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The Slow and Steady passive portfolio update: Q4 2020

The Slow and Steady passive portfolio update: Q4 2020 post image

Well so long 2020. You have been the weirdest year of my life, and 2021 is really going have to work hard to top you.

Perhaps the weirdest of the weird is that you didn’t leave our investment portfolios looking like smoking craters.

Monevator’s own Slow & Steady passive portfolio ended the year up over 14%. Not something I’d have predicted during the teeth of the coronavirus crash.

At that point global equities were down 26%. The Slow and Steady passive portfolio got a 3% bonus by rebalancing out of bonds and into battered equities just after the market bottomed out towards the end of March.

However we mostly owe our good fortune to an economy intubated by the central banks. I wouldn’t blame anyone for thinking that the ultimate reckoning is only postponed.

Then again, some people have been warning asset prices were defying gravity for the entire decade we’ve been reporting the Slow & Steady portfolio’s progress.

10 years of Slow & Steady

We launched our model passive investing portfolio in January 2011 as a proof of concept. We wanted to demonstrate how a DIY passive investing strategy might unfold – the thought processes and techniques that underpin it – and to document the twists and turns along the way.

You can read the origin story and catch up on all the previous passive portfolio posts that are tucked away in the Monevator vaults.

I don’t think The Investor or I would have guessed that we’d be blowing out the candles on the portfolio’s tenth birthday cake all these years later.1

But what are the actual scores on the doors?

Here’s the latest numbers in Denarian Spreadsheet-o-vision:

The key number is the annualised return of 9.75% down in the bottom-right. A real return of over 7% annualised, once you knock off inflation of about 2.5% per year.

That’s a tremendous performance – especially for a portfolio that’s been heavily invested in government bonds along the way.

What has the last 10 years taught us?

Probably not as much as you’d hope. Certainly not how to write concise blog posts.

The biggest lesson is that, contrary to what James Bond thinks, the World is enough.

We’d have done better by simply investing our equity allocation in a Total World tracker.

The ten year time-weighted returns for the portfolio’s main holdings are:

  • Developed World ex-UK: 11.9%
  • Global Small Cap: 10.8%
  • Global Property: 7%
  • UK Government Bonds: 5.6%
  • UK FTSE All-Share: 5.5%
  • Emerging Markets: 5%

All our faffing with separate weightings was shown up by the global (ex-UK) index fund.

This wasn’t preordained. There’s an alternative universe where we were better rewarded for choosing diversifiers like global property and small caps, and overweighting in emerging markets. But that hasn’t been our universe for the last decade.

Many readers have asked us whether they needed all the bells and whistles. Can you get away with a one-stop-fund like Vanguard LifeStrategy? Or perhaps a Global ETF plus a Government bond ETF?

Absolutely you can. And you most definitely should if you don’t want to spend time fiddling with your portfolio.

My personal reward for sinking countless hours into researching arcana like factor investing was to be taught a few valuable life lessons:

  • Nothing is guaranteed.
  • Simplicity works.
  • Good is good enough.
  • Fees are certain, returns are not.

A pertinent question: would I be drawing these lessons if our diversifying funds had instead smashed the world tracker?

Probably not.

I’d likely be having a sly showboat about how wise an investor I’d been.

Lesson two

The second most valuable lesson I’ve learned is not to waste time beating yourself up for having less than perfect foresight.

If I could just pop back 10 years in my Tardis then I’d go 100% big tech or whatever stock has had the most amazing run up according to this week’s stats.

I have a stock-picking friend who spends his spare time torturing himself about the shares he sold that have since made someone else rich. You might as well flagellate yourself for not guessing this week’s winning lottery numbers.

There was good reason to think the tech sector was overpriced 10 years ago. It didn’t turn out that way but perhaps it will in the next decade. Or perhaps not.

Life’s easy in hindsight. That is why there’s always something to regret.

Don’t play that game. Don’t forget the good decisions you did make, and remember what role the different elements of your portfolio play.

Lesson three

My risk tolerance diminished rapidly as I closed in on my goal. So I’ve watched with interest as – despite many people being queasy about bonds because of negative yields – our model portfolio’s bonds have always cushioned the blow when equities took a hit.

Bonds are not guaranteed to protect your portfolio. They did not ride to the rescue during the UK’s worst ever stock market crash.

But I wouldn’t be without them, having witnessed the panic unleashed when equities caved in.

The trade-off is bonds will likely act as a brake on returns for the next decade. Better that than risk breaking yourself when all hell breaks loose.

Lesson four

It’s hard to be curious about investing and the world and remain completely passive.

I have never cared for ideological purity and am much more interested in the insights and rationale that underpin strategy.

I can cope with sub-par results if I know that the underlying process is sound. Fantastic outcomes built on poor process are otherwise known as flukes.

So I’m happy to alter the strategy if that’s where the evidence leads.

Change ahoy!

Which brings me to the strategic shift that I think is forced upon us by recent events.

Every year, we derisk the Slow & Steady portfolio by moving 2% of its equity allocation into government bonds.

This rule of thumb (known as lifestyling) helps account for our reduced capacity to recover from major losses as we age.

The portfolio was 80% in equities in 2011, and will be 60% equities in 2021 with 10 years left on our (notional) time horizon.

But the capacity of bonds to provide a real return has been diminished by repeated rounds of quantitative easing.

Continuing to move into bonds at 2% per year, as originally planned, would land us with a 50:50 equity:bond asset allocation in 2026 and 40:60 in 2031.

That plan no longer makes sense to me given bonds after-inflation return is likely to be negative over the next decade.

So I’ll make one final 2% move to take the portfolio’s bond holdings to 40% and then lifestyle no more.

Why hold bonds at all? Because we still want conventional government bonds to help limit losses during a crash. There isn’t a good alternative asset that can play that role as reliably.

So my compromise is to limit bonds to 40% of the portfolio, lean more heavily on equities for growth, and accept that a riskier portfolio is a necessary evil under the circumstances.

Asset allocation changes for 2021 are:

  • Emerging Markets -1%
  • Global Small Cap: -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 its regular updates on the weights of world stock markets.

Inflation adjustments

RPI inflation was only 0.9% this year according to the Office for National Statistics. In 2011 we invested £750 every quarter; we need to invest £985 in 2021 money to maintain our purchasing power.

New transactions

Every quarter we commit £985 to the bedlam of the markets. Our hopes and fears are split between seven funds according to our predetermined asset allocation.

We automatically rebalance every year, and so these are our trades:

UK equity

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

Fund identifier: GB00B3X7QG63

No trade

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: £2108.55

Sell 4.702 units @ £448.44

Target allocation: 37%

Global small cap equities

Vanguard Global Small-Cap Index Fund – OCF 0.29%

Fund identifier: IE00B3X1NT05

Rebalancing sale: £1591

Sell 4.553 units @ £349.41

Target allocation: 5%

Emerging market equities

iShares Emerging Markets Equity Index Fund D – OCF 0.18%

Fund identifier: GB00B84DY642

Rebalancing sale: £1175.61

Sell 612.299 units @ £1.92

Target allocation: 8%

Global property

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

Fund identifier: GB00B5BFJG71

New purchase: £58.07

Buy 28.355 units @ £2.05

Target allocation: 5%

UK gilts

Vanguard UK Government Bond Index – OCF 0.12%

Fund identifier: IE00B1S75374

New purchase: £3809.60

Buy 19.81 units @ £192.31

Target allocation: 31%

Global inflation-linked bonds

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

Fund identifier: GB00BD050F05

New purchase: £1992.49

Buy 1811.354 units @ £1.1

Target allocation: 9%

New investment = £985

Trading cost = £0

Platform fee = 0.35% per annum.

This model portfolio is notionally held with Fidelity. Take a look at our online broker table for cheaper platform options if you use a different mix of funds. Consider a flat-fee broker 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.

Interested in tracking your own portfolio or using the Slow & Steady investment tracking spreadsheet? This piece on portfolio tracking shows you how.

Take it steady,

The Accumulator

  1. Note: The birthday cake and the portfolio are both notional. The numbers are real and meticulously tracked, but this is a model portfolio rather than the one either of us invest in. []
{ 30 comments… add one }
  • 1 xxd09 January 5, 2021, 11:05 am

    Right out of the John Bogle playbook !
    The only item I find difficult to handle in this article is trading/rebalancing during a downturn
    It would be nice to be able do this but in practice 1) most barebones investment platforms freeze during downturns -trading becomes problematic 2) to be out and in of the market during downturns risks major losses for amateur investors if trades go wrong
    John Bogles rule for this situation was to “Stay the Course” ie sit tight
    Done this myself over at least 3 severe downturns and it works
    I would leave rebalancing to when you add money during the Accumulation phase and when you withdraw money during Drawdown phase
    Aged 74 retd 17 yrs and have never in fact had to rebalance (except when adding or withdrawing money as itemised above)
    I am aware of Larry Swedroe,s 5 % rule -never needed to use it
    Oh and I sleep at night which means a lot!

  • 2 Chiny January 5, 2021, 12:42 pm

    A timely article reminding me to get rebalancing (most effective this time last year). I just need to contemplate the “40%”, as distinct from “100 minus your age”, allocation rule – can this work when you reach age 80 ? 90 ?

    And my CGT sell/buy (another Monevator article) changes.

    Sadly, the taxman demands my attention first, this month.

  • 3 Bal January 5, 2021, 4:22 pm

    Another great article, I’ve enjoyed following the portfolio articles. I’d be well chuffed with a 9.75% annualised return.

    Interesting to note that Investors Chronicle has run a few articles on a simple portfolio which comprises of 50% world index tracker, 20% Gilts, 10% Gold, 10% sterling cash and 10% US dollar cash. The author seemed very pleased with a 4.6% return for a year.

    Nice to see IC showing something that wasn’t focused towards active funds for a change but not much to boast about and little confused why the author chose currencies and stated he purposely ignored assets classes such as index linked bonds, corporate bonds, global bonds and property. He seemed to claim cash was less risky and happy to accept that inflation would eat away at the cash value over time.

    Also kept comparing his simple portfolio (5 components doesn’t sound super simple to me) against the FTSE UK all share which has suffered badly recently (bit like comparing the last place time in a race and then using that as the benchmark because you beat it). Vanguard LifeStrategy 60 has made around 7% over the same period with no effort required (and UK bias). Wonder how the IC simple portfolio would compare against a decent 2 or 3 fund portfolio.

  • 4 The Investor January 5, 2021, 4:45 pm

    @Bal — Glad you liked the article, and thanks for the comment.

    I’d be wary personally of getting too sure that one portfolio (@TA’s, say) is better than another portfolio (the IC’s say) on the basis of returns.

    We don’t live counterfactual realities, and we don’t know how the world will play out over any multi-year period. There may well be scenarios where having 20% in cash looks like a great move, in retrospect, for example.

    The most important thing an investor can do is to have a broadly diversified portfolio and a sensible, logic-based strategy, and to keep costs down. After that, luck is involved.

    Here’s a couple of articles highlighting previous research in this area:



  • 5 Jonathan B January 5, 2021, 4:54 pm

    @Bal, my response to @TA’s update was also to compare VLS60. Trustnet gives figures going back 5 years in which time it has increased 56% which I calculate is 9.3% annualised. @TA has done a little bit better, though that wasn’t buy and hold so the quarterly additions will weight his yield towards more recent returns.

  • 6 Bal January 5, 2021, 7:04 pm

    Hi guys, I agree there is no right or wrong path and no one has a crystal ball but I just felt the IC author was retrospectively crowing about being ahead of the FTSE all share index which doesn’t seem much of an achievement. If he had focused on a better comparison such as the VLS60 there wouldn’t be much of a story.

    Sorry for implying one portfolio was better than another I just didn’t understand the logic going for currencies instead of other options due to the eroding effect of inflation. If we were to look back a year ago was it widely known that some bonds would be in danger of producing negative returns? If so why did a number of these publications suggest to increase bonds and active funds over equities?

    I’m not sure I feel the IC portfolio was diversified enough even without hindsight as 20% in currencies was known then to potentially fluctuate a lot and 10% gold running its own path may well have backfired.

    No one is perfect but I’ve noticed a few minutes ago the same author is now downplaying equities returns over bond fixed returns stating the risks are not compensated enough (what about his choice of currencies!). He may be looking at different viewpoints but he muddies the waters when his own simple portfolio also avoided bonds for cash. I’ve no axe to grind as I don’t feel I know that much, I’m just not sure where the author is coming from, I’ll just stop reading his articles 🙂

    P.s. I’d still be really chuffed with the 9.75% annualised return 🙂

  • 7 Bob January 5, 2021, 7:11 pm

    I have become increasingly aware recently of the the pound strengthening against the dollar. Given this portfolio is heavily invested in US equities, would you be concerned about currency risk (especially now the immediate impact of brexit has taken its course…). Could some of the gains over the past 10 years be attributed to the weakening pound? And would you be concerned about the opposite effect now? (I haven’t come across any hedged equity funds in my platform, but I believe they do exist elsewhere…)

  • 8 Prisoner January 5, 2021, 8:05 pm

    If I plug the target allocations in Portfolio Charts I get:
    Deepest Drawdown = 41.4%
    Longest Drawdown = 13 years
    There are no inflation linked global bonds, so I substituted short term Dev World bonds.

  • 9 Bal January 5, 2021, 8:31 pm

    @Jonathan B – Thanks for the VLS60 5 year annualised return calculation. 9.3% sounds a pretty nice result for minimum effort. Apologies that I forgot to mention this earlier.

  • 10 Liam January 5, 2021, 9:08 pm

    Hi all, I’ve been following along the last 5 years or so (although have read from the beginning) and it’s great to have a case study to help new investors like myself along so a real heartfelt thank you.

    I have the ishares Global property class D as you do above however this quarter fidelity states it’s unavailable and suggests class H. I was wondering if 1) Anybody else had come across this or is it a ‘fidelity issue’ (I was previously cavendish and this is first time investing since the take over) and 2) the main difference I can see between D and H is the buy / sell spread being larger in H – would I be right in thinking this is to reduce frequent buying / selling?

    Any answers greatly appreciated, thanks.

  • 11 Al Cam January 6, 2021, 12:12 pm

    I always find “real world” stuff interesting – so thanks for keeping this going.

    Re: “… a few valuable life lessons: …”
    I think it would be fair to say that taxes might matter too. Having said that, I understand that Slow & Steady (S&S) is assumed to be held in an ISA.

    Have you ever given any thought to re-casting your S&S data and spreadsheet to explore how things might look had it been held in a SIPP?

    Such an exercise would, of course, require more assumptions. Perhaps a good start for these would be along the lines you considered in your six part series about how best to combine ISA’s and SIPPS to achieve FI.

    I ask because I think the results could be informative – just a thought.

  • 12 The Accumulator January 7, 2021, 11:24 am

    @ Bob – yes, some of the gains were due to the weakened pound after the Brexit vote. While the pound can and has recovered some of that ground, there’s no intrinsic reason why we should expect an opposite effect. The UK is still out of Europe and even our own OBR believes the economy will be weaker as a result. If you think that a glorious economic future awaits then you could invest in trackers hedged to the pound but, frankly, predicting currency fluctuations is a fools errand and another performance-chasing trap.

    @ Liam – is the bid/ask spread differential permanent between the two or does it fluctuate over days and weeks? From memory the H Class iShares trackers allowed certain big platforms to offer ‘exclusive’ cheap index trackers than were generally available at the time (back in 2014) – Hargreaves Lansdown being one. Fidelity are big too, so H Class availability may have been due to their market power at the time.

    The D Class were more widely available and at least in the case of iShares Global Property index fund there’s no longer any OCF difference between the two classes.

    In short, they’re two sub-classes of the same fund, there shouldn’t be any intrinsic differences between them. Just make sure that the H Class is available at alternative platforms you might want to move to if Fidelity suddenly jacked up their prices. Otherwise, you’d have to sell down to cash, or invest in a different fund if you wanted to transfer in-specie.

    @ Al Cam – interesting idea. I am planning to make the model decumulation portfolio SIPP and ISA specific.

  • 13 Liam January 7, 2021, 2:25 pm

    @TA many thanks for the response, I realise I actually meant ishares emerging not property, although obviously your answer still stands (and the OCF is also the same for both classes of emerging as well). Interestingly the property fund has identical numbers and therefore the same bid / ask spread difference for class D and H, however for emerging class D has 0.80p difference compared to 10.6p for class H. This difference hasn’t changed in the week I’ve been looking at it but I only became aware of the difference of classes when investing on this occasion. Presumably this would mean for x investment I would get marginally less units buying class H (not that I have a choice if they’ve stopped class D!) as the bid is 9.3p higher for class H (I appreciate we are probably talking very small differences but just trying to understand it).

    Really appreciate the advice re considering other platforms fund availability, I’m nearing the point of swapping to fixed fee broker so will do some research using the broker table etc, thank you!

  • 14 Al Cam January 7, 2021, 5:07 pm

    Putting aside all complication re SIPP limits, my top-level understanding is that depending on (in no particular order):
    a) the tax differential (accumulation vs de-accumulation);
    b) use of any tax free allowance (impacts both acc and de-acc, but probably of most benefit in de-accumulation);
    c) salary sacrifice or not;
    d) any employer contributions;
    e) the accumulation duration;
    f) the pattern/shape of contributions in accumulation (i.e. flat, front-loaded, back-loaded, etc), and
    g) the assumed pattern / shape of withdrawals in deaccumulation

    the SIPP annualised return may be somewhat different to that from an ISA.

  • 15 SemiPassive January 7, 2021, 6:27 pm

    I think even the biggest proponents of gilts have to finally admit it is now difficult to hold 50% or more of a portfolio in them over the longer term looking forward given where we are now.
    You’ve absolutely been proven right up until now, but I’m glad to see you’ve finally taken an active asset allocation decision for the next decade 😉

  • 16 The Accumulator January 7, 2021, 7:50 pm

    @ Liam – yes, you’re right – same for emerging markets. You’re also right to think of the spread as a cost on your investment. Here’s a piece that goes into more detail: https://monevator.com/bid-offer-spreads-and-etf-costs/

    Obvs, with emerging markets, you have a wider choice of providers, so it’d be worth looking at rival offerings.

    @ Al Cam – it’s that simple 😉

    Pretty sure you’ll have seen this piece before, but for anyone else who’s looking for quick ways to compare SIPP vs ISA:


  • 17 Al Cam January 7, 2021, 9:01 pm

    Yes I have read that before – and IMO it is a very good article.

    When you translate all that article into a CAGR (or similar) over a period of, say, ten years the results may still surprise. And yes, there are a lot of factors – but I strongly suspect that these could be simplified somewhat.

  • 18 Steveark January 7, 2021, 9:11 pm

    I was surprised you didn’t compare the portfolio performance against the US indexes, either the S&P 500 or the total US market. Do you know how they fared over the same period?

  • 19 Al January 7, 2021, 9:12 pm

    Thanks for the update. Can you remind us why you are more heavily weighted towards non inflation linked bonds, rather than inflation linked gilts? At one point I think you had a 50/50 split.

  • 20 Slow T0 Learn January 7, 2021, 11:00 pm

    Thanks for the quarterly update. Tiny correction, the fee for GB00B84DY642 is 0.19%.

  • 21 Slow To Learn January 7, 2021, 11:03 pm

    The MSCI version (IE00BKM4GZ66) is 0.18%.

  • 22 Slow To Learn January 7, 2021, 11:06 pm

    GB00B84DY642 tracks the FTSE and is 0.19%.

  • 23 Al Cam January 8, 2021, 7:40 am

    Take a look at this classic which JPG seems to update around every April/May

  • 24 The Accumulator January 8, 2021, 10:06 am

    @ Al – There’s more conventional bonds because they’re likely to give us more crash protection during a recession than linkers. The linker proportion will head up over time to take the bond allocation to 50:50.

    @ Steveark – I’m not sure why you’d do that? The relevant benchmark for the equity section of the portfolio is a global index and the most relevant benchmark for the overall portfolio is now a 60:40 composite of equity and bonds.
    The S&P 500 has had a tremendous decade but that doesn’t tell us much about its next decade.

  • 25 Al Cam January 12, 2021, 4:32 pm

    Thanks to a recent chat with @TI, I have now realised that you use IRR to calculate the S&S portfolio returns. Thus, I imagine it would be quite easy to update your S&S returns spreadsheet to mimic a SIPP set-up.

  • 26 a_reader January 18, 2021, 10:38 pm

    So what about this for bonds, 10% allocation?

    Vanguard Global Aggregate Bond UCITS ETF GBP Hedged Accumulation

  • 27 long_investor January 19, 2021, 12:55 am

    Very educational

    I believe in LAZY and KISS

    This is what I have been doing

    Vanguard FTSE All-World ETF USD (GBP)
    Vanguard Global Aggt Bd ETF GBP
    Vanguard Glb Small-Cp Idx
    Baillie Gifford Pacific B Acc

  • 28 hyperhypo January 25, 2021, 12:39 pm

    @TA..great summary and well done for keeping the S&S up and relevant. It’s been hugely inspirational and educational for me, and many others i’m sure. Am i being a bit obtuse in thinking that, given a likely ceiling now on any future bond purchases (as overall %), that all future adjustment will occur in the 60% element. (other than the relative proportion of gilts / linkers in the 40% bit)? And that this marks the beginning of a deaccumulation phase. I appreciate you and @TI stress frequently that it’s a notional not a real portfolio, but why wouldn’t anyone want to put their real money where your mouth is, as it were?
    Candidly i’ve been hugely tempted to align my real sipp savings with the S&S, and the only thing that’s put me off was fact that i was ahead of the curve time wise, ie more like 60/40 or 50/50 realm, and didn’t have the confidence to make the relative adjustments. That obstacle seems to have been removed. Or have i got the wrong end of the stick on the ongoing 60/40 status.

  • 29 Jonny February 3, 2021, 10:31 pm

    Is there any reason for the 31%/9% UK gilt/inflation linked bonds split, and not say either:

    30%/10% (which is easier to balance, and much more pleasing on the eye)

    of 50%/50% (you mentioned in an your asset allocation post that “Many people split their fixed income allocation 50:50 between the two” – https://monevator.com/asset-allocation-construct/)


    Just curious.

  • 30 ADT June 15, 2021, 11:07 pm

    The Starcapital page appears to be gone. Are there any other reliable sites that show the weights of world stock markets? My workplace pensions has recently moved to Legal and General, and I’m trying to recreate a passive global tracker from their funds.

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