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The Slow and Steady passive portfolio update: Q4 2015

The portfolio made 1.03% in 2015.

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:

193. S&S Q4 2015_portfolio

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

  1. 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. []

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{ 74 comments… add one }
  • 51 The Accumulator January 9, 2016, 12:51 pm

    @ 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.

  • 52 old_eyes January 9, 2016, 3:25 pm

    @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.

  • 53 Planting Acorns January 10, 2016, 12:49 pm

    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 ?

  • 54 The Accumulator January 10, 2016, 1:57 pm

    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.

  • 55 Planting Acorns January 10, 2016, 3:47 pm

    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)

  • 56 oldie January 10, 2016, 6:48 pm

    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

  • 57 grey gym sock January 10, 2016, 10:17 pm

    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.

  • 58 Nick January 11, 2016, 10:06 pm

    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

  • 59 The Investor January 11, 2016, 10:38 pm

    @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/

  • 60 Pawel January 12, 2016, 1:17 am

    @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.

  • 61 Nick January 12, 2016, 5:56 pm

    Thanks TI

  • 62 Planting Acorns January 14, 2016, 10:47 am

    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)

  • 63 The Accumulator January 15, 2016, 6:57 pm

    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.

  • 64 Planting Acorns January 16, 2016, 9:43 am

    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

  • 65 Curious Investor January 19, 2016, 8:36 am

    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.

  • 66 Sam February 4, 2016, 4:10 pm

    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?

  • 67 The Investor February 4, 2016, 4:55 pm

    @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/

  • 68 Gary February 11, 2016, 12:55 pm

    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

  • 69 The Accumulator February 13, 2016, 2:39 pm

    Hey, thanks for the comment Gary. I’m glad it’s going well for you and you’re calmly weathering the current storm.

  • 70 Shane February 24, 2016, 8:18 pm

    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

  • 71 Nick February 24, 2016, 10:16 pm

    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

  • 72 The Investor February 25, 2016, 8:58 am

    @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.

  • 73 Milw March 10, 2016, 12:12 pm

    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

  • 74 The Accumulator March 12, 2016, 11:29 pm

    @ 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/
    .

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