Remarkably, our Slow & Steady passive portfolio now has five candles on its birthday cake. And while its growth rate won’t make anyone’s wishes come true overnight, the portfolio is piling on the pounds at a textbook rate that’s comfortably in line with expectations.
We’ve made an annualised gain of 6.8% over the five years, which amounts to a real return of just over 4% a year once you knock off inflation.
That puts the Slow & Steady ahead of the FTSE All-Share, which grew a nominal 6% annualised over the last half decade. Exciting.
Our portfolio has been buoyed by a large slug of US equities, which put on 13% per year over the five-year period. There’s one in the eye for the many over the years who advised trimming the US because it’s overvalued. Those naughty market-timers!
The US does look frothy by the light of the tools we have available but those measures only explain about 40% of the variation in returns.
In other words, trying to outfox the market is quite likely to leave you out of pocket.
Meanwhile, emerging markets – supposedly the only economic bright spot on the horizon when we first started the Slow & Steady project – are the one asset class that’s really dragged us down, losing an annualised 3.88% over five years.
So much for the moribund West and the Asian Century, eh? At least as far as our cache of capitalism is concerned to-date.
Agreeably average
Despite the inherent unpredictability of the markets, our 4% annualised gain sails very close to the 3.8% return we’d have expected from a 70:30 portfolio based on the UK’s historical growth rates for equities and gilts1.
Really, this is a statistical quirk. We can’t expect portfolios that are riding on market turbulence to habitually deliver the historical average, especially over a relatively short five-year run.
But it does go towards showing that a passive portfolio can be expected to deliver reasonable returns over time using little more than a consistent, diversified, low-cost strategy and a steady dripfeed of cash.
Micromanagement as a response to the worries of the world is just guessing – and markets will always fluctuate. For example, despite losing nearly 8% in six months earlier this year, we’ve ended up just over 1% on the past twelve.
Here’s our regular spreadsheet snapshot:
Note: Global Prop, Dev World, Small Cap and Inflation Linked bonds show one year returns. (Click to enlarge).
In raw cash, we’re up 21.23% since we started. That’s a £3,862 gain on total contributions of £18,130.
The Slow & Steady portfolio is Monevator’s model passive investing portfolio. It was set up at the start of 2011 with £3,000 and an extra £880 is 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.
New Year, same plan
While others attempt to rebalance their lives and maybe lose a few kilos – New Year, New You style – we prefer to rebalance our portfolio and trim our equities.
Each year we shift 2% from our equity allocation over to UK government bonds.
This is known as lifestyling and it’s designed to lower the risk level of your portfolio as you run out of years left to recover from the large stock market crash that lurks around the corner. (We just don’t know which corner.)
When it happens (not if) we’ll be relying on our boring bonds to be our portfolio counterweight – limiting the depth of our plummet by pulling in the opposite direction. (We hope).
- In our first five years we’ve moved from a highly aggressive 80:20 equity:bond split to a still fairly fearsome 70:30.
- In another five years, we’ll have moved to a borderline bellicose 60:40.
As of now, we have 15 years left on the portfolio’s investing clock, and I’m comfortable with the level of risk this far out.
The 2% equities cutback is going to come from our UK fund. We’ll add 1% to the conventional UK government bond fund and 1% to our inflation-protected UK government bond fund.
Currently the portfolio is a little slanted towards UK equities in comparison to the wisdom we’re receiving from the world’s investment crowd.
The UK makes up about 7% of global stock market capitalisation right now. That means we should give it around a 5% slice of our total portfolio, once you take into account that we’re 70% in equities.
Originally the Slow & Steady portfolio was more heavily biased towards home but subsequent research has led me to conclude this is just a comfort blanket.
I’m weening myself off it over time.
All a question of rebalance
Next we’re going to rebalance the portfolio back to its target asset allocations.
Ordinarily, we only rebalance if an asset veers wildly off course – more than 25% above or below its target allocation (or after a 5% change if the asset represents more than 20% of portfolio).
This annual move, like the shift to bonds, is a risk management exercise. Our aim is to try to ensure the portfolio doesn’t get overloaded with riskier assets.
The upshot of this rebalancing back to our (predetermined) asset allocations is we’ll be putting a lot of money into bonds – less risky assets – and Emerging Markets – risky but seemingly cheap at the mo’.
In the case of emerging markets we’re also hoping for a rebalancing bonus – buying an asset when it’s relatively inexpensive and capitalising when (if) it bounces back in the years ahead.
But again, it’s important to stress we’re not making a judgement call here – rather we’re just staying in line with the asset allocation we previously set.
Finally, we need to adjust for inflation. We invested £870 per quarter in 2015 but RPI has gone up by about 1.1% over the year. So from now on we’ll need to top-up our quarterly contribution by a tenner to £880 to account for cash’s loss of value.
Incoming!
Q4 is income bonanza time for our funds. They paid out £313.23 in dividends and interest, which we’ve promptly fed back into the growth machine courtesy of our automated accumulation funds.
Here’s how our income massed up:
- UK equities: £80.31
- Developed world equities: £159.37
- Global small cap equities: £4.82
- Emerging markets equities: £36.15
- Global property: £18.86
- UK Government bond index: £13.72
Total dividends: £313.23
New transactions
We’re lobbing another £880 into the market’s maw while rebalancing each fund back to its target asset allocation. That means:
UK equity
Vanguard FTSE UK All-Share Index Trust – OCF 0.08%
Fund identifier: GB00B3X7QG63
Rebalancing sale: £369.97
Sell 2.391 units @ £154.77
Target allocation: 8%
Dividends last quarter: £80.31
Developed world ex-UK equities
Vanguard FTSE Developed World ex-UK Equity Index Fund – OCF 0.15%
Fund identifier: GB00B59G4Q73
New purchase: £50
Buy 0.221 units @ £226.27
Target allocation: 38%
Dividends last quarter: £159.37
Global small cap equities
Vanguard Global Small-Cap Index Fund – OCF 0.38%
Fund identifier: IE00B3X1NT05
No trade
Target allocation: 7%
Dividends last quarter: £4.82
Emerging market equities
BlackRock Emerging Markets Equity Tracker Fund D – OCF 0.24%
Fund identifier: GB00B84DY642
New purchase: £396.03
Buy 400.432 units @ £0.99
Target allocation: 10%
Dividends last quarter: £36.15
Global property
BlackRock Global Property Securities Equity Tracker Fund D – OCF 0.23%
Fund identifier: GB00B5BFJG71
No trade
Target allocation: 7%
Dividends last quarter: £18.86
UK gilts
Vanguard UK Government Bond Index – OCF 0.15%
Fund identifier: IE00B1S75374
New purchase: £382.55
Buy 2.66 units @ £143.80
Target allocation: 15%
Dividends last quarter: £13.72
UK index-linked gilts
Vanguard UK Inflation-Linked Gilt Index Fund – OCF 0.15%
Fund identifier: GB00B45Q9038
New purchase: £421.39
Buy 2.853 units @ £147.71
Target allocation: 15%
Total dividends = £313.23
New investment = £880
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 portfolio is worth substantially more than £20,000.
Average portfolio OCF = 0.17%
If all this seems too much like hard work then you could instead buy a diversified portfolio using an all-in-one fund such as Vanguard’s LifeStrategy series.
Take it steady,
The Accumulator
- Historical growth rates from the Barclays Equity Gilt Study 2015 minus 0.1% fund costs. Fund costs already subtracted from the Slow & Steady portfolio results. [↩]
Comments on this entry are closed.
There’s a better share class, H, available for the blackrock property fund with lower expense ratio. I was able to convert for free at HL, presumably Charles Stanley allows something similar.
Exciting stuff, I’m interested to see if you switch platform this year as you are coming close to the £20,000 cross over point between % based and fixed fee brokers right?
How would you switch from Charles Stanley Direct to another broker without incurring too much cost?
Side note, I assume you are wrapping this in your ISA, what would that mean in terms of switching broker?
Thanks
Tony
Interesting comment about the home bias. I have a considerable home bias, because I have been swayed by arguments about currency risk and for holding equities in the currency one is spending. I can see that both these arguments are diminished by the fact that much UK listed stock is making its money in other currencies, but how strong is the evidence that UK based investors should not weight the UK market at all? (I know the lifestrategy funds reduced weighting to about 20% of equities, I thought vanguard had some data to back that up, or is that naive faith?)
Actually now I remember I think another reason for my home bias was the cheapness of UK trackers compared with world trackers or lifestrategy funds. I know that’s only about 0.1-0.2% though so possibly not worth stressing about. I can’t be bothered to hold all the international ones separately!
I was almost going to reply to his comment but that was in fact a low-cost approach, it will beat most of them in the long run ;).
@Pawel — Regarding the deleted comment…
I don’t have a problem in general with people having dissenting views, or occasionally wanting to discuss these issues further. But that particular commentator had a long history of repeatedly causing arguments on this site to no useful purpose. He also invariably cites some winning active fund over the past few years (i.e. with hindsight — hardly clever or a repeatable strategy), seemingly either oblivious or else ignoring the real issue which is that most active funds underperform long-term and there’s no proven way to select the handful of winners in advance.
As a result I thought we had agreed to disagree and that he’d gone off to do his own blog and so forth. I deleted most of his comments, and that was that. Yet he still seems to reappear now and then.
A newcomer to the site might say “let’s have the debate” but it went around in circles for years with this particular chap, was time consuming and frustrating, and I can’t be bothered to do it again. There are plenty of places to read about the supposed merits of active investing on the web (i.e. in any mainstream financial site/paper) if you want more in that direction.
We have also discussed these issues in proper broad terms for those who want to think about active investing versus passive some more.
E.g.
http://monevator.com/is-active-investing-a-zero-sum-game/
http://monevator.com/cost-of-active-fund-management/
http://monevator.com/passive-index-investing-feels-wrong/
http://monevator.com/what-if-you-want-to-invest-in-active-funds/
http://monevator.com/passive-vs-active-investing-episode-1/
I’m not a passive zealot — on the contrary regular readers may recall that I (as opposed to my co-blogger, who writes these model portfolio pieces) am an active stockpicker! (See the last of the links above).
However I do so with my eyes full open to all the evidence and aware of the big risks.
In contrast, many active investors / active fund promoters are of the ‘little knowledge is a dangerous thing’ ilk, and I didn’t create this website to platform their misconceptions.
Sorry for this aside, let’s keep further discussion here on the article / model portfolio please. 🙂
Thought Paul C in spite of being sometimes unloved here, raised an interesting point. Why not hand over to a respected manager? Why do we feel happier and persist with our DIY approach?
Ben Carlson’s recent book as recommended by Monevator makes two key points :-
+ It’s not other people’s money that we’re managing. No one’s ever going to care more about your money than you.
+ One of the biggest advantages individuals have over the pros is the ability to be patient. You don’t have to answer to a committee or a group of clients. No one is judging you against your peers or a custom-made benchmark.
JFK said after the Bay of Pigs fiasco, something like “why did I listen to the experts”. In life, whatever decisions we make IMHO should be based on researching and understanding problems,; not blindly handing over the problem to the ‘experts’, good though they might be in this instance.
The Slow & Steady may not shoot the lights out, but my goodness it is overflowing with thoughtful common-sense.
Wish it had been around 30 or more years ago!
Had expected a poorer performance from the S&S over the last quarter than in fact it turned in.
All the best for the new year.
@magneto — Oh I really don’t want to derail this thread, but you haven’t even mentioned the main reason as to why go passive — which is because passive funds will beat virtually all ‘respected fund managers’ and their active funds, after fees, as thrashed out dozens of times here, and as confirmed by academic research around the world for decades.
To give just one example:
http://www.telegraph.co.uk/finance/personalfinance/investing/funds/10904050/Just-one-fund-manager-in-100-beats-the-market.html
This is why I can’t be bothered with this debate — as the blog owner who has taken on a responsibility to make sure readers don’t get misled, it requires endlessly going around in circles repeating myself, whenever someone who can use a fund screener pipes up and witlessly says: “Surely you should have invested [three years ago, when we didn’t know the future] in Active Fund X that did 2% better instead?”
[My brackets]
More interesting questions are perhaps “Should you choose an all-in-one fund like LifeStrategy instead of bothering to do it manually?” or “Is it okay to stock pick for fun?” or “Is it worth active investing to have a shot at the very low odds of beating the market, at the high probability of doing worse.”
But please, please let’s not fail to mention that they overwhelmingly do to beat the market (/a passive alternative) whenever we discuss any pros versus the obvious cons.
We’ve been here before and before and it’s why I’d rather just delete. It’s groundhog day.
“Had expected a poorer performance from the S&S over the last quarter than in fact it turned in.”
Part of the outperformance could be due to overseas assets benefiting from the slump in £ sterling in particular against the US$.
As the article also points out :-
“Our portfolio has been buoyed by a large slug of US equities, which put on 13% per year over the five-year period. There’s one in the eye for the many over the years who advised trimming the US because it’s overvalued.”
Yes; we would do well to consider growth when reviewing regional/country valuations. I.E. back to Jim Slater’s PEG ratio.
Valuations without taking into consideration growth is an incomplete formula. We would all be 100% Russia!
Looking ahead where is the growth going to be? Would be foolhardy to say not US!
So as always best we can do is pick a long term allocation (global balance or other) and stick with it, rebalancing as we go.
@ Jeremy – I think class H is a Hargreaves exclusive.
@ Tony – here’s a piece on switching: http://monevator.com/how-to-transfer-a-stocks-and-shares-isa/
@ Vanguardfan – As it’s you, I thought some research from Vanguard on home bias would be apt:
https://advisors.vanguard.com/VGApp/iip/site/advisor/researchcommentary/article/IWE_InvResHomeBiasGlobal
Essentially, if your home market outperforms the global portfolio then you’re quids in, but that’s a crapshoot. How you gonna know?
However, if I was a few years from retirement then I’d consider being more heavily into UK stocks to cut out currency risk.
I’d also suggest that forgoing global diversification for the sake of 0.1% is a bit tail-wagging-dog.
@ Magneto – thank you for your thoughtful comments.
Thanks TA, but ‘the article you linked to cannot be found’. I’m about 50/50 UK/international, which just reflects my usual approach when I can’t decide 😉 I do seem to remember reading a vanguard article on this subject which essentially said ‘we overweight the UK because the customers expect it’ which seems a bit lame…
(Warning: stupid question coming up)
How come your S&S portfolio’s blended average return for the quarter, +6.8%, is higher than all the individual quarterly returns of each constituent asset class (the highest being UK Equities, +6.28%)? Is this a currency effect – i.e. each asset class’ returns are shown in local currency, but when the GBP falls then they overdeliver to a GBP portfolio? Or something else that I am missing?
(End of stupid question)
P.S. Sorry I didn’t meant the quarterly return, but the average annualised return – but the point still stands
Would be nice to see a “growth of 10,000” chart, annually if not quarterly. Figures to calculate should be at hand with your ROI calculator. Brings it to life.
FvL good spot! Maybe because of when the money was invested? e.g. My return last year was about 3% after fees but my asset allocation says 1% before fees, purely to do with when I pumped money in this year. Surprised if there is such a disparity over 5 years however.
A View.
One of the consequences of the passive approach to investing is that you get what you get. Generally it reflects the market, in the S&S case, as that is how it is built. Can’t get more (or less). But importantly you don’t have to respond to the recent trends (which may continue or not?) or forecasts (which one?) of the future which may not turn out as predicted.
A downside is patience, and being tempted to adjust things.
@ FvL – as T says its prob due to the fact your pushing new money in quarterly, so its not going to tie up with the overall annual figure. It is a bit of a beast working out the annual % growth for stuff. I’ve made several attempts at it in the old spreadsheet over the years and have never been quite convinced by its validity. There was a good MV article about how to do it using normalised units or some similar term.
TA/TM re we saying then that if it was not for the performance from the US that your portfolio would be lagging behind the average FTSE return?
@Vanguardfan
” I’m about 50/50 UK/international, which just reflects my usual approach when I can’t decide”
Yes this domestic weighting is for us also an ongoing continuing question, and wish I could nail it!.
We currently have stocks 23% UK, 37% global, balance in specific other regions. Tim Hale in Smarter Investing without being firm on a recommendation looks at a compromise 35% stocks UK.
The S&S seems to be about 15% stocks UK.
Much as I would like a firm position on domestic weighting, there doesn’t seem to be a single definitive answer to this issue.
Have seen recommendations varying from global weighting of 8% UK domestic to 66% UK.
As TI points out it may be prudent to increase UK later in life if currency variations are to be minimised.
But don’t forget that our bonds, domestic real estate and any cash held will be in sterling as a good domestic currency counterweight. Then the 50/50 stocks might seem to be overloading sterling?
Remain clueless on this issue!
Good Luck
I have found the UK domestic equity allocation an issue.
The article below by Vanguard is helpful and discusses an approach to help decide. Generally it says there is a tendancy to over allocate to ones domestic equities.
Search
“The role of home bias in global asset allocation decisions” and Vanguard
Hope helps
Tony has raised some excellent points, would love to hear your thoughts on them
Vanguard’s Global Bond Index in the LifeStrategies is currency hedged I think and eventually they may do the same with the equity portion, negating local currency issues somewhat. Should make the LS even less volatile and easier than ever for beginners.
@The Investor
Jokes aside, I wanted to say that I’ve read so much of what you and TA have written both in the articles and in the comments so you got a fan here and I can’t resist the feeling that I know you quite well. 🙂 And that makes me feel a bit silly and certainly not objective whenever I write in other purpose than to learn something or contribute.
@Paul C:
It is important for the authors of a blog not to have it sabotaged and while I may be wrong you seem a bit desperate for readership of your own blog. There must be another way of getting it, you will figure it out.
@The Rhino
We had a discussion here and whereas some people still disagree, I am convinced by now that it is IRR (or Excel’s XIRR) that does the job. And to be fair it was also Paul C, who insisted on it’s validity despite of being annoying in some of his comments.
@all — Here’s the article on How To Unitise Your Portfolio:
http://monevator.com/how-to-unitize-your-portfolio/
I’d also read the 80+ comments as there’s some great insight into the pros and cons of different methods in there.
In short: Return calculations are a can of worms. 😉
@The Investor
My thought process did not end there, I was quite confused at the time having heard about IRR only a few days before. I read several articles, discussed it heavily and had headaches before I got convinced. Drawing correct conclusions when comparing two investment projects is tricky and this is when you can’t rely solely on IRR, because you have to worry about reinvestment rates, value of these projects, cost of borrowed money, time frames and so on. But if you look at one investment only, IRR gives correct answer (or sometimes a few confusing but still correct! answers) of what the internal return of that investment was. And this is it for the purpose of a portfolio.
@ Vanguardfan – sorry, new link: https://pressroom.vanguard.com/content/nonindexed/6.26.2012_The_Role_of_Home_Bias.pdf
This is the same one Oldie pointed too. The evidence I’ve read says much the same thing. Unless you’ve got special reason (i.e. vulnerable to currency risk, you’re American) then there’s no rational reason to overweight and plenty of good reasons not too. It seems to be a behavioural kink.
@ Tony / Nick – the Charles Stanley exit fee is £7o @ £10 per holding. That’s the only direct cost of switching. Plus a certain amount of faff. Of greater concern is that it would only take a price hike from the new broker to render the move pointless. So I think I’d want the portfolio to be substantially over the line before making a switch. e.g. I wouldn’t do it for the sake of £20 a year. Need to do some sums on that one…
(I should point out for the sake of clarity that the portfolio is notional. I don’t physically make these transactions but the run the numbers as if I did. That said, there’s a reasonable overlap with my personal portfolio.)
@ Fire – those asset class numbers don’t take into account the different configuration of the portfolio a year ago. So 12-months ago, Dev World ex-UK was split into US, Europe, Japan and the Pacific. The return you’re seeing there is for the Dev World ex-UK fund’s one year return. Similarly, the index-linked bonds, property and small cap fund have only been in the portfolio for a year while the annualised number shows the result of everything that’s been held over the last 5.
I’d also like to say a big thanks to Pawel who was of immense help earlier in the year when he did spot a flaw in the figures. We redid the whole spreadsheet using IRR for the annualised numbers. Am happy to share it with you.
@ Nick – yes, I’d expect the portfolio to lag the FTSE over time because of the bond holdings. And certainly bonds have trailed the FTSE over the lifetime of the Slow & Steady. Emerging markets have dragged us down further still. Japan and Europe are pretty much on a par while the US has been the star performer.
@The Accumulator
Thank you :). I am a bit shy writing this, because it’s not quite on the article… However, having an opportunity to contribute to Monevator is one of the biggest blessings. Haven’t expected to be able to. Thank goodness! I always try and learn as much as I can from the articles and comments, and now I am very proud. This blog is one of the best things in the world. Absolutely invaluable.
the FTSE global all-cap index (up 8% p.a. over 5 years) might be a better equities benchmark than the FTSE all-share (up 6%). you would expect to trail a pure equities benchmark, since the portfolio also includes bonds. (and you are doing so already, if you go by the global all-cap :).)
@grey gym sock — Benchmarks are always a thorny issue, and I think that’s true with a fund of passive funds like we effectively have here.
What’s the benchmark for? It’s not trying to show that The Accumulator has any alpha generating capability or what not. Really it’s saying “here’s what you could have won…” and trying to judge whether it’s worth all the effort (with respect to returns and ideally volatility and drawdowns and so on).
As such I think the FTSE All-Share has relevance, since it might be a default choice for a UK investor.
At the logical extreme, the perfect benchmark here is just the indices that these ETFs/trackers all seek to replicate, blended in equal allocations. Unlike with an active fund (where benchmark discussion invariably gets even murkier) we could produce a ‘perfect’ benchmark here, after all. But it wouldn’t really tell us much, apart from tracking error. 🙂
It’s an interesting subject though.
TA I understand the portfolio is notional do you think it would be a good model in which to invest
@ Old Grey – yes, that’s a good point. I chose the FTSE originally as TI says – UK default. But think I will start looking at it versus global index. Would be interesting to plot it against a LifeStrategy fund too.
@ Tony – yes, I think the range of funds gives excellent exposure to a simple, low cost and diversified portfolio. The asset allocation depends on circumstance of course.
The benchmark for this portfolio would be (as TI pointed out) the exact same allocation of assets, then we would see how much or how little is lost by tracking and trading costs. Faring better than the FTSE All-Share is just an inspiring example. Even surprising after all these warnings about the US being overvalued and FTSE on sale for some time now.
What I would find interesting is a comparison to LS, but it seems not easy to make.
I don’t think it’s even possible. We could of course mimic the contributions to probably two LifeStrategy funds starting in June 2011 as this was when LS was launched, to reflect the bond share in the S&S portfolio, but home bias would still be different and the comparison would be just as meaningful as the one with the FTSE. It could be interesting anyway but not very useful for deciding which one is better especially after only 5-year long period and tweaks made to both S&S and LS portfolios over the time.
I tend to think that lower costs of S&S portfolio compared to LS would gain an advantage returns wise over a long term but somehow I consider the possibility that Vanguards “strategy” of rebalancing and tweaking may prove advantageous to a DIY prone to temptations and error approach. I don’t know :).
@TA would it be possible to see that IRR calculation you are using? I would be interested to compare and contrast to my spreadsheet method..
On a tangent, I (think) I have found a good wheeze for holding cash at a reasonable interest rate. It does rely on having one or more children though. Nationwide have a limited access (1 withdrawl/year) savings account paying 3% with a 50k limit. Thats pretty much a best buy, even if you have to pay your rate of IT after the first £100 of interest. Say if you have two kids you can sock away 100k without having to jump through any of the hoops associated with current accs.
@ The Investor, The Accumulator
I hope I am not opening another can of worms. It’s just too interesting and I’ve made up my mind on the comparison with LS.
But first – a comparison of the gain of the S&S portfolio as calculated by IRR shouldn’t be made with a unitized gain of any benchmark. This is comparing apples and oranges. To make a valid comparison we either
– unitize the S&S and look only at the price of a unit at the beginning and at the end of the period. Probing only two points of a curve is still timing, though; it is a special case of IRR for a one-off contribution, isn’t it?
http://monevator.com/how-to-unitize-your-portfolio/
We could try to unitize the S&S portfolio. I am not sure if it’s easy in this case, though.
or:
– we simulate the same contributions to a FTSE All-Share tracker (with reinvested dividends) or any benchmark we choose. (in other words we calculate IRR on these contributions placed on another curve)
Isn’t LifeStrategy a great benchmark for the S&S from a practical point of view? This is after all the main alternative for many if a DIY portfolio seems too much a hard work.
IRR of a blend of LifeStrategy 60% and 80% run on the same dates and contributions as the ones made to S&S portfolio would answer the question whether LifeStrategy actually did better or worse with its different asset allocation and slightly higher TER.
To find out, on the launching date of LS we buy it for the total value of S&S and then we match the contributions to S&S keeping the same bond allocation. It looks very straightforward to do, daily prices are easily available on Vanguard’s website. (we need to know them to calculate how many units we bought in total)
I’d be very interested to see a comparison between the performance of the S & S portfolio against the Vanguard LS funds.
Excellent article. Good to see steady progress that matches the title of the portfolio!
I have many of the same funds in my own portfolio, but most of the money has gone in over the last couple of years (for complex reasons to do with employment status and pensions) and my yield is way lower. I guess the lesson as you have always advised is keep drip feeding and be patient.
@Pawel
“Isn’t LifeStrategy a great benchmark for the S&S from a practical point of view? This is after all the main alternative for many if a DIY portfolio seems too much a hard work.”
You may be right, but in investing we might be getting far too emotionally involved fretting over whether we are failing to match specific benchmarks. We do not endlessly seek the perfect portfolio, but aim to accumulate, construct a good enough portfolio and steadily move ahead, to meet our goals.
Sometimes LS might outperform S&S, sometimes not. Data mining seldom helps with sorting out the road ahead.
When we look at LS v S&S there are other major issues surrounding such mattters as rebalancing bonuses, even whether we use constant ratio or variable ratio allocations, and so forth, which can have a significant effect on the final outcome and investor’s return, which are also worth pondering.
So whether LS or other is the best benchmark for the S&S does not trouble this particular investor one whit.
All Best
@ Pawel – Morningstar gives me a time-weighted return for the portfolio as well as money-weighted so could use that to compare against LifeStrategy. Much as I know you’d love to subject LifeStrategy returns to IRR.
I think you make an excellent point about LifeStrategy’s auto-rebalancing being less prone to ‘meddling’ than a DIY portfolio.
@ Magneto – all good points. With my personal portfolio, I check it against the FTSE All-Share cos I can’t help gamifying things to some degree. Then it’s either a quick punch of the air or a ‘sheesh, might as well have just invested it all in a FTSE tracker’ and then I forget about it.
@ Rhino – this is an excellent article that helped me build the spreadsheet: http://whitecoatinvestor.com/how-to-calculate-your-return-the-excel-xirr-function/
Those formulas tally beautifully with the returns MorningStar gives too which amounts to my belt and braces.
These are helpful too:
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/
@TA
Oh yes I would :). I don’t completely trust their calculations. Have seen a few online calculators using wrong formulas even for simple things as monthly investment. Top google hit and wrong.
@magneto
Thanks for your thoughts. I agree with everything you said. However, if it was my portfolio, I would still compare it to LS the way I described or maybe another if only out of pure curiosity. I know both are very good and there will always be a difference between any two different portfolios, but I simply couldn’t stop myself. But that’s me. I will probably do it anyway if not now than five years from now :).
One little tale which may have told before?
An added incentive encouraging us to take a hands on DIY investing approach.
Some years ago my wife and I (couple A) were visiting some friends (couple B), and in error we (couple A) raised the subject of problems we were facing at that time with investments.
It killed the conversation, as might be imagined!
The husband of couple B then airily dismissed our thoughts by saying “Oh! We leave all that sort of things to the ‘experts'”.
We (couple A) felt extremely embarrased and stupid.
Some years later we learnt who the ‘experts’ were.
EQUITABLE LIFE
So the lesson for us was reinforced, to take control of our own destiny.
Good Luck to us All.
I fear experts.
What a convivial thread, I’ve really enjoyed it.
Magneto, if you ever write a blog then “Good luck to us all” should be your catchphrase.
Old_Eyes. Interesting that you have had your investment running longer but that your yield is lower. how much lower may I ask?
I’ve calculated the rate of return of the Slow&Steady and Vanguard LifeStrategy 80% Acc portfolios from 01/07/2011.
I used first days of months as dates for both to do it faster, but it doesn’t matter. I didn’t do any lifestyling of LS to mirror target bond allocation of S&S either – it means that LS 80 may be currently ‘riskier’. This was just a first quick calculation.
S&S – 6.97%
LS – 7.07%
In raw cash there was £56 difference.
@Nick
Apologies if I was not clear. The bulk of my portfolio uses five out of the seven funds listed funds (the other being an emerging fund, but I have nothing in small cap), but most of the money went into those in the last two years. My balance is also slightly different with a greater home bias. So I have experienced the general drift, volatility etc of the last couple of years (and weeks!), but not the long term growth.
Hence my comment that I should be patient and not fiddle with the allocation.
@TA many thanks for the links – spreadsheet night tonight i think, what a life i lead..
@ Rhino – rock ‘n’ roll, my friend 😉
@ Pawel – I had a feeling you wouldn’t be able to resist it.
Is it me, or do people on this thread have a very twisted idea of fun?
Anyway, this is the result we should have expected. The two portfolios are similarly built so should be in the same ball park. Real difference would be created from divergent bond allocations or potentially large factor tilts.
@TA
Yeah, I could tell you knew I would do it. 🙂 But I also thought that almost everyone reading this thread would be interested to see it. It is indeed fun to make these calculations and to see the result of the comparison not only predict it. To sleep better is fun as well ;).
@ FIRE v London
That was a very good question and we should always ask these questions whenever numbers don’t seem right. We have every right not fully understand this table of returns, because it does not contain the whole history of contributions and holdings (for practical reasons). But as suspicious as I am towards anybody’s calculations (including mine) these were tested in many ways. I did my own calculations from scratch just to check them against TA’s and I got exactly the same results. I can’t be much more assured of their correctness as I already am. Even this rate I’ve just got of 6.97% for a half a year shorter period is expected when you look at the return of the portfolio over its first six months of existence (in 2011 Q2 report).
Thanks old_eyes for explanation. What has not been answered is whether or not this would be a viable portfolio to invest in rather than just a simulation
If anyone would ever feel like double checking the correctness of my comparison of S&S and LS 80, there you go. It’s really easy to do from scratch anyway. The hard part for a lazy me would be filtering dates and copy pasting the fund prices, so I wrote a script getting the prices from Google’s website (because export function didn’t work on Vanguard’s…), but it can be done by hand in reasonable time with this small number of contributions, though less fun and less future proof.
Prices of LS 80 are from first sessions of the months. Sometimes it’s weekend on the first day of the month but as I said earlier I was impatient and I used first days of the months of contributions as dates, because it matters for S&S to the same tiny extent as for LS (feel free to challenge my opinion). We should understand what we are really calculating and how much additional effort we are willing to put into getting the result correct to, say, three decimal places instead of two.
(date, amount invested, unit price) as given to Excel’s XIRR function, plus number of units in the fourth column.
7/1/2011 4531.92 103.47 43.79936213
10/1/2011 750 90.46 8.290957329
1/1/2012 750 99.58 7.531632858
4/1/2012 750 105.43 7.113724746
7/1/2012 750 102.92 7.28721337
10/1/2012 750 106.61 7.034987337
1/1/2013 750 110.22 6.804572673
4/1/2013 750 120.98 6.199371797
7/1/2013 750 119.49 6.276675872
10/1/2013 750 121.9 6.152584085
1/1/2014 850 125.77 6.75836845
4/1/2014 850 127.79 6.651537679
7/1/2014 850 130.13 6.531929609
10/1/2014 850 131.33 6.472245488
1/1/2015 870 138.35 6.288398988
4/1/2015 870 146.34 5.945059451
7/1/2015 870 141.49 6.148844441
10/1/2015 870 135.31 6.429679994
1/1/2016 -22036.23968 139.72 157.7171463
@ Nick – I did answer your question in comment 30 but mistakenly called you Tony [slaps head]. Here’s my reply:
“yes, I think the range of funds gives excellent exposure to a simple, low cost and diversified portfolio. The asset allocation depends on circumstance of course.”
Also, Pawel’s plotting versus the Vanguard LifeStrategy shows its viability.
@Nick – obviously the answer is don’t know yet. Ask me in ten years time!
However, this was the portfolio I selected having read Smarter Investing (Tim Hale) and The Permanent Portfolio (Rowland and Lawson). Then I found the Monevator slow and steady portfolio and thought – OK, probably not a ridiculous choice. Since slow and steady is what I want, I will stick with it unless some financial disaster strikes and I need the money now.
Nothing I have read points me to a different portfolio that would suit my needs and fears, unless it is one of the Vanguard Lifestyle funds.
Great blog,
Very interested you use the lifestrategy’s as a baseline…I invest into the 10pc and 80pc lifestrategy funds as well as the same blackrock property tracker you do, as well as a UK FTSE 100 tracker (the FTSE 100 is as close as I’ll get to ‘stock pickingg’ and is based on my belief banks and oil are undervalued) …
…my comment though is about rebalancing…as there is a cost involved with selling funds (£10 per fund per sale??) could you not rebalance by raising the contributions to the funds you want to increase and lowering the ones you want to decrease ?
My portfolio is less than a year old, so I don’t know what I’m talking about, however I was thinking I could just lower the contributions into the higher equity lifestrategy funds and move them into the (as yet not bought) lower equity ones as time goes on which would produce a similar effect?
You’re going to contribute 3300 this year surely that’s enough to rebalance the portfolio without any sales ?
You’re absolutely right. You can rebalance using new contributions. The transactions this quarter use a blend of both techniques.
Bigger portfolios will struggle to rebalance solely using contribs (and it depends on how big the shifts are too) but then you’d take a judgement call on how precise you want to be.
I also chose a broker that doesn’t impose trading charges for funds, so it’s not a problem either way.
Thanks for replying and I apologise, based on what you said I’ve gone back and ‘scoured through’ the charges and I also use a platform that doesn’t impose a trading platform for funds…just an exit fee for transfer, sorry.
Here’s to the next five years ;0)
This maybe on interest to some of your followers. (hope I am not repeating any earlier material)
It show simply several portfolios built up in ways similar to your S&S portfolio. It is US based but principles common. Currency of course not.
But it does conveniently show past performance and therefore potential reference levels.
http://www.marketwatch.com/lazyportfolio
i think Pawel’s approach, of comparing the portfolio’s returns to the returns from investing the same amounts on the same dates into a benchmark, is a good way to look at it. i do something similar for my portfolio.
having had another look at the discussion about IRR in old thread on unitization (i think i gave up before the end originally) …
the paradoxes of IRR (i.e. multiple solutions, or very odd answers) don’t arise for a portfolio (such as the S&SPP) in which you are only adding money and looking at the end value (or, more generally, for a portfolio in which you cease adding money before the date of the first withdrawal).
however, ISTM that, in the general case, there are 2 kinds of solutions for IRR that 1 should label as “silly” and ignore:
1) any solution of less than minus 100% … exactly minus 100% is meaningful, signifying a total loss. anything lower is pretty obviously ridiculous – but such solutions did get a mention in the old thread.
2) any solution which implies that, if returns were at a constant rate, then the net present value of the investment would have fallen to less than 0 at any time … for the example in the old thread with 3 apparent solutions (10%, 20%, 30%), all 3 fail this test: you start by adding 1000 to the portfolio (so after 1 year’s return, you have 1100, 1200 or 1300), then you withdraw 3600 (leaving -2500, -2400 or -2300) – so we can reject all 3 solutions right there. a negative net present value is implying that you can, and would, go short an investment, and that you will then obtain a “perfect” inverse return, with no cost of borrowing or collateral. which is clearly untrue.
adding these 2 restrictions, you can’t get more than 1 solution for an IRR. though you can get no solutions; the latter implies that there cannot have been a single rate of return over the whole period, but there were different returns in different sub-periods.
Old_Eyes many thanks. I have read smarter investing and this slow/steady portfolio would seem to do exactly what is suggested in the book. Next question is lump sum or drip feed, but I think? I know the answer to that
@Nick — Well worth having a dig about with our Search bar in the top right. 🙂 But for your convenience:
http://monevator.com/lump-sum-investing-versus-drip-feeding/
@grey
I think you are right that our portfolios are in a class of projects that don’t often come across problems when calculating the rate of return using IRR. In general it is a bit more complicated but I was happy to see this paper today, because it goes in line with my intuition:
http://users.iems.northwestern.edu/~hazen/EnginEconPrint.pdf
We can make sense of multiple IRR’s or even when they are expressed in complex numbers. However, personally I would rather avoid going to deep into this.
Thanks TI
I read a fascinating piece in today’s online telegraph (prob be in print tomorrow) about research done into so called ‘smart trackers’. The researchers used data over a 50 year period, in the US, to come to the conclusion many forms of ‘smart beta’ were better than traditional tracking…
…what struck me was they plotted the different outcomes over the 50 years using different types of tracker…and a 1pc difference in annualized return made a HUGE difference to the outcome…
Makes me wonder if I should sack off the lifestrategy’s and try and use cheaper trackers built up the way TA does…
…on the other hand fund costs of .24pc and broker costs of .25pc are very close to what a lot of people pay just for the broker…is 0.49pc low enough to get on and enjoy Netflix ;0)
Sooo, there is plenty of evidence that the ‘risk factors’ that smart beta products are built on have outperformed over the last 90 years and beyond (where data is available).
But there were no smart trackers 50 years ago and the ones that are available now invest in a watered down version of the risk factors that the research is usually based on.
In other words, reality usually can’t match the results of the research.
That’s not to say that smart trackers can’t outperform, they can and some do. But, they aren’t as effective as the academic research suggests and they won’t reliably outperform every year. They could underperform basic trackers for decades or lose their potency forever if patterns of risk and investor behaviour change.
In other words, you need to know what you’re getting into. These pieces will help:
http://monevator.com/return-premiums-introduction/
http://monevator.com/why-return-premiums-disappoint/
http://monevator.com/how-to-build-a-risk-factor-portfolio/
This is a piece from a Monevator writer who doesn’t buy into smart beta:
http://monevator.com/why-a-total-world-equity-index-tracker-is-the-only-index-fund-you-need/
Please post a link to the article, would be good to see how rigorous it is.
TA – thanks for putting all those links in the same place…here is the webaddress as requested ( couldn’t work out how to get it to link….)
http://www.telegraph.co.uk/finance/personalfinance/investing/funds/12095408/How-the-scrabble-index-beat-the-stock-market.html
Love the Slow and Steady Passive Portfolio updates.
I would really like to see an article outlining how you perform your rebalancing with particular focus on the process you go through to create the spreadsheet snapshot.
So I’m a 25 year old university student and have £200 to invest, but I don’t know what my first investment should be. I was thinking investing Vanguard Lifestrategy but not sure which one. I’m not adverse to risk as I know any near future losses will more than likely be offset in the long term. Any ideas?
@Sam — The best thing to do is to try to invest a little and often into a broad market portfolio for the rest of one’s life. (A *lot* and often is even better but not always practical! 😉 )
No guarantees, as you say (and this is not personal advice to you) but that’s generally what we advocate around here.
See this article: http://monevator.com/how-to-invest-on-a-budget/
Just wanted to say a big thanks both to these updates and the simple underlying rules that have allowed me to plan and invest in a sensible manner.
The benefits are that in market turmoil, such as now, a sensible strategy means that the fluctuations can be ignored.
Over a 15yr period while investing annually, I have been slowly shifting from 80/20 to a current 55/45 equity/blond split, and in the next two years I will be at 50/50 which is my planned final position. This may not work, or be practical for others, but it has allowed me to sensibly invest at a risk level I am comfortable with.
Thanks again,
Gary
Hey, thanks for the comment Gary. I’m glad it’s going well for you and you’re calmly weathering the current storm.
Very new to this and been reading all the articles.
I guess the questions I would ask is:
£18,000 (ish) cash invested so far and 3,000 (ish) gained…Is the time worth it ?
I’d be interested to know the hours you’ve put it and what that would cost in monetary terms and if it would have been more sensible sending it to a bank and doing other things
with the recent market turmoil I will be interested in the update in the slow and steady portfolio. I have been sitting on the sidelines so far but am very tempted to take the plunge, with another £10k to go into my SIPP pre April
@Shane — Glad to have you reading the site. It’s best to think in terms of percentages, not absolute sums, I think, when contemplating an investment strategy. (Would it sound better if we’d put a notional £180,000 into the model portfolio and then said it had made £30,000? What if it was a notional £1.8m?).
So the real question on your numbers I’d suggest is was it worth the effort for a 16% gain?
Well, I think so. Firstly it’s better than cash over the past few years (albeit with more risk). But more importantly, this is a strategy that aims to run for years — decades. We don’t know what the market will do over 5 years, but we have reason and data to suggest (as discussed in many other articles on the site) that over 25-30 years this sort of diversified portfolio will deliver an overall solid result, that builds our wealth while we have money to save, and is gradually de-risked as we approach the years of spending (i.e. a pension). The current value is just a point in time.
It really has to be seen holistically like this. For example it’s statistically likely that at the end of the 20 years we would have done better to just put all the money into one of the asset classes — almost certainly one of the share trackers. So again will it have been worth all the faffing to build a portfolio? Yes, because it smooths volatility, and because we don’t know at this point which asset class will do best.
All that said, if @TheAccumulator wasn’t writing up these posts for the site but was rather just running this model portfolio on his own account, I doubt it would take more than 4 x 30 minutes a year to keep it on track and rebalanced. Maybe an extra 30 minutes at the end of the year for an overall recap / double check and mince pie. 🙂
That’s slightly deceptive though, as it takes one quite a bit of studying to get to the point where you know what you’re doing. That’s what you’ve made a start with in reading our site etc. Good luck! 🙂
@Nick — The updates are quarterly so a little while to go until the end of Q1. I’d imagine the portfolio will be down, but of course not as much as the stock markets have fallen as the bonds will have risen and countered some of that.
Finding the site really helpful since I started investing in a S&S ISA last year. I like the format of the spreadsheet and trying to do something similar with my portfolio. Do you share it in spreadsheet format? Is the fund gain/ loss column the same as unrealised gains on a fund?
Thanks
@ Milw – the fund gain / loss is the fund’s gain / loss since purchase divided by total inflows. Morningstar’s portfolio manager calculates this for me.
If you email me then I’ll clean up the back end of the spreadsheet to make it shareable. It’ll take me a while to get around to it though. In the mean time, this excellent article helped me build it:
http://whitecoatinvestor.com/how-to-calculate-your-return-the-excel-xirr-function/
These are helpful too:
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/
Or, there are some links to ready-built portfolio tracking software and spreadsheets in the portfolio tracking section of this piece: http://monevator.com/financial-calculators-and-tools/
.