Our Slow & Steady model portfolio is now four years old. I doubt The Investor or I ever really imagined we’d see the day.
And how it’s grown! In four years our little snowball has swollen 24.92%.
That’s £3,651 in cash terms and an annualised gain of 9.49%.
This compares with the FTSE All-Share’s annualised growth of 9.8% over the same period.
Our portfolio has lagged the All-Share partly because of our allocation to government bonds. But please remember that we don’t hope to beat any particular stock market index over the long-term. This portfolio is designed to give us a strong chance of a good result, not an outside chance at the best result.
The very best asset class is unknowable 20 years in advance whereas good is good enough.
Also, most people can’t handle the volatility of an all-equity portfolio. They are helped by the stabilizing benefits of bonds in bad years for shares, even if bonds prove to deliver lower returns than equities over the long-term, as they have in the past.
That said, our portfolio has trounced the FTSE All-Share in the past year, growing by 10.43% versus the latter’s 1.18%.
Our geographic diversification and the healthy dollop of UK government bonds has kept us in the hunt.
The portfolio’s benchmark-busting performance was led by:
- The US galloping ahead 20%
- UK gilts put on 14%
- Emerging Markets spurted by nearly 9%
- Pacific Rim increased by 6%
Note, there’s nothing clever about this. We just stuck to the asset allocation we laid down in 2011.
The Slow & Steady portfolio is Monevator’s model passive investing portfolio. You can read the origin story and catch up on all the previous passive portfolio posts here.
Here’s the portfolio lowdown in mighty spreadsheet-o-vision:
This snapshot is a correction of the original piece. (Click to make bigger).
New year, new you
So if things are going so well, why am I not happy?
January’s always a good month for making changes and I think the portfolio could be better diversified.
Our current set-up was the best we could do with commonly available index funds in 2011, but things have moved on for UK passive investors.
We’ve now got some good options that cover a broader range of asset classes:
- Global property – which tends to enjoy relatively low levels of correlation with equities.
- Inflation-linked government bonds – should stand us in good stead when inflation is high and growth low.
- Global small-cap – our existing equity funds are dominated by large firms. A small cap fund gives us exposure to a group of equities that might behave differently, even though the small cap premium is contested.
I’m going to add all these to the model portfolio. We like to keep things simple though, so to prevent it from becoming unmanageable we’ll replace our existing US, Europe, Japan and Pacific holdings with a single ‘Developed World ex-UK’ fund. This single fund maintains exposure to all four regions but rolls them into one faff-less vehicle.
Here’s a handy table to summarise the changes:
| Old portfolio | Asset allocation (%) | New portfolio | Asset allocation (%) |
| Vanguard FTSE UK All-Share Index Trust | 15 | Vanguard FTSE UK All-Share Index Trust | 10 |
| BlackRock Emerging Markets Equity Tracker Fund D | 10 | BlackRock Emerging Markets Equity Tracker Fund D | 10 |
| BlackRock US Equity Tracker Fund D | 25 | Vanguard Developed World ex-UK Index Fund | 38 |
| BlackRock Pacific ex Japan Equity Tracker Fund D | 6 | Vanguard Global Small-Cap Index Fund | 7 |
| BlackRock Japan Equity Tracker Fund D | 6 | BlackRock Global Property Securities Equity Tracker Fund D | 7 |
| BlackRock Continental European Equity Tracker Fund D | 12 | Vanguard UK Inflation-Linked Gilt Index Fund | 14 |
| Vanguard UK Government Bond Index Fund | 26 | Vanguard UK Government Bond Index Fund | 14 |
The total weighted OCF of the new portfolio is 0.18%
That compares to 0.16% for the old version.
We don’t incur any dealing costs for the switches because the portfolio is notionally held with Charles Stanley Direct who don’t charge for fund trades.
In reality you would face some risk of being out of the market for a day or two, but you can’t know if it’ll be positive or negative in advance. I ignore it here.
Reasoning
It’s important to remember that I’m not doing fiddling with our allocations because I think this new combination will outdo the old one in the next year.
Rather, this is a strategic change that spreads our risk and hopefully means the portfolio is better buffered against whatever the future has in store.
Previously we only had exposure to world equities and conventional bonds.
Now we’re exposed to property, small cap, and inflation-linked bonds as well as world equities and conventional bonds.
That’s five layers of diversification instead of two.
As ever, we use index funds to achieve our goals because the evidence shows that low-cost investments will, on average, give us the best return over time.
Risk management
The inflation-linked gilt fund comprises 50% of our 28% bond allocation. That bond allocation itself swells 2% every year as we’re lowering our exposure to volatile equities in line with our shrinking time horizon.
We’ve now got 16 years left on the Slow & Steady clock.
Meanwhile, to make room for the global property and small cap funds, I have carved a slug out of our equity allocation.
I want to give each of these diversifying assets a meaningful but not dominant role in the portfolio. So they get 7% each of the total, which amounts to 10% of our 72% equity allocation.
To make room, I’ve lopped big slices off the UK and Developed World allocations.
A purist’s asset allocation would heed the wisdom of the crowd – buying assets in line with global capital distributions.
UK equities are worth about 7% of the global market so by rights should have a 5% share of our equity allocation. We’ve always held a larger dollop in our home country though, partly because it slightly reduces our exposure to currency risk and partly because like most investors we suffer from home bias.
A desire to correct that bias accounts for the large chop in UK equities with this reshuffle – from 15% to 10% overall – but I’m not so rational as to drive it right down to 5%.
The Emerging Markets cut stays at 10%, which is now a 14% slice of our equity allocation and commensurate with the developing world’s greater role in the global economy.
So that’s the asset allocation logic in a large and hairy nutshell.
My actual index fund choices are either the only or the cheapest available in each category.
Incoming!
Q4 is income bonanza time. Our funds paid out £148.11 in dividends and interest, which we’ve promptly fed back into the growth machine courtesy of our automated accumulation vehicles.
Here’s how the income adds up:
- US equity tracker: £31.49
- European equity tracker: £38.82
- Japan equity tracker: £7.95 (Go Japan!)
- Pacific equity tracker: £17.40
- Emerging markets equity tracker: £30.67
- UK Government bond index: £21.77
Total dividends: £148.11
Finally, we need to lift our investment contribution in line with inflation.
Inflation erodes the value of money as surely as the wind and rain wears away rock. We up our ante by 2% to stay level with the latest RPI advances.
That means we now need to throw £867 into the pot every quarter instead of £850.
Let’s round that up to £870.
New transactions
That new £870 is divided between our funds in line with our asset allocation.
Here’s how it breaks down, along with the rest of the dozey-doe required to reshuffle our portfolio.
UK equity
Vanguard FTSE UK All-Share Index Trust – OCF 0.08%
Fund identifier: GB00B3X7QG63
Rebalancing sale: £630.90
Sell 4.12 units @ £153.03
Target allocation: 10%
N.B. Vanguard merged our old fund – the Vanguard FTSE UK Equity Index Fund into the Vanguard FTSE UK All-Share Index Trust on November 1.
North American equities
BlackRock US Equity Tracker Fund D – OCF 0.17%
Fund identifier: GB00B5VRGY09
Sell: £4,996.13
Replaced by:
Vanguard FTSE Developed World ex-UK Equity Index Fund – OCF 0.15%
Fund identifier: GB00B59G4Q73
New purchase: £7,289.80
Buy 33.69 units @ £216.35
Target allocation: 38%
Japanese equities
BlackRock Japan Equity Tracker Fund D – OCF 0.17%
Fund identifier: GB00B6QQ9X96
Sell: £1,041.27
Replaced by:
Vanguard Global Small-Cap Index Fund – OCF 0.38%
Fund identifier: IE00B3X1NT05
New purchase: £1,342.86
Buy 7.5 units @ £178.59
Target allocation: 7%
Pacific equities excluding Japan
BlackRock Pacific ex Japan Equity Tracker Fund D – OCF 0.19%
Fund identifier: GB00B849FB47
Sell: £1,077.30
Replaced by:
BlackRock Global Property Securities Equity Tracker Fund D – OCF 0.23%
Fund identifier: GB00B5BFJG71
New purchase: £1,342.86
Buy 894.05 units @ £1.50
Target allocation: 7%
European equities excluding UK
BlackRock Continental European Equity Tracker Fund D – OCF 0.18%
Fund identifier: GB00B83MH186
Sell: £2,008.79
Replaced by:
Vanguard UK Inflation-Linked Gilt Index Fund – OCF 0.15%
Fund identifier: GB00B45Q9038
New purchase: £2,685.72
Buy 17.98 units @ £149.39
Target allocation: 14%
Emerging market equities
BlackRock Emerging Markets Equity Tracker Fund D – OCF 0.26%
Fund identifier: GB00B84DY642
New purchase: £109.69
Buy 96.3 units @ £1.13
Target allocation: 10%
UK Gilts
Vanguard UK Government Bond Index – OCF 0.15%
Fund identifier: IE00B1S75374
Rebalancing sale: £2,147.76
Sell 14.93 units @ £143.88
Target allocation: 14%
New investment = £870
Trading cost = £0
Platform fee = 0.25% per annum
This model portfolio is notionally held with Charles Stanley Direct. You can use its 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 = 0.18%
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.
Take it steady,
The Accumulator
Excellent review.
Thank you.
Can I slightly off-topic share my thoughts on something that is troubling me, and raise the subject of how to construct a more simple/simplest portfolio investing for our heirs, who are not finance savvy.
Warren Buffett suggests that the legacy for his wife be invested 10% short gov’t bonds, 90% low cost US S&P500 tracker, which for us translates into 10% IGLS/cash, with 90% VWRL/IWRD world stock tracker.
If our heirs wish to adopt a similar simple method, then they may be better served with the following positions; with rebalancing every four years, but rebalancing only if capital gains taxes consequences are not significant; otherwise don’t rebalance. The infrequent rebalancing designed to prevent safe assets being dragged into an ever downwards vortex in a prolonged severe bear market (think 1929, 1930s).
If rebalancing is practised then rebalance back to allocation Jan 2024, Jan 2028, etc.
25% Index Linked UK Gilts Passive Tracker ETF : INXG
25% UK Stocks Passive Tracker ETF : VUKE
50% Global Stocks Passive Tracker ETFs : VWRL and/or IWRD
Have any others been addressing this problem?
All Best
‘Inflation erodes the value of money as surely as the wind and rain wears away rock. We up our ante by 2% to stay level with the latest RPI advances.
That means we now need to throw £867 into the pot every quarter instead of £850.’
Sorry but I can’t see how this is 2%.
£867 per quarter is £3468.
2% of £3468 is £69.36 a year extra due to inflation.
Every quarter, that’ £69.36/4 = £17.34
£850 + £17 = £867.
@jonascord
Assuming you’re questioned the new contribution figure (rather than the level of RPI inflation itself) it’s:
£850 * 1.02 = £867
where the 0.02 represents the referred to 2% inflation increase
err.. 850 x 1.02 = 867
thats self evident beyond even a forum discussion board so the comment must be about a disagreement as to the value of RPI? possibly > 2%?
@Brendan
Not wanting to be pedantic, but those figures are inaccurate given you’re taking 2% off the resultant value (i.e. after inflation) and not the initial value (before inflation).
It should be worked out as:
Initial contributions of £850 per quarter * 4 = £3,400 per annum
2% of £3,400 = £68 per annum increase
£68/4 = £17 per quarter increase
Leading to £850 + £17 = £867 (new quarterly contribution)
For comparison, i calculate my vanguard lifestrategy 80% acc fund has had a gain of 7.5% this year. Albeit i’ve had it 14 months but still…
Hello. Been following this excellent site for a long time, first time I’ve posted.
Just a quick query – I was wondering how to find out how much income has been generated within an accumulation fund. I have a bunch of trackers on the Fidelity platform (via Cavendish), but I can’t see this information anywhere.
@paul – The fund managers should produce information about the distributions within accumulation funds – have a look at their website or email them if you can’t find it.
@Paul — Also, see this article: http://monevator.com/accumulation-funds-dividends/
Cheers guys. Found the info on the Trustnet site via the link above. Thought I’d read all the articles on here – must’ve missed that one!
Thanks for the update. I always enjoy this series TA, I think it is a fantastic illustration of how even putting small amounts away can build (slowly and steadily) a healthy savings pot.
I have one question, which may be because I’ve missed something obvious.
The “24.96%” return on the portfolio is since purchase. You state that this works out “7.6%” annualised. I presume this takes into account the fact that the investments have been made periodically, I think this has been discussed in the past (note that the 4th root of 1.24 is 1.057 [5.7%]).
Can I ask, have you weighted the annualised return on the FTSE all-share similarly to the portfolio’s return (the “9.8%”)? If not, would that imply that the Slow & Steady Portfolio has done even better than the comparison in the article (due to the “9.8%” having been a return on a lump sum invested for a full four years)?
All the best,
L
Is there something “special” about that Vanguard Global Small-Cap fund? It’s not available on TD Direct (various other Vanguard funds are) and it’s even hard to dig up on Vanguard’s own website – I had to use google to find the fact sheet.
@paul if this is for the purposes of filling in a tax return then your platform should generate a report for you showing this sort of stuff (i know hl and iweb do this for you)
@The Rhino thanks. I’ve had a look around the Fidelity website and can’t see any way of finding details of actual income earned on my investments, although there are fund provider reports showing the per-share dividend. It’s not for a tax return; I was just curious as to how much had been reinvested in my accumulation funds.
An update to my previous comment – there is an Income Reporting facility on the Fidelity website, but it’s only showing quarterly ‘Tax Reclaim Reinvestment’ entries for my bond fund – there are no entries relating to any of my equity funds. Also, the number of units of my equity funds is the same as when I invested – surely the numbers should’ve gone up slightly due to dividend reinvestment? Bit worried now that I’ve not been getting any dividends since I opened the account! I think I’ll drop Cavendish a line.
Sorry, I’m talking nonsense aren’t?! Accumulation funds automatically reinvest dividends themselves which is reflected in an increased fund value, rather than sending the dividends to brokers to buy more units. I’m sure I already knew that. Must be getting old!
@Learner I sent an email to TD Direct asking why they didn’t have it, their reply was:
“The reason you are having trouble is because we only trade in UK funds, and what you are interested in (Vanguard Global Small-Cap Index Fund) is registered in Ireland.
its a big pain for sure as if the accumulation funds exist outside of an isa or sipp then you may have to pay additional tax even though it doesn’t look like there is anything to tax at first glance as you never ‘see’ that income so to speak. so they can surreptitiously drag you into the world of agony that is the hmrc tax return. once ensnared in its icy grasp you will never be set free. i have very recent scarring..
Mine are in an ISA thankfully, so it’s one less thing to worry about.
Hello. Sorry for bringing this up again. Currently my SIPP/ISA portfolio is pretty similar to this in terms of Stock / bond weighting. But I am really thinking that economic de-growth will become a reality over the next decade; either forced upon us or by choice due to the impact of climate change.
What do you think you be the best portfolio for wealth protection against this ? Would it simply be 20% bond / 80% world stock ? Or something more sophisticated ?
Ooops. I mean:
Would it simply be 80% bond / 20% world stock ? Or something more sophisticated ?
Great post, thanks you for laying it all out as I’ll be having to start a similar pension pot myself soon. Quick question. If you owned property with roughly the same market value of your ‘other’ investments, how might that skew the mix between equities and bonds or otherwise affect your choices about diversification?
@Martin
“If you owned property with roughly the same market value of your ‘other’ investments, how might that skew the mix between equities and bonds or otherwise affect your choices about diversification?”
IMHO it would skew diversification hardly at all.
Assets could be considered split into liquid and illiquid.
The liquid assets would need then need to be invested along the lines of TA’s article or similar; except that the investor might want to avoid real estate in his liquid investments. RE think was at 7% in TAs article?
We can’t avoid the real estate in the main indices, but we may not want to tilt further in that direction!
Just an opinion!
I’m leaning towards the idea of a similar passive portfolio myself. However, I’m wondering how the weightings particularly between the UK and Developed World ex-UK components might change if CAPE valuations are taken into account (assuming they’re not?). I ask this because I gather that the S&P is (or certainly was) over-valued compared to the FTSE and a big proportion of the Developed World ex-UK fund is allocated to US stocks. If reversion to the mean is a real phenomenon, would it not make sense to adjust the UK and US weightings periodically in line with the respective CAPE valuations to try and avoid capital losses? Great website by the way.
@ Magneto – for family members who aren’t going to maintain their investments, I’ve been recommending the Vanguard LifeStrategy funds. That way they get instant diversification and they don’t even have to worry about rebalancing. It’s fire and forget.
@ L – the results are worked out by Morningstar’s Portfolio Manager and Morningstar provided the FTSE number too. To the best of my knowledge, all index returns are time-weighted.
@ Learner – Global Small Cap is listed along with the rest of Vanguard’s index funds here: https://www.vanguard.co.uk/uk/portal/investments/mutualfunds
It’s available from several brokers other than TD. Off the top of my head: Charles Stanley, iWeb, Youinvest, there will be more.
@ Algernond – if you want to take volatility out of your portfolio then yes, the most important thing is to up your bond allocation. I’m not sure what you mean by de-growth, but if that’s deflation then cash and high quality government bonds are your best protection. Also, take a look at Harry Browne’s Permanent Portfolio for a solution that’s particularly geared to downside protection.
@ Martin – theoretically you’d subtract the value of your property from your equity allocation – if they’re both aligned towards the same financial objective.
Hello Accumulator,
By de-growth I mean decades of GDP shrinkage in the developed world. I consider this a real possibility in the near future (due to climate change challenges as I’ve already mentioned). I was wondering if this would require a special kind of defensive portfolio compared to the usual high bond allocation. I had vaguely considered a Harry Browne PP type portfolio; will give it some further consideration.
@algernond — You are moving well beyond passive investing with this kind of thinking. Not to say it’s right or wrong, but you’re not likely to get much insight into the “special kind” of defensive portfolio you’re after on this thread.
Glad you corrected your 80/20 split — I was thinking, really, defensive? 🙂
Something like a Harry Browne portfolio might be appropriate, though I wouldn’t expect gold to do very well in a deflationary environment like that, personally. Cash would probably not hurt though, provided you’re prepared to chase keen interest rates.
You might need to think about buying particular stocks that fit your investment theme. (Security companies? Water management? Seed specialists?) You might have to think about your fossil fuel exposure. (Would less be burned because of the clear disaster it had caused in that scenario? Or more because desperate times mean desperate measures?)
FWIW I think the global economy is going to soar for the next 20-30 years, and I speak as somebody who agrees with you on the threat from environment disruption:
http://monevator.com/environmental-degradation-and-wealth/
Over our lifetimes there’s probably only a small chance of an outsized collapse, and it’s rarely profitable to bet on those. If you’ve got grandchildren though, that’s another matter.
Also, it’s partly the expanding global growth and demographics that I think make the environmental threat more likely. If the world started slowing significantly now, that might have a positive feedback on the risks.
This sort of speculative roundabout is of course one reason why passive investors choose to be passive investors! Much of that global money is trying to assess these risks every day, and theoretically the state of the market right now is the best guess at the impact of global warming et al.
That’s not to say the consensus is right or wrong, but global warming is clearly not a Black Swan type thing that nobody has seen coming. We’ve been regularly warned for the past 20 years.
@ The Accumulator
“for family members who aren’t going to maintain their investments, I’ve been recommending the Vanguard LifeStrategy funds. That way they get instant diversification and they don’t even have to worry about rebalancing. It’s fire and forget.”
Many thanks TA.
The 60% stocks LifeStrategy Fund would indeed be a good fit. Will give the idea much thought.
Re the LifeStrategy funds in general; do you have a view on :-
+ The heavy international bond weighting, which we usually tend to avoid in our fixed income.
+ The frequent rebalancing, which fills me with horror, should our heirs ever run into a repeat of the 1930s; and find themselves being continually rebalanced from safe assets into an ever deepening stocks black hole, with falling income from dividend cuts.
But maybe 1930s was an outlier and will not be repeated?
‘This time is different’? Maybe it is, but stocks history is not reassuring.
Thanks again for all your hard work. Much appreciated.
@magneto interesting question about the frequency of rebalancing within the LS funds. I don’t remember seeing any data on that in the literature.
maybe the scenario you quote would have worked out well though if your time line was long enough?
@magneto – I think many stock indexes were back to 1929 levels by 1936 because of *de*flation + dividends, so rebalancing from bonds into falling stocks worked out OK when you look at total return over many years. The “90% drop” in the Dow in USA was not 90% really. If you’re close to retirement you shouldn’t have much money in stocks anyway, while young people have loads of years to invest at low stock prices after crashes. It’s always a leap of faith, and I imagine the entire world will have a Japan-style 30 years of zero returns eventually.
I’m investing in 6 out of 7 of those so perhaps I’m heading in the right direction? 🙂
My weightings are different though, currently only have around 10% in the bond funds, although they are appear to be doing quite well at the moment.
@TI,
Thank you for the link to your excellent 2010 post. I hadn’t seen that before! I would be very interested to see another post from you on the topic which included the passive investors perspective on the matter.
@ The Accumulator
I’m fully invested in the LifeStrategy 60 fund within my pension – it’s my sole investment. However, the idea of a property hedge does seem attractive – as you point out its doesn’t necessary correlate with stocks.
My only concern with the BlackRock fund suggested is that much of the fund is comprised of shares in property companies, which seem to have more of a correlation with the stock market rather than the property market.
I assume the answer here is “no”, but are you aware of any index funds that track the global property market more closely? I assume the only way this could be done would be through the use of synthetics, but it may provide some additional diversification. Thanks and keep up the amazing work!
@ The Accumulator
Following on from my last comment, a quick look on HL would suggest that the fund is mainly made up of property investment trusts rather than equities – and that there are few alternatives – certainly not with a comparable AMC. Still interested in your thoughts though!
@Accumulator – any thoughts on my earlier question re weighting by CAPE? Thanks
@ John – you’re right, there aren’t any index tracking alternatives bar the more expensive iShares ETF that does exactly the same thing. The alternative is actually investing in property, although I think The Investor has written in the past about investing in individual shares of property companies. I checked the correlation of the BlackRock tracker myself recently and you’re right it’s very close to the global market over the last few years. Correlations shift over time, so maybe that property and equities have just had a close run of late.
@ Magneto – a number of good sources are recommending international bond diversification as a solution to being stiffed on bonds by the financial repression being practiced by the US and UK governments. Given there’s no good alternative to the simplicity of the LifeStrategy fund and that it’s for heirs with time on their side then I wouldn’t let it concern you.
Ditto rebalancing. On the whole it’s a good thing, but we can certainly conjure up scenarios where it didn’t work out. That way lies paralysis. Better to go with best practice and the balance of probabilities.
Different Paul – Sorry I missed your CAPE comments. [Love your rebranding btw]. Ultimately the CAPE valuations are only thought to correlate with outcomes around 40% of the time. If you use it to guide your thinking, I don’t think that’s a problem, but remember you’re still dealing with a wide dispersion of return scenarios i.e. There’s every chance you’ll be kicking yourself in retrospect. So I wouldn’t use it as a prompt for drastic change. There’s a superb article here about how CAPE is meaningless in the short-term but has value as a long-term range finder: http://www.kitces.com/blog/shiller-cape-market-valuation-terrible-for-market-timing-but-valuable-for-long-term-retirement-planning/
I was thinking that is it really worth investing in Emerging Markets? They seem to be so erratic and yes I understand the need for diversified portfolio but aren’t there better options?
@Mike — I think it is worth it. They add two useful things… (1) Returns and as you say (2) diversification.
It’s ironic… 3-4 years ago, we would have comments on the blog saying “why have you got 30/40/50% in the US/developed markets, when all the growth is in emerging markets and the West is on its uppers.” Now, not so much. 🙂
I am not having a go, it’s human nature that we all tend to overweight the most recent periods. (It’s called recency bias at behavioural finance cocktail parties. 🙂 ) But it’s something I think we need to guard against.
As for erratic returns, that doesn’t matter at all if you’re a long-term investor with a 20 year horizon, provided the asset adds value overall.
The ever-wise Warren Buffett said something like: “Given the choice between a smooth 12% annualized return or a lumpy 15%, we’ll take the lumpy 15% every time.”
We’re almost certainly not talking 12% versus 15% here, but even 0.5%-1% extra over the long-term from a return advantage and/or diversification and a rebalancing bonus is worth putting up with a bit of volatility for. (And as I say, the diversification factor means sometimes they may be reducing the volatility at a portfolio level, anyway. 🙂 )
Does your model have the ability to feed in fund alterations at certain points over the last 4 years, then re-calculating current value?
The reason I ask is that it would be interesting to see the effect on the current value from the addition of a few index beating active funds.
For example – MFM Slater Growth instead of UK tracker, FS Asia Pacific Leaders instead of the asia pacific tracker. Alternatively maybe Baillie Gifford global growth over a number of region specific trackers.
I realise this goes against the grain of the model and your site in general but as I am mixing actives and passive funds it is something oft at the forefront of my mind.
@Stu — If you feed in market-beating active funds you’ve chosen retrospectively, then surprise surprise the returns will be higher. In terms of historical accuracy, it would be more appropriate to somehow recalculate the returns knocking 1-2% off the returns from the index funds — so if an index fund has done 7% over the past four years, maybe stick in 5% for the active fund selection — given how over the medium to long-term the majority of active funds underperform.
As I always caveat, I am an active investor myself, though directly in shares where at least I get the fun of stock picking. 🙂
But there’s no point doing so in a delusional sense. What evidence have you got that you can pick winning funds? What is your method that the market has missed? Why do you think you need to? Are you prepared to risk the likelihood of doing worse over a 5-10+ year period? Why do you think it’s appropriate to select funds like the MFM Slater Growth (for those not aware from memory one of the top few funds in the UK out of literally thousands over recent years) which is literally a needle in a haystack? (These questions are asked constructively!)
Anyway, I suspect the answer is “no” he can’t do that. It’s work enough keeping track of the real ones! 🙂
[Apologies if you were emailed the reply to this question with a crucial typo re: performance! 🙂 ]
@Rhino/TA
Noticed on a thread running on Bogleheads, that the US Vanguard LifeStrategy Fund supposedly rebalances DAILY!!!
If correct, this is completely unacceptable, and must rule out LifeStrategy as a recommmendation to our heirs and/or their trustees.
Either our heirs will have to come up to speed with an allocation similar to The Slow and Steady Portfolio (with own preferred methods of progressive rebalancing and valuation based allocations);
or we will default to a recommendation of a simple two or three fund portfolio, that they can manage, with rebalancing no more frequently than every four years.
Wish us luck!
@magneto – basic question – what’s the problem with daily rebalancing?
An unrelated question: Is it possible to wrap up something like the Vanguard LifeStrategy product inside a tax-efficient pension, ISA or similar?
@ Martin
” basic question – what’s the problem with daily rebalancing?”
Goes against the grain of everything learnt about rebalancing over the last 30 years+ of investing.
Try running the maths of a prolonged serious stock decline and see how the overall portfolio performs.
Also read The Great Depression, A Diary’ by Benjamin Roth, and contemplate how an investor rebalancing daily would fare. Could not possibly recommend such rebalancing to our heirs, without being there at their side to help, and call a halt as and when things get out of hand.
‘Rational Expectations’ by Wm Bernstein who is very interested in the subject of rebalancing, ‘Markets tend to exhibit momentum (that word again) at periods of one year or less, and mean reversion takes place over longer periods. Rebalancing once every two to three years is plenty.’
Will pick up on this subject and expand probably in future discussions.
All Best
Hi Magneto. As far as I understand the Lifestrategy funds rebalance using the new monies they receive, not by selling assets. This effectively means that whatever portfolio you buy, you will always hold the same equity/bond split regardless of market conditions.
If you are not comfortable with this then you could always blend two Lifestrategy funds and rebalance them less frequently. For example 80% & 40%/or 100% & 20% Equity could be held 50%/50% and rebalanced.
With regards to the fixed interest, they allocate based on the global market weighting but have a UK bias (something like 20% compared to 5% which is the global capitalised weighting of UK Fixed Interest). They also hedge all overseas back to sterling so there is no currency risk.
Just checked. Vanguard allocate 35% of the Fixed Interest to the UK. This represents a significant overweight because the market indicates that the UK market only makes up 6% of the global fixed interest market. The 65% allocated to global bonds is hedged.
@magneto @woody085 @martin — Actually, I’m not so sure daily rebalancing is a slam-dunk bad idea. I’m pretty sure I’ve read research saying it would deliver a rebalancing bonus in some implementations, absent costs and obviously only in tax-exempt accounts.
From memory Swensen discusses Yale’s daily rebalancing in Unconventional Success, but my copy is in the loft. 🙂
Perhaps someone else has it to hand?
I love this series. You guys I started my own investing adventure a few months after you started this portfolio, and it’s great to see how we compare. (You guys are slightly ahead of me on gains – mainly due to 10% more equities, and, I hate to admit it, a little bit of over-eager portfolio fiddling on my part.(
Just a question about the “% gain and loss since purchase’. I have my portfolio all kept nicely in the slightly hectic ‘Fund Manager 2014’ software. It’s great in many ways, and I can report my gains/losses by annualised ROI, time weighted return and % gain/loss. Is one better than the others? Is there one measure that most people use?
@ dave – good to see we’re both doing well! There isn’t one universally used measure but ultimately it’s £ gained / lost that really counts.
On the Iweb/Halifax fund screener it lists only the inc version of the Vanguard UK All Share tracker (although it has both inc and acc versions of all the other Vanguard trackers).
That can’t be right, surely?
With regards to daily rebalancing of LifeStrategy funds, I understand the justification from Vanguard is that this is to manage risk rather than to boost returns.
Really useful site, learning a lot, thanks.
I’m interested in the choice of bond funds here – also widely employed in your 9 lazy portfolios for UK investors (Vanguard UK Inflation-Linked Gilt Index Fund & Vanguard UK Government Bond Index Fund).
Tim Hale’s book (thanks for the tip-off!) suggests shorter-dated (c. 5 yrs) bond funds to limit volatility; these two VG funds have average maturities of 22 and 16 yrs respectively. Do you take a different view to Hale on this, or is it pragmatism in the face of limited fund choice? If the latter, is the extra volatility exposure with these two funds a serious concern or not? Thanks.
I cannot find BlackRock Global Property Securities Equity Tracker on charles stanley? Do you know why?
@ sarj – https://www.charles-stanley-direct.co.uk/ViewFund?Sedol=B5BFJG7&Isin=GB00B5BFJG71&PreviousSearchResults=%2FInvestmentSearch%2FSearch%3Fsortdirection%3DAsc%26SelectedFundManagerGroupIds%3D24%26PreviousSelectedFundManagerGroups%3D24%26AddFundGroupId%3D0%26SelectedImaSectorIds%3D-1%26PreviousSelectedImaSectors%3D56%26AddImaSectorId%3D0%26WrapperCompatibility%3Dfalse%26TypeOfUnit%3Dfalse%26category%3DFunds%26submit%3DSearch%2520Now%26page%3D2
@ Richard – it’s mostly a question of fund choice. From memory even Hale can’t find a short-dated index-linked gilt fund. He cites a DFA fund that’s only available through DFA approved advisors.
There are a few short-dated nominal bond ETFs available from SPDR, iShares and db X-trackers.
The greater your equity allocation the less difference a short-dated bond fund makes as most of the volatility comes from your equities. You give up return as you shorten your duration so it’s a balancing act. The closer you are to meeting your objective, the more you value low volatility then the more a short-dated fund or even ladder of individual gilts will fit the bill.
Hi just had a quick look. How does this fund compare against the Vanguard LifeStrategy funds?
Thanks for such an excellent resource! I was interested to read you are diversifying your portfolio with a global property tracker (BlackRock Global Property). I’d be interested to hear your thoughts on investing in UK commercial property (instead) as it seems to give a slow and steady upward trend (over last 5 years), whereas the global property index has been more volatile over the same period. Thanks!
Hi Alan,
I invest in global property because it’s more diversified. I can’t predict what will happen in the UK market in the future. There’s no reason to believe that because it’s done well in the last 5 years that that trend won’t revert. Extrapolating the recent past into the future is known as the recency bias: http://skepdic.com/recencybias.html
So I prefer to spread my bets as widely as possible because I can’t predict the future. There’s an interesting argument here for doing the same in equities: http://monevator.com/why-a-total-world-equity-index-tracker-is-the-only-index-fund-you-need/
Thanks very much for getting back to me! I can understand the benefits of diversification.
Hi,
I was wondering whether you could post a copy of the spreadsheet you use to track this portfolio.
Thanks