We’re in a dreaded sideways market. Drifting without drama, except that I can hear the faint hiss of a leak as the Slow & Steady portfolio deflates 0.33% this quarter.
If it wasn’t for having to write this update, I admit I’d be executing Operation See-No-Evil. Not even looking at the market for months, maybe years, until this glum period passes.
Passive investing is the name of the game – and it does not encourage actively urging on your portfolio from the sidelines like Ted Lasso shouting impotently at his struggling team.
Still, check-in I must.
Almost inevitably we can see it is government bonds – and property – that are holding us back this quarter:
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 £1,200 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 tucked away in the Monevator vaults.
The Slow & Steady’s overall return after almost 13-years is 5.9% annualised. Let’s call that 3% after inflation.
Respectable, but I can’t help but wonder how many of us won’t go absolutely loopy if our portfolios continue to spin their wheels for the next several years.
How likely is that? How long will we have to wait for the gloom to lift?
Let’s see how many lost decades UK investors have endured down the years.
Lost decades
Most people’s investing fate will be dominated by their equities, not bonds. And the good news is there are few decades when stocks actually go backwards. The even better news is that the follow-on decade is often spectacular.
The table below shows the lost decades that beset World equities, the rebound that followed, plus the year the portfolio turned positive again. (See the ‘Back in the black’ column).
Note: returns are real annualised total returns. In other words, they show the average annual return (accounting for gains and losses), are inflation-adjusted, and include the impact of dividends.
World equities: lost decades since 1970
World equities have suffered two lost decades in the past half century:
| Lost decade | Ann return (%) | +10 years (%) | Back in the black |
| 1970-79 | -5.8 | 11.1 | 1984 |
| 1999-2008 | -0.9 | 8.5 | 2009 |
Data from MSCI, compiled by Monevator
The stagflationary ’70s were not an era for checking your stocks six times a day. Six times in the entire decade would have been too much.
But look at the 11% annualised return over the next ten years! That’s more than double the historical average of 5%. If you avoided self-destruction during the wilderness years then you were richly rewarded during the go-go 1980s.
Quite a few Monevator readers will have made their investing debuts during the next lost decade, which followed the Dotcom mania of the late ’90s. I remember colleagues frothing down the pub about their newfound riches and how “the Internet has changed everything”.
It had and it felt like it was raining money.
Then the rains failed.
Looking back the annualised returns from 1999 to 2008 weren’t dreadful. The Noughties were a decent decade. But they were spit-roasted by the Dotcom Bust and the Global Financial Crisis (GFC).
Thankfully confidence was restored by a V-shaped recovery from 2009. The 8.5% annualised returns scooped up over the next ten years helped establish DIY investing as online platforms proliferated.
It may be a tougher sell now though, as a portion of those gains were probably borrowed from the future via high valuations. Such frothiness may have to be paid for by several mediocre years to come.
UK equities: lost decades since 1825
What about shares here in Blighty? UK equities have only posted four lost decades in two centuries:
| Lost decade | Ann return (%) | +10 years (%) | Back in the black |
| 1907-16 | -0.2 | 4.1 | 1924 |
| 1943-52 | -0.06 | 12.4 | 1953 |
| 1965-74 | -5.4 | 7.8 | 1975 |
| 1999-2008 | -0.7 | 6.5 | 2009 |
Data from Rule Britannia,1 JST Macrohistory2 and FTSE Russell, compiled by Monevator
UK equities didn’t suffer a single lost decade from 1825 to 1907. Those really were the good old days.
Even with the first entry in our table, 1907 to 1914 was actually a raging bull market until World War One derailed everything.
The following ten years were sub-par, but not terrible when you consider the Spanish Flu pandemic that killed millions and the economic depression that settled across Britain and the rest of Europe.
World War 2 is a real eye-opener, given the scale of real-world destruction. The market recovered quickly as post-war inflation dissipated. Returns from 1953 to 1962 are the best of those following the entries in our Lost Decade tables.
Take heart
So don’t feel despondent dear reader. Clearly things have been much worse for some of our investing forebears. We’re far from lost decade territory right now.
In truth, lost decades are not that common, but long stretches of down years are. They’re not a sign that anything is broken. They may well herald that the best years in your particular investing lifetime are yet to come.
Looking at stock market returns through this lens reminds me investing is a long-term game – and that it can feel even longer!
It can take many years of grinding before we enjoy the hoped-for rewards.
New transactions
Every quarter we blow £1,200 onto the market dice and hope to roll a six. Our stake is split between 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 like this:
UK equity
Vanguard FTSE UK All-Share Index Trust – OCF 0.06%
Fund identifier: GB00B3X7QG63
New purchase: £60
Buy 0.246 units @ £244.28
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: £444
Buy 0.804 units @ £552.29
Target allocation: 37%
Global small cap equities
Vanguard Global Small-Cap Index Fund – OCF 0.29%
Fund identifier: IE00B3X1NT05
New purchase: £60
Buy 0.158 units @ £378.69
Target allocation: 5%
Emerging market equities
iShares Emerging Markets Equity Index Fund D – OCF 0.21%
Fund identifier: GB00B84DY642
New purchase: £96
Buy 54.201 units @ £1.77
Target allocation: 8%
Global property
iShares Environment & Low Carbon Tilt Real Estate Index Fund – OCF 0.17%
Fund identifier: GB00B5BFJG71
New purchase: £60
Buy 29.241 units @ £2.05
Target allocation: 5%
UK gilts
Vanguard UK Government Bond Index – OCF 0.12%
Fund identifier: IE00B1S75374
New purchase: £324
Buy 2.603 units @ £124.46
Target allocation: 27%
Royal London Short Duration Global Index-Linked Fund – OCF 0.27%
Fund identifier: GB00BD050F05
New purchase: £156
Buy 150.87 units @ £1.03
Target allocation: 13%
New investment contribution = £1,200
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%
If this all seems too complicated check out our best multi-asset fund picks. These include all-in-one diversified portfolios, such as the Vanguard LifeStrategy funds.
Interested in tracking your own portfolio or using the Slow & Steady investment tracking spreadsheet? Our piece on portfolio tracking shows you how.
Finally, learn more about why we think most people are better off choosing passive vs active investing.
Take it steady,
The Accumulator
- Acheson G, Hickson CR, Turner JD & Ye Q (2009) Rule Britannia! British Stock market returns, 1825-1870. [↩]
- Òscar Jordà, Katharina Knoll, Dmitry Kuvshinov, Moritz Schularick, and Alan M. Taylor. 2019. “The Rate of Return on Everything, 1870–2015.” Quarterly Journal of Economics, 134(3), 1225-1298. [↩]
Thanks for the update, TA. It is all rather listless at the moment but this too shall pass, as you indicate.
NB Minor typo in the New Transactions, Global Property section: “Buy 28…” – I suspect you need to delete the 28 and bring forward the following line.
What an excellent overview @TA of lost decades and next decades. To give some more hope to fellow accumulators:
– Feb. 9 1966, SP500 closed @ then record level of 94. 16 yrs later, Aug. 12 1982, stood @102. Corp. earnings, post- inflation, shrank 15%.
– But SP500 paid growing divi’s, reaching nearly 6% by 1981/2. Its total return was 5.95% p.a over 16 yrs, behind inflation, but not by miles. Meanwhile US value stocks returned 13.39% p.a. over that period, well ahead of inflation.
– Aug. 1982, by some measures, then marked start of one of GOAT bull markets.
Reports pretty much what I’ve found personally recently.
A little frustrating that progress is slow at the moment but from an accumulators perspective treading water at lower portfolio values with the hope of higher future returns helps keep me optimistic. From that perspective slowly moving towards a hypothetical FI finishing line is easier than seeing it rapidly move away.
@ Curlow – great typo spot! Much better than my so-called ‘editor’ 🙂
Listless is the word.
@ TLI – thanks. I’m still hopeful we’re not going to go through anything like the 1970s.
@ Rosario – Keep going! If you’re on a reasonably compressed timeline then your savings rate is going to swamp the market return.
Yes, it is a bit dreary at the moment.
From what I remember the first few years in the 1980’s were nothing to shout about, think they were the Geoffrey Howe years ( think ‘savaged by a dead sheep’ if that means anything to you), stringent budget 1980, recession, moratorium on spending etc. So any stock market performance in the 1980’s was not uniform. And then there was 1987 and black Monday. So stock investing has always been a test of nerves until 2011 ish.
Thanks for the update as I thought maybe I was the only one thinking we were in the Doldrums. I have to resist the urge to “do something” with most of my investments now sitting in the Vanguard LS 80/20. Passive investing in a slow market does try the patience and make you feel that you’ve very little control or agency, which in turn makes you feel that you should do something just to prove you actually can do something! “Take it steady”, I remind myself. Daily.
There has been a biggish move this quarter which S&S avoids: hedged global trackers are -4.4% and £/$ is -4.75%. Perhaps we are getting very close to the point where bonds offer stability and safety?
The thing I dislike about S&S this time: there’s no target! Perhaps that’s a good question: if S&S was on track 2 years ago, how far behind is it now, and is upping the contribs by inflation enough to right it?
Thank you for the article as need some motivation. My stock and index monitoring list shows all red today! I am a bit late to (passive) investing. The life strategy 100 is not GBP hedged. Does this pose a great risk as valuation increase over next few years could get negated by currency movement. So whilst the theory would say the global market went up, the individual investor might not be any better off. I understand this sounds pessimistic and perhaps questions by a newbie. Any information or articles in this direction would be much appreciated.
@Jim McG #6: in truth, once your money’s in the market then we’ve little agency. “The stock doesn’t know you own it”, as George Goodman put it. Bad periods for returns follow on from good ones, and good ones follow on from bad.
All that we control (and perhaps all that we can ever hope to control) are our reactions (buy, sell, hold), how we feel about things (ignore, indifference, calm, panic, sad, happy, rationalising), the lessons – if any – which we draw (sometimes there aren’t any, it just happened that way), all forms of costs and tax efficiency, and how much we invest and for what period.
The good news is that, if the future does resemble the past, then in the long term the odds are stacked in your favour. There’s never been a 20 year period or longer where global equities did not deliver a real terms positive total return even if you picked the worst possible times to invest, like 1929 and 1999.
The less good news is that the excess returns of shares as compared to cash necessitate uncertainty as otherwise, if the returns of equities were constant and certain, then shares would be bid up to the point that they no longer offered any additional return to cash.
Uncertainty and lack of agency are the price which has to be paid for returns.
(@TA: apol’s for 2nd post. Only spotted query from @Dips #8 after submitting #9)
@Dips #8: try these Monevator articles from 2022, 2017 and 2018 respectively:
https://monevator.com/dont-currency-hedge-your-equity-portfolio/
https://monevator.com/currency-hedged-etfs/
https://monevator.com/how-hedging-your-shares-against-currency-risk-can-boost-returns/
This is just what I needed to read. Being fairly new to passive investing and seeing some great returns in my first few years from March 2017 to December 21 with a portfolio based on the slow and steady, I’ve now been hanging around the same point for 18 months after a decline.
Just Keep Buying!
@Time like infinity,
Thanks for sharing these. It helps viewing this in conjuction with other UK assets like property.
PS: I have enjoyed reading your comments in this & the recent posts. As a newbie, I love to take in as much as I can 🙂
@ Meany – it’s a fair point! When we started the Slow & Steady we gave it a notional lifespan of 20 years but didn’t set any actual goals. That said, I don’t think either TI nor I guessed it would have even lasted this long.
Based on my real-life behaviour I can say I’d have targeted real return growth of 4% a year (approx the historical average for a 60:40 portfolio).
The portfolio fell behind on that measure exactly one year ago. So I don’t think I’d be too worried yet.
Any drift off target can be met by upping contributions, extending the time horizon, cutting the target, or some combination of all three.
Which blend you choose is a very personal choice but I must admit I’d be leaning towards ‘one-more-year’ given cost of living pressures.
Well, just as I was thinking maybe it was near the time to extend my bond duration, the market gets in a tizzy.
Maybe I’ll stay put.
@Brod. Surely, if you want to extend duration, you want the bond market in a tizzy? Seems we are just range trading tbh.
As someone getting near the decumulation finish line I’m just holding out to try to stuff pension and ISA in the next tax year then we’ll see. Not overly concerned about moribund returns in the short to mid term as long as inflation knocks off somewhat. Better than significant market falls. SOR risks remain front of mind though really shouldn’t be as I’ve deferred trigger pulling to give me a bit more accumulation in the light of geopolitics : Post COVID, supply shocks, Ukraine. Just need to guard against “one more year” syndrome when the next external thing happens.
It would be helpful if the returns were indexed using RPI, CPI, CPIH or similar.
You could also index it against some of the returns from the NEST pension as that is a transparent benchmark that a DIY investor could use
Many thanks @Dips #12.
Yes, if you own UK property (priced in £) and have UK income received in £ too, there is a risk diversification benefit to leaving global equities exposure through a tracker unhedged.
In my experience, the $ (which is the normal base currency for global shares) is normally a safe haven currency, whilst the £ isn’t. So when equity markets go risk off, the $ quite often strengthens reducing portfolio volatility. This does not seem to happen to shares denominated in £.
The most vivid recollection I have of this was in March 2020 when the $ surged in value offsetting, in Sterling terms, a very substantial proportion of the % falls measured in $’s of global equities.
Of course, when equity markets then rally, global shares which are not hedged to Sterling would go up less in £ terms if the $ weakens at the same time.
In my own experience, leaving it unhedged has tended to work out OK for me because of the potential volatility dampening in a risk off environment.
Currency hedging to Sterling also costs fees, although not too much in the grand scheme of things. The last time that I investigated – a few years back IIRC – it was a difference of about 0.15% p.a. between a hedged and an unhedged global equity tracker.
There are then a whole load of plausible arguments as to whether or not to currency hedge any global government bonds held in the portfolio.
I’m at virtually a 100% global equity allocation FAPP, and so I’ve not had to take a view on that debate; but I do note that it’s complicated by another school of thought which claims that it’s actually US Treasury Bills (T-Bills) which are the ultimate reserve / risk off asset. People who argue that point of view also say that investors outside the US should stay currency unhedged if buying T-Bills. There are some UK ETFs tracking different duration T-Bills.
However, again, as I basically don’t (at least directly) own any fixed income (although I am very seriously thinking about buying some index linked UK gilts presently) I haven’t formed an opinion on the merits and demerits of the T-Bill argument.
It does sound a somewhat plausible argument to me but, of course, that certainly doesn’t, at least in and of itself, make it correct, and it may well be wrong.
I’ve been waitting for the quarterly result of your portfolio, so thanks for the update. My last quarter return is also negative and not sure if the worst had passed. I started to put money in stock and put in saving account as it has relatively high return rate.
@ TLI – quick note on hedged global equity funds – UK investors are not just exposed to the dollar. You’re exposed to every foreign currency that the underlying shares are denominated in. For example, 60% of your foreign currency exposure will be to the dollar if the fund holds 60% US equities. 5% Japanese shares = 5% Yen exposure etc.
The fund’s base currency is just a trading / accounting measure when it holds assets valued in multiple currencies.
TI has a good explanation here:
https://monevator.com/currency-risk-fund-denomination/
Happily, diversified exposure to foreign currency is generally seen as a good thing. And of course, the dollar dominates our outcomes as US shares dominate the global portfolio.
@ Maggie – Hopefully you’re buying in at a relatively low price right now and you’ll be well rewarded in the future for your persistence.
@TA many thanks for clarifying. Yes, it’s not just a $ thing, or even a $, €, ¥, RMB, ₹ and £ thing, but rather a truly global mix. Perhaps shares will be denominated one fine day in some future, more inclusive and universal, version of Special Drawing Rights. Better that than in ₿ 🙂
@TI nicely sums up lots of useful info. in reply #6 to the comments on the 2013 version of the above linked currency risk piece (to quote): “long-term investors who invest widely and globally in equities probably shouldn’t bother with hedging, and instead prefer to get the diversification benefits of exposure to multiple currencies” and “Bonds are different both because the returns are lower (so they can’t overwhelm currency risk), because they’re not infinite duration like equities, and also because the feedback loops you see with equities pretty much don’t exist because with fixed income the income stream and eventual return of capital are fixed, unlike with equities”.
@TLI. I prefer to keep all my assets fx hedged in my passive benchmark portfolio. Fx risk is uncompensated volatility so taking it on is always an active view. It’s basically a correlation trade.
Now, I am FX unhedged on my US equities. That’s because when seen as a GBP based investor this can be risk reducing since spot GBP/USD and the S&P are often positively correlated in risk-off. That wouldn’t work so well if you are a Japanese or Swiss investor. So it all depends on what you are trying to achieve.
What I find odd is that people seem to think that the following are different positions: 50% US equities, FX unhedged + 50% US bonds, FX hedged vs. 50% US equities, FX hedged + 50% US bonds, FX unhedged. Clearly these are identical. It cannot matter where the FX hedge is held but some seem to think it does!
Why dreaded? Especially for the slow and steady portfolio, unless you’re looking for excitement rather than making money over the long run ..
@ZX #22: is it uncompensated FX risk, or just having FX exposure? If FX pair moves are, in aggregate, just a noisy random walk, then being unhedged should be a wash on average, with there being as many gain as loss scenarios.
Sometimes FX moves are not random of course, but strongly directional (whether trend continuation or mean reverting).
A better performing quant driven equity strategies has been, I understand, to buy the national equity market whose local currency performed worst in the previous 12 months, hold for a year and repeat. GFD (Bryan Taylor, their Chief Econ.) has a piece (27 Oct. 2020) “Can Invesors Profit from Devaluations” covering some similar ground.
OTOH, Jack Glen in EM Review (Dec. 2002) found across 24 devaluations in 18 EMs from 1980-99 that returns following the devaluation were “characterized by normal return behaviour” (the returns were obviously bad during devaluation).
There’s also the inverse, where the country with the strongest performing equity market in the previous year is then more likely to see an appreciating currency during the next year due to inflows of funds into the local currency to try and chase those recent strong stock returns.
But, in any event, it doesn’t seem obvious to me that FX exposure is inherently a risk per se, rather than just a factor which could produce a relative FX gain (e.g. for a UK investor with unhedged global equity exposure over the course of the market reaction to the Brexit vote) or a relative FX loss (e.g. for an unhedged UK investor in global equities in a 2007 type weakening dollar scenario).