It is time to execute our solemn duty and perform one of the most difficult tasks that any passive investor must face: rebalancing. Defying the screaming instincts of every nerve in our body we must cut our winners and embrace our losers.
The US may be up over 25% on the year, Japan over 23% and Europe over 20%, but no matter. We must trim back their rampant growth and cast the proceeds at UK Government bonds and Emerging Markets – 2013’s twin losers: down 3.20% and 9.43% respectively.
This act of financial self-flagellation demonstrates the iron discipline that passive investors require in the face of buoyant markets that are making even the humans look good, never mind the dart-throwing chimps.
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 £750 has been 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.
It sounds wrong – and it definitely feels wrong – to back the losing team with more of our cash, but this is the behaviour that is hopefully laying the foundations for our long-term success.
The rocketing prices of developed world equities are likely to reduce their returns in the future. In the long run valuations are tied to the fortunes of the global economy. If prices go on a happy juice bender, driven by blissed out investors and gallons of quantitative easing, then eventually economic forces will snap them back to reality.
In other words, returns will eventually revert to the mean.
I have no idea if equities are overvalued (though the US is certainly well above its historical average) or when prices will snap back. But the historical record tells us that at some point it will happen.
And when it happens, we won’t be sitting on a portfolio that’s all in on the most overvalued portions of the market.
Rebalancing is the positive habit that boosts your immune system over the long term. It’s the mechanical conscience that forces us to be good; making us down the cod liver oil of the cheapest markets – the source of strong growth in the future as they recover.
Rebalancing also keeps us diversified. One reason we allocated 24% of our asset mix to government bonds was to ensure a buffer when equities do hit the skids. Right now, our bond allocation has sunk to 20%. Time to plump it back up.
We use Larry Swedroe’s 5/25 rule to trigger rebalancing moves when markets swing wild. We also rebalance annually back to our target asset allocations and that’s what’s driving the sales you’ll see below.
That said, you can channel new contributions to your underweight assets too, and a combination of the two techniques helps us to make a bond purchase that’s four times larger than usual.
Remember, we’re not bailing out of any asset – nobody knows which will perform next year. We’re just respreading our bets to prevent excessive concentration in any one area.
Scores on the doors
Before we make our new purchases, let’s tally the portfolio’s vital statistics.
- The portfolio is three years old and is up 17.23% since we started. That’s a £1,938 gain on total contributions of £11,250.
- It’s equivalent to an annualised gain of 8.5% over the three years.
- The FTSE All-Share has gained 9.37% annualised in the same time period.
Our portfolio has lagged the All-Share because of our allocation to government bonds and because our later drip-fed contributions haven’t benefitted from the market’s near relentless rise over the entire three years. A lump sum dropped in three years ago would have done better but that’s the way it goes.
Here’s the portfolio lowdown in spreadsheet-o-vision:
This snapshot is a correction of the original piece. (Click to make bigger).
In another piece of good cheer, our funds have paid out more than £125 in dividends this quarter, although every single penny is invested straight back into growing our accumulation funds, so we benefit from compound interest.
Now, we have two final pieces of annual maintenance to attend to.
First, we shift our target asset allocation by 2% every year from equities to bonds. As our time horizon diminishes (only 17 years left!) we practise the time honoured ritual of lifestyling – reducing our exposure to volatile assets as we get older and have less time on our side.
Hence we’re shaving 1% each from Japan and the Pacific in favour of a now 26% allocation to bonds.
Finally, we need to think about inflation. We started off investing £750 every quarter at the start of 2011. Three years later and £750 ain’t what it used to be.
We should now be investing around £827 to punch at the same weight, so let’s jack that up to £850 as I haven’t been conscientious about matching inflation so far and this investing lark seems quite fruitful after all.
New transactions
Every quarter we attempt to appease Mr Market with another £850. Our cash is divided between our seven funds according to our asset allocation.
However, this quarter I had to top up the UK and Pacific fund purchases as they didn’t comply with Charles Stanley Direct’s £50 minimum contribution for regular investing. I did this by shaving off £72 from the bond purchase. It’s not a perfect solution but then little is.
UK equity
Vanguard FTSE U.K. Equity Index Fund – OCF 0.15% (Stamp duty 0.5%)
Fund identifier: GB00B59G4893
New purchase: £50.66
Buy 0.2611 units @ 19403.7p
Target allocation: 15%
Developed World ex UK equities
Split between four funds covering North America, Europe, the developed Pacific and Japan1.
Target allocation (across the following four funds): 49%
North American equities
BlackRock US Equity Tracker Fund D – OCF 0.17%
Fund identifier: GB00B5VRGY09
Rebalancing sale: £269.88
Sell 204.6114 units @ 131.9p
Target allocation: 25%
OCF has gone down from 0.18% to 0.17%
European equities excluding UK
BlackRock Continental European Equity Tracker Fund D – OCF 0.18%
Fund identifier: GB00B83MH186
Rebalancing sale: £10.32
Sell 6.3098 units @ 163.6p
Target allocation: 12%
Japanese equities
BlackRock Japan Equity Tracker Fund D – OCF 0.18%
Fund identifier: GB00B6QQ9X96
Rebalancing sale: £136.61
Sell 103.5719 units @ 131.9p
Target allocation: 6%
Pacific equities excluding Japan
BlackRock Pacific ex Japan Equity Tracker Fund D – OCF 0.24%
Fund identifier: GB00B849FB47
New purchase: £50.55
Buy 24.7181 units @ 204.5p
Target allocation: 6%
OCF has gone down from 0.22% to 0.21%
Emerging market equities
BlackRock Emerging Markets Equity Tracker Fund D – OCF 0.28%
Fund identifier: GB00B84DY642
New purchase: £302.76
Buy 291.9585 units @ 103.7p
Target allocation: 10%
OCF has gone up from 0.28% to 0.29%
UK Gilts
Vanguard UK Government Bond Index – OCF 0.15%
Fund identifier: IE00B1S75374
New purchase: £862.85
Buy 6.8840 units @ 12534.15p
Target allocation: 26%
New investment = £850
Trading cost = £0
Platform fee = 0.25% per annum
This model portfolio is notionally held with Charles Stanley Direct. 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 ISA portfolio is worth substantially more than £20,000.
Average portfolio OCF = 0.18%
If all this seems too much like hard work then you can always buy a diversified portfolio using an all-in-one fund like Vanguard’s LifeStrategy series.
Other asset allocation options include adding a high-grade corporate bond fund, an index-linked bond fund, BlackRock’s Global Property tracker and replacing the four developed world funds with Vanguard’s FTSE Developed World index fund. You could also use Exchange Traded Funds (ETFs).
Take it steady,
The Accumulator
- You can simplify the portfolio by choosing the do-it-all Vanguard FTSE Developed World Ex-UK Equity index fund instead of the four separates. [↩]
Comments on this entry are closed.
I’ve just rebalanced my UK small companies fund to gilts. I look at it as locking in profits!
You are completely right about the psychological difficulty of rebalancing. I find that I can buy and hold and I can even sell high when needed to simplify my portfolio. But I find it nearly impossible to balance formerly in the way you have done by selling high and then buying assets which have fallen in value.
As you mention a way round this is to use Vanguard LifeStrategy funds which rebalance automatically.
One helpful (though perhaps rather obvious) point is that you don’t need to use VLS funds for the whole portfolio. If you use VLS funds for only half or even one-third of investments it means that you only have to rebalance the rest of your portfolio every few years rather than annually. The VLS funds have a strong damping effect on big swings in asset allocation in the rest of the portfolio.
@ TA – thanks for this – I have been eagarly awaiting it. Not ideal for me to have only just started investing and missed out on the last fantasitic year, and to be buying inwhile the US, Japan are so high, but still….that’s life I guess!
Two quick qustions.
1) If you personally were setting up your first investment portfolio now, would you out your defensive allocation into cash, the Vanguard UK Government Bond Index, high-grade corporate bond fund or an index-linked bond fund. This is the bit of my portfolio that I am really struggling to get my had around, so currently I have it all in cash, but think I should probably have 20% in bonds/ gilts, I just don’t know which / which types, though I have taken on board Hale’s changed view that short term are better than long-term at the moment.
2) If you were to add the property tracker, how much would you allocate to it, and what would it mean for the your allocations (i.e. where would the additional 10% / 15% or however much it was, be taken from?)
Thanks as ever,
E
@ TA – thanks as ever for this.
2 quick questions.
1) If you personally were setting up your portfolio now (as I am, I know not ideal timing given that I have just missed out on the last good year in the US and Japa etc, and am now buying in high, but better than never doing it, I am hoping, in the long term at least….!), where would you invest the defensive aspect of your portfolio. Cash, the Vanguard UK Government Bond Index Fund, high quality corpoate bonds, or an index-linked bond fund. this is the aspect of my portfolio that I am currently really struggling with, so currently it is all in cash, though I think I should probably have 20% in bonds or similar.
2)If you were to include the Blackrock property tracker and the Vanguard small cap global tracker in a portfoio similar to this one, what allocations would you give them, and where would the allocations come from?
I know you can’t give advice and I have to make my own mind up etc, but any opinion on this would be greatly appreciated.
Thanks as ever,
E
I sometimes wonder whether the constant re-balancing of the Vanguard LifeStrategy funds would have a worse effect on returns as your quarterly re-balancing does.
The way I see it, with your method of periodic re-balancing (whether a period is a day, a week, a month, a year) you run with your winners (and losers) over that period (in your case quarterly), and then re-balance to lock in those returns. The longer the period you choose, the more you run with your winners (but also the more chance you have of a correction having a detrimental effect on your returns).
With the Vanguard LifeStrategy having the equity allocation (20%/40%/60%/80%) as part of its title, I expect there are pretty strict rules that govern how often they need to re-balance (i.e. I’m guessing at each daily valuation) to match the target allocation.
What I wonder is whether this constant re-balancing means you miss a run of rising prices of equities (i.e. a portion of them are sold almost immediately).
Am I worrying too much?
Would anyone who managed to follow my ramblings this far care to comment?
Interesting stuff.
I’d be interested to know how you came up with the portfolio mix percentages? (Had a quick look in the original article but couldn’t see it)
Isn’t rebalancing at odds with passive investing?
To put it one way: if you buy an index (say the FTSE) and one of the components of that index goes up faster than that index (say, Tesco outperforms a lot) then you end up holding a higher proportion of your assets in Tesco. A passive investor doesn’t think they can beat the market by selling some Tesco and buying some Sainsbury’s (say) – that would be active investing.
But now say you own two ETFs: say one on the FTSE and one on the S&P500. Let’s say you initially hold 50% of your assets in each. But over time the S&P500 does better than the FTSE, so that after one year you have 55% of your assets in the S&P. “Rebalancing” implies that you would sell some of your S&P ETF and buy some of the FTSE ETF to even up your allocations. *But this is really no different than the active investing that I described in the first paragraph – it’s just that I relabelled “Tesco” as “S&P500” and “Sainsbury’s” as “FTSE”*. You are making a judgement that underperformance in one period (last year) will be followed by outperformance going forward – this is active investing – and comes with the same transaction costs that makes what we normally think of as active investing so unprofitable.
A truly passive investor would buy a value weighted index of all assets out there, and would never rebalance. This in practice is quite difficult (as such a index doesn’t exist, to my knowledge) but you can get quite close within asset classes (e.g. global equity or bond ETFs).
Charles Stanley seem to have another perverse rule that a month’s sub must purchase at least one unit, which is a git on Mrs Ermine’s ISA with Vanguard Lifestrategy (ACFDV) where you have to put in > £150 a go. TD were happy to sell me a fractional amount of that, but CS won’t 🙁
@ Jonny –
There is quite a lot of literature about how often to rebalance. As you say if you do it too often there will be high costs and the likelihood of losing momentum effects.
From memory I think that the re-balancing strategy for the Vanguard Lifestrategy funds is proprietary and hasn’t been published
Here is link to a paper from Vanguard
http://www.vanguard.com/pdf/icrpr.pdf
Something from William Bernsteins (mothballed) Efficient Frontier Site.
http://www.efficientfrontier.com/ef/996/rebal.htm
And this excellent summary on this site
http://monevator.com/threshold-rebalancing/
I am only a (fairly) well read but quite experienced amateur strictly passive investor. But my take on rebalancing is
– there is no strict science, as advantages / disadvantages will be heavily dependent on volatility and specific market conditions.
– rebalancing too frequently has known disadvantages as you mention
– it therefore makes sense to rebalance once every few years or when there has been a very big movement away from the target allocation
– as I said having a significant proportion of Vanguard Lifestrategy Funds means rebalancing frequency can be reduced to 2 or 3 years under most market conditions
– finally of course ‘formal sell high / buy low’ rebalancing is rarely necessary in the accumulation phase as you can maintain portfolio asset allocation targets by redirecting new money appropriately once a year.
All the best
PI
@Jonathan
You’re totally over-extending it. For starters, in your approach one would be almost entirely in bonds as the capitalisation of the bond market is so much more than equities.
The point is that one is choosing asset allocations based on their general behaviour, tuning them to the volatility / return profile that is appropriate. How one gets the exposure to the components is another thing – cap weighting works fine, so use that. Cap-weighting the whole lot doesn’t make sense.
I’ve got no chance at knowing when to buy low and sell high. Rebalancing is my best shot at it.
> value weighted index of all assets out there, and would never rebalance.
Although there’s something to be said for the never sell doctrine under certain conditions (Google Robert Kirby’s The Coffee Can Portfolio, from 1984), surely the whole point of rebalancing is to keep the weighting steady in the face of market variations? It’s the way you keep your head when all around are losing theirs etc. Trading charges are not the only costs in investing…
Passive investing is inherently a bet on reversion to the mean. It’s not a bad one, and there’s enough track record, but it is making a call 😉
@Jonathan
Constituents of a mainstream index fund tend to be similar to each other in several important respects; besides, there are many of them in the index, so the fluctuations of individual fortunes are evened out by the law of large numbers (with the proviso that in a capitalisation-weigthed index this advantage gets diluted when the index becomes overly concentrated). The same logic does not apply to asset classes: there are only a few of them to play with, and they are not at all similar to each other. Therefore, unless you proactively keep the distribution of your investments across asset classes reasonably close to a pre-defined allocation that reflects your time horizon and your attitude to risk, you may run into avoidable trouble. Multiple funds within the same asset class fall somewhere in between asset classes and individual shares/bonds/whatever in this analysis.
Out of interest what is the annualised returns if you take inflation out?
Lesley,
A quick Google search threw this up:
http://www.whatsthecost.com/historic.cpi.aspx
2013 Not calculated yet
2012 2.83%
2011 4.48%
Remember that rebalancing is as at least as much about risk and volatility management as anything to do with returns.
If you want the best odds of to maximizing your returns*, start investing in a small cap value fund when you’re 21-years old and cross your fingers that a 50% drawdown doesn’t come just before you retire. 🙂
*Note I don’t know that this specifically is giving you the best odds of the best returns, it’s just an illustration. The point is that a diversified portfolio is designed to take you through different multi-decade periods where we can’t be sure which asset classes will do best. In most periods, equities do best over 10-20+ years, so much of the time your other asset classes will detract from the returns if you’d just held equities.
But your risk (/volatility) is far greater, and the majority of people can’t stomach that sort of lurching portfolio in reality even when they’re in the accumulation phase of investing, let alone before they need to start running down their funds.
@Greg, @oldthinker
Points well made. OK, let’s say that I accept that rebalancing across asset classes makes sense. I still don’t see why you’d ever rebalance *within* an asset class (e.g. my example between an ETF on the S&P and an ETF on the FTSE?) if you are a passive investor.
To put it another way: I can accept that equities and bonds have different risk/return characteristics (due to the different payoff structure of each security). However, I find it much harder to accept that US equities and UK equities (say) should be treated as separate asset classes. Why? Equities in two different countries are the same financial contract, and the price of each reflects the market’s expectation of the risk-adjusted present discounted value of future dividends. If you disagree with the markets relative valuation of US vs UK equities then you’d want to overweight one relative to the other – but this is active investing! Passive investors aren’t supposed to take a view on whether market prices are “wrong”. By rebalancing you are implicitly saying that the S&P “should” be x% of the global market cap of equity markets, which seems very much like making an active call to me.
BTW – @ TA – thanks for all your great blog posts. I don’t often disagree with anything you write, and all of it is thought provoking!
@ Lesley @ Luke
You need to think about your personal inflation rate, not an arbitrary government statistic that’s based on a broad basket of goods and services that you might never buy.
If you track your spending in a spreadsheet you will be able to see how prices are changing over time and how much of your budget is dependent on factors outside your control.
@Jonathan
You are advocating having a single cap-weighted global equities fund. This is perfectly sensible. VWRL will do it.
Note that for passive investing you are relying on whoever creates the index! Index construction (even things like the S&P500) is not trivial. Remember there are currency effects too!
Remember the aim of the game is to make money in a stable and (slightly) predictable way, not becoming the most passive investor ever. As in most things in life, pragmatism is the way to go.
Personally I think cap weighting is a good way to index a market, but not obviously the best way to invest in that market at all. I have an interest in alternative indexing strategies and think they have a decent amount of potential. All my passive allocations are cap-weighted though, as I think alternative indexing is too young to be sure. (e.g. Backtesting is a load of rubbish – I guarantee 100% of marketed indexes will outperform over their backtesting period, but I expect this vanishes as soon as a physical product appears.)
Two methods for indexing I think have potential are:
1) Minimum volatility – selecting stocks that historically have low correlations in proportions that minimise the volatility
2) Maximum diversity – the same sort of thing. (In fact, when I have time, I’ll do some work in looking at possibly “optimising” my own portfolio this way.)
There are plenty of dumb ideas like “risk parity” which sound like a good idea until you actually stop and think about it. (Get loads of bonds and a tiny amount of equities then gear it up.)
A nice reminder I need to work out some sort of asset allocation full stop. I’m all in on various equity trackers right now, albeit for small amounts. Need to be more disciplined like the accumulator and work out a solid plan!
@ermine
Re setting up monthly payments: This is a bug with Charles Stanley Directs computer system, if you send them a message they will happily manually setup a monthly payment for less than a unit amount – I have a Vanguard Life Strategy 80 payment setup for £50 a month, the absolute minimum and way below what a single unit is worth.
I haven’t started rebalancing my portfolio yet (mainly because I have been too lazy), but I have set up a percentage range for each tracker fund. When the percentages are approaching the edge of a range, that is when I will rebalance, so not necessarily on a time bound basis but on a weight basis. Obviously this means I have to assess the percentage weight reasonably frequently (quarterly). I don’t want to over do this as I wish to balance with being a passive investor.
I think this is probably a stupid question and not as clever as all this talk of rebalancing, but here goes! — Why is there such a big gap between “fund gain loss on purchase” and “asset gain loss on purchase”? What is this gap?
It is about 30% for the US funds. This can’t be due to tracking error or high fees, we know this! The Accumulator is too clever and too stingy for that (in a good way!)
Have you ever compared how this is performing compared to if you just made the same investment in the Vanguard Lifestyle 80% ?
or compared to the Vanguard World Equity Index fund and the Vanguard Total Bond fund ..
@Alistair Thanks I’ll give that a spin. It’s a hell of a pain going for the switch on for a couple of months switch off for a few option!
https://www.vanguard.co.uk/documents/portal/press_releases/vanguard-to-lower-charges-on-lifestrategy-funds.pdf
Vanguard have reduced their amc on lifestyle funds.
Hi all, sorry I’m late to the thread. Last week was a blur.
@ Tricky and PC – I haven’t but it’s a good idea. I’ll look into that. The results should be similar, but I wonder how close they are.
@ Curious Sarah – not a stupid question at all and you’re living up to your name 😉
Fund gain/loss shows how that individual fund has performed, of course.
However, I’ve switched funds in various asset classes along the way e.g. HSBC’s US index fund was sold earlier in 2013 in favour of the BlackRock US Equity Tracker D.
So Asset Class gain/loss tracks how that individual asset class has performed – accounting for all the historical fund purchases and sales. In other words, it’s the performance of HSBC US until it was sold plus BlackRock US.
There’s another version of the portfolio tracker that shows every single fund bought or sold ever but it looks a mess, so I handled things this way instead.
@ Jonathan – you make a good point about developed world equities – you could treat them as effectively interchangeable and therefore there’s no need to rebalance as long as your allocation reflects the global portfolio.
I personally use the Vanguard Dev World ex-UK fund for my developed world equities plus a UK fund. When the Slow & Steady portfolio was set up, the Dev World fund was not available on the terms required for a portfolio of this size. Total Dev World funds are still only available as ETFs, which is fine, but the S&S portfolio was set up using funds only because it was a lot simpler to track.
All that said, there is an argument for overweighting your home market, especially as you age to avoid susceptibility to currency risk. So I would make a distinction between the US and UK funds (if currency risk is a concern) and rebalance between the two according to your asset allocations.
@ PC – Re: asset allocations, I would start with allocations in line with the global portfolio i.e. the % split between the world’s major stock markets. Then adjust according to your personal situation. Fixed income first: 20% bonds originally for the S&S portfolio because we had 20 years to run and I decided we’re an aggressive bunch.
Then I heavily overweighted to the UK market (mostly at the expense of the US) because of currency risk. In retrospect, this hasn’t worked out too well, which only goes to show: stick with the wisdom of the crowd as embodied by the global portfolio.
I’m currently pondering over consolidating the separate non-UK equity funds (except emerging markets) into Vanguard’s Dev World ex-UK fund and purchasing BlackRock’s Global Property index tracker and an index-linked gilt fund. Maybe high grade corporate bonds too.
This would be a better diversified portfolio making use of options that weren’t all available originally. I’m reluctant to keep changing the mix, but this would be a good move.
It’s interesting to note that Vanguard are adding global bonds to their LifeStrategy funds.
@ Emma – the right answer to your question about fixed income is ‘all of the above’. That would be the most diversified solution but it depends on whether your portfolio is big enough to withstand the impact of trading costs and whether you want to deal with the complexity.
If you are mostly in equities e.g. 80% then most of your inflation and growth needs are catered for, so the conventional gilts would be a good choice to provide a buffer in the event of a bear market.
Take your property allocation from the equity side. Most of the model portfolios I looked at set the property allocation between 5 and 20%, so I plumped for 10% personally. If you have particular exposure to property for other reasons i.e. you work for a real-estate firm or own rentals / a hotel, then you might want to dial your allocation down.
@ TA. Thanks for that, I think I will go with a property allocation of 10%.
With regards to the the non-equity allocation, you are correct that I want my portfolio to be 80:20 equity to non-equity. Given that, and that fact that my portfolio size is currently £20,000 would you recommend just conventional gilts, or a mix of them and high grade corporate and / or index linked gilts? Also, I am not sure what the best way of buying any of these (I don’t thik that the Vanguard UK bond fund meets any of these criteria?) so any on pointers on good funds or ways to go about actually purchasing these would be appreciated.
Thanks,
E
Vanguard have all 3 options available: https://www.vanguard.co.uk/uk/mvc/investments/mutualfunds#mf_fundstab
The Vanguard UK Gov Bond fund is an intermediate conventional gilt fund.
Take a look at the clean class brokers on our broker table. You’ll be able to buy them from most of those brokers.
If it were me, I’d start with one bond asset class to start with. At 80% equity then conventional gilts would give you the best level of less correlated diversification.
@ TA – thanks for that! Very nearly there with a complete portfolio now!
Have you thought about using EFTs for your portfolio?
@ermine, can anyone else confirm this is true? That Charles Stanley force you to buy at least 1 unit with your monthly contributions.
I am currently with Hargreves Lansdown and I put £50 a month into a Vanguard LS fund. I was considering switching to CS since HL are changing their platform fee, but it would be a pain if I couldn’t maintain my regular contributions. The other option seems to be Youinvest, but it seems they would charge £5 for every purchase which would make regular investing a no-no as well.
This has probably been covered somewhere on this site, but if so can someone point me in the right direction?
Does the decision to use BlackRock D class trackers take into account their bid-offer spread? This seems to be as high as 0.61% (on the Pacific tracker) according to BestInvest: https://select.bestinvest.co.uk/fund-factsheets/brpejetgbp/blackrock-pacific-ex-japan-equity-tracker-d/overview
Corroborated by BlackRock bid and offer prices: http://www.blackrock.co.uk/individual/prices-and-performance/prices# (select index trackers as the asset class)
Is there a way to avoid incurring the spread? eg, is it not suffered if you use a broker than rebates all commission? (Other platforms don’t mention the spread, eg: https://www.charles-stanley-direct.co.uk/ViewFund?Sedol=B849FB4&Isin=GB00B849FB47&PreviousSearchResults=%2FInvestmentSearch%2FSearch%3FSearchType%3DKeywordSearch%26Category%3DFunds%26SortColumn%3DTER%26SortDirection%3DDesc%26Pagesize%3D50%26Page%3D1%26ToggleSortDirection%3Dy%26SelectedFundManagerGroupIds%3D-1%26AddFundGroupId%3D0%26SelectedImaSectorIds%3D56%26AddImaSectorId%3D0%26WrapperCompatibility%3Dfalse%26TypeOfUnit%3Dfalse%26submit%3DSearch%2520Now)
Or does the spread benefit the fund (like a dilution levy), so a long term holder is better off?
If not, then in comparison, Vanguard Pacific has an OCF 0.09% higher, so is the rationale that it is worth suffering an upfront loss of 0.51% (Vanguard Pacific has a 0.1% initial charge, which is not the same thing as a spread) because you claw it back in the lower OCF (if you wait nearly six years)?
This has probably been covered somewhere on this site, but if so can someone point me in the right direction?
Does the decision to use BlackRock D class trackers take into account their bid-offer spread? This seems to be as high as 0.61% (on the Pacific tracker) according to BestInvest (I wanted to include links, but when I do this my post does not appear, so I assume it is falling foul of spam blockers again)
This is corroborated by BlackRock website bid and offer prices.
Is there a way to avoid incurring the spread? eg, is it not suffered if you use a broker than rebates all commission? (I note that other platforms don’t mention the spread, eg Charles Stanley )
Or does the spread benefit the fund (like a dilution levy), so a long term holder is better off?
If not, then in comparison, Vanguard Pacific has an OCF 0.09% higher, so is the rationale that it is worth suffering an upfront loss of 0.51% (Vanguard Pacific has a 0.1% initial charge, which is not the same thing as a spread) because you claw it back in the lower OCF (if you wait nearly six years)?
Let’s see if I can post a webaddress by asking you to substitute full stops for the ? in the following: select?bestinvest?co?uk/fund-factsheets/brpejetgbp/blackrock-pacific-ex-japan-equity-tracker-d/overview
OK, that worked, so here’s the BlackRock address:
www?blackrock?co?uk/individual/prices-and-performance/prices#
(select index trackers as the asset class)
You can’t avoid the spread. Indeed, you can’t even avoid it with unitary priced OEICs. They charge a spread too, only it’s masked by the single price. Yes, the spread hurts fund flippers more than buy ‘n’ holders and I’m not put off by the spread because in the long run I’ll be better off with the lower OCF. Assuming it doesn’t change, but this really is fine detail that you can safely file under ‘life’s too short’. Incidentally, you could sub any of the BlackRock funds for Vanguard equivalents, there’s very little in it and Vanguard are a great company.
Thanks. I agree it is fine detail, but I need to make a choice, so it might as well be the cheapest. And I might as well take into account all costs. With BlackRock Pacific I would be paying £255 extra spread, compared with Vanguard. I’m a long term buy-and-hold investor, but it would take more than 5 years to claw this back in OCF savings. I have no plan to sell my Pacific tracker holding, but a lot can change in 5 years.
I’m surprised that most platforms don’t even mention the spread.
To what extent should new investment be used to rebalance? I am looking at starting a simple passive portfolio with say 4 funds split equally. I want to add a regular amount, for easy numbers say £1000 a month. Is there a consensus on whether each fund should always receive £250 or if the current asset allocation should be taken into account?
I understand the point of a diversified portfolio is to not put all your eggs in one basket and that it makes sense to rebalance to prevent accidentally ending up this way. Rebalancing too often feels like it you would only be backing losing funds… do monthly adjustments to the amounts input effectively result in this or are they just “buying low”?
I guess the target performance of an index-based portfolio is to match the average performance of each of the funds (weighted by their intended allocation). Has anyone measured this and the effect that various rebalancing strategies have?
Steve, there are endless studies on this topic and few firm conclusions because ultimately the best course depends on future returns. From my own reading, I’d suggest that the consensus has settled on rebalancing every one to two years to avoid the worst effects of as you say losing funds suffering from negative momentum.
It’s probably also a good idea to layer on some threshold trigger points (e.g. if your allocation shifts by more than 5%) that will bring you back into line if the markets go doolally in the meantime. Here are some articles that might help:
http://monevator.com/the-simplest-way-to-rebalance-your-portfolio
http://monevator.com/threshold-rebalancing/
http://monevator.com/rebalance-with-new-contributions-to-save-on-grief-and-cost/
dear accumulator… a simple question….
ive been looking at vanguards tracker fund costs.
if I invested individually say uk ftse equity @ 0.15% then developed world ftse ex uk @ 0.30% blackrock emerging market index 0.29% then add a guilt index 0.15% we be looking at a total charges of say 0.89% which is almost nearly 1%. where as with the Vanguard Life stratergy you get it all in one for about 0.32% is that not better? would it make that bigger difference? I suppose rebalancing would be easier when they are all individually bought. dawn
Dear Dawn
You should be looking at the weighted average cost and not just adding the TERs. So for example if you invest in 3 funds
A. 50%. Charges 0.1 %. Weighted charge. 50% x 0.1. = o.05%
B. 30%. Charges 0.2%. Weighted charge. 30% x o.2 = 0.06 %
C. 20%. Charges. 0.5%. Weighted charge. 20% x 0.5 = 0.1%
Effective (or mean-weighted) charge is 0.05 + 0.06 + 0.1% = 0.21%
Generally the Vanguard Lifestrategy funds are slightly more expensive than buying the individual constituents but the automatic rebalancing and convenience are worth it (in my view at least)
To put that another way, you will only be paying one charge on each of your investments, so your average overall cost will be somewhere between 0.15% and 0.3%, depending on the proportions you put into each fund. If you did a quarter in each, then your average cost would be a quarter of 0.15+0.3+0.29+0.15, which is 0.2225%.
On any mix, you will be paying less than with the Lifestyle fund.
to passive investor and ivanopinion
thankyou so much for explaining, i understand now.
cheers
dawn
Accumulator,
Been scouring all these SSPP posts for how you calculate your Annualised Return? Is it based on unitizing your potfolio or something else?
Cheers
@Richard Barnes — He has written about it somewhere, but I think it was a blog comment not an article. I believe he uses a spreadsheet function like XIRR and tracks new money coming in, but don’t hold me to that. I’ll drop him a line.
Hi Richard, The Investor is right, I use XIRR. It’s money-weighted (i.e. takes into account when money is invested in your portfolio) whereas unitisation is time weighted. Some handy links:
http://whitecoatinvestor.com/how-to-calculate-your-return-the-excel-xirr-function/
https://onedrive.live.com/view.aspx?cid=826E19AB9B5B8CE9&resid=826e19ab9b5b8ce9%21137&wacqt=sharedby&app=Excel
http://www.experiglot.com/2006/10/17/how-to-use-xirr-in-excel-to-calculate-annualized-returns/