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 [1] 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 [2].
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 [3] we laid down in 2011.
The Slow & Steady portfolio is Monevator’s model passive investing [4] portfolio. You can read the origin story [5] and catch up on all the previous passive portfolio posts here [6].
Here’s the portfolio lowdown in mighty spreadsheet-o-vision:
[7]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 [8].
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 [9].
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 [10] 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 [11] who don’t charge for fund trades.
In reality you would face some risk of being out of the market [12] 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 [13] 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 [14] and partly because like most investors we suffer from home bias [15].
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 [16] 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 [17] 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 [18] 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 [19] 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 [11]. 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 [20] 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 [21].
Take it steady,
The Accumulator