Remarkably, our Slow & Steady passive portfolio [1] 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 [2] but those measures only explain about 40% of the variation [3] 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 [4] from a 70:30 portfolio based on the UK’s historical growth rates [5] for equities and gilts1 [6].
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 [7] portfolio can be expected to deliver reasonable returns over time using little more than a consistent, diversified [8], 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:
[9]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 [7] 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 [10] and catch up on all the previous passive portfolio posts here [11].
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 [12] 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 [13] 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 [14] 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 [15].
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 [16] 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 [17] 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 [18]. 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 [19] 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 [20].
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. [↩ [25]]