The trouble started just after the last update of our Slow & Steady passive portfolio. We took a hit in October, staggered on through November, then went down like a sack in December.
News reports made the market turmoil sound like the Charge of the Light Brigade.
The result of this butchery? Our passive portfolio turned in its worst ever annual performance. We were down 3% on the year.
Quick, send in the trauma counsellors!
Do not adjust your sets
As a rule of thumb, we should expect our equities to be down one in every three New Year Eves. Sure, 2017 was all champagne corks and 2018 was nose pegs – but this is situation normal.
The fact is we’ve had an easy ride since the Global Financial Crisis. This is only the second negative year recorded by the Slow & Steady portfolio since its debut eight years ago. We’re still growing at 7.95% annualised and we’ve yet to take anything worse than a noogie from the market.
You can inspect this latest Chinese burn for yourself in Retina-Blitz-Super-Gore-o-vision:
The Slow and Steady portfolio is Monevator’s model passive investing portfolio. It was set up at the start of 2011 with £3,000. An extra £955 is invested every quarter into a diversified set of index funds, tilted towards equities. You can read the origin story and catch up on all the previous passive portfolio posts.
It’s always salutary to see how diversification dilutes the pain. This time our global property and UK government bond funds closed the year in positive territory – just. That salved our portfolio from the deeper cuts borne by emerging markets, UK equities, and global small caps. They’re showing annual losses of around minus 10% at the time of writing.
Diversification doesn’t always work immediately – sometimes it doesn’t work at all – but our bonds take the edge off more often than not. If you’ve been chewing your fingernails over the last three months, upping your bonds is the answer. Read up on risk tolerance.
As it is, the Monevator reader ranks seem to be holding the line and dreaming of cheap equities.
Elsewhere, the doom-mongers hold court. We’re at the mercy of Brexit, Trump’s next tweet, the Fed turning the interest rate screw. Take your pick.
A couple of those woes illustrate why you can’t profit from prophets. Does anyone know how Brexit will end? No. Does anyone know what Trump will do next? No. Even he doesn’t know.
Portfolio maintenance
Moving on, it’s annual portfolio service time. Our plan commits us to reducing equity exposure as our investing clock runs down. Every year we move 2% from the risky equities side to the defensive bond side of our portfolio.
This is conventional and sensible risk management. As we age, we have less time to recover from a market-quake. More wealth in bonds means more wealth in recession-resistant assets.
Our asset allocation is now 64:36 equities vs bonds, very close to the classic 60:40 mix. The portfolio started on 80:20 back in 2011, when we had little to lose and two decades stretching ahead. With 12 years to go it’s still a pro-growth portfolio, but with plenty of padding should markets crash.
So this time around we just shave 1% from a couple of our spicier asset classes and buy more bonds, right?
If only!
Prepare yourself for a rejig more complicated than the pasodoble:
- Global small cap: -1%
- Global property: -1%
- UK equities: -1%
- UK inflation-linked bonds: -1%
- Developed world equities: +1%
- UK conventional government bonds: +3%
Why so fiddly? Allow me…
Firstly, our equity diversifiers (global small cap and property) are set at 10% of our total equities allocation. Meanwhile our equities allocation downsized from 66% to 64% of our portfolio pie. The effect on global small cap was: 10% x 64% = 6.4% total allocation.
Decimal points have no place in asset allocation but now we’re rounding down not up. Hence global small cap and global property got 1% sliced off.
Ideally we’d end it there, but we also try to keep our main equity holdings in line with global market allocations. Star Capital helps us do that with their regular updates on the weights of world stock markets.
The UK’s share of global markets was about 5% (from around 8% in 2o11, incidentally, economic decline fans). That translates to a 3% share of our equity allocation.
However there’s little point to sub-5% holdings in relatively small portfolios – it just doesn’t make enough difference. Instead we’ll reduce the UK to 5% of our overall portfolio and that will be our bottom line. This makes us overweight UK (crack open the Union Jack underpants) but we’ll let that pass – the UK market seems quite cheap and it’s our home currency, for better or worse.
We should have knocked back emerging markets, too. They’ve had a rough year and their wedge is smaller now. But emerging economies themselves are under-represented by the capital markets and valuations are favourable, so we’ll hold our overall allocation at 10%.
Finally, I’m now broadcasting from the outer reaches of interest but if anyone wants to know why I’ve trimmed our UK inflation-linked government bonds then it’s because the available linker funds have structural issues.
The short version is there’s mucho interest rate risk embedded in these products. We only carry them as a diversifier and I’d prefer to do that at the minimum practical level of 5%.
What no robot?
You can see how even a committed passive investor like myself needs to make all kinds of judgement calls. It’s hardly day-trading, but it isn’t pure mathematics, either.
In my view, rules only fit reality if you bend them a bit.
There’s no guarantee that any of my tilts will play out better than buying an all-in-one, Vanguard LifeStrategy fund – but this kind of portfolio maintenance only takes a few hours a year. And I like being invested in my investments.
Increasing our quarterly savings
Now we need to face one more fact of life – inflation. Each year we adjust our regular contributions by the Office for National Statistics’ RPI inflation report. This tells us we have to find another 3.2% this year to ensure our plan keeps pace with the cost of living.
In 2011 we were investing £750 every quarter. That had ballooned to £935 by 2018. That’s £955 in 2019 money.
So £955 it is this quarter, which merges with our annual rebalancing move to generate the following hot buy and sell action:
UK equity
Vanguard FTSE UK All-Share Index Trust – OCF 0.08%
Fund identifier: GB00B3X7QG63
Rebalancing sale: £204.82
Sell 1.107 units @ £185.08
Target allocation: 5%
Developed world ex-UK equities
Vanguard FTSE Developed World ex-UK Equity Index Fund – OCF 0.15%
Fund identifier: GB00B59G4Q73
New purchase: £827.85
Buy 2.595 units @ £318.97
Target allocation: 37%
Global small cap equities
Vanguard Global Small-Cap Index Fund – OCF 0.38%
Fund identifier: IE00B3X1NT05
Rebalancing sale: £162.22
Sell 0.633 units @ £256.21
Target allocation: 6%
Emerging market equities
iShares Emerging Markets Equity Index Fund D – OCF 0.27%
Fund identifier: GB00B84DY642
New purchase: £310.74
Buy 208.554 units @ £1.49
Target allocation: 10%
Global property
iShares Global Property Securities Equity Index Fund D – OCF 0.22%
Fund identifier: GB00B5BFJG71
Rebalancing sale: £455.15
Sell 229.756 units @ £1.98
Target allocation: 6%
UK gilts
Vanguard UK Government Bond Index – OCF 0.15%
Fund identifier: IE00B1S75374
New purchase: £1,100.92
Buy 6.721 units @ £163.80
Target allocation: 31%
UK index-linked gilts
Vanguard UK Inflation-Linked Gilt Index Fund – OCF 0.15%
Fund identifier: GB00B45Q9038
Rebalancing sale: £462.33
Sell 2.425 units @ £190.64
Target allocation: 5%
New investment = £955
Trading cost = £0
Platform fee = 0.25% per annum.
This model portfolio is notionally held with Cavendish Online. 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. The Slow & Steady portfolio is now worth over £41,000 but the fee saving isn’t juicy enough for us to push the button on the move yet.
Average portfolio OCF = 0.18%
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
Why do you bother with the UK Equities if you are only holding the UK share of global stock market value? Why not just use a Developed World Equity fund that includes UK?
For most people the reason for a separate UK holding is because they want to be overweight in the home stock market (thinking it better reflects inflation and economic conditions where they live and/or avoiding currency risk and/or lower costs). I am sure there is a whole load of varied opinions on the pros and cons of being overweight on the home market – and probably no “right” answer either way. But if you are keeping to global stock market weighting I don’t see the point of keeping it separate, and now you have the issue with it being less than 5 % etc. Perhaps now is the time to merge it into a full Developed World fund? (or commit philosophically to being overweight in UK!)
Nice job chief
If linker funds are dud how about a ladder of linkers? If 5% is too small to allow that, why not just buy a linker? Choose a maturity date, and buy? No annual costs then since the coupon would presumably be too small to reinvest anyway.
I have been splashing about in my investment universe trying to invest a pension transfer and rebalance other stuff to reduce risk. I have put quite a lot into a couple of global index linked funds, both hedged to sterling. The reason I had to do that was there seemed to be no etf with a duration I could live with. The effective duration of the Vanguard IL fund seems to be 21 years. If you swopped that for a fund with duration of less than 8 years, currency hedged, would you allow yourself a higher allocation?
I am curious because you make me look very overweight in IL.
Thanks for the article.
I’ve got to agree with Moomeister in that you might as well have a single fund unless you are overweight in the UK. However before rushing to do so the portfolio might like to test it’s ‘allocation resolve’ but running the numbers on back test with portfoliocharts. I recently did so and found that switching 25% of my allocation to UK Total Stock Market from World Total Stock Market made some dramatic improvements to the baseline CAGR returns and the Safe Withdrawal rates. In addition consider this Vanguard research from 2012 which suggests that the most efficient allocation UK: ex-UK 1988-2012 was 80:20! I’m not changing my allocation but it made me wonder if I’m not guilty of a little (negative) recency bias when it comes to the FTSE All-share.
https://www.google.com/url?sa=t&source=web&rct=j&url=https://personal.vanguard.com/pdf/icrrhb.pdf&ved=2ahUKEwiU9fOhs9zfAhUOKuwKHTLbDl0QFjABegQIBhAB&usg=AOvVaw1LVNfmJ04cas-BNKw4-4jB&cshid=1546890287504
RE: The funds held by The Slow And Steady, we’ve been through this many times. 🙂 Firstly, the passive fund landscape has changed many times over eight years since the start. Secondly (more importantly) this portfolio is clearly a demonstration portfolio, and it has functions beyond making @TA richer (particularly as it’s only a model portfolio. It’s not exactly how he invests his money.) One reason we’ve kept it more atomised is for the educational value of showing how the different components move over time. The article ends as every quarterly update ends with a suggestion that a LifeStrategy fund is a perfectly good alternative — but that wouldn’t be much of a read?!
None of which is to decry the discussion — it all adds to the education, and indeed perhaps eventually @TA will blob away the UK allocation. But some context. 🙂
I actually welcome this nice dip we are seeing. I don’t plan on retiring for 20+ years, so this is helping me to purchase more stock per $ here. I think you are exactly right in that folks have gotten a little too comfortable with a free-ride since the great recession. Time to spice things up a bit!
Any guidance please how to create a similar spreadsheet to monitor portfolio performance as yours does?
Hi, I’ve been reading some articles and info about portfolios and asset allocations and your info is pretty detailed.
The problem I’ve encountered is that most of the info is talking about pretty small portfolios. I wanted to ask you guys how would you handle a pretty large amount in the current conditions and starting from scratch? For example, if you suddenly had £1 million in cash, how would you suggest to start: investing everything as a lump sum in a similar portfolio, doing some kind of x% investing every few months for one or several years, something else?
I think the mindset for handling larger amounts is quite different to do things… Looking forward to reading your thoughts.
@Michael — Hello! We can’t give personal advice. However in principle — and in the absence of other information — someone investing £1m is no different from someone investing £10,000. It’s a lot of money, but less so if you’ve £10m. And £10,000 is a relatively small amount of money, but not if it’s your life savings. 🙂 Passive investing scales, and the principles generally hold just as well for large sums (arguably there are some tax advantages to holding more individual holdings with larger sums, but most people probably don’t want to get involved with that.) There are issues with getting the money into tax shelters though, due to the limits on annual contributions to ISAs and SIPPS.
Lump sum Vs monthly investing is more a matter of risk and temperament than maths. Statistically it’s usually best to lob it all in at once, because markets tend to go up over time (and passive investors don’t believe they can time markets) so get it in ASAP. But sometimes markets go down, and when they do you’d have done better to drip feed.
Often people come out and say “this is why it’s better to drip feed” after a market decline; in reality they had an unlucky roll of the dice.
None of which to say you shouldn’t invest over a period of months or years. It will depend on how you will take losses, how much you can afford to lose, and how annoyed you’ll be about potentially missing gains — and figuring out your risk tolerance.
Take a look at this: https://monevator.com/lump-sum-investing-versus-drip-feeding/
@Michael – wise words from The Investor. You can’t predict so choose what feels comfortable. It’s a personal choice.
For what it is worth, faced with a sudden and relatively unexpected influx of cash (much smaller than what you are talking about, but see The Investor’s comments above), I stuck it straight into the market following my target allocation. Having it languishing in cash slowly losing value did not seem right to me, and my investment horizon was more than 10 years. Other people would reach different conclusions!
@The Investor – thanks for the update. Fine evidence for the underlying strength of a well diversified portfolio, and of not paying much attention to sudden headline-generating downturns.
Nice to see your update.
I’ve just done a calculation on my ‘playing with money’ fund and I’m 8.3% down on last year. I’m not so worried though because I’m an inactive active investor and the FTSE 100 is down 12% this year. Also, I’ve been removing dividends to fund two of my offspring’s university education so haven’t been reinvesting much (that usually makes money in my opinion). My worst ever year for negatives was 2008 (-25.5%), however I made it all back in 2009 (+31.6%). In fact I’ve only had three negative years in the last 15 years so life isn’t so bad. I mostly hold shares and investment trusts (hardly any gilts 1.6%) and don’t trade much as a rule. If I do trade it is to reinvest take overs with what I call bargains.
I took a lot of temporary “pain” as you might expect with my 90% in global small caps (i keep emergency cash seperately and am long term – in for a penny, in for a pound, and generally global small caps acts like a magnified s&p 500 without using margin)
But i’m rubbing my hands (gradually) buying into this dip – not tempted enough to tap emergency cash though because I may need that cash, and also because i dont market time due to expected opportunity cost
I know you would like to know: for me, at least, the well known “Martin Lewis” Bitcoin scam advert appears at the end of the feature this morning.
It’s all over Trustnet too – heavy promotion at the moment.
@ChesterDog — Unfortunately we can’t block these ads, it needs Google Adsense to take them down. (I couldn’t even get a different ad stopped that was illegitimately using the Monevator name and logo, but luckily it went away after a while.)
Interesting stuff until the penultimate paragragh which was fascinating.
GBP750 per quarter in 2011 is now GBP 955 in 2019- a 27.33% increase over 7/8 years in one of the lowest interest environment rates since records began (in this case 400+ years!). And denominated in sterling so without the external currency depreciation factoring in, otherwise than through inflation/purchasing pricing which takes time to work through. Scary if base rates ever go up, which is why i guess the rearguard action against Powell is so strong. Dangerous world we live in, as ever!
Just came across your blog for the first time, great work!
While no single investor would put together the same portfolio, I very much like your stringent approach and discipline in carrying it through – congratulations.
All the best as you hang in there in a difficult market environment!
If one were to want to protect their sterling in the event of a simultaneous hard exit and deep (global) bear market, which ETFs would allow for saving in another currency but not be hedged against currency risk?
Being down ONLY 3% in 2018 is a great achievement. People have done lots worse. As you said, diversification is important.
In the expectation of this, more than half of my portfolio has been in peer loans, which have performed exceptionally well, but now it’s time to go back from them, as equities are getting cheap.
Sorry I’m late, got waylaid.
@ Moomeister – I agree with you in principle about the separate UK fund but The Investor is right: part of the job of the Slow & Steady is to spark a little debate and show the mechanics of a passive portfolio.
When I first set it up, the portfolio was more heavily split on geographic lines and I was happier about being overweight in the UK.
Subsequent reading including a great piece by Lars Kroijer has caused me to lighten up on the UK in the years since. Here’s the piece:
https://monevator.com/why-a-total-world-equity-index-tracker-is-the-only-index-fund-you-need/
@ Neil – be very wary about drawing strong conclusions from backtesting, especially over a relatively short timeframe like 1988-2012. Why did they choose those dates out of interest? What happens if you look at 1988-2017? Or 1938 – 2013? Portfolio Charts is a wonderful tool but even that data only commences from the early 1970s. There’s no reason to believe that concentrating in the UK stock market will have the same effect again in the future. What you’ve found could just be data-mining.
@ Mr Optimistic – yes, I’d be very happy to up the linker allocation with a lower duration fund. Can you let me know which funds you found? Last time I looked I couldn’t find anything suitable but it sounds like you have.
@ dearieme – last time I looked, constructing a ladder from UK linkers left you with rungs spaced very far apart! Interesting idea about the single linker – though obviously comes with interest rate risk. I’d definitely look into that but it’s out of scope for a portfolio like this.
@ Justin – any ETF or index fund that holds foreign securities and doesn’t expressly advertise that it’s hedged to GBP gives you non-sterling exposure. That includes all the funds in this portfolio bar the UK equities and bonds products.
@ Tony – this excellent article helped me build the spreadsheet:
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/
@TA. Waylaid – Aren’t you getting a bit old for that ?
Had in mind L&G Global Inflation Linked Bd Idx I GB00BBHXNN27. Just noticed other fund I have has duration of 21 years. Sell instruction will be there in a minute !
This time getting my name right (sigh), L&G Global Inflation Linked Bd Idx I GB00BBHXNN27 also ROYAL LONDON
GLOBAL INDEX LINKED FUND, claims a duration of 11.8 years B772RM8.
@TA – would you be so kind as to provide a link to the report(s) that you draw your inflation figures from? I’m guessing somewhere on ONS
@ L – https://www.ons.gov.uk/economy/inflationandpriceindices
CPI and RPI reports available here. I use RPI.
@ Mr Optimistic – Hope you sold in time. Yes, both of those look like decent options. L&G fund says duration 8 and I could live with the 14% with a credit rating below AA.
The Royal London one has cut its OCF significantly since last time I looked and there wasn’t any duration info available then either. There’s a sister fund called: The Royal London Short Duration Global Index Linked Fund – BD050F0. Duration 5.
I need to look at them again in more detail but selling out of the UK linker fund and into hedged global linkers makes a lot of sense.
Hi,
I am fairly new to the investing arena…actually totally a virgin investor, so an ignorant question now arises!
I see that you have both Vanguard and I shares in the portfolio how do you manage to bag them all in to one ISA? As there are two separate companies (or investment platforms). I do love reading your views and comments and please keep up the great work informing the Joe and Josephine Public of the complex financial world.
Hi Richjohn,
You’ll hold your ISA with an investing platform and most allow you to mix and match funds from different companies in a single ISA. You can find a list of platforms here:
https://monevator.com/compare-uk-cheapest-online-brokers/
This series of posts will help with a lot of the questions you might have:
https://monevator.com/how-to-buy-index-trackers/
please can anyone let me know the Google sheets formula for % of portfolio?