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 [1] ended the year up over 14%. Not something I’d have predicted during the teeth of the coronavirus crash [2].
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 [3] and catch up on all the previous passive portfolio posts [4] 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 [5]
But what are the actual scores on the doors?
Here’s the latest numbers in Denarian Spreadsheet-o-vision:
[6]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 [7] 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 [8].
The ten year time-weighted [9] 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 [10], 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 [11]? 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 [12] 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 [13] 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 [14] diminished rapidly as I closed in on my goal [15]. So I’ve watched with interest as – despite many people being queasy about bonds [16] because of negative yields [17] – 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 [18].
But I wouldn’t be without them, having witnessed the panic [19] 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 [20].
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 [21] (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 [22] 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 [23] 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 [24].
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 [25], and so these are our trades:
UK equity
Vanguard FTSE UK All-Share Index Trust – OCF [26] 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 [27]
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 [28] 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 [29] such as Vanguard’s LifeStrategy series [11].
Interested in tracking your own portfolio or using the Slow & Steady investment tracking spreadsheet? This piece on portfolio tracking [30] shows you how.
Take it steady,
The Accumulator
- 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. [↩ [35]]