Periodically, I’ll get a stock market-related communication from my co-blogger The Investor that sounds like he’s in the midst of a depth charge scene from Das Boot.
It’ll go something like this:
“Schnell! Schnell!” I’ll hear down the Monevator speaking tubes.
Or perhaps it could be: “Sell! Sell!”
“We’re going down!”
“Financial Independence under attack!”
I imagine The Investor in his control room, bathed in emergency light red. Market sonar pinging, portfolio pressure gauge spinning, shares getting crushed.
Valiantly The Investor tries to contain the hull breaches, as volatility rocks his boat and reality floods in.
Das Boot on the other foot
Me? I take it all as my cue to “Dive! Dive! Dive!” my psychological Nautilus.
Iron-clad against stock market news and cruising fathoms below the turmoil, there is comfort in the darkness.
The occasional morsel of information floats down from above. A rotting carcass picked up by my searchlights – already too stale to divert me from my course.
When at last I do surface – days or weeks later – the market seas are generally calm.
And so it is today, as I inspect the Slow & Steady portfolio nets after the recent alarm… while The Investor hangs his sodden undies out to dry on the deck.
Sorry. That’s an image you can’t quite unsee.
Despite a winter battering by Omicron waves – with The Investor’s growth stocks apparently being hit by a shrinking gun – our Slow & Steady portfolio is up over 4% on the quarter and a remarkable 10% for the year.
That’s on top of last year’s 14% gain.
And it builds on 2019’s 16%.
I keep pinching myself, but I’m not dreaming.
The Slow & Steady portfolio is Monevator’s model passive investing portfolio. It was set up at the start of 2011 with £3,000. An extra £1,055 is invested every quarter into a diversified set of index funds, tilted towards equities. You can read the origin story and find all the previous passive portfolio posts tucked away in the Monevator vaults.
So which of our passive lobster pots landed the biggest catch this time?
- Global Property: up 28.3% in 2021 and 9.3% annualised over the seven years we’ve been invested in this asset class.
- Developed World ex-UK: up 22.3% in 2021 and 15% annualised over the 11-year lifespan of the portfolio.
- UK FTSE All-Share: up 18.3% in 2021 and 7.4% over 11 years.
- Global Small Cap: up 16.7% in 2021 and 13.8% over seven years.
- Inflation-Linked Bonds: up 4.7% in 2021 and 16.3% over seven years.1
- Emerging Markets: up 0.36% in 2021 and 7.8% over 11 years.
- UK Government Bonds: -5.6% in 2021 but up 0.2% over the 11 years.
Note: these are nominal gains. Subtract inflation for the real return.
The 28% annual gain from global property in 2021 versus near-zero from Emerging Markets reminds us again of the importance of diversifying our equities.
It was impossible to know when we started this portfolio in 2011 that we could have just invested the lot in the S&P 500 and left it at that.
In an alternate universe US equities might have spent the last decade turning in the sort of deeply average returns we’ve had from the FTSE All-Share.
Indeed we may yet enter that alternate universe if the current valuation levels of the S&P 500 (levels last seen en route to the dotcom bust) fulfill the latest prophecies of poor expected returns to come from US large caps.
If so, it’s plausible that our US-heavy Developed World fund will then trail in the wake of our other equity holdings in the decade to come.
Or maybe the entire equity asset class will take a pounding and we’ll be left clinging to bonds like a buoyancy aid?
Nobody can ever perfectly see the future through the gloom.
Steady as she goes
For that reason I’m very happy to now rebalance away from our Developed World fund; it has drifted away from its 37% asset allocation anchorage to comprise over 41% of the portfolio.
Our rules dictate we’ll take some of those profits and invest them back into bonds – the ‘buy low’ asset class after a very poor year.
There’s some light rebalancing to be done with the other equity funds, too. Their proceeds will help pump emerging markets back up to its 8% target allocation.
We’ll also increase our inflation-linked bond allocation by 2%, at the expense of gilts.
We do this because we’re gradually shifting the portfolio’s defensive assets to a 50:50 split. We hold index-linked bonds for inflation protection and conventional UK gilts for recession resistance.
Finally, with our annual rebalance and asset allocation review complete, it’s time to calculate the increase in our investment contributions in line with inflation.
RPI inflation was a shocking 7.1% this year according to the Office for National Statistics. (The CPIH rate was 4.6%). We increase our contribution by RPI every year to maintain our purchasing power.
It means we’ll invest £1,055 per quarter in 2022. That’s up from £985 in 2021 and just £750 back in 2011.
Our contribution is split between seven funds, as per our predetermined asset allocation. As discussed above, we also rebalance every year.
These are our trades:
Vanguard FTSE UK All-Share Index Trust – OCF 0.06%
Fund identifier: GB00B3X7QG63
Rebalancing sale: £196.79
Sell 0.843 units @ £233.56
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: £2,536.24
Sell 4.626 units @ £548.30
Target allocation: 37%
Global small cap equities
Vanguard Global Small-Cap Index Fund – OCF 0.29%
Fund identifier: IE00B3X1NT05
Rebalancing sale: £154.30
Sell 0.378 units @ £407.67
Target allocation: 5%
Emerging market equities
iShares Emerging Markets Equity Index Fund D – OCF 0.19%
Fund identifier: GB00B84DY642
New purchase: £585.92
Buy 304.061 units @ £1.93
Target allocation: 8%
iShares Global Property Securities Equity Index Fund D – OCF 0.17%
Fund identifier: GB00B5BFJG71
Rebalancing sale: £534.90
Sell 203.615 units @ £2.63
Target allocation: 5%
Vanguard UK Government Bond Index – OCF 0.12%
Fund identifier: IE00B1S75374
New purchase: £1,928.10
Buy 10.616 units @ £181.62
Target allocation: 29%
Royal London Short Duration Global Index-Linked Fund – OCF 0.27%
Fund identifier: GB00BD050F05
New purchase: £1,963.20
Buy 1731.214 units @ £1.13
Plus reinvested dividends: £87.83
Target allocation: 11%
New investment = £1,055
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 = 0.16%
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,
- Much of that gain stems from when we were invested in longer-dated UK index-linked bonds until April 2019. [↩]