≡ Menu

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

Receive my articles for free in your inbox. Type your email and press submit:

{ 61 comments… add one }
  • 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:

    https://monevator.com/income-tax-on-accumulation-unit/

    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
    xxd09
    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
    xxd09

  • 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
    xxd09

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

    @Xxd09

    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.

Leave a Comment