over it. Duration is a factor of time horizon for my money – although I’d steer clear of long bond funds. At some point in the next year or two I am going to have to shorten the Slow & Steady’s bond mix duration as the time horizon ticks down to 12 years. Never thought I’d see that day.

    @ Peter – AIEEEE! Thank you for the spot. Shameful. I’m off to tender my resignation to The Investor. At least I got Wile E. Coyote right 😉

    @ YFG – nice job on the rebalance! You must have done that through gritted teeth.

  • 7 MrOptimistic October 3, 2018, 8:40 pm

    iI find myself in the same boat as AncientI. Odd to be holds portfolio of stocks and hoping the correction will hurry up and correct itself. Suppose the bond market will lead the way. I haven’t done much to anticipate any downturn, perhaps award myself a meddle for not meddling!

  • 8 P&M Properties October 4, 2018, 6:20 am


    Can I ask why you have chosen vanguard dev world and UK all share over a simpler global? Like fidelity index world?

  • 9 xxd09 October 4, 2018, 9:14 am

    Hi P&M Properties
    I did the same as Monevator to get a Global Index Tracker
    I liked Vanguard
    No Global tracker available when setting up my Portfolio
    Now available but more expensive than the two Trackers combined
    Vanguard Life Strategy might be a substitute but too much UK bias
    Like simplifying my Portfolio as I get older(72) so keeping funds under review
    Ideally one fund required in old age so no rebalancing and wife could easily run it ie just sell units as required

  • 10 Ade October 4, 2018, 10:55 am

    @ xxd09, would the Vanguard “FTSE Global All Cap Index Fund” ISIN: GB00BD3RZ582 with 0.24% TCR do the trick for a true one stop global equity fund without a UK bias?

    North America 58.0%
    Europe 19.3%
    Pacific 13.4%
    Emerging Markets 9.0%
    Middle East 0.2%
    Other 0.1%

  • 11 The Investor October 4, 2018, 11:21 am

    @P&M — It’s a combination of this being a model portfolio (so we’re trying to show what happens under the skin of a diversified portfolio — it’d be pretty dull if it was just a quarterly review of a Vanguard 60/40), slightly cheaper costs, a hobbyist/enthusiast aspect for want of a better word, and a limited range of global tracker options when the portfolio was established.

    As @TA says in his last paragraph it’s perfectly acceptable for readers to simplify to suit. 🙂

  • 12 Archer October 4, 2018, 11:37 am

    I see that you have opted for the ‘Vanguard FTSE UK All Share Index’ (OCF 0.08%) over the ‘iShares UK Equity Index Fund (UK) D Acc’ fund (OCF 0.06%). However, if we then consider the transaction costs for each Vanguard (0.15%) and iShares (0.05%) on the Cavendish platform, Vanguard works out to be 2 times less cost efficient than iShares. Would this not make much difference to your returns over a long term? Is there a reason you chose to go with Vanguard?

  • 13 xxd09 October 4, 2018, 11:57 am

    Hi Ade
    Yes -that one does the business
    I would use it now if I was starting out
    It was not available when I originally set up my Portfolio
    It is more expensive than the two funds I currently use
    As I get older though(72) and am in Drawdown ,will die,and want to simplify-a single fund(Global Tracker )is becoming more appealing
    My wife would understand it!
    Having One fund only however really appeals-Vanguard Life Strategy -but too UK biased at the moment

  • 14 P&M Properties October 4, 2018, 12:09 pm

    Thank you, Much appreciated!

  • 15 P&M Properties October 4, 2018, 12:13 pm

    Thanks, I was thinking of doing something similar with my wife’s SIPP. At the moment I just mirror my own (which is very similar to this one!).

  • 16 Arcticyam October 4, 2018, 1:04 pm

    Please could someone explain the process of rebalancing a portfolio like the Slow & Steady Passive Portfolio which has a steady quarterly investment.

    Is the rebalancing done by adjusting the amount of the new investments to rebalance the ratio/percentage of the individual funds to their target allocation within the portfolio, or is it to actually sell the ‘overachieving’ funds and buy the ‘underachieving’ funds?

    Or is that effectively the same thing? Apologies for the elementary question.

  • 17 The Investor October 4, 2018, 9:32 pm

    @Articyam — As noted in the copy, the portfolio follows Larry Swedroe 5/25 rule, which you can find described here:


    In practice though I’m not sure a rebalance has ever been triggered to-date — the quarterly contributions have seemingly kept things in line. (Additionally, the allocations have been rejigged once a year to slowly dial down risk and increase the bond holding’s in accordance with the portfolio’s notional 20-year time horizon).

    I may well be forgetting a rebalancing even or two though, so hopefully @TA will chime in if I’m wrong.

  • 18 Arcticyam October 4, 2018, 10:58 pm

    Excellent. Thanks for the response. I find the website very useful, informative and clear to understand for someone starting out in investing.

  • 19 The Accumulator October 6, 2018, 12:46 pm

    @ Archer – I used the charting tool at Trustnet.com to compare the annualised returns of those two funds over the longest available time period (5 years).

    iShares UK Equity Index (UK) D Acc = 7.1%

    Vanguard FTSE U.K. All Share Index Trust Acc = 7%

    That’s a negligible difference. Without going back to check, it’s likely that Vanguard’s costs were lower than iShare’s at the time of choosing. Moreover, Vanguard’s tracking difference is very good whenever I check it, often making up for differences in headline costs. But, but, but…

    There comes a point when costs are so low that switching around to save a few basis points here or there is counter-productive. You incur dealing costs; could suffer an adverse market move while in cash mid-switch; get frustrated when the next round of transaction costs come to light showing iShares costs have gone up and Vanguard’s have gone down, or some new fund weighs in with an even lower OCF! Then it turns out that the transaction costs weren’t measuring the same time period and aren’t directly comparable. All the time you spent on switching around is a cost too. Whether you’re in Vanguard or iShares is near irrelevant at this point. You’ve done your job. You’ve chosen a low cost index fund. You’re in the right ball park and that’s where you need to be.

  • 20 Archer October 6, 2018, 2:50 pm

    Thanks for your response @TA. That explanation is so well laid out and you have made a point :). Much appreciated.

    I posted my comment before going through all your older Slow n Steady posts to realize that you switched to Vanguard around 3-4 years back – the costs must have very much been the opposite for these two then.

    I am a total newbie so trying to figure out how you have been playing your portfolio and it’s very interesting. Thanks for all the invaluable knowledge in your posts.

  • 21 The Accumulator October 6, 2018, 3:04 pm

    Hey, I’m glad to help 🙂

  • 22 Vanth October 8, 2018, 12:35 pm

    Given the UK has been so weak, when should one be evaluating our allocations? After all if the US does grow significantly then we could find our preset allocations actually slip below the proportion of the whole market that we originally chose to adjust for.

  • 23 Dorf October 8, 2018, 5:09 pm

    When I looked at the Morningstar info sheet about iShares Global Property & the Vanguard FTSE Dev World ex UK, I saw that they each required minimum investments of 100K – ?? So is your passive portfolio purely theoretical? Or do you have that much stashed in this slow and steady portfolio? I wanted to replicate it but am not sure I can commit that much.

  • 24 The Accumulator October 8, 2018, 5:40 pm

    Hi Dorf, that Morningstar info is wrong. Happens all the time. Minimum investments are set by your platform – normally £50 or thereabouts.

  • 25 Dorf October 9, 2018, 6:52 am

    Thank you, Accumulator, I reallly appreciate your quick response. Let me give a broader thanks to the whole Monevator team– your website has been invaluable to me. I look forward to every post!

  • 26 The Accumulator October 10, 2018, 1:30 pm

    Hi Vanth, if you chose a set of country funds in proportion with global allocations then their growth should keep you in line with future global asset allocations. Decision time comes when you rebalance. As long as you’re not rebalancing too often then that would be a sensible time to review your allocations. If you use the principles of threshold rebalancing then you’ll find you have a fair bit of latitude: http://monevator.com/threshold-rebalancing/

  • 27 stu K October 10, 2018, 2:32 pm

    Thanks for these updates – i’ve enjoyed following them over the years. Can I ask how this model portfolio compares with the Lifestrategy offerings – performance wise? I’m guessing the one to compare to would be the lifestrategy 60% ?

  • 28 The Accumulator October 10, 2018, 6:30 pm

    Hi Stu, it’s very difficult to say as LifeStrategy doesn’t have a dynamic bond allocation (S&S started 80:20 equities:bonds) and we’d have to replicate the contributions. In retrospect, we’d have looked like geniuses if we’d just picked a S&P 500 fund and left it at that. But it’s easy to be a genius after the fact. Personally, I’d be quite happy to invest in a LifeStrategy fund if I wasn’t interested in investing and that’s what I’ve put my nearest and dearest into.

  • 29 George October 28, 2018, 9:50 pm

    Hi: thanks for keeping up this series.

    Could anyone recommend any sources of information on market-cap weights by region?

    I’d like to weight better than the world products because, for example, they overrepresent the US.

  • 30 The Accumulator October 30, 2018, 7:03 pm
  • 31 George October 31, 2018, 9:58 pm

    @ TA – thanks for the link.

  • 32 Mike Rodent November 5, 2018, 3:48 pm

    I am currently investing basically 0 in anything held in £. The reason being Brexit. I realise that the £ may rise if a deal is reached… but my house (for example) is valued in £… that’s enough hedging for me.

    It is easy enough to buy foreign equity funds, whether active or passive. But I am a bit equity-heavy at the moment and want to put more into bond funds, again whether active or passive.

    The trouble is that most bond funds (e.g. Vanguard, etc.) appear to be hedged against the £. I most definitely do not want this! Hedging not only makes little sense if you suspect the £ may plummet… it also seems it is expensive in its own right.

    It’s can be frustrating being a UK investor: as you google you see lots of funds which turn out to be only for US investors. And then you think: well, surely in these days of ETFs there must be something that does that, which can be bought in the UK… (NB I would only ever be interested in physical ETFs, never in synthetic ones).

    Anyone got any suggestions or recommendations?

  • 33 C Harrison June 15, 2019, 9:50 am

    I’m just setting up a Cavendish account now. How do you invest £935, when the minimum payment is £1000?

  • 34 The Accumulator June 15, 2019, 1:10 pm

    You can make monthly contribs as low as £50

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