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The Slow and Steady passive portfolio update: Q4 2016

The Slow and Steady passive portfolio update: Q4 2016 post image

The Slow & Steady passive portfolio leapt up by 25% in the last year. So if you’re a passive investor who stuck to your mechanical guns then you’re probably feeling a lot better off now than back in January 2016.

At that point our psyches were screeching like fingernails down a blackboard as the major world equity markets slid into bear market territory1. The bounce back since then has made our portfolio more money in one year than we managed in the previous five.

Here’s a walk through the sunny side:

  • We’re up 46% since starting six years ago.
  • That’s 11.4% annualised, or around a 9% real return – far higher than the historical average of 5% we might expect from a 100% equity portfolio. Happy times.
  • By way of comparison, our portfolio’s real return was about 4% annualised when we took a snapshot this time last year.

Here’s the portfolio latest in TruColor spreadsheet-o-vision:

Slow & Steady portfolio tracker, Q4 2016

Our 2016 barnstormers were our riskiest asset classes:

  • Emerging Markets up 36% (after plunging similarly over the previous two years)
  • Global Small Cap up 34%

Meanwhile our ‘worst’ performers in 2016 were…

  • FTSE All-Share up 16%
  • UK Gilts up 11%

…although as you can see, even our rearguard has been tremendous. Despite the fear and loathing rippling across the political spectrum, every asset class surfed the wave higher.

Our biggest holding – the Developed World excluding the UK – put on 29%.

Sure, that’s a performance buoyed by the pound tumbling against other major currencies, so our gain has been bought at the price of national impoverishment. But at least it means your financial votes count even if you feel your actual one didn’t.

Hedging against massive national gambles is a side-benefit of global portfolio ownership that I didn’t fully appreciate when I began investing.

The Slow and Steady portfolio is Monevator’s model passive investing portfolio. It was set up at the start of 2011 with £3,000 and an extra £900 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.

It’s interesting to reflect on how difficult it was to feel enthusiastic about any asset in 2016, with so much negative press sluicing through our news feeds, yet:

  • The ‘overvalued’ US stock market rose 34%.
  • ‘Moribund’ Europe was up 19%.

I’m running through all this not to sound triumphalist, but to emphasise how disconnected results can be from the flow of media bilge lapping against our brains.

Forget trying to predict what’s going to happen next. Stick instead to a sound asset allocation strategy that will see you through thick and thin.

We kept buying on the cheap through the 2015–16 mini-bear and made out like bandits as the market recovered and soared.

It’s become very noticeable that we’re picking up fewer and fewer units for every purchase as the market tear continues. That’s why future downturns are not to be feared by accumulators. The more shares you can pick up when the market is lower, the better your gains when the recovery comes.

Portfolio maintenance

Okay, it’s time for the portfolio’s annual service. The underlying asset allocation is built on sound principles – except I’ve come to question the role of index-linked gilts (also known as linkers).

Our inflation-resistant bonds haven’t done the portfolio any harm so far. In fact they have made 22% since we bought them. But their role in our portfolio is to ward off unexpected inflation, and that’s where the linker story starts to unravel.

We’ve posted the lengthy version of my thinking previously. But in short, UK linker funds are stuffed with long-term bonds that are highly sensitive to real interest rate rises.

That potentially makes our linker fund a source of volatility rather than stability. Moreover, a number of experts believe that UK linkers’ inflation protection could be overwhelmed by their exposure to real interest rates.

Linkers still have diversification value though – and experts can be wrong. Considering all this, I’m going cut the portfolio’s linker exposure down to a 6% holding, or around 20% of our bond allocation.

I did consider adding global index-linked bonds as an alternative. They would add more diversification and less interest rate risk, in exchange for a lower likely correlation with UK inflation.

But I’ve decided against introducing extra complexity at this stage. We’ll rely on equities and property to keep us ahead of inflation over the long-term and look into more short-term conventional bond funds as our model portfolio’s time horizon ticks down.2

My, how we’ve grown

Another light winking on the portfolio dashboard is that we’ve heading out of percentage-fee broker territory.

Our portfolio is notionally held in an ISA with Charles Stanley who charge an annual 0.25% of assets. That’s around £80 a year on our current value.

A flat-fee broker, in contrast, would levy a fixed cost regardless of our portfolio’s size. They’d also add dealing charges on top.

Right now there’s little in it either way for us. But as our portfolio swells (hopefully!) then the percentage-fee will swell too. By comparison, the flat-fee alternatives will look increasingly cheap and therefore more alluring! We’ll need to consider a switch.

It’s not worth us doing anything too hasty – broker charges can change, as can portfolio values – but I’ll need to address it at some point over the next year.

Or not, if the market crashes.

Buying more bonds

We’re also committed to shifting 2% from equities to government bonds every year. This risk management move gradually curbs our exposure to stock market crashes as our time horizon shortens.

We’re now 68:32 in favour of equities versus bonds, with 14-years left on the clock. The 2% equities cutback comes from our UK fund, as part of our ongoing move away from the home bias we originally built into our allocation.

This change, plus the reduction in our holding of linkers, lifts our conventional government bond allocation by 11% to 26%. We’ll likely be glad of this if the market takes a dive in 2017.

Increasing our quarterly savings

Accursed inflation is next on our list.

If we want to invest a consistent amount every year then we must beware of inflation eroding our cash like water against a rock.

The last RPI inflation report was 2.2%. That means we need to increase our £880 quarterly contribution in 2016 pounds to £900 in 2017.

Rebalancing act

Finally, it’s time to rebalance.

Every year we rebalance the portfolio back to its target asset allocations. Again this is primarily about risk management as we automatically make slight course corrections away from assets that have soared in value recently in favour of those that are now on sale.

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 a tiny smidge into global property, which fell back a little last quarter.

We sell down a portion of our other five funds and throw in our new quarterly cash contribution to fund the rebalance.

Remember, we’re not making a judgement call here. We’re just staying in line with the asset allocation we have set.


Q4 was income jackpot time for our funds. They paid out £387.89 in dividends and interest, which is automatically reinvested thanks to our accumulation funds.

Here’s our income scores:

  • UK equities: £78.52
  • Developed world equities: £209.99
  • Global small cap equities: £7.06
  • Emerging markets equities: £51.76
  • Global property: £24.61
  • UK Government bond index: £15.96

Total dividends: £387.89.

As I say, this isn’t new money we have to invest. It is automatically been rolled up by the accumulation funds.

I just think it’s motivating to see this hidden income being accrued by our funds.

New transactions

Every quarter in 2017 we will slot another £900 into the market’s fruit machine. Our cash is divided between our seven funds according to our (freshly tweaked) asset allocation:

UK equity

Vanguard FTSE UK All-Share Index Trust – OCF 0.08%

Fund identifier: GB00B3X7QG63

Rebalancing sale: £414.23

Sell 2.296 units @ £180.43

Target allocation: 6%

Developed world ex-UK equities

Vanguard FTSE Developed World ex-UK Equity Index Fund – OCF 0.15%

Fund identifier: GB00B59G4Q73

Rebalancing sale: £24.11

Sell 0.082 units @ £292.27

Target allocation: 38%

Global small cap equities

Vanguard Global Small-Cap Index Fund – OCF 0.38%

Fund identifier: IE00B3X1NT05

Rebalancing sale: £83.70

Sell 0.332 units @ £252.02

Target allocation: 7%

Emerging market equities

BlackRock Emerging Markets Equity Tracker Fund D – OCF 0.25%

Fund identifier: GB00B84DY642

Rebalancing sale: £175.80

Sell 130.415 units @ £1.35

Target allocation: 10%

Global property

BlackRock Global Property Securities Equity Tracker Fund D – OCF 0.22%

Fund identifier: GB00B5BFJG71

New purchase: £114.04

Buy 58.781 units @ £1.94

Target allocation: 7%

UK gilts

Vanguard UK Government Bond Index – OCF 0.15%

Fund identifier: IE00B1S75374

New purchase: £4,249.85

Buy 26.588 units @ £159.84

Target allocation: 26%

UK index-linked gilts

Vanguard UK Inflation-Linked Gilt Index Fund – OCF 0.15%

Fund identifier: GB00B45Q9038

Rebalancing sale: £2,766.04

Sell 14.956 units @ £184.95

Target allocation: 6%

Total dividends = £387.89

New investment = £900

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 ISA portfolio is worth substantially more than £25,000.

Average portfolio OCF = 0.17%

If all this seems too much like hard work then you can buy a diversified portfolio using an all-in-one fund such as Vanguard’s LifeStrategy series.

Take it steady,
The Accumulator

  1. Defined here as 20% below their peak of the previous year. []
  2. Assuming a shorter-term linker product doesn’t come on to the market by then. []
{ 74 comments… add one }
  • 1 Fremantle January 3, 2017, 11:24 am

    Great results. A bit more sobering when you look at results denominated in USD. My 80/20 Tim Hale (3rd ed.) based global diversified portfolio saw similar GBP growth to the S&S for the year, but only 6% in USD, which is more in line with expectations.

  • 2 hutman January 3, 2017, 11:32 am


    I’m a new investor and would like my portfolio rated. I have two portfolio’s across TD & HL.


    BlackRock Global Property Secs. Eq. Tracker Class H – Income (GBP) – £1,257.62
    Vanguard LifeStrategy 60% Equity Income (GBP) -£627
    Vanguard LifeStrategy 80% Equity Accumulation (GBP) – £5,221.06
    Vanguard LifeStrategy 80% Equity Income (GBP) – £1,071.30
    Vanguard UK Inflation Linked Gilt Index Income (GBP) -£2,889.07
    Vanguard US Equity Index Accumulation (GBP) – £2,378.85

    Gain/Loss – 2.67%


    VLS100 -£10,700
    VLS80 – 5,452

    Gain/Loss – 4.5%

  • 3 hutman January 3, 2017, 11:34 am

    Could someone help with allocation? As you can see I’ve probably got too many funds – should consolidate into one platform? My risk appetite is high.


  • 4 Fremantle January 3, 2017, 11:50 am


    There are lots of resources on this site, hunt around.

    A few observations

    1. You don’t say whether your investments are tax sheltered in ISAs or SIPPS. This is important, any non-sheltered investments should be moved into ISAs ASAP via a bed & breakfast type arrangement, particularly as your holdings fit neatly into the ISA allocations for 2016/17 and any left over can be moved next financial year.

    2. Consider consolidating your income units into accumulating units within tax sheltered ISA and SIPPS. Outside of ISAs and SIPPS, income units make more sense. More info on income v accumulating units can be found on this website

    3. Unless there is a particular reason for not doing so (e.g. saving for a house deposit, university fund, or other purpose with a different time horizon), consider consolidating your portfolio records into a common spreadsheet and measure total performance using a unitized method. Unitization is discussed on this site, or you can google it.

    4. Target a set allocation based on your risk profile and rebalance with new contributions or some other method. Again, plenty of info on this site and others.

    Hope this helps.

  • 5 TheFIexplorer January 3, 2017, 11:53 am

    I really admire the disciplined approach to rebalancing, keeping a track of management costs and a focus on real returns (i.e. identifying inflation as one of your biggest enemies). As someone on the FI journey, it is so tempting to think only about the compounding returns on the upside, and to ignore inflation.

    A major part of my portfolio is in Vanguard’s Lifestrategy funds – and would definitely recommend.

  • 6 hutman January 3, 2017, 12:10 pm

    Thanks Freemantle – I’ve drawn inspiration from this website among others.

    Sorry forgot to mention but the investments are wrapped in ISA S&S.

    My post was really a cry for experienced investors as it looks a mess. As i understand it the VLS is a one stop shop for passive investing accroding to risk profile of the investor .. yet i have 5 VLS funds across two platforms. Crazy?

    My rationale for doing so originally was trial and error. I looked at the performance of such funds and wanted to see how things pan out even if VLS is quite heavily invested in US equity for example.

    Now that my period of playing around is over, I’d like to tidy up the mess and go for a few funds on one cheap platform as a way to go?

    Also i have £8k on HL SIPP invested in Vanguard retirement 2055 fund.


  • 7 Martyn January 3, 2017, 12:50 pm

    I think there’s a case for going for fixed cost brokers from day 1 – even though the percentage cost is quite high compared to the variable cost brokers at the start, the absolute cost is tiny. However if one goes with the varaible cost broker, there comes a point where it’s so cost prohibitive to stay that one has to move and the costs of moving are quite high, both in hassle and money. I took the view I’d pay a little extra early on and avoid the need to move it later.

    I would also observe that currency value in the UK has historically been indefensibly high at huge cost to the countries competative position, your national impoverishment, is my ‘getting back to fair value’. Is STILL over valued, the balance of payments deficit is as good a metric as any to make the point. Though I do not expect it will fall much further and hence last week sold daollars for pounds and will use the proceeds to fund this years ISA.

    I’d be interested in any defence you can mount that argues the pre-brexit exchange rate was justified on economc fundamentals.

  • 8 The Investor January 3, 2017, 12:52 pm

    I’d be interested in any defence you can mount that argues the pre-brexit exchange rate was justified on economc fundamentals.

    Let’s not continue this on this thread, please.

    Happy new year all!

  • 9 Fremantle January 3, 2017, 12:58 pm


    Passive investing isn’t really about picking hot index funds, it is about cost minimisation, diversification and risk allocation. First I’d look to consolidate your ISAs into a single platform, it will make rebalancing easier.

    First choose a equity to fixed income ratio, given that you say you’re highly risk tolerant, an >80% equity allocation is appropriate, more so if your time horizon is long. Again, unless your portfolios have different time horizons, make sure your asset allocation is considered across all your investments.

    Then look to diversify your equity and fixed income allocations. Your current allocation is very biased to the UK and US. VLS equity allocation is essentially a total world market allocation, although very biased to the UK. It does all the rebalancing for you and you don’t have to think about it at all, but you do have to accept its asset allocation.

    If you want to diversify more globally and across classes, but still have the benefit of VLS rebalancing, you could look at these

    VLS60 – 50%
    ex-UK developed world – ~15-20% (instead of just US)
    Global Small Capital – ~8-10%
    Global Value – ~8-10%
    Emerging Markets – ~8-10%
    Global Property – ~5-10%

    The returns on your income & accumulating units for the same fund will be identical. Dividends are paid in cash to your platform cash account with the income units. The same dividends are reinvested back into the accumulating fund with those products. So you can sort of think of them as dividend re-investment funds.

    Remember, this isn’t advice. Only you can decide.

  • 10 DaveTheHedgehog January 3, 2017, 1:05 pm

    I can only say, I’ve been really happy with my Vanguard Life Strategy fund.

    Just put everything into a VLS accumulation fund, with a fixed fee broker and then sit back and relax. Set up a monthly payment on a cheap regular investment and you are good to go.

    All this manual rebalancing is too much effort for lazy me 😉

  • 11 hutman January 3, 2017, 1:10 pm

    Thanks guys – i assume in the long run it is worth transferring out of HL since they seem to be the most expensive platform.

  • 12 BB January 3, 2017, 1:28 pm

    My portfolio has lots of similarities to the slow and steady (which is probably because reading Monevator has greatly informed my thinking about investing…. thanks!).

    It’s also time for me to rebalance and I should be loading up on bonds but I’m finding it really hard to do it. Market timing/active tendencies no doubt but I’m nervous about interest rates. I’m torn between holding my nose and rebalancing as I “should” do and taking a quarter to think about things.

  • 13 IanH January 3, 2017, 2:25 pm

    I’ve followed the discussions around the potential problems faced by we mini-investors holding inflation-linked gilts and I am planning to reduce my holdings too. I don’t have the flexibility of a platform that allows tinkering with trades like £24.11 though – perhaps unlimited free trades is an advantage of percentage charging platforms, however my flat-fee provider interactive investor charges £10 per trade, so £20 to rebalance one fund into another. I try to use only each quarter’s £20 platform fee, which can be offset against trading fees.

    I’m considering buying a global property fund with my sale from the linker fund as I don’t hold any property, principally because I accepted the argument that many of the large firms held in the index funds I hold already invest in property – I think this is Lars Kroijer’s view. However, as a global property fund is in the S&S portfolio I have been looking for the reasoning behind this to help form my decision. As far as I can see the original S&S didn’t include property, but I’ve baulked at trawling through the post archive to see when and why property was included. Also the Property page / tab is mostly about house purchases and renting – nothing on property funds.

    So, if someone has a moment, could you point me to a relevant discussion if you recall one?

    A potential addition to the S&S updates might be the inclusion of a table listing the key decisions each quarter / year and links to relevant posts. For example this quarter it would be good to record the move to reduce the holding of linkers significantly and point readers to the post behind this decision a couple of months back.

    Best for 2017 everyone – let’s hope the fan is pointing in a direction other than ours …

  • 14 Fremantle January 3, 2017, 2:32 pm
  • 15 Ray January 3, 2017, 2:35 pm

    I have been working steadily towards a portfolio that resembles the Slow and Steady portfolio and the approach proposed in books by Andrew Hallam and The Seven Secrets of money. (Wish I had got this much earlier, no idea how many FS people made more money from my investments than I did! but c’est la vie). I have recently retired and my focus is on retaining the value of the portfolio until I eventually need to start drawing down. I discovered “fundamentals” ETFs in Hallams book, The Global Investor. These seem very sensible investments to me but they are not part of Slow and Steady. What am I missing? I have only about 18 months experience in managing my own investments so help like Monevator is priceless.

  • 16 The Investor January 3, 2017, 3:11 pm

    @Ray — We’ve written a lot about this subject, under the name “factor investing”. (You’ll also hear it called Smart Beta. All essentially the same thing).

    You can use the Search tool top right, but here’s a short-cut:


    Debate rages about these products. In those links you’ll find an article on some of the potential pitfalls. Jack Bogle, father of Vanguard, urges people avoid them. Our contributor Lars Kroiker is skeptical too:


    Others are more keen. You do your research and pays your money and makes your choice. 🙂

  • 17 FIRE v London January 3, 2017, 6:01 pm

    Many thanks @Accumulator. What clear and strong results.

    This result is slightly higher than mine (https://firevlondon.com/2017/01/02/2016s-amazing-performance/), with roughly similar allocations, which leaves me wondering why the ~30% leverage in mine hasn’t helped me more. But I’m not sure I can face doing a full attribution analysis of mine and am plenty happy with >20%.

    One small mathematical quibble: 46% gain over 5-6 years is not >11% annualised. Is your 11% figure unitised and your 46% money-weighted? Or am I missing something?

  • 18 IanH January 3, 2017, 6:44 pm

    @Femantle – thanks for digging that post out – very interesting indeed. It seems the main reason property was not in the original S&S portfolio is that cheap tracker ETFs were not around when it was conceived, and the rationalle for their inclusion was to add new layers of diversification.

    An alternative idea I had is to swap my UK index linked gilts for global index linked gilts, which was an option mentioned in the original ‘linkers-are-doomed’ article. The only ones I’ve found so far are:

    Standard Life Investments Short Duration Global Index Linked Bond GB00BP25RC86
    Royal London Short Duration Global Index Linked Fund GB00BD050F05.

    The former has a reasonable TER of 0.29% but is not available via my platform (interactive inv.) and the latter has a TER of 0.68%, so not cheap. Has anyone decided to invest in these or found better funds? Diversifying with a property funds still seems a more attractive option to me – thoughts anyone?

  • 19 Runnygum January 3, 2017, 7:18 pm

    Nice result, as they say, the only free lunch is asset allocation/diversification.

    Question: Rather than ACC funds, would it not be better to accrue cash and use that for rebalancing?

    Reason being you save on transaction costs from sales and have a more flexible means of rebalancing.

  • 20 The Investor January 3, 2017, 8:01 pm

    @Runnygum — There are no transaction costs in rebalancing this portfolio. Trading funds is free here.

  • 21 SemiPassive January 3, 2017, 8:22 pm

    IanH, yes, the problem seems to be linkers are guaranteed to achieve a real loss due to the bid up prices, and suffer from interest rate risk or currency risk if buying foreign (e.g. TIPS) . Even buying them individually they seem to be priced to lose money.
    So if you hold global equities, a mix of bonds (high yield, investment grade corp and short dated gilts), gold and property then why hold linkers at all? Cash and short dated gilts will be your boring assets and the others should take care of inflation as a portfolio.

    I am yet to add a property ETF or investment trust but seems to be the final piece of the jigsaw, even if only between 5 and 10% allocation.
    I like F&C Commercial Property trust as it kicks out a 4.4% divi but is UK only.
    As for costs, I do wonder whether the real TER is hidden in ETFs when property and REITs are the underlying components.

  • 22 IanH January 3, 2017, 8:51 pm

    @SemiPassive – thanks for your input. F&C Commercial Property trust does look nice indeed. Apart from the odd blip early on their 0.5p dividend per month goes back to the year dot – though I wonder if that means in effect it is decreasing in real terms as the share price wanders upwards over time. Anyway – off topic I guess – thanks for the feedback on the other points.

  • 23 BGV January 3, 2017, 9:10 pm

    I’m quite interested by the asset allocations… not trying to pick holes but more wanting to understand.

    The equity exposure to Emerging markets is 10% – but this is of the total portfolio value. Similarly the UK exposure is 6% of the entire portfolio. In terms of the overall construction, with equities at around 70% (bonds 30%) this weights Emerging markets as nearly 14% of assets which is a significant over-weighting to the region?

    A second question I have is down to tracker (fund) costs. I’ve been taking a look at performance and can’t find any concrete evidence that the very lowest cost trackers perform any better than their low cost peers.

    As an example looking at Japanese trackers, the offering from HSBC is quite significantly more expensive at 0.21% OCF than than that from Blackrock or Fidelity, however performance difference is negligible; so far it has actually performed better on the available data than the Fidelity offering at just 0.12% OCF.

    I guess the move from Active to Passive gives you 80% of the savings and niggling over 0.05% here and there is not likely to significantly enhance performance, given that the Index tracked and tracking error can wipe this out?

  • 24 The Investor January 3, 2017, 11:33 pm

    @IanH — There are a few older articles on commercial property on the site, but from memory they mainly focus on the active side of things from back when they looked cheap to me:


  • 25 WM January 4, 2017, 1:50 am

    @SemiPassive – in theory, and “all else being equal” – which it never is – it doesn’t matter which currency your IL Gilts / TIPS / whatever are issued in.

    Imagine for a second that you were holding TIPS and there was a burst of inflation in the US; this would cause the USD return on your TIPS to increase, but would almost certainly result in a corresponding FX loss.

    Conversely, high inflation in the UK would result in increased nominal returns from the IL Gilts, but would almost certainly mean more expensive imported goods.

  • 26 FIREplanter January 4, 2017, 2:14 am

    @The Accumulator How do you calculate your Asset class Annualised Return?? I am modelling my spreadsheet after your S&S passive portfolio as it is so well laid out but I don’t see how you input the annualised return portfolio.

    I also use the unitization method as per one of your posts for tracking returns. Is this a more accurate reflection of performance?

  • 27 Nicholas Stone January 4, 2017, 2:43 am

    I am also interested in the asset class annualised return calculations.

    I have a spreadsheet which calculates the overall performance of the portfolio, both time and money weighted, and an annualised performance of each fund. (You can see a website version of it next to my name).

    But an asset class calculation is missing! Would be great to be able to add that in.

    My bonds in comparison performed pretty badly; nowhere near the 11% you mentioned. Moribund. I have IGLS and IGIL (10% each) and ISXF (5%).

  • 28 Nicholas Stone January 4, 2017, 2:45 am

    Or not… Sorry I thought entering data under ‘website’ would be publicly accessible!

    Here is the link: https://docs.google.com/spreadsheets/d/1TBjWq9UC0iBWe4S2u0kuLSQITVrxt4rn7EYlIX9JIoU/pubhtml

  • 29 Passive Investor January 4, 2017, 5:03 am

    @BB I agree that bonds look terrifying in many respects. If you don’t re balance though you are likely to regret it when stocks drop 25% in a year as they inevitably will at some time (if only we could know when!). I have shortened the duration of my bond portfolio by choosing appropriate shorter duration bond funds and holding some cash instead of bonds.

    You highlight the huge psychological difficulty in rebalancing. Over coming this hurdle is a big reason I like Vanguard LS range of funds.

  • 30 The Investor January 4, 2017, 10:04 am

    Re: Holding overseas bonds, I would hedge for currency. That’s the balance of the advice and research I’ve read, and it makes sense to me intuitively on the basis of the role of bonds in a portfolio, and return expectations.

    (Unless you’re specifically betting on a recovery in say Argentina, where you for instance might expect a currency to strengthen and its national finances to recover at the same time).

  • 31 Rory January 4, 2017, 11:38 am

    Happy new year TA,

    Great progress on the passive portfolio. I’m doing something similar but also incorporating peer to peer lending. Receiving dividends is such a wonderful feeling I wonder why more people don’t do it!


  • 32 ABC123 January 4, 2017, 3:04 pm

    Why would you do all that separate fund buying and then all that re-balancing when you get basically the same thing in one Vanguard Life Strategy fund? All the asset allocation and re-balancing done for you by Vanguard…apart from two asset classes – Global Small companies and property. But it’s easy enough to buy those two and tag them on.

    If you’re doing it to illustrate the principles then great. As always, you have put it across better than most of us could!

    Vanguard now offer actively managed funds in the UK – it will be worth seeing how they perform in comparison to their trackers at he end of this year. I have an “active” SIPP (with some passive funds & ETFs in it) and a “passive” SIPP (with one active fund in it) – last year the “active” was up 22.36% and the “passive” was up 21.23% For the difference of 1.13% it’s hardly worth having to decide which fund / share / ETF to buy every month.

  • 33 Hariseldon January 4, 2017, 8:24 pm

    Vanguard Life Strategy is very simple portfolio in one holding but there is justification for some investors in splitting it down into separate holdings.
    1) ETF’s can be cheaper to hold on some platforms, allow trading, when required, to take place at a known price.

    2) The breakdown of the individual ETF’s can be cheaper, the small difference of around .1% on the annual management charge can be worth having on a larger portfolio.

    3) Some of us prefer to vary the balance of allocation ie LifeStrategy has a sizeable UK allocation, I prefer a lower % holding of the UK and Japan.

    It’s all splitting hairs though if one has gone down the low cost passive route, the small differences in allocation and costs are of a much smaller magnitude than the difference between a poor high charging, high turnover active fund.

  • 34 Malcolm Beaton January 4, 2017, 11:59 pm

    Hi ABC123
    Can I confirm Hatriseldon,s point,s
    Trying to simplify my Passive Portfolio I noticed that
    a) Vanguards Life Strategy Funds were not “global” enough for me-too UK biased
    b) The Global Equity Index fund which would be a good one off fund to use for my equity portion of the portfolio is relatively expensive compared to its compatriots

  • 35 BGV January 7, 2017, 9:09 am


    My thoughts exactly. I ended up going for the HSBC FTSE All World tracker (0.2%) and combining it with a bond fund (0.15%) in one portfolio.

    It includes Emerging Markets and is not so UK weighted. Using this approach it’s easy to balance the equity/ bond allocation to suit and takes away the headache of regional tracker balancing.

    This approach also shaves a bit off fees compared to the lifestragey funds.

  • 36 ABC123 January 7, 2017, 5:53 pm

    I agree with BGV and Malcom Beaton that the Lifestrategy funds are a little overweight UK – Vanguard said so themselves somewhere, justifying this with their research that this was what UK investors prefer. I, like you, would rather not have the UK bias, so I do also have separate emerging market, Latin American, Japanese and European ITs / ETFs. I never bother re-balancing any of these as I agree with Jack Bogle that you shouldn’t get too obsessed with re-balancing. These holdings are my counterweight to the UK bias of Lifestrategy. The UK bias is a small flaw in the LS funds, but one I am prepared to put up with in view of the convenience and relatively low cost.

    Which global bond fund you use use? I have not yet found a global bond ETF which mixes government, corporate and inflation-linked global bonds.

  • 37 Malcolm Beaton January 7, 2017, 11:49 pm

    Hi ABC123
    Vanguard Global Bond Index Fund GBP Hedged Acc does it for me -a mixture of Govt and Corporate Bonds

  • 38 The Accumulator January 8, 2017, 11:12 pm

    @ ABC123 – An excellent point and I wouldn’t blame anyone for going all in on LifeStrategy. I agree with the counterpoints others have put forward and would only add that 1. Because this article would be a lot shorter otherwise 😉 and 2. Because it’s fun.

    @ fireplanter – This excellent article helped me build the spreadsheet:


    These are helpful too:



    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/

    @ BGV – Emerging markets and developing economies account for over 50% of world GDP according to IMF. Sure their stock markets account for a much smaller slice of the global market but I think upweighting for diversity and likely future contribution to growth makes sense given their economic weight.

    “A second question I have is down to tracker (fund) costs. I’ve been taking a look at performance and can’t find any concrete evidence that the very lowest cost trackers perform any better than their low cost peers.”

    Look up William Sharpe. Also read this: http://news.morningstar.com/articlenet/article.aspx?id=752485

    Over what time period are you looking at your Japanese tracker? Are you looking at tracking difference? Ignore anything less than 5 years. And really, you want 10. Are you getting clean figures that are measuring the same time period? It’s hard to find the evidence you want for free in the UK but the underlying theory is sound.

    You are absolutely right though, there’s no point worrying about the odd 0.05%. If you’ve got a competitive tracker then you’re in good shape.

  • 39 BGV January 9, 2017, 8:52 pm

    @The Accumulator

    Many thanks for the response. I was only looking over short periods of time for the trackers, principally the funds from Fidelity, Blackrock, HSBC etc so I take your point that tracking error over this period will be a key factor as much as the accuracy of the reported results – I guess Managers changes in fund charges over time will also factor.

    Thanks also for the explanation re the Emerging Markets weighting.

  • 40 Joe January 10, 2017, 8:03 pm

    I’ve discovered your website this week and it’s made me reevaluate my entire investment approach. I hadn’t even heard of passive investing before. I’m now liquidating my 10 or so company stocks and piling it into a the L&G International Index Trust (0.13%) and a couple of other trackers. So thanks for your great site.

    Hold gold to create cash for crashes?

    I love piling cash into the market during falls. I’m looking forward to capitalising on overreactions in the UK and European markets this year following Brexit and election volatility (I know this is not pure passive investment but it’s a calculated risk I’m happy to take and at least understand).

    My fear though is having no ammo when the market falls. Is it possible to hold gold stocks or some other investment which naturally rises during a market crash in order to sell it high and then use the funds to buy low into a bear market?

  • 41 The Accumulator January 10, 2017, 9:54 pm

    The asset most likely to do well during a crash is high-quality nominal government bonds e.g. UK gilts. They’re not guaranteed to perform well during a sell-off but they’ve acted as a safe haven historically

  • 42 Joe January 10, 2017, 9:59 pm

    I see, thanks. I need to read up some more on these.

    Am I crazy (or too greedy?) to try and play the game of storing up potential future ammo in gilts and flip it for equities in a market fall, or is this a sensible approach of selling high and buying low?

  • 43 The Accumulator January 10, 2017, 10:08 pm

    It’s a recognised tactic but as with any smart move you can get yourself into deep waters unless you know what you’re doing.

    Here’s the passive take on what you’d like to do: http://monevator.com/threshold-rebalancing/

  • 44 Passive Investor January 10, 2017, 10:28 pm

    @ Joe. I am a private investor (no connection to the website other than as an intermittent commenter in the blog). I have nearly 25 years experience of investing mostly passively but clearly take or leave my advice as you wish. I think your ‘game’ of storing up ammo in gilts then flipping to equities is quite badly misguided as it amounts to market timing. You have to remind yourself as many times as it takes that you simply can’t predict market movements. By staying out of the market you are quite likely to miss out on rises even when the market seems high.
    The correct strategy is to decide on your risk tolerance. One way is to make sure that you can be phlegmatic when the stocks in your portfolio drop 30% (it isn’t easy when it happens if you haven’t been there yet). If you are going to be lying awake during severe bear markets then you are over-invested in stocks. Put the rest in bonds and then apart from rebalancing every year or two do absolutely nothing, ever…..There really isn’t much more to say about it than that except keep your costs down. These days you should be aiming to have costs below 0.25%.

    Apart from this website where there is a wealth of excellent material I recommend
    The Vanguard UK Website – Quite a few very well written guides such as

    Investing Demystified Lars Krojer – who posts here very occasionally

    Smarter Investing – Tim Hale


  • 45 Joe January 10, 2017, 11:19 pm

    Thanks PI, I can see that is very sound advice. I feel like I’ve had my eyes opened to the world and freedom of accepting my inability to know more than the collective wisdom of the market and therefore instead of plumping for newspaper tips, I’m letting the global market do my thinking for me.

    I read Lars’ article here about a global tracker and watched his youtube videos as well as sifting through the great articles here. The slow and steady model portfolio is a brilliant explainer of how it works. I’m now trying to convince my brother to embrace the simplistic beauty of low cost index trackers. I was going to opt for the Vanguard LifeStrategy fund but my broker (AXA Self Investor – no charges for a year thanks to offer from Money Saving Expert) doesn’t have it. Hence the cheap L&G Global fund plus a couple of others.

    My problem is not so much worrying about sitting on losses in a bear market – I love bear markets – it’s there being a big sell off and not being able to get in on the action. As someone has said, the stocks are the only market that when there is a big sale everyone runs out of the store.

    As I’m youngish (34) and can accept quite a high risk tolerance with my investments. I recognise the potential folly of staying out of the market which is why I want to find a way of not holding lots of cash but still able to dive in when the market loses its mind over something (like Brexit). If I have any ‘edge’ over say, active investors and hedge fund managers, it is that I don’t need to save my job by reducing losses in the short term like them. So whereas they get panicked by a crash and sell, I can afford to dive in and play the long game. Hopefully this doesn’t make me sound naive or arrogant, I’m totally on board with passive investing. I just think my life stage means I can afford to tilt things towards higher risk right now.

  • 46 Passive Investor January 10, 2017, 11:30 pm

    @Joe – sounds like you have got the not-following-the-herd psychology right but I don’t follow your plan of not holding cash but being ready to dive in. May be I have misunderstood but surely you are either in the market or not (and therefore in cash)? If you are in cash you do well if the market falls if you are in stocks you do well if it rises. As the market generally rises (we wouldn’t be investing otherwise) then better to be invested than in cash provided your risk tolerance is OK. You might end up sitting out a rise to 8000 and the fall to 6000 or 5000 that you expect due to Brexit may never materialise. As someone like Bogle or Buffet said “the best time to invest is when you have the money” and “it’s not timing the market but time in the matket” that counts.

  • 47 Joe January 10, 2017, 11:38 pm


    Absolutely. That is spot on and although I can see why people are tempted to time their entry, it’s foolish because you may miss out on a 2 year rally waiting for a fall that never comes. So I fully intend to put all my cash into stocks as soon as I have it.

    The problem is that when there is volatility and it falls, I won’t have any left to capitalise on a market where stocks are cheap because everyone has overreacted (because they need immediate wins). The problem is I won’t be able to free up any cash from my equity holdings because they’ll have crashed too.

    So that’s why I wondered if it was possible to buy funds in say gold, or as I’ve now learned gilts, which will do the opposite to the market. That way I don’t have any cash wasting away in my account and when the market goes down, my gilts investment will rise and I can sell it ‘high’, leaving me with cash that I can then invest in equities which will be low.

    Does that make sense?

  • 48 Passive Investor January 11, 2017, 4:55 am

    @ Joe. Yes I understand what you meant I think. I was using ‘cash’ a bit loosely to mean ‘non-equities’. There are important differences between cash and gilts of course as you suggest. I strongly recommend reading up about it and getting a handle on the relationship between interest rates, bond duration and gilt values. The last five + years since QE have been a strange time for bonds. For example there are good reasons for recommending bonds with short duration at present (though opinions differ particularly for someone with a long investment horizon)

  • 49 The Accumulator January 11, 2017, 7:03 am

    Joe, the mechanism you’re looking for is called rebalancing. It gives you a set of guidelines to follow to move from a high performing asset to a low performing asset to manage your risk and take advantage of the potential for mean reversion. It’s not market timing and it’s a perfectly rational way thing to do. Read this piece and you’ll be a happy man: http://monevator.com/threshold-rebalancing/

    What you’re talking about is roughly right but the gung-ho way you initially talked about it clearly set off PI’s alarm bells and mine too.

    Holding government bonds alongside equities is also a perfectly rational thing to because bonds often perform when equities don’t and stop investors panicking in a bear market as they watch their wealth disappear. That’s why the LifeStrategy funds are built the way they are with different bond levels for different risk tolerances. I feel like PI is muddying the waters at this stage with loose definitions of cash and talk of durations but can also see it comes from a desire to see you much better educated before you dive in.
    There are a few posts here on risk tolerance, asset allocation and Lifestrategy but I second PI’s book recommendations. Definitely the best way to tool yourself up for a lifetime of good investing.

  • 50 The Accumulator January 11, 2017, 8:03 am

    @ Fire v London – the 46% is just a simple percentage increase on cash contribs vs current portfolio value – it’s neither time nor money weighted. The 11% annualised is money-weighted using XIRR. Btw, keep up the blog, I enjoy it very much.

  • 51 Joe January 11, 2017, 11:03 am

    Thanks both,

    Yes, my enthusiasm for not following the stampeding herd may have given the impression I was being a bit gung-ho. The rebalancing you refer to is of course exactly the solution. I guess the only issue is as someone with a high risk tolerance right now I would lean to going for a 100% equities portfolio to maximise long term returns and so holding bonds feels like it would reduce my ambition. But maybe that’s the point. I see how bonds actually boost long term returns during volatile markets.

    But in that case I wonder, what’s the most aggressive ratio of bonds to equities in volatile market conditions?

  • 52 The Investor January 11, 2017, 12:30 pm

    @Joe — Welcome to the site, and to investing. Nothing you’re suggesting hasn’t been thrashed out a million times over the markets over the past 100 years, and there are trillions of dollars betting one way or another right this instant, by teams of quants running supercomputers and/or hooked up milliseconds away from price flows. You might wonder in this context what your edge is, and if you haven’t got one invest passively.

    Sometimes tilting actively works, sometimes it doesn’t. I invest actively but “with my eyes wide open” would be an understatement. 🙂 Most people will do better to invest passively and get on with their lives (and their careers) rather than trying to be cute.

    This article might be of interest as you weigh up potential opportunity cost (aka the risk of missing out on further equity rises) versus downside risk:


    All the best, and happy investing.

  • 53 Joe January 11, 2017, 1:04 pm

    @TheInvestor – Thanks for the info. Yes, I’ve long thought how I can’t compete against the massive resources of the hedge funds so the discovery of passive investing and effectively harnessing the power of The Borg-like, hive mind has been a revelation. Seriously, huge thanks for creating such an engaging online resource.

    I certainly have no ‘edge’ in terms of knowledge or skill, the only edge is in what I need compared to them. Many of them need quicker returns whereas I do not. So if I can use my lack of need for short term returns in exchange for longer term ones then it seems sensible to try to do so.

  • 54 The Investor January 11, 2017, 2:02 pm

    @Joe — I’d agree that’s rational. In investing it’s called “time arbitrage”:


    A very closely related concept also shows up in investing via a debated ‘factor‘ called the illiquidity premium.

    Keep in mind money might not be as desperate for short-term returns as you may think, though. For instance most passive equity money stayed invested through the financial crisis; it’s marginal sellers that set prices.

    Glad you’re enjoying the site, and good luck.

  • 55 Joe January 11, 2017, 3:29 pm

    @TheInvestor – Thanks for the links. I have so many Monevator tabs open on my browser! I enjoyed your Thermodynamics post – a useful way of thinking about risk.

  • 56 Joe January 12, 2017, 1:24 pm

    I have a question about buying a fund of gilts or bonds. I wonder why does the Slow and Steady Portfolio have UK gilts/bonds rather than global? If we’re tracking the global equities market as a whole would it not be wiser to hedge the risk of the global market by having global bonds?

    I’m currently using the L&G International Index Trust ex UK (0.13%) plus the Blackrock UK Equity (0.06%) to track the global market as a whole. I’m assuming the automatic market rebalancing within the L&G fund, plus my manual rebalancing of UK vs world means I’m set up to benefit from any changes between regional markets? But in order to benefit from rebalancing between the global market volatility and bonds/gilts should I have access to global bonds/gilts rather than just UK? Thanks.

  • 57 Malcolm Beaton January 12, 2017, 1:36 pm

    Hi Joe
    I could never understand why one would globally diversify ones equities and not ones bonds.
    Seems logical to do both
    I have nearly finished transferring my short term gilt ladder into the Vanguard Global GBP Hedged Index fund
    Taken about 5 years and done as each Gilt matured
    Worked well for me-fund has performed well-better than the Gilts

  • 58 Passive Investor January 12, 2017, 1:58 pm

    @malcolm Beaton @joe. It’s about currency risk. International bonds give more diversification obviously but also a lot of exposure to currency risk. The cost of hedging was probably prohibitive in the past but global bond funds hedged to sterling are available now. Vanguard do one and maybe other companies do too. There is an excellent not too technical paper from Vanguard type “going global with bonds considerations for uk investors vanguard” into Google and it should come up.

  • 59 hyperhypo January 15, 2017, 8:32 pm

    I’m following the S&S with great interest, half my sipp in VLS60 and i would align with S&S but for (for me) the thorny question of how to adjust asset allocation as closer to retirement date. Inspired but not quite baked yet.
    So question is , with S&S 14 years to go , does that mean that at presently 68/32 , with a 2% adjustment each year , S&S ends at 40/60 Equity bonds ?
    ie is that when the notional drawdown starts, or state pension age reached , assume it’s not for an annuity…..or is it simply a time when no further contributions likely, and accordingly set to preserve rather than grow
    Of course i’m trying to relate this to my situation, 8 years from SP age, and 5 from whence a modest DB scheme kicks in. i’ve read the articles , deducted my age from various numbers , and seem to keep going around in circles when it comes to a suitable asset allocation as retirement approaches. Also, and i’m assuming it will be at least 50% in bonds, given the recent comments on limiting index-linked Gilts, whether to start to include Global bonds (in GBP) now ? Will certainly be watching closely on whether TA includes Global bonds in later updates.
    Really appreciate all your efforts…

  • 60 Malcolm Beaton January 16, 2017, 12:52 am

    Hi hyperhypo
    Difficult isn’t it!
    However some thoughts from someone down the line-13 years into retirement.
    A portfolio of 70-30 % equities balanced by 70-30% bonds give a probable 4% return.
    Your income from your portfolio at all times will be roughly this-ie save as much as you can!
    A rough guide is your age should be % of bonds in your portfolio
    Once you have made enough -stick at a minimum of 30% bonds-age 70.
    Worked and is working for me-now 71

  • 61 hyperhypo January 17, 2017, 9:44 pm

    @Malcolm Beaton

    Please could you clarify your comment…I’m afraid I’ve not entirely understood your point. Are you implying that at age 71 your folio is set at 71% bonds / 29% equities …I didn’t understand what you were getting at by ” portfolio of 70-30 % equities balanced by 70-30% bonds give a probable 4% return”…..and I didn’t get what you meant by “stick at a minimum of 30% bonds-age 70”.
    Thank You ! I can certainly see where the 50/50 lazy folio advocate was coming from now …

  • 62 Toby January 17, 2017, 10:28 pm

    Dear Mr Monevator, thank you for turning economics and investment into a language that I can understand. You have helped me immensely. Thanks for making economics interesting and relatively easy to understand.

  • 63 Malcolm Beaton January 18, 2017, 1:09 am

    Hi Hyperhypo
    Sorry for lack of clarity-it’s a big subject for one post
    Yes -aim for you age in bonds .70 year old 70% bonds.
    30 year old -30% bonds
    General rule-younger more equities-older less equities
    Equities are the “risk” part of the portfolio but the area where you make gains
    Yes-a portfolio constructed this way would generate at least 4% return-use 4% figure to estimate your eventual withdrawals at retirement.
    Yes-it is generally considered unnecessary (and probably unsafe)to go below 30% bonds in a portfolio to get best returns
    These are 3 General rules to use only as a guide
    There are more-this website is a good source of material and information

  • 64 The Accumulator January 18, 2017, 7:29 pm

    Hey Toby, thanks for taking the time. We’re glad to help.

  • 65 Jusiph January 24, 2017, 10:29 am

    Dear Monevator,
    Long time listener, first time caller. I have been working on my passive portfolio for 2 years inspired by your blog (although mine has a Euro slant since I invest in Luxembourg). So all the funds you have selected are accumulators? 5 of my 8 funds pay out dividends back into my trading account. I know I should reinvest this money, but how best to do it cost-effectively, since I pay €25 per trade? Similar problem with rebalancing, it would take a few separate trades to rebalance, and maybe it would add up to €75 or even €100 in trading costs.
    Thanks for your insights over the years – love the blog.

  • 66 Ben January 30, 2017, 12:59 pm

    Spent the better part of the weekend reading all of the articles in the Passive Investing section of the website, and wanted to thank you for the helpful information presented in a way I can almost understand 🙂

    I’ve been meaning to move my cash ISA pot into a stocks & shares ISA for a few years but just haven’t had the confidence to make the jump; worried that I would may poor choices and lose it all. One nagging question at the back of my mind is this: is NOW the wrong time to invest? I’m trying to feel buoyed by the idea that “time in the market” is better than “timing the market”, but after seeing the spectacular gains made last year, is this a relatively expensive time to start investing?

  • 67 The Investor January 30, 2017, 2:12 pm

    @Ben — Only you can decide that for yourself. We generally think that most investors will do better to stick to a long-term plan and not make such calls, which on balance will hurt more than they help. These articles (and the comments that follow them) may be of interest:




    Good luck with your investing. 🙂

  • 68 Percy Sugden March 9, 2017, 8:01 pm

    Hello – regarding the Vanguard Life Strategy series. I read on a forum the following critique made of the Funds. I am am wondering what the thoughts are of of resident expert/s:

    “- The VLS fund for example is in a pigeon hole where its apparent “competitors” may have a fixed or variable equity component going up to 85% at very top end. VLS80 is permanently no less than 80%. It has pretty much the highest equity component in its “mini-league”. In an equity bull run it will do awesome. In an equity crash it will be terrible and other end of the league

    -VLS fund has 75% of its equities overseas and its UK equities are majority FTSE100 with high dollar revenues. That is a higher overseas equity and foreign currency component than most UK investors accept, so it is higher risk from that perspective and in sterling weakness it will do awesome but in sterling strengthening it would be poor and other end of the league

    – VLS non equity component is 100% bonds while other things in the mini league will use a mixture of bonds, real estate maybe a bit of gold or other commodities or multi-strategy solutions like currency plays or whatever. Some rivals are pure equity/bond, but many aren’t. As we mentioned, bonds have been on a 30 year bull run until last year. So when you pull up a chart for five years, the VLS non-equity component did nicely thanks to the bull run, and maybe better than the other competitors in the mini league whose non equities bit on average had a broader mix of some bonds, some “other non-equities”. As such, VLS did well but if bonds fall next to other non-equities it will push them towards other ends of the table.

    Basically, VLS as a product range was well positioned for the specific set of circumstances we experienced since VLS launch in July 2011. It tops the table in the widely-drawn mixed asset categories and people recommend it.

    There is a risk that some investors think that because it topped the table in the good years it will be better at surviving the bad years because the reason it topped the table was due to vanguard being competent, reliable and cheap. Ok cheap is a part of it. But instead the performance was really due to how the static asset mix was positioned. It pushed them right to one end of the table. Opposite economic circumstances could push them right to the other.”

  • 69 The Investor March 10, 2017, 2:19 pm

    @Percy — I don’t think that’s a criticism of the LifeStrategy funds so much as (potentially) a criticism of the people using them. Around here we think most people are best off getting a mix of *global* equities and bonds, as cheaply as possibly, with allocations adjusted to suit your risk tolerance. The LifeStrategy funds give you that cheaply and easily. But of course if global stock markets crash they’ll fall too.

    The currency/sterling issue potentially more relevant than usual due to political factors. I discussed this recently here:


  • 70 Percy Sugden March 10, 2017, 3:26 pm

    Hi Investor – thank you very much indeed for your reply. I appreciate your time. So other than the currency/sterling issue, you see no reason to think that VLS will perform worse than it’s rivals in a downturn?

  • 71 The Investor March 10, 2017, 3:54 pm

    @Percy — Hi again. It’s a tracker fund, it will do what its mix of assets/markets do, minus its low costs. Its mix of assets are transparent, so you can have a look and take a view (or do what most passive investors eventually do, which is try *not* to have a view).

    Hard to gauge your level of reading up on all this, but a good place to start is here:


    Then have a read here:


    Remember this is not personal advice, which we can’t give anyone. Just some ideas for further reading/research. 🙂

    Best of luck!

  • 72 Percy Sugden March 10, 2017, 4:40 pm

    Thank you very much indeed, Investor. For all of your work, not just this advice. Your site is a fantastic resource.

  • 73 The Accumulator March 10, 2017, 10:30 pm

    Hi Percy, the critique is effectively like criticising a dog for not being a cat or a kettle for not being a toaster. It isn’t all things to all men but it is a straightforward, globally diversified fund that can be expected to deliver reasonable returns over the long term at low cost.

    For my money, it is a positive that its equity and bond components are fixed. That means I have a reasonable idea of how suitable it is for me without paying over the odds for some fund manager to keep fiddling with the asset allocation on the pretence that they can forecast the future. If you’re worried about an equity crash then VLS 60 or 40 could be a better solution.

    This line: ‘higher overseas equity and foreign currency component than most UK investors accept’ implies there’s a problem with a globally diversified portfolio. Most UK investors are over-allocated to the UK because of a common behavioural quirk called home bias. It’s a version of the familiarity bias – we’re drawn to things we know well. That’s a weakness not a strength. A home bias makes sense for retirees or near retirees but not for most other investors.

    Equities and bonds are the best combination of assets available. The others mentioned are either unnecessary or of uncertain or marginal worth. Equities generally provide growth, bonds generally provide a measure of safety in a crash. They are complementary assets. Beware: no asset works in every situation, or as advertised, all the time.

    Finally, VLS is a good fund because it is simple, cheap and offers a diversified asset allocation without getting bogged down in the exotic or esoteric. It has performed well over the last few years but that’s not why I think it’s good. I don’t know if the author of the critique meant to imply that the fund was somehow only fit for a narrow range of circumstances, or somehow designed to capitalise on the trends of the last 6 years, but that’s not the case.

    When global equities underperform then the fund will underperform. Historically, equities have been the most reliable driver of returns over most periods.

    VLS 60 is 60% equities, which is probably a better balance for most people, especially if they don’t know what their risk tolerance is.

    Hopefully you’ll get a chance to browse through the links The Investor recommends. Useful books that will also help:

    Smarter Investing by Tim Hale


    Investing Demystified by Lars Kroijer

  • 74 Percy Sugden March 11, 2017, 10:38 am

    Hi Accumulator – thank you very much indeed for that explanation. I very much appreciate you taking the time to do that. I’m fairly new to investing, having started in November of last year (and reading this site for much/most of my learning, so thank you very much for all of your hard work on this brilliant site).

    Yes, that was my impression of the VLS products. I think if someone told you that they had purchased the components of VLS separately (as happens pretty much on your ‘Slow and Steady’ case study) then you’d say that it was a very sensible choice. So I see no reason to think that simply buying VLS isn’t also a very sensible choice.

    I guess we won’t know how VLS, and therefore it’s choice of equities and bonds, performs in a crash until the crash actually happens. And as you say, a crash will lower all ships, not just VLS.

    Thank you very much for all the links, which I will be reading over the weekend (and have indeed read a few).

    Many thanks!

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