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The Slow and Steady passive portfolio update: Q4 2019

The Slow and Steady passive portfolio update: Q4 2019 post image

Last year felt leaden with dread and anxiety, yet as investors we were walking on sunshine. Our Slow & Steady passive portfolio rocketed up 16.3% in 2019. That’s its second-best year ever!

Perhaps the global markets don’t know that we’re sleepwalking towards disaster, or maybe things aren’t as bad as they seem?

  • Our Developed World equities performed best – up 24% this year, with the US to the fore but other regions buoyant, too.
  • Global Small Cap grew 22%.
  • Even the dear old FTSE All-Share soared 20%, enjoying a late bounce from the election result.
  • Emerging Markets and Global Property both scored above 17%.

Our defensive bond holdings hardly embarrassed us, either:

  • UK Government bonds (conventional) rose 7%
  • Global inflation-linked bonds (index-linked) managed over 4%.

Nine years in and the portfolio has grown at 9.4% annualised per year. Call it 7% after inflation.

Here are the numbers in SuperDuper Spreadsheet-o-vision:

The annualised return of the portfolio is 9.4%.

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 £976 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.

If you’re 100% in global equity trackers then your portfolio probably returned north of 20% this year. That’s worth celebrating. Equities have had a stunning decade. You may well have notched up a return of more than 25% in 2016, and another 10% in 2017.

Understand that this isn’t normal. A stretch like this isn’t unprecedented, but it is extraordinary.

The bull run may well have changed your life. You may now have pushed so close, or so far beyond, your original objective that your eyes are on stalks and your ambitions on stilts.

The danger lies in pushing your luck. Forgetting you can lose after an amazing run. Reaching for more, when you already have Enough.

If your portfolio has grown far larger than it was say five years ago, then cool your jets and chill your spine with a few thought experiments.

How badly would a 30% loss hit you?

When we started this portfolio, a 30% loss would have cost us £900. We’d have replaced that with four months worth of cash contributions.

Now we’d lose over £16,000. That’d take fours years to replace with our current contributions, if the market stayed down – as it easily could.

How about you? Maybe 30% would cost you £50,000, or £100,000, or £500,000. It all depends upon where you are in your journey.

How long would it take you to make up for a 30% correction, if the market afterwards stayed flat?

The probability of loss is much the same in any given year. Our portfolio will be invested for 20 years. We roll the dice every year –and sooner or later it will come up snake eyes.

If an unlucky roll of the dice would now hurt you badly, then maybe you should think about easing off the accelerator if your equity asset allocation is highly aggressive.

I’m not predicting bloodshed in 2020. But I do like to think about the downsides before they happen.

  • To keep partying like it’s 1999 turn to page 666.
  • To manage your risks, turn to page 999.

You have chosen wisely

We built risk management into our Slow & Steady plan by committing to selling 2% of our equities every year, and using that money to increase our defensive bond allocation by 2% every year.

This year’s rebalance will give us an asset allocation of 62:38 equities vs bonds.

That compares to our original asset allocation of 80:20 back in 2011, when we felt young and invincible.

More precisely, our model portfolio had no skin in the game back then and time was on its side.

As the years slip by, we’re less optimistic about our prospects should the market crush our portfolio for half a decade or so. Hence we dial down the risk every year while remaining pro-growth.

We haven’t really lost out either in comparison to a high-risk 100% equities strategy.

The Slow & Steady’s 9.4% annualised return compares nicely with the 10% annualised you’d have earned from global equities and the 9.5% you’d have earned from the FTSE All-Share over the last nine years.

Portfolio maintenance

Here’s the changes we’re making to our asset allocation as of the end of 2019:

  • Emerging Markets -1%
  • Global Property: -1%
  • Global Inflation-Linked bonds: +2%

I’ve reduced Emerging Markets because we try to keep our equity allocations in line with global market allocations. Star Capital helps us do that with their regular updates on the weights of world stock markets.

The current weight of the Emerging Markets on the global stage is 13.4%.

13.4% x 62% (our new equities allocation) = 8.3% portfolio asset allocation.

Strictly speaking I should have trimmed Emerging Markets from 10% to 8% and been done with it. But emerging economies are under-represented by the capital markets and valuations seem decent, so I’ll knock ’em back by 1%.

That means I can cut Global Property by 1%, too. I’m happy to do that because I’ve uncovered evidence that the diversification benefit of REIT equities is marginal. My plan is to reduce the portfolio’s property allocation over time.

Some people disagree with this move, some claim it’s active investing, and The Investor pushed back, too – cautioning that the evidence and my personal experience over the last decade could all be wrong. He may well be right and I could just leave things alone.

Some believe that a passive investor must leave things alone. But I disagree. Even a passive investor must make decisions as the situation changes.

Here’s what I think about when constructing a portfolio:

  • Is there a good case for including the asset class?
  • Do the available investment vehicles adequately capture the benefit of that asset class?
  • Are the characteristics of the asset class right for my investment objectives / risk profile?

The reason I included REITs in the first place was because the weight of expert opinion in favour of them as a diversifier at that time was near-unanimous. The evidence is mixed now, and that’s causing me to reconsider the size of my allocation.

Why not ditch global property entirely if I’m so convinced? Well, I’m not convinced. Evidence has emerged which suggests a new course, but I’m gonna take it slow. As is my way. In matters of finance (if not the heart) I proceed with caution.

The purchases are more straightforward. We’re underweight inflation-linked bonds so the 2% goes there. There isn’t a default fixed-income asset allocation that passive investors can live and die by. I’ve seen arguments for:

  • 50% inflation-linked bonds.
  • 100% inflation-linked bonds.
  • 100% total bond market.
  • Manage in line with your duration.

And that’s not an exhaustive list.

My conundrum is that with 11 years to go for the model portfolio, the main purpose of holding high-quality government bonds is because they’re my best buffer in a recession.

Conventional bonds have historically done a better job in that situation than inflation-linked bonds.

In contrast, index-linked bonds are our best protection against rampant inflation.

I currently fear a recession far more than runaway inflation. I concede that I am making an active decision here. I haven’t got a strong rule that determines my fixed income allocation and that’s giving me license to ‘read the game’ rather than play the percentages.

Apologies for thinking out loud. I hadn’t recognised this until the thought came tumbling out of my typing fingers. It’s too late now so let’s chalk this one up to The Accumulator stumbling over a flaw in his plan. I’ll resolve to come up with a stronger rule to manage the Slow & Steady fixed income allocation over the course of the year. I’ll set out my thinking in a future Slow & Steady post, make the changes necessary, and stick to it.

Okay, to finish off the maintenance section: our annual rebalance means selling a little from all of our surging equity positions to top up our allocation to bonds. In particular, we need to transfer a wedge of our Developed World wealth into weakening UK Government bonds, just to maintain our existing allocations.

Repeat after me: “Sell high, buy low.”

One final cheery note: our average portfolio Ongoing Charge Figure (OCF) has dropped to 0.15% (from 0.17%) due to cost-cutting from Vanguard and Royal London. The portfolio’s OCF has been stuck at 0.17% for over four years, so, like the Swiss flag, this is a big plus.

For perspective, that saves us £2 per £10,000 in our portfolio, or around £10 a year at the mo’. We smash costs for kicks, but there comes a point where it’s not worth the trouble obsessing over what fund is topping the best-buy charts.

Increasing our quarterly savings

Now to face the dreaded inflation beast. We must increase our investment contributions in line with inflation to stop the money monster munching away our wealth like sugar puffs.

We use the Office for National Statistics’ RPI inflation report to tell us how much less money is worth this year. Turns out RPI inflation is 2.2%. In 2011 we invested £750 every quarter; that’s £976 in 2020 money.

You could use CPIH as your inflation measure, but RPI is usually worse. Therefore I use RPI because that’s the fun kind of guy that I am.

All that best-practice jazz means we’ll invest £976 this quarter and throughout 2020. These are our trades, taking into account our annual rebalancing move:

UK equity

Vanguard FTSE UK All-Share Index Trust – OCF 0.06%

Fund identifier: GB00B3X7QG63

Rebalancing sale: £22.74

Sell 0.103 units @ £221.42

Target allocation: 5%

Developed world ex-UK equities

Vanguard FTSE Developed World ex-UK Equity Index Fund – OCF 0.14%

Fund identifier: GB00B59G4Q73

Rebalancing sale: £862.99

Sell 2.179 units @ £396.06

Target allocation: 37%

Global small cap equities

Vanguard Global Small-Cap Index Fund – OCF 0.29%

Fund identifier: IE00B3X1NT05

Rebalancing sale: £96.92

Sell 0.309 units @ £313.89

Target allocation: 6%

Emerging market equities

iShares Emerging Markets Equity Index Fund D – OCF 0.18%

Fund identifier: GB00B84DY642

Rebalancing sale: £466.39

Sell 267.116 units @ £1.75

Target allocation: 9%

Global property

iShares Global Property Securities Equity Index Fund D – OCF 0.17%

Fund identifier: GB00B5BFJG71

Rebalancing sale: £495.87

Sell 212.544 units @ £2.33

Target allocation: 5%

UK gilts

Vanguard UK Government Bond Index – OCF 0.12%

Fund identifier: IE00B1S75374

New purchase: £1,595.88

Buy 9.124 units @ £174.91

Target allocation: 31%

Global inflation-linked bonds

Royal London Short Duration Global Index-Linked Fund – OCF 0.27%

Fund identifier: GB00BD050F05

New purchase: £1,325.04

Buy 1261.94 units @ £1.05

Target allocation: 7%

New investment = £976

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.

Average portfolio OCF = 0.15%

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

{ 61 comments… add one }
  • 1 xxd09 January 7, 2020, 10:44 am

    You have uncovered the secret of passive investing
    Leave investments alone -forbear to tinker at all!
    Just stay the course
    Modify the Asset Allocation as you get older and savings goals are achieved(more bonds less equities)
    That’s it

  • 2 Victor January 7, 2020, 12:05 pm

    Thank you very much for the great work you are doing and for sharing it with us!
    I am not sure if you realize, but you inspire, you give hope, you educate lots of people. The value you create is immense! God bless you!

  • 3 Dave Tester January 7, 2020, 4:15 pm

    Thanks for the update Mr Monevator!
    I’d be interested in finding out how this compares to the Vanguard Life Strategy 60 over the same time period as the both have similar percentages. Is it worth the extra effort of The Slow & Steady Portfolio or could you have achieved something comparable with just making the same quarterly payments and no rebalancing required?

  • 4 Dawn January 7, 2020, 5:13 pm

    Hi all
    Thanks monevator I always enjoy reading your thoughts and opinions.
    I’m enjoying being FI , not yet living off my stash , working part time with rental income.
    Aware markets are surging ahead, am I over exposed to equities as I’ve not experienced a major market crash before, so dont know how i will respond! IM 55 yrs old

    my portfolio is …..

    45% global and UK equities [trackers, etfs]
    28% rental property [owned]
    27% cash split up in various interest rate products ,lowest being 1.5%
    [ never decided /stuck on bond funds!]

    Exclude the rental property and I’m
    62% equities
    38% cash

    Any thoughts from you and your like minded readers would be intresting for me.
    I lost 10% off equites 12 months ago and was OK.

  • 5 Jim McG January 7, 2020, 7:57 pm

    Who says passive investing isn’t fun? If there was a 30% rebalance one year, unless you need the money right away, you can ride it out. Take it steady, as a wise man once said.

  • 6 Jan Bloomberg January 8, 2020, 6:31 am

    Just a thought, I understand why you are highlighting the cost drop of the OCF but what you don’t mention in all this rebalancing and selling/reinvesting proceeds is how much the total costs incurred are for commission/stamp? 5 sells and 2 purchases… and who/how much are you paying in platform fees per year? And regular investment costs for the holdings?

    Not trying to be negative but costs are a big part of this investment journey and if this rebalance occurs every year they it’s an ongoing drag on performance worth factoring.

  • 7 The Investor January 8, 2020, 9:10 am

    @Jan Bloomberg — Morning! 🙂 There is no trading fees (commission) or stamp duty or other costs payable on rebalancing (or buying/investing in) these index funds. They are traded without charge on our (notional) chosen platform, and at other major UK brokers.

  • 8 Money Mountaineer January 8, 2020, 9:32 am

    Mr Accumulator, sir,

    Just a massive thank you for maintaining the Steady Portfolio. I find the monthly reading soothing to the soul – and it encourages me to keep my own steady investments on an even keel.

    You’re Calpol for my brain!


  • 9 The Accumulator January 8, 2020, 9:37 am

    @ Jan – trading fees (zero) and platform costs (o.25%) are given at the end of the article, see last couple of paragraphs just above my sign-off.

  • 10 Whettam January 8, 2020, 10:55 am

    I have only been seriously interested in investing and my retirement plan for about 10 years and I must admit I find the idea of a 30% fall pretty scary. Even more sobering that it would take me over 11 years to get that back with just new contributions, but I’m hoping to retire sooner than that.

  • 11 weenie January 8, 2020, 10:56 am

    It’s heartening to read that the slow and steady passive portolio did so well in 2019. The way some active investors are talking, it’s as if they’re stockpicking gods, single-handedly picking winners, when all that’s happened is that they’ve just been lucky to be riding on a buoyant market, one that’s been enjoyed by passive index investors too.

  • 12 Matthew January 8, 2020, 7:30 pm

    The good returns of 2019 were i think partly a recovery from q4 2018, and the numbers you see really depend on your cutoff date, and thats when it let off a little steam, as such (although there could always be a crash) I don’t think theres anything unusual, or unsustainable about this bull market – of course it should reach new highs, theres inflation, profit, and those two things leveraged (under the hood, companies have debt and so naturally leverage your exposure to inflation and growth)

    I would say that crashes are mostly flukes, although I understand protecting more nearer retirement, although you could consider shielding a fixed number of months living costs rather than a %, since a percentage might be above/below the actual safety net you need

  • 13 Brady January 8, 2020, 11:51 pm

    Whilst I’ve read Lars’ risk free asset posts from a few years back and understand why people have bonds in their portfolios, does anyone else worry that UK gilts are currently massively over valued (30 year gilt yields are sub 1%). I don’t own any bonds at present and portfolio is 95% global equity tracker; c5% Henderson Diversified Alternatives (fund that invests in private equity, property, hedge funds etc)

  • 14 BBlimp January 9, 2020, 8:21 am

    @TA – this represents so much work ( a labour of love ?!) and I’ve really enjoyed reading the progress over the years, thanks…. but given how access to multi asset funds/ platforms has changed since you started I wonder if a link to the piece you wrote about your mother’s investments in LS might be a good permanent part of the ‘spiel’ at the bottom ?

    The cost of holding life strategy on the vanguard platform ( 0.37pc) is probably similar to the platform charge on the notional platform used here (0.35?), which is actually just an aside compared to the ease of having a computer do the rebalancing for you…

    I’m not suggesting you give up, might just enhance the reader experience to read both pieces side by side each time…

  • 15 Gentleman's Family Finances January 9, 2020, 12:20 pm

    This is a very good post and thanks for putting it out there.
    My own performance was about 18% in 2019 but if only equities are considered it’s higher (P2P is a drag as are some other shares + VCTs)

    Regarding a 30% drop – you mean to levels that we thought were ok 2-3 years ago?
    Personally, I think that we aren’t served well by our pyschology and I will try to remember that any drops now whilst I’m buying just make things cheaper for me. 🙂
    The sequence of returns risk runs both ways and high prices now make reaching retirement targets more and more difficult.
    A good recession (one in which I keep my job) is just what we (I?) need!

  • 16 SemiPassive January 9, 2020, 12:50 pm

    Brady, yes I think 30 year gilts are in some ways one of the riskiest assets out there especially if your time horizon is much shorter. Lars emphasizes that your bond maturity should match the time horizon for when you need the money.
    I’ve been dragged kicking and screaming into holding a fund with short-dated gilts in it to cover some of my forecasted 25% PCLS with a 6 year horizon.
    But I don’t use gilts for my long term hold assets. Even a simple FTSE100 tracker yielding 4.5% or so make gilts very unappealing if you are intending to live off natural yield.

    However look at TA’s portfolio – you can’t argue with that cracking performance. If interest rates stay at rock bottom for years, or even head negative, bonds could still do OK, and you will be in for a rocky ride with your current asset allocation. Could you hack another 2008-9?

    Bear in mind I won’t be buying an annuity with my pension pot but instead living largely off the natural yield. If I was buying an annuity then I would be much more likely to move the bulk of my pot into a (short-dated) gilt fund as I approached retirement, or just keep moving more into a specific gilt that matured close to my retirement date.

    In contrast across the pond US treasuries look much more appealing relative to equities. As a US investor I’d be much happier to hold a good slug of US govt bonds over the long term. They are at least within spitting distance of the inflation rate.

  • 17 Xailter January 9, 2020, 1:11 pm

    @Brady (#13) – you aren’t the only one who thinks this, but instead of moving out of bonds entirely I’ve switched over a a global bond ETF and have been pushing more of my monthly contributions that way. Maybe worth a look into?

  • 18 November January 9, 2020, 6:01 pm

    ‘using that money to increase our defensive bond allocation’

    ‘But perhaps none of that is as scary as the slow torture inflicted on UK bonds over 27 years from 1947 to 1974. The total real return loss: -73%’


  • 19 Dawn January 9, 2020, 6:10 pm

    @Xailter and Brady
    very intresting reading everyones thoughts on bonds !
    Xailter..whats your global bond ETF?, unless its hedged, you got exchange rate risk.
    XGSG and XGIG are global government bonds that are hedged. I like the sound of them but the bummer is they are not all short term in there. which makes me uncomfortable for reasons expressed above.
    There’s VIAABT global, hedged, short but corporate bonds not government.
    I did put a slug in a short guilt I hold directly in my brokerage account.! maybe i should buy another!!!

  • 20 The Investor January 9, 2020, 7:32 pm

    I’m glad everyone’s learned their lesson from literally ten years of nearly every pundit (including at one point me) saying bonds are “obviously” expensive / a bubble. And them continuing to chug along and many years deliver positive returns.

    Remember how rates could only go one way in 2018? And then they went the other way in 2019.

    I am not saying bonds do not look expensive. They do. But they have for many years. A massive dose of humility is required approaching this asset class, especially from passive investors (or the many more who should be passive investors) who rightly admit they can’t predict the movements of securities or markets or outsmart other investors, but who think they know something the market doesn’t about bonds. 🙂

    Oh, and bonds are definitely not the riskiest asset class out there. Global equities, especially US equities, could fall 50% in a year*. The chances of that happening with triple-A government bonds in the current environment is *extremely* remote.

    *Obviously also not a prediction. Just a note that equities are *always* the riskiest asset class in a vanilla portfolio. The problem with bonds currently is the likely poor / negative (real) returns going forward, not that they have suddenly become risky.

  • 21 Two Shillings and Sixpence January 9, 2020, 8:04 pm

    Thanks for keeping up the good work.

    Is the plan going forward to continue to increase the allocation to “Global inflation-linked bonds” as equities decrease. Have you any concerns regarding the allocation to UK government bonds. Considered adding an International Bond index hedged to GBP.

  • 22 Brady January 9, 2020, 8:29 pm

    Thanks TI

    I’ve slapped myself on the wrist for being too active in my portfolio construction.

    I totally get equities are much riskier than bonds. I’m 20 years away from retirement and would take a 50% fall on the chin, happy in the knowledge I’d continue to buy equities each month at the lower price. (I view ongoing cash contributions as doing a similar job to bonds in a falling market)

    I’m not trying to outsmart the market re gilts. I was more making the point that I don’t see UK gilts as being a risk free asset at current valuations. There is also a chance the inverse relationship between equities and bonds will no longer hold true meaning gilts would not do the job they are supposed to in a traditional portfolio of 40% gilts, 60% equities in a falling equity environment.

    I’ll read up a bit more & take a look at adding in some short dates gilts (and a global bond tracker?) but remain sceptical and tempted to just ride the FTSE All World index rollercoaster for the next 5 years.

  • 23 Mr Optimistic January 9, 2020, 8:49 pm

    Apologies if this has been explained, but why separate holdings for the UK and dev world ex UK? Would a whole ( developed) world fund have been that bad?

  • 24 Xailter January 9, 2020, 9:07 pm

    @Brady – I’m currently using Vanguard only global bond ETF (VAGP): https://www.vanguardinvestor.co.uk/investments/vanguard-global-aggregate-bond-ucits-etf-gbp-hedged-distributing?intcmpgn=fixedincomeglobal_globalaggregatebonducitsetf_fund_link

    It’s not hedged, so yes I am open to currency risk, but as I only buy a global tracker otherwise, I’m not overly concerned. Short-term I’m not a fan of the pound, but longer term it’ll all probably be noise anyway. Also my stocks portfolio is pretty small compared to my house and other assets which are in pounds anyway 🙂

  • 25 Xailter January 9, 2020, 9:14 pm
  • 26 Matthew January 9, 2020, 10:05 pm

    I read somewhere that more QE could be on the cards in developed world, so valuations should increase if that happens

    I could imagine a world where retracting QE is preferable to raising interest rates, although QE doesn’t seem to have much effect on inflation, but what it would do is tweak the government’s ability to borrow and spend

  • 27 DaveDatum January 9, 2020, 10:05 pm

    VAGP – not hedged? What does the ‘hedged’ in the link and the bumpf mean?

  • 28 The Accumulator January 9, 2020, 10:40 pm

    @ all – thank you for your kind comments about the post and the Slow & Steady series. It’s really nice to know that it’s appreciated.

    @ Dave Tester – Vanguard LifeStrategy 60 would have performed slightly worse and Vanguard LifeStrategy 80 would have performed slightly better. I would make your portfolio decision on grounds of convenience, risk tolerance and temperament not on performance. We don’t know how assets will perform ahead of time. Similar passive portfolios will perform similarly. If you don’t enjoy investing then you’re way better off with a single fund portfolio than a seven fund one. If you doubt your will to rebalance hot assets for stinkers, then let someone else do it for you. On the other hand, if you like control, slicing costs to the absolute bone, bringing additional asset classes like property, small caps and linkers into play then create your own portfolio. Portfolio theory provides reasons to believe that all the extras can lead to better performance or diversification, but probably not by much and there are no guarantees. If in doubt, go LifeStrategy.

    @ Mr Optimistic – that would be fine. Having two funds allows you to overweight the UK which is handy when you’ve got few years left on the clock and want to reduce currency risk. But the Slow & Steady portfolio is meant to show some of the nuts and bolts and to enable us to compare asset classes. It’d be pretty dull if I just took a picture of the LifeStrategy 60 returns every quarter.

    @ BBlimp – that’s a really nice idea. I’ll have a think on that.

    @ Brady – it’s not ideal that expected returns for bonds are so low. I’d rather it wasn’t this way, but it is, so the question is what are bonds for? They belong in your portfolio because they are the best way to prevent you from freaking out in a recession if your portfolio drops 30%, 40%, 50% or worse. They are the asset class most likely to hold up when there’s blood on the streets. It’s not a guarantee but they are your best bet in that situation. With 100% of your portfolio in risky assets big losses can happen fast and it can be devastating psychologically. It will be devastating financially if you panic and sell. If you know how you will perform under those circumstances and that you definitely won’t crack then you’re golden. If you’ve never been tested in those conditions then you’re taking a big risk. If your time horizon is under a decade, or your portfolio is so big that you can’t replace the losses quickly then you should also think twice.

    @ November – yes, it’s important to know that bonds can lose big too. Difference is that UK equities lost -73% in 1973-74. High quality government bonds took much longer to register that loss. They don’t tend to crash catastrophically like equities, and not during a recession, as TI pointed out. Bonds have a tendency to hold up when equities are down and that’s what makes them useful. When didn’t that work? In 1973-74. Bonds were down too because inflation was off the hook and only linkers are liable to help you then. Unfortunately, linkers weren’t available in 1973-74.

    What caused that bond smackdown over that period? High unexpected inflation, especially during the 70s. Conventional bonds do not do well in those conditions. So sometimes equities don’t do well, sometimes conventional bonds stink and sometimes linkers really help. It’s almost like you need a diversified portfolio!

    Something I found out since writing that piece: the UK gov bonds measured were essentially long bonds. You wouldn’t have suffered so badly with shorter-dated bonds. Ultimately, there’s a lot of nuance to this, so I don’t know how helpful juxtaposing two quotes out of context is? Still, it got me talking.

  • 29 The Accumulator January 9, 2020, 11:08 pm

    @ Xailter – if you think the pound will depreciate then you should be unhedged. I’m glad you’re hedged though cos that’s meant to reduce the volatility in your portfolio, which is the job of the bond component.

    @ Two Shillings – yes, I’ll keep increasing the linker side. I’m a little concerned that it should be higher now, which is why I need to formalise my rules for this side of the portfolio. It’s a little bit too woolly at the mo and gives me too much latitude to tinker.
    No real concerns about the £. If I buy a hedged international bond fund, it’ll be more diversified yes, but it’s also more expensive, hedging isn’t perfect and other developed world gov bonds are yielding less than the UK. If I go unhedged then I’m just adding volatility to my portfolio for little gain.
    That said, I don’t have anything against international dev world gov bonds (hedged). I can see the appeal and think it’s a close call. But I’m just as comfortable holding gilts and keeping it simple.

    @ Dawn – The key to your conundrum lies in your statement: “I’ve not experienced a major market crash before, so dont know how i will respond!”

    That suggests caution. If you could lose 50% of your portfolio and still be FI then no problem. But if losing a large chunk of wealth would give you stomach ulcers then be as conservative as you can afford. This piece is worth a read on the topic:


  • 30 Bubu January 10, 2020, 9:40 am

    “But emerging economies are under-represented by the capital markets and valuations seem decent, so I’ll knock ’em back by 1%.”

    And there I thought this was a passive portfolio…

  • 31 The Investor January 10, 2020, 10:10 am

    @Bubu — Morning! You write:

    And there I thought this was a passive portfolio…

    I fully get where you’re coming from. However I’d argue that in practice no long-term portfolio is anything like 100% passive and decisions are required along the way. Situations change, funds change, indices potentially, too (this latter is likely to become a bigger issue IMHO as there’s the potential for a price war on fees from the index providers to fund management companies.) Even one’s knowledge changes.

    The latter is why @TA has decided to tweak down the REIT component of this portfolio — something I was/am wary of, as I’m not convinced enough has really changed since inception to warrant it. (Also I think the portfolio will be a shade more interesting/useful the less tinkering there is.)

    But the decision you mention does not bother me. In a multi-fund portfolio like this, judgements are required along the way and there are no firm rules or perfect %s. This stuff may seem clear-cut, but it’s not really.

    If @TA was using one of the popular world tracker funds/ETFs here, the emerging market allocations could vary from 6.6% (SPDR) to 7.9% (Vanguard) to 0% (MSCI Core World ETF). His “DIY” World Tracker has a rougher and readier allocation, for ease of maths/simplicity.

    Agreed, “valuations seem decent” is a tad active. I also noted it at editing time but left it in. The allocation decision is mostly driven here by a desire for simple and appropriate round numbers, the rest is mostly colour. And I think that’s fine, because we don’t and can’t know in advance whether 0.13% more or less in some particular market would boost or reduce returns over the next couple of decades. 🙂

  • 32 xxd09 January 10, 2020, 10:18 am

    Have held the Vanguard Global Bond Index Fund hedged to the Pound for many years
    Aged 73-17 years retd
    Made my pile and this fund is 65% of my Portfolio
    Returns 4% -5% pa -will it going forward ?
    Simple, cheap and easy to understand and follow
    Does the “safety factor” for me

  • 33 Onedrew January 10, 2020, 12:06 pm

    Is it possible to arrange to get notifications of follow-up comments via email without having to submit a comment first?

  • 34 Whettam January 10, 2020, 12:15 pm

    @TI I agree and its one of the reasons why I enjoy this series so much. I think the passive – active argument is a scale. My own portfolio is not as passive as @TA’s (for equities I’m about 30% active, considerably more for other asset classes) and I’m very active in this type of allocation decision, but I’m not as active as you @TI. I think we can all learn from different approaches and I like to hear justifications for positions irrespective of whether I personally agree (Emerging Markets, Linkers) or disagree (Property) with them.

    The de-risking of the portfolio is particularly interesting to me, because I’m starting to do the same, I’m at 58% equity so similar to @TA. But my portfolio is probably more ‘aggressive’ than @TA’s because I’m not just using Bonds for the remainder. But the thought process / opinions, I find fascinating.

  • 35 ZXSpectrum48k January 10, 2020, 12:41 pm

    @Julien. Following up from TI’s comment. TA has always made a clear active decision with regard to EM because while the portfolio contains EM equities, it contains zero EM bonds.

    Personally, I’m the other way around with zero EM equities (MSCI EM index) but a larger allocation to EM US$ denominated sovereign debt (JPM EMBIGD index). Like EM equities, it’s a risk asset. I like owning the combination of interest rate duration (from the embedded UST exposure) and spread duration from the EM sovereign credit risk. I also like the absence of EM FX exposure which I think you are simply not compensated for in EM equities. EM sovereign debt has produced the same returns as EM equities but with a fraction of the volatility . It also offers a somewhat lower correlation with broader equities.

  • 36 Adrian January 11, 2020, 12:27 pm

    The problem with hedged bond funds is the cost of it. I’ve read that the hedging costs as much as 2% which seems a high price to pay. I’d rather go with the originally currency.

  • 37 xxd09 January 11, 2020, 1:45 pm

    Good info on Vanguard .co.uk website
    Estimated costs of hedging 0.03% pa over the last few years
    Never more than 0.1% as a spike
    Hedging costs would appear to be negligible in relation to other ongoing costs and not a reason for using it

  • 38 ZXSpectrum48k January 11, 2020, 3:20 pm

    @Adrian. As someone who trades fx forward and fx swaps as part of their day to day job, there is no way that the transactional costs associated with fx hedging could possibly add up to 2%. Perhaps up to 0.05% in G10 currencies. This is a hugely liquid market with incredibly tight bid-offer costs. Most of the time you trade at mid.

    The 2% “cost” you are seeing is more likely to stem from the impact of uncovered interest rate parity (i.e. the interest differential between the two markets). That “cost” has to exist, otherwise an arbitrage would exist. So, for example, I could take my money in the UK, earning 0.5% at the BoE, and deposit it at the US Fed at 1.5%. If I could then hedge out of the FX risk for zero then I could earn a risk free 1%. So guess what? The rate of GBP/USD fx forward rate to hedge out the FX just happens to be 1% different from the spot value of GBP/USD. No arbitrage, no free lunch.

  • 39 IanH January 11, 2020, 6:37 pm

    Is it just me or is the “stellar performance” this past year worthy of a bit of eye-rolling?
    “Our Developed World equities performed best – up 24% this year,” might be correct, but going by my (monevator prompted https://monevator.com/how-to-unitize-your-portfolio/) unitized view of my (70/30) protfolio I’m barely back to the same level seen last september, and the year before that was basically a dead rubber – though note that that is in the context of me drawing down on the portfolio at about 3.5% p.a. in July / August each year now. My ‘unit’ price is now 149.47 and it was 149.88 in july 2018.

  • 40 SemiPassive January 11, 2020, 8:35 pm

    ZXSpectrum48k, I’ve held iShares $ EM bond ETF (ticker SEMB) previously and more recently moved into the GBP hedged equivalent (ticker EMHG) as I was concerned about the pound bouncing in the run up to the election and didn’t want to be overexposed to such moves, considering global equity holdings as well.

    Still wondering whether I should switch back to SEMB if the uncovered interest rate parity you mention is going to effectively rob me of yield or asset value over the long term. I still think GBP could climb a little more once some kind of basic bare bones trade deal with the EU is made in the next year or so. Maybe that will be the time to swap back to SEMB for the long term – but I realise it is a mugs game predicting currency moves. Any opinions welcome.

  • 41 ZXSpectrum48k January 11, 2020, 10:57 pm

    @SemiPassive. I’m not in the business of providing financial advice but I’d say this: GBP/USD at 1.31 is sort of middle of the two year range (1.18-1.42). GBP looks undervalued on a long-term basis, the USD somewhat overvalued. FX volatility is driven by politics more than economics in recent years and you have both Brexit negotiations and a US presidential election this year. So GBP/USD could move in either direction (and probably both).

    The rate differential between USD and GBP has narrowed by around 1% in the last year (given Fed rate cuts), so the yield give-up from hedging has reduced. The implied volatility for GBP/USD over the next year is 8%+. So you’re paying 1% or so to reduce volatility by 8%. For someone like myself, who likes to run a low volatility portfolio that is an ok deal. I’d stay hedged. If GBP/USD was closer to 1.40, I’d probably take the hedge off.

  • 42 Bastiat January 12, 2020, 12:46 am

    @IAnH, are you sure you are doing the unitization right? Your withdrawal rate should have no impact on the unit performance (that’s the whole point of initiation)

  • 43 IanH January 12, 2020, 12:11 pm

    @Bastiat Thanks for picking up on that – you are right, but I think I am doing the unitization OK I just mentioned the drawdowns without thinking, guessing it might have an impact. So yes – not much change in 18 months really.

  • 44 SemiPassive January 12, 2020, 12:39 pm

    Thanks ZX, re: “I’d stay hedged. If GBP/USD was closer to 1.40, I’d probably take the hedge off” – yes, I was thinking roughly along those lines.

  • 45 David January 12, 2020, 8:04 pm

    Hi all. I have been following this site since 2014 and what a great find it was. I am very grateful, as a newbie I was/still am confused, but I took the advice on Life strategy 6 years later my fund is up 30%. That has now allowed me to move to a new stage of protection. So some advice please. Should Vanguard Global Bond Index Hedged be my vehicle to keep inflation at bay.

  • 46 xxd09 January 12, 2020, 11:08 pm

    Why would you change your Investment Plan? You have won the game!
    You are using an Index Fund-I presume a Vanguard LifeStrategy Fund -what one are you using?
    If you feel things are getting too risky -increase the percentage of Bonds in your Fund
    For instance -a retired person with a big enough portfolio might be LifeStrategy 20/80 or 40/60
    A younger man in work starting out might be LifeStrategy 80/20 Etc etc
    In the words of Vanguards John Bogle-“Stay the Course”

  • 47 David January 13, 2020, 12:30 pm

    Hi xxd09. The reason to change is precisely that I have won and am fearful of losing what I have gained. Currently in 60/40 equities VLS as you guessed. I’d now be happy to keep up with inflation as I have no dependants. Thanks for taking the time to reply

  • 48 Malcolm January 13, 2020, 2:32 pm

    For your own interest
    I am 73-retired 17 years with a 30/70 portfolio
    It can be done

  • 49 David January 13, 2020, 8:39 pm

    Thanks Malcom, gives me hope as my own retirement is approaching.

  • 50 Mike Rodent January 14, 2020, 4:59 pm

    Dear Investor(s),
    I have a question about dividend tax and choice of funds for a non-ISA fund account. This question may have been covered elsewhere ad nauseam.

    I’m just doing my tax return and I’m getting annoyed by dividend tax. I have been running my own single-person micro-company since forever, and since the Osbourne 2015 changes I’ve obviously had to pay 7% on any dividends I’ve issued.

    But in addition to that, since I have some personal investment funds which are not covered by a tax wrapper I have to pay dividends on those as well for tax year 2018-19. The best company I’ve got in that regard is BRK.B, which I bought quite a bit of a few years ago. Yes, I know I shouldn’t have, as it goes against not only this site’s philosophy, but also what the young man at the head of BRK.B himself says. Still, it’s tended to do pretty well.
    But the great thing about BRK.B from a dividend tax point of view is that the Sage of Omaha never issues dividends.
    Conversely, I am annoyed to discover from my platforms’ tax certificates that some index funds, even though all my funds are accumulator funds, do indeed generate dividends as far as HMRC are concerned. Indeed, some of these are put down on the certificate as “foreign dividends”.

    Is this, or should it be, a factor that needs to be taken into account when recommending funds? Are there many UK funds which are like BRK.B, in that they somehow manage to avoid generating a dividend stream? At the same time, I don’t understand how BRK.B *can* manage not to generate a dividend stream: all the companies it invests in are obviously generating dividends… why don’t those somehow “fall through” and become taxable dividends for people who hold BRK.B?

    Another active UK fund which I hold, Fundsmith, whose company code is, wonderfully, FUQUIT, again doesn’t seem (according to my tax certificates) to generate much in the way of dividends… again, how come? It holds successful companies, and these presumably issue dividends…

    So are there any funds in the “passive” world which are particularly good at managing not to generate much dividend income, i.e. for when one has non-tax-wrapped accounts?

  • 51 The Investor January 14, 2020, 8:13 pm

    @Mike Rodent — Yes, you’re being hit by a little known issue with your Accumulation funds:


    There are investment trusts that pay low-to-no dividends, but they are not passive. These trusts are companies that happen to go about investing, rather than funds like your passive accumulation funds. If they retain/reinvest income internally that’s their business. 🙂

    BRK.B (which I hold too, as the non-passive party in the Monevator universe) is a US company as you know, which means it’s subject to entirely different rules to UK companies. Similar with US funds, where things are equally confusing. (E.g. US taxpayers who own mutual funds in the US have to pay capital gains annually, or something like that, even on gains made internally by the fund. I forget the exact rules. Whereas US ETFs do not).

    This sort of thing is why I urged UK investors to shield as much of their portfolios as they could in ISAs and SIPPs for many years before the dividend tax appeared. Okay, some already had too-big portfolios for that. But others said there was “no point” wasting money (at the time maybe a few quid a quarter, now free in most cases) on an ISA versus a general investing account because dividends weren’t taxed for them. Well, things change.

    Anyway, you have my condolences since I’m in a similar set-up (I have a limited company that pays dividends, and still have a smattering of dividend-paying shares outside of ISAs and SIPPs for historical reasons, although down to bare bones now. Still pregnant capital gains on the other hand…. Sigh.)

  • 52 CisforV January 18, 2020, 2:21 pm

    Regarding inflation rate. If we stick with RPI for the sake of argument, how do you decide which point of reference to use? ONS publish 12-month inflation rates each month Jan-Dec. They also publish an annual rate (appears to be average for the year Jan-Dec), not to mention quarterly rates (average every three months).

    The state pension uses the rate published in Sep. A small DB pension I have uses Apr. Personally I would use Dec or the overall annual rate (then apply the increase in Jan following the ONS publication).

    Using 2019 RPI, the above would give:
    Apr: 3.0
    Sep: 2.4
    Dec: 2.2
    Annual average: 2.6

    Source: https://www.ons.gov.uk/economy/inflationandpriceindices/timeseries/czbh/mm23

  • 53 Grey Wolf January 30, 2020, 3:18 am

    Be glad for any help or input, Is my current portfolio diversified enough, age 38. Also how should I allocate future contributions my aim was to contribute monthly to each fund equal to its desired allocation percentage, then after a year start to re-balance via monthly contributions until the allocation is back in line, or should I invest to each fund equally, or would yearly re-balancing via selling and buying be better?

    L&G AAA-AA-A Corp Bond All Stocks Index 8%
    L&G All Stocks Gilts Index Fund 8%
    L&G Cash Fund 10%

    L&G FTSE Global Developed Small Cap Index 4%

    L&G Global Emerging Markets Index Fund 6%
    L&G Stewart Investors Asia Pacific Leaders 11%

    L&G Artemis Income (hopefully adds diversification though defensive stocks) 8%
    L&G UK Equity Index 17%

    L&G World (Ex-UK) Equity Index Fund 28%

  • 54 xxd09 January 30, 2020, 10:38 am

    Grey Wolf
    If you like complex portfolios and you like tinkering your portfolio is ok
    You seem to believe in indexing
    If I was your age and starting my serious investing career again (I am 73) I would buy a Vanguard Global Equities Index Fund and a Vanguard Global Bond Index Fund hedged to the Pound
    Simple,cheap and easy to follow -KISS
    Leave it alone-stay the course and concentrate on your life and day job( where you have control and can make money)
    Increased proportion of bonds as you get older
    That’s it
    PS I arrived at this arrangement at 55-38 would have been so much better

  • 55 Grey wolf January 30, 2020, 5:38 pm

    Yep I do enjoy to tinker and possibly the 2 fund approach would be a sensible move! Not sure im there just yet! I intend to increase my contrubutions steadily every year now and have been, every pay rise I get I apportion some to increase my contributions for tax purposes also.

    I find that taking an active interest in my investments spurs me keep improving and increasing my contributions if that makes sense!

    Also I have limited spare cash due to a young family, my pension tinkering gives me something to focus on apart from sleep deprivation and the stress of work!

    Thanks for the advice! Maybe in 2 years i will assess my skill at rebalancing try and further increase my knowledge! Take the promotion next time im offered it and likd you say concentrate my energies on other things!

  • 56 Brady January 30, 2020, 8:33 pm

    Hi Grey Wolf

    I agree with xxd09, I’m a similar age to you and have just ditched all my active equity funds in favour of the same L&G world ex Uk, and Uk funds. One of the funds I sold was Stewart Investors Asia Pacific, the fees are too high, the fund held loads of cash which was a drag on performance and it underperformed its index last year or 2.
    Personally I’d sell or reduce your Artemis Income, Stewart Inv & Corp bonds Fund in favour of World (Ex UK) tracker. (Corp bonds are correlated with equities so at your age you may as well just own the equities direct)

    Or you could just copy the slow and steady portfolio !

  • 57 xxd09 January 31, 2020, 12:12 am

    Just a further note
    I think playing about with funds does give you a feel for the market and the sheer mechanics of handling a portfolio BUT I would get over that as soon as possible to let the magic of compounding(which needs time) do it’s work
    I still maintain a great interest in investing but it tends to more through reading than actual hands on stuff anymore
    My Asset Allocation and choice of funds was set years ago but is reviewed regularly-doing that keeps me on my toes

  • 58 two shilling and sixpence February 1, 2020, 11:00 am

    @ xxd09

    Regarding the “Vanguard Global Bond Index Fund hedged to the Pound”.
    If i am reading the fact sheet correctly 17% is in BBB rated bonds.
    Is this a concern ?

  • 59 xxd09 February 1, 2020, 7:04 pm

    I take your point -it is a matter choice as bond funds reach for return how much risk the investors takes
    I have been in this fund for many years as my only Bond fund -actually 65% of my Asset Allocation
    I guess it’s a question of trust by the investor -as always -of the bond fund managers
    The inclusion of some corporate bond funds in this fund is also a matter of bond fund manager choice and is of some concern to a bond fund purist

  • 60 two shillings and sixpence February 2, 2020, 1:32 pm


    Thanks for feedback.
    Had a look at a few of the other global bond index funds and they have similar BBB rated %
    My concern with UK government bonds is how the whole brexit is going to play out.
    Maybe my home bias is seeing potential problems on the horizon for the UK and failing to see similar problem for outside the UK. Or maybe i seeing a problem for UK Gov bonds where there is none.

    Anyhow a bit of both Global and UK Gov bonds might be the way to go for my own peace of mind if nothing else

  • 61 Mike Rodent February 4, 2020, 7:01 pm

    Dear Mr Monevator,
    I’ve just been dipping into your SSPUs over the years to try and see how and more importantly why the changes in funds and target percentages have occurred.
    Could you just tell me why you decided to take up global property, and linkers (which you seem to have gone off in 2018 Q4 but still hold a year later)?

    Also your initial target for UK equity was 20%, but I see that is now down to 5%, quite a drop. Partly this is no doubt due to the strategy of switching 2% to bonds each year, but I was just wondering whether this shying away from the UK is at all Brexit-related? Obviously your “Dev world ex-UK + global small cap + global property” still stands at slightly over 50%, the same as your initial 2011 “Dev world ex-UK” percentage.

    Plus: I ask this as basically someone who just doesn’t get bonds: do bonds still work in such a continuing low-interest environment? Many, including the Sage of Omaha, say don’t invest in things you don’t understand. Doesn’t that mean I should avoid bonds? More or less the only bond holdings I currently have (admittedly quite a large quantity) is IE00BCRY6227: ultra-short-term US bond ETF, pretty much equivalent to putting your money in a US bank account paying a reasonably good 3% interest.

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