Well that’ll do nicely. The Slow & Steady enjoyed 9.5% growth over the past year. Not bad for a portfolio on auto-pilot. I think it’s fair to say that reports of the death of the 60/40 portfolio are greatly exaggerated.
Here are the latest numbers:
The Slow & Steady is Monevator’s model passive investing portfolio. It was set up at the start of 2011 with £3,000. An extra £1,310 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 in the Monevator vaults. Last quarter’s instalment can be found here.
With the exception of global property, our equity holdings had a spectacular year:
Source: Morningstar Portfolio Manager
The returns for Emerging Markets, Global Small Cap, and the UK’s FTSE All-Share would look wonderful if they weren’t put in the shade by the blowout performance of Developed World equities – specifically US equities.
Indeed the S&P 500 delivered nearly three times the return of its nearest Developed World compadre this past year:
Source: JustETF
And this isn’t a new story. The US has been the Slow & Steady portfolio’s main engine of growth over the course of its 14-year lifespan:
Charts like this can shake your faith in the power of diversification.
If this is a free lunch then it comes with a bad case of food envy.
Where to go from here?
Do you want some more of what the guy in the cowboy hat is having? Or are you (sensibly) wary of piling in near the top?
There are three options as I see it.
You could:
1. Fold your non-US cards and project that the current trend will continue forever. Because that usually works out, right? [Editor’s note: Strong ironic tones detected.]
2. Conclude the trend contains the seeds of its own demise, as hinted at by valuation measures. For instance, Research Affiliates’ expected returns metric forecasts a real US annualised return of just 0.04% for the next decade:
If this version of the universe comes to pass, then ditching your diversifiers now to go all-in on Team America would be precisely the wrong move.
3. Finally, you could ignore both visions of the future, remembering that the US can indeed lag the rest of the world for years but also that the switchover point is inherently unpredictable:
Data from JST Macrohistory1, The Big Bang2, MSCI and Aswath Damodaran. August 2024.
The longer-term view revealed by this chart shows that lengthy periods of dominance are quite common.
They do end – or at least they always have before – yet in the meantime the winners in those eras probably seemed ‘locked-in’ to many investors at the time, too.
Worldly wisdom
The World index is now 72% occupied by US shares. If the S&P 500 continues to crush it, then World funds will pass that on, mildly diluted by the also-rans.
On the other hand if other locales do have a moment in the sun, then with a globally-diversified portfolio you’ll at least have some exposure to those new sources of momentum.
Personally I’m uncomfortable banking my net worth on any single sector, country, or asset class.
I’m happy to take my time getting to where I’m going, which is exactly why we called this project the Slow & Steady portfolio and not the Get Rich Quick Or Die Trying Mega-Punt portfolio.
Long story short: stand down, as you were.
Fourteen years down, six to go
I can scarcely believe it but the Slow & Steady portfolio is now 14-years old.
Back in 2010, I gave it a 20-year time-horizon – never thinking that was a destination this series would ever arrive at.
Now it looks like we might.
In the meantime, the original £3,000 seed money has multiplied to nearly £91,000 thanks to regular cash injections, reinvested dividends, and capital gains.
Here’s the story in a chart:
The first half of the journey was almost a cakewalk, barring the launch year’s knock back:
And the portfolio has only suffered one serious blow, in 2022. That year saw a bad-enough 13% loss in nominal terms – but a knuckle-gnawing 20% takedown after inflation.
Indeed, inflation went on to pour cold water over 2023’s glowing 9.2% result too, leaving us with a tepid 1.8% return in real terms.
Inflation stayed becalmed for most of my adult life. Yet old hands – and books – had warned us for years that ballooning prices was the most fearsome enemy we might face as investors.
Well, now we’ve lived it. Hence all the articles we’ve published on various ways to defend against galloping money rot.
Landing the plane
Still, such setbacks have done little more so far than knock the froth off the portfolio’s early promise.
Right now our annualised return is bang on average at 4.2%.3
However the next six years will have an outsized impact on the portfolio’s eventual fate due to sequence of returns risk.
If this was not a model portfolio but rather our life savings – and if we couldn’t afford to take a big loss from here on – then there’d be a strong case for allocating more to wealth-preserving, short-term inflation-linked bonds than we currently do.
Portfolio maintenance
We rebalance every year so that our portfolio doesn’t drift too far from our preset asset allocation.
Meanwhile our key equity/bond split is fixed at 60/40 for the remainder of the portfolio’s lifetime.
As the Developed World performed spectacularly in 2024 and bonds handed us another year of defeat, rebalancing amounts to selling off around 4% of our primary equities fund to plough into cheaper bonds.
Perhaps we’ll be rewarded for such saintliness in the next life – or maybe in the near future, if equities have a shocker in 2025.
Either way, remember rebalancing is about controlling your exposure to risk rather than juicing returns.
Our final move is to shift our 40% bond asset allocation by 2% per year until this sub-component is split 50/50 between conventional gilts and short-term index-linked bonds.
Which means that this quarter:
- The Vanguard UK Government Bond index fund decreases to a 23% target allocation
- The Royal London Short Duration Global Index Linked (GBP hedged) fund increases to a 17% target allocation
The reason for this is we believe short-term index-linked bonds help defend the purchasing power of a portfolio once you’re ready to spend it.
(See our No Cat Food decumulation portfolio for more on our thinking.)
Inflation adjustments
We increase our regular cash injections by RPI every year to maintain our inflation-adjusted contribution level.
This year’s inflation figure is 3.6%, and so we’ll invest £1,310 per quarter in 2025.
That’s an increase from £750 back in 2011. We’ve upped the amount we put in by 75% over the past 14 years simply to keep our nose ahead of inflation.
New transactions
Every quarter we’ll drip-feed £1,310 onto the stalagmites of our funds. This time our trades play out as follows:
UK equity
Vanguard FTSE UK All-Share Index Trust – OCF 0.06%
Fund identifier: GB00B3X7QG63
New purchase: £72.87
Buy 0.262 units @ £277.74
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: £3222.39
Sell 4.46 units @ £722.32
Target allocation: 37%
Global small cap equities
Vanguard Global Small-Cap Index Fund – OCF 0.29%
Fund identifier: IE00B3X1NT05
Rebalancing sale: £21.81
Sell 0.048 units @ £456.45
Target allocation: 5%
Emerging market equities
iShares Emerging Markets Equity Index Fund D – OCF 0.19%
Fund identifier: GB00B84DY642
Rebalancing sale: £161.45
Sell 77.532 units @ £2.08
Target allocation: 8%
Global property
iShares Environment & Low Carbon Tilt Real Estate Index Fund – OCF 0.18%
Fund identifier: GB00B5BFJG71
New purchase: £403.84
Buy 171.789 units @ £2.35
Target allocation: 5%
UK gilts
Vanguard UK Government Bond Index – OCF 0.12%
Fund identifier: IE00B1S75374
New purchase: £1434.45
Buy 10.985 units @ £130.58
Target allocation: 23%
Royal London Short Duration Global Index-Linked Fund – OCF 0.27%
Fund identifier: GB00BD050F05
New purchase: £2804.48
Buy 2653.248 units @ £1.06
Dividends reinvested: £196.10 (Buy another 185.52 units)
Target allocation: 17%
New investment contribution = £1,310
Trading cost = £0
Average portfolio OCF = 0.16%
User manual
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Take it steady,
The Accumulator
- Òscar Jordà, Katharina Knoll, Dmitry Kuvshinov, Moritz Schularick, and Alan M. Taylor. 2019. The Rate of Return on Everything, 1870–2015. Quarterly Journal of Economics, 134(3), 1225-1298. [↩]
- Dmitry Kuvshinov and Kaspar Zimmermann. 2021. The Big Bang: Stock Market Capitalization in the Long Run. Journal of Financial Economics, Forthcoming. [↩]
- 2024’s annual inflation figure is currently estimated to be 2.5%. [↩]
Personally don’t really like these global trackers. Some will only buy these taking the view that they are diversified but they contain hidden risks if you don’t know how weighted they are to the US. Really they should come up with something new that either caps the weight in a single market or have more of a fixed allocation per country.
Does anyone know why only an income version of The Royal London Short Duration Global Index Linked (GBP hedged) is available? Much prefer an accumulation fund.
@TA
You mention changing the bond mix to 23/17 but in the purchases section it states 25/15 as the target allocation. Is the latter in need of an update?
Thanks for the quarterly update!
@TA:
OOI, are you using CPI in the returns chart and RPI to escalate your cash injections?
Re: “If this was not a model portfolio but rather our life savings – and if we couldn’t afford to take a big loss from here on – then there’d be a strong case for allocating more to …”
How about [index linked] annuities?
Thanks as ever for the update.
As I have mentioned before, this is very similar to my own portfolio, except that I don’t rebalance except when I add funds (basically ‘cos I am too idle!).
As a long-term and real-life experiment in passive investing, I think it provides excellent evidence. Long may it continue.
I realise it is not an index fund, but would be interested in anybody’s thoughts on PIMCO Global Low Duration Real Return Fund GBP Hedged Acc.
Duration is 2.97 years vs 5.19 years for the Royal London fund.
Track record seems decent, the fund has $1159mm in assets and PIMCO is a very large fund manager in fixed income investing.
Benchmark is Bloomberg World Govt ILB 1-5yr Index (GBP Hedged).
@Mike, The, Abrdn Short Dated Global Inf-Linked Bond Tracker Class N Acc, is identical to The Royal London Short Duration Global Index Linked (GBP hedged) and is also hedged to GBP. Its charges are lower at 0.12%.
@Rob isn’t that the aim of the fund (in this portfolio at least)? Accepting that we don’t know better than the market, go with the market weight. As the article says, there may be a risk that the US is overwighted for future returns, but if we try and correct that then there’s the risk we lose out. I’m not sure I follow why a fixed allocation or capped market weights would reduce risk per se.
I’ve been following this portfolio since the start and my own investments have been passive since reading your web site and Smart Investing in 2011. As a token of gratitude I even turned off my ad blocker for this site and no others!
I try and be totally passive, but I retired at age 54 some 7 years ago, and our SIPPs provide our only income, so I have to play safe. When we need to sell to free up cash, Vanguard All World ETF has been the main (but not only) victim, but its heady valuations in the US holdings mean that I have been decreasing my allocation to that and increasing bonds, property and global dividend equities.
I’ve been doing the same in our ISAs. We shouldn’t have to touch them for several years (we’re still rolling unwrapped holdings from our PCLS into them) but we’re drawing harder on SIPPs than is safe (8%+) to bridge to state pension, meaning the ISAs will end up being mission critical, so they are being derisked along the same lines.
BTW, I did a search and can’t see anything recent about NS&I Index Linker Certificates. We have some maturing in 2026 and rolling them over doesn’t appeal as there is NO ACCESS to the money before the end of the term so they are zero use as emergency cash. I’m planning to also roll these into the ISAs but wonder if a gilt ladder is an alternative? I just read a recent (ish) article on buying gilts and now need a stiff drink!
@Rob While I think it is important to be aware of any strong weighting of a global fund, I am happy to trade that with not having to decide on an allocation between a set of alternative funds… or manage rebalancing them. Going a step further to something like a vanguard life strategy fund avoids even more decisions (guesses) and avoids wasting time / funds not being in any market: I know I suffered from analysis paralysis to start with.
@Precambrian I’m not saying this is true as it’s just a simplified thought example but imagine the scenario where US investors all by default put X% of there money into the S&P at whatever price and every other investor globally put half of X in their domestic index and the other half of X in global indexes. If X is low this is no issue but if you grew X then the power of money flows would be sufficient to create a bubble even if one did not exist. If at most 10% of a global index could be in one market you get less issue but no limit can feed the bubble and divert funds by design into a single market. The case made to me is that increased use of trackers, their design and belief in the exceptionalism of the US may make more substantial bubbles possible with indexes actually being a notable contributing cause, not just a passive spectator. Maybe that seems dramatic but it is certainly true that a global company in the US will trade at a higher multiple than the UK even if they operate in the same markets with the same profits. Maybe it’s nothing new but following the money flows does make it feel more like bitcoin than sound investment and maybe index investing has got too big for their current design without intervention to avoid bubbles. A simple redesign to avoid the one market global indexes are heavily weighted to to be honest would in my opinion outperform over the next 10 years
@Rob
The 2024 archives are well worth a peruse on these topics, for example:
https://monevator.com/passive-investing-edge-and-market-efficiency-winners-need-losers/
https://monevator.com/us-stocks-vs-the-world/
@Curlew – great spot! Obvs just a test to make sure people read that far down 😉
@Al Cam – yes, CPI for inflation-adjusted returns but RPI for escalation. I’m not sure if we’ve spoken about it before but I think using RPI for uplift creates a little extra wiggle room. In reality, it’s whatever people can afford from their disposable income.
You’re quite right, index-linked annuities are worth looking at too – if the money is intended to fund retirement at a more traditional age 🙂
@old eyes – cheers!
@gadgetmind – I am honoured that Monevator makes your adblocker exception list! I shudder to think what sleaze TI is promoting these days 🙂
My NS&I index-linked saving certs are maturing this year and I won’t be renewing for the same reason – no access. I’ll sink the proceeds into a rolling linker ladder which works the same way as a rolling savings ladder – so long as I don’t sell early.
@Rob – bubbles have always been possible – you don’t need index trackers to cause ’em. There’s a huge amount of active and institutional money invested in trackers, never mind the rest of the market, so price discovery is not dead. I don’t think we need worry about vast swathes of dumb money blindly rising prices. If you see it coming then sell!
re: US dominance in vanilla funds – you might be interested in the World ex-US ETF that launched recently? And there are plenty of factor ETFs that let you buy a world index that isn’t weighted by market cap.
I was expecting a slightly bigger rebalance this time – maybe enough to be triggered by the 5/25 rule as well as the annual, but it’s just -4% from DevWxUK. Looking at the target weights v FTSE All-World, I think S&S is actually already tilted a bit away from USA?
I kinda see @Rob’s point about Cap weighting & active buyer bias & passive buyer following making bubbles: why don’t indexes weight companies by their actual profits?
MegaTech really does have plenty of future profit baked in though – the whole world now pays them to facilitate it’s admin, entertainment, etc!
Thank you for the update @TA. The 600+ % S&P return dominates other markets like the Himalayas would tower over the Dolomites. There are 3 possibilities:
1. Mike Green of Inelastic Markets fame is right and the 0.2% p.a. (as a % of market cap) net fund flow via automatic monthly contributions to trackers is creating a structural tailwind for the US and pumping up valuations Stateside relative to other countries (the “relentless bid” as Ben Carlson and Michael Batnick put it).
2. It’s just part of the normal back and forth cycling of global equity market leadership between the US and the rest of the world, with the only distinguishing feature this time being that the current period of US leadership just by chance happens to be longer and more pronounced than before.
3. The US is an exceptional market with exceptional companies and on sheer growth, wide moat, quasi monopoly quality grounds the largest stocks in the US deserve to and will continue to have dominance.
Explanations 1 and 3 are not mutually exclusive, but explanation 2 is. Which explanation is true will radically affect ones’ choice of actions or, indeed, of inaction. Unfortunately we can’t know which explanation is true, even in hindsight, yet alone prospectively.
@TA (#13):
We may well have spoken about this before – possibly a hazard of my aging!
Re annuities: pity deferred annuities are seemingly not available in the UK.
Re ILSC’s: the [t & c’s] changes for the worse are IMO regrettable – not sure what I will do with mine yet though, as they have served so well especially over the recent past!
@Al Cam, I’m about to double down on my holding of ILSC (due to an inheritance), so i was a little surprised to see that others here were looking to offload. For me, losing the cash in early option was never an issue. The Govt switching from RPI to CPI a few years back was far more concerning, but even that didn’t budge me off holding them as part of a diversified portfolio.
TI’s article from June 2016 rated ILSC’s as….”a solid hold, then”, and for now i think i remain in full agreement with that.
Re ILSCs I’m guessing that at some time soon the ability to roll over will be withdrawn.
@KC (#17):
I am definitely not against taking a contrarian view.
Having said that:
a) unless something has changed you have not been able to buy any new ILSC’s for years; and
b) gilts are indexed to RPI (generally higher than CPI) but in 2030 RPI will change to use the CPIH data and methods – ie it will effectively become CPIH. Interestingly though, CPIH has behaved much more like RPI than CPI over the last year or so – whether this will continue is not at all clear to me. Furthermore, since it was introduced, CPIH has generally lagged CPI by a small amount. Currently CPIH stands at 134.6 vs CPI at 135.1 (both were 100 in 2015).
So, if the inability to cancel early (possibly with a loss) is not of concern, then this is not – at least to my mind – a no brainer! Add to that, that once you have dropped your ILSC’s you currently cannot ever replace them!
@Meany – check out factor investing ETFs for alternatives to market cap e.g. RAFI’s fundamental indices. Also see: https://monevator.com/how-to-invest-in-the-profitability-or-quality-factor/
@DH – has anyone put credible numbers on this passive effect?
Questions I have include: why isn’t undone by active price discovery? (The active share of the market is still far larger than the passive share.)
Why do we need a passive narrative when the US is economically outperforming the rest of the developed world by a wide margin?
If what we’re seeing is the effect of passive investors dumping money into the S&P500 or a world tracker then why are the gains concentrated in a handful of tech giants poised to reap the benefits of the AI revolution…? (Suggesting that active investors are driving the trend.)
I’m genuinely interested. I haven’t read Mike Green. The ‘dumb money’ trope has been doing the rounds for years, so I’m wondering if anyone is making a more convincing case – other than tracker inflows are rising so something funny must be going on.
@Kid Cocoa – For me those ILSC’s are effectively an emergency fund. I was only ever able to buy into the last tranche before they were kyboshed. I need to be able to access the money in a hurry. If it wasn’t for that then I’d roll them over.
But index-linked gilts are effectively the same thing. Except they have a better yield and I can sell them anytime. The downside is they’re shrouded by a lot of arcane jargon which makes them seem complex, but it can be decoded!
Hi @TA.
These few links give a decent summary of the advocates for explanation 1 in my earlier post:
https://www.yesigiveafig.com/p/why-bother-being-better
https://www.yesigiveafig.com/p/be-better
https://www.yesigiveafig.com/p/a-look-forward
https://klementoninvesting.substack.com/p/market-efficiency-active-vs-passive?s=r
https://klementoninvesting.substack.com/p/the-butterfly-effect-index-funds
Although not stated in the above links, the academic papers on the inelastic markets hypothesis come up with flows into the S&P 500 increasing market cap in a ratio of between 3 and 8 to 1 (most likely 5 to 1), with flows to active managers (who in principle are price sensitive) most likely increasing market cap in a ratio of 2.5 to 1, whilst flows to passive funds (which are price insensitive, in both theory and practice) increasing market cap by, most likely, 17 to 1.
About half the increase in market cap is persistent.
As passive share increases the persistent effect on market cap of fund flows increases.
Historically I get an extra 1.5% p.a. performance for the S&P 500 from this effect (back of envelope is (17 minus 2.5) x (0.2% p.a. change of market share net fund flow to passive) x 0.5 persistence).
Over the past 25 years that alone would be enough to account for all the US outperformance – as it has led on passive market share change over the period.
Mike Green says stay with passive. Active structurally can’t compete. Active has the headwind and passive the tailwind.
Where Green goes beyond Klement is identifying that in the US the mega caps have less effective liquidity per unit of market cap (even though they have an absolute higher level of liquidity than the rest of the market) because, measured as a proportion of their market cap, market makers hold less mega cap stock (relative to the market cap) as they make a far smaller spread on the mega caps than the smaller caps.
This relative lack of liquidity in the mega caps compared to their market cap exaggerates the effect of fund flows which has tended to push up the market cap share of the mega caps as a percentage of the whole market.
Green also emphasises that these effects are non linear and convex.
At 50% passive share, 70% in the US and 40% of that in mega caps the effects are noticeable and persistent but not crazy.
However as you get to 95% passive share and higher (than now) levels of US share (of global market cap) and mega cap share (of US cap) then things are projected to go bananas unless something breaks first.
“If what we’re seeing is the effect of passive investors dumping money into the S&P500 or a world tracker then why are the gains concentrated in a handful of tech giants poised to reap the benefits of the AI revolution…? (Suggesting that active investors are driving the trend.)”
100% agree on this and to me this is a key point. Tesla has a PE exceeding 100 and is worth more than the next 10 most valuable car companies due to active investments and the “Musk effect”. That cannot be caused by passive funds but if that Tesla value is wrong then the world fund allocation is to an extent wrong. Indeed the world index gives the same weight to Tesla as it does to Germany which to me fails a sniff test.
To use a historical example 40% of the world index in the late 80s was invested in Japan. Spoilers: this was a bad allocation (go check the Nikkei).
This has been on my mind for the past year as I want to invest passively without intervening but risk management tells me to intervene and safeguard my hard earned money. For now I’m passive with a sniff test on top but that is only possible because I’m not as busy as I used to be.
For me passive funds are though still very much the smart way to invest as nothing beats them on cost and diversification, but I do feel is a layer of risk management missing to fire and forget. Whilst I would be 100% happy to buy 10% in each of the 10 biggest markets even including the US as even a 50% US drop would be capped at 5% total drop. 100% in a world index has higher risk once I start sniffing.
@Rob — I wouldn’t necessarily agree with you about Tesla. (It’s been ‘insanely crazy mis-valued’ according to many who cite the much same logic – all the way from $1 in 2010 and change in today’s money to $400 – though I’m infinitely less enamoured of the company today, mostly due to its CEO.)
But I do share many of your concerns about the US market, and the risk embedded by its overweight in global trackers.
Indeed I saw data today from JP Morgan saying that from today’s starting valuations for the S&P 500, ten-year annualised returns have *always* been between just -2% to +2%.
The snag? The picture was more or less the same when I opined as much last March:
https://monevator.com/what-to-do-if-youre-queasy-about-the-us-stock-market-members/
So one has to at the least be prepared to look wrong and feel silly for a long time in betting against the US right now.
And to very possibly be wrong forever, because sometimes things do change, though yeah, my own money says probably not.
It’s a sixty four thousand dollar question – or sixty trillion dollar one, going by the S&P 500 current market capitalisation.
I find all three possibilities persuasive. But adopting the principle of indifference in assigning probabilities (in the absence of one scenario being obviously more compelling), the odds would be 25% (and not 33%) each as the options are not options 1 (inelastic markets), 2 (the ‘ordinary’ cyclic market leadership) or 3 (American companies’ exceptionalism); but instead are option 1 only, option 3 only, options 1 and 3 in combination or option 2.
That would mean only a 25% chance this is just the normal ebb and flow of the US leading followed by the rest of the world leading.
It does seem pretty clear that the US had led on earnings growth for a protracted period and by a county mile. But US PE multiples have grown faster too. On both see for example Top Down Charts today:
https://open.substack.com/pub/topdowncharts/p/chart-of-the-week-earnings-superpower
@KC # 17
Looking at the real yields on index linked gilts on yieldgimp.com, they have got up again today.
TG36, which is roughly 10 years duration is yielding 1.37%. That is based on RPI to 2030 and then CPIH, but the extra 1.37% should easily beat out CPI + 0.01%, especially as RPI is usually a bit higher than CPI.
Or go further out to look at TG48, maturing in 2048, that has a real yield of over 2% now.
Not sure why I would want to hang onto the Index Linked National Savings Certificates. Sure I have to hold them to maturity to get that return, but I am no more likely to sell them than I would be to cash in the ILNSC’s, the difference being I would have the option to do so, albeit at the prevailing market price, where as you are locked in with the new, renewed, ILNSCs. In 2016, Index Link Gilts were yield much lower, like conventional gilts. Times have changed.
Always interesting to see the progress of the Slow and Steady portfolio. Love these updates. I underperformed the Slow and Steady portfolio this year due to under-exposure to USA and overexposure to Europe.
One thing that I can’t reconcile is that the chart of Slow and Steady portfolio annual returns 2011-2024 above seems to show a nominal annual return for 2020 of about 11.1% but the Q4 2020 article says “Monevator’s own Slow & Steady passive portfolio ended the year up over 14%”.
Just wondering what the reason for that difference is, the other years do look consistent.
For retirement purposes, an additional reason to prefer inflation linked gilts to ILNSCs is that you can liability match with the former but not the latter.
For example, if you were 10 years away from retirement you can currently build a 30 year collapsing ILG ladder that (with the exception of the coupons*) starts paying out in 10 years time with a payout rate of a shade over 5% (using the tool at https://lategenxer.streamlit.app/Gilt_Ladder). At retirement the ladder could be kept for income or swapped for an RPI annuity (a comparison at the time would determine which was the best approach).
* In the tool, coupons are just kept as cash (just over £1k in the first year), but could be reinvested in the earliest gilts in the ladder.
@Jam (#25), Alan S (#27):
All good stuff* – as of today. But this situation was not always so, and who knows what the future may bring. As things stand, if you drop your ILSC’s you cannot ever get them back, which – of course – could change too.
I can absolutely see the attraction of deferred ‘products’ but with the benefit of hindsight still question the practicality to even a [non-retired] fifty something year old. Having said that, at least a gilt ladder is reversible. To add a few more details, in my case, I would have significantly over bought which could have significant opportunity cost implications – but that is a whole other story!
*The +0.01% ILSC’s currently provide is indeed very poor value
@Jam, thanks, it does appear that index-linked gilts are a no brainer in comparison to the dull old ILSC’s, but i do believe that there are a few differences between the two products that i need to consider. In recent times i’ve become a big fan of gilts, but whilst i’ve purchased a number of the more straightforward conventional ones i’m yet to dip my toes into the murkier waters of the index-linked variety. I do need to understand their relative complexities better, but from what i can gather (please correct me if i’m wrong) i believe they could respond differently to ILSC’s in certain situations.
A deflationary environment (gilts could perform worse), personal tax (gilts subject to income tax), and Government default (would gilts receive a bigger haircut than ILSC’s???) are 3 such considerations for me, but whether the combination of these would outweigh the superior yield of the index-linkers remains to be seen.
I think ultimately i may want to have my feet in both camps, but only time will tell which product performs better. If anyone has got Tom Baker’s number please let me know!
@Delta – many thanks for the links! I’ll dig into that.
@Snowman – good spot! I’ve gone back into the dusty S&S vaults and the higher 2020 return is a money-weighted return – as reported by Morningstar at the time. Morningstar’s Portfolio Manager has gone a bit HAL of late, so I recently unitized the portfolio and that’s the source of my annual returns now. IIRC, the Covid crash triggered a rebalance from bonds to equities and that must have worked out pretty well after the rebound.
@Rob and TI – am enjoying the debate. I’m genuinely torn about the US. I expect we’ll all know what we should have done by 2028.
@Kid Cocoa – you’re dead on about linkers being subject to income tax on interest (unlike ILSCs).
It’s also true that linkers don’t have a deflationary floor whereas ILSCs do. The UK hasn’t had a prolonged bout of deflation since the 1920s / early ’30s though. Of course, no guarantees without a hotline to Mr Who as you point out 🙂
re: haircut – I can’t think of any way to judge that one so personally I’m happy to take the yield.
The learning curve definitely takes some climbing but I think you’re most of the way there already with your conventional gilt forays. Anyway, I’ll shut up now 🙂
@TA (#30):
HAL?
Excel’s XIRR is pretty easy to use if you wanted to resurrect the money-weighted calculation and I am fairly sure you have all the relevant transactions.
I knocked this up a few years back to check out something and was pretty much able to re-produce your results then, as follows: Q3 2021 I got 9.44% vs your 9.45%!
FWIW, ideally I favour ILSC’s and linkers.
Not entirely similar: but lots of people bailed out of [cash] ISA’s because they could get better rates elsewhere but, IMO totally overlooked the tax benefits they were foregoing. IMO for a variety of reasons (possibly largely unforeseeable at the time of peak ISA jettisoning) every penny of ISA allowance is far more useful today than it ever was! Now where is my aged Filofax as I am sure it has a landline number for Tom Baker somewhere – probably in a packing case next to my XXL3 Crystal ball!
@The Accumulator
Thanks for the explanation. You say the (over) 14% 2020 return is a money-weighted return (MWRR) whereas you imply the roughly 11% is a time weighted return (TWRR). You think this difference may be because of a rebalance from bonds to equities and that must have worked out pretty well after the rebound (?) Or are you saying the MWRR and TWRR returns were both higher because of the rebalance and that the difference between MWRR and TWRR is down to the portfolio manager anomalies in which case ignore what follows; those sort of things happen sometimes.
A rebalance like this that worked out well would have increased returns, but that would be reflected in both the TWRR and the MWRR. So if the rebalance happened at single points in time without any period of disinvestment this wouldn’t explain the difference between TWRR and MWRR, it would only explain why the returns were relatively good for the year.
If a significant sale of gilts happened and then there was a time lag before the equities were bought by the sale money, so there was a period of disinvestment, and markets moved significant during that lag, I could see how that might cause the TWRR to be less than the MWRR.
But that aside I would expect the MWRR and TWRR for 2020 to be closer, assuming there is no period of disinvestment during the year. It’s only the new money being invested which would cause the TWRR to diverge from the MWRR slightly because the MWRR weights very slightly to returns towards the end of the year whereas the TWRR doesn’t so weight.
In summary I don’t like the use of TWRR for calendar years like this for portfolios without significant inflows of new money or withdrawals of existing money, in circumstances where it diverges from MWRR, because it removes the effect on returns of periods of disinvestment. I can understand that for a 10 year period say you might choose to link those one year MWRRs geometrically over the 10 years, to take out the effect that net money is going in over time and that effect builds up over long periods, and then that tells you if your portfolio is producing reasonable returns (in amount and variability) compared to indices or other investors. And I can understand in the very early years calculating a TWRR also makes sense because the net money going in over the year is a sizeable percentage of the average portfolio value.
I personally calculate a money weighted rate of return (nominal and real) for my entire investing lifetime, but I do also calculate linked annual money weighted rates of return just to see how my returns compare with say the FTSE all share.
Of course whether it is appropriate to use a MWRR or TWRR depends on the purpose to which it is used, or the question being asked, and the purpose isn’t always consistent with either methodology, so there can be some subjectivity here. The monevator article from a while back on TWRR vs MWRR covers this.
@Al Cam – I remember that well! It was reassuring that we got near identical returns. My returns were XIRR too. I’ve been using XIRR to calculate the portfolio’s overall annualised return for years, but I’ve been relying on Morningstar figures until recently for more granular figures.
HAL = the psychotic computer from 2001: A Space Odyssey. Turns out Morningstar has been suffering from HAL-ish episodes for longer than I realised. See below 🙂
@Snowman – thank you for your guidance as always. I’ve just calculated the money-weighted annual return for 2020 myself. I’ve got 11.62% vs 11.19% time-weighted. So looks like Morningstar’s 14.86% money-weighted return for 2020 was way off.
Hopefully that’s the only one out of whack as you mentioned that the others you looked at were all close to the time-weighted figures I’ve reported this episode. Either way, I’ll redo the money-weighted annual returns myself just to check. I can see why you prefer money-weighted returns more generally – though as you say, depends on the task. For the record, no period of disinvestment during the lifetime of the S&S. Anyway, thank you for noticing the discrepancy and nudging me to investigate!
@The Accumulator
That makes much more sense with 11.62% (money weighted) for 2020. Yes the other years in the chart are all consistent with the reported annual returns in the articles. I’ve always kept a note of the slow and steady annual return as a comparator with my own annual returns.
@TA:
Re HAL [9000], I am sure you know this, but just in case: have you ever transposed the letters one to the right, IB…. Turns out Arthur C Clarke had a pretty wicked sense of humour too. Do you think that also applies to Morningstar or is it something else?
P.S. I did find my aged Filofax but unfortunately my landline number for TB is not recognised, and …. my Crystal ball is just as fuzzy as it always was!!
P.P.S. I am with you and Snowman re MWRR
@Al Cam – I did not know about the IBM theory. Love it.
There’s two films going on in 2001.
First a quasi religious surface narrative about a God like disembodied alien intelligence which manifests itself through the abstract geometry of the Monolith, which serves as both an evolutionary catalyst (from ape to astronaut to star child) and as a portal (for Bowman to witness the birth of the Universe, transcend spacetime and overcome mortality in the “Jupiter And Beyond The Infinite” sequence, AKA Kubrick’s trippy lights show and Louis XVI room).
Then there’s a hidden simultaneous narrative which subtly undermines the hubristic notions of the Space Race. The unfinished Space Station / Stamford Torus in Earth orbit, the otherwise empty flight on the way to the Moon. The horror of the void in Discovery’s Jovian voyage. IBM (sorry HAL) deciding mere humans were not worthy to rendezvous with the creators of the Monolith.
Kubrick kept Arthur C Clarke well away from the filming itself and used him as an unwitting buffer with the invesors, including the likes of IBM and NASA, who thought he was making a documentary like production to promote what was at the time hugely contentious expenditure on the Apollo programme. They were mightily annoyed when they saw what he’d produced instead. and that’s without picking up on the film’s subversive hidden narrative (Kubrick always insisted on final cut and total editorial control).
Ultimately the Monolith is the black film screen itself onto which Kubrick has us project our fantasies of transcending. You have to remember this is the director who gave us Dr Strangelove and How I Learnt to Stop Worrying and Love the Bomb. If anyone could have pulled off the feat of hiding one film inside another it would be Kubrick, perhaps the greatest director of all time.
I would have loved to have seen, had he lived on, how he would have parodied and demolished the likes of Sam Altman and Elon.
Like the Space Race interpretation. I read a piece a few years ago that used 2001 as an aesthetic reference point for how our present might have looked had the Space Race continued.
@DH (#37), @TA(#38):
Interesting character Kubrick.
I understand that 2001 A… appears on a lot of peoples all time favourite list of films. Having said that, it was utterly panned by the critics on release. I strongly suspect it could/would not be made today – which is worrying, I think?
OOI, there are many interpretations of 2001, and AFAICT Kubrick never explained it. I read one recently that was adamant it was all about eating food!
Under the media franchise entertainment complex getting art onto screen now is like getting a camel through the eye of a needle. Even in the ‘New Hollywood’ era Kubrick could not have got it made without the subterfuge of using Arthur C Clarke as frontman and putting out (in 1966, two years prior) a supposedly promotional documentary on the making of 2001 (“Look Behind The Future”) which deliberately mislead the financiers and distributors that this was going to be a conventional film. Whilst interpretations of 2001 vary, I think it’s fair to say that everyone agrees it is the anthesis of conventional. Funnily enough, and returning to the themes of money (this is an investment blog after all 😉 ), Kubrick was an avid gold bug, and at just the right time, going ‘all in’ on Keynes’ “barbarous relic” after it became possible again for US citizens to buy and sell gold. The symbolism of The Shining has even been interpreted as a monetarist critique (I kid you not).
Gone through the past few years of the Slow and Steady portfolio updates, comparing to my 3 years of 80/20 stock/bond ETF ISA and mine which is showing cumulative:
Stock – positive 29%
Bond – negative 5%
Overall – positive 20%
Cumulative CPI 11%, so 9% real return over 3 years…
Not the worst returns, and while the bond performance is not good, I remind myself it’s been high inflation and there’s not been enough time to truly test the portfolio.
tl;dr keeping the 80/20 faith
Re #15, 20, 21 and 24 above: Dollars and Data’s Nick Maggiulli’s recent take on the Mike Green (and others) ineslatic markets hypothesis:
https://ofdollarsanddata.com/is-there-a-problem-with-passive-investing/
Nicely balanced. I’m pretty much with the conclusions save I think there’s already a bit more effect on price and will likely be more effect on both price and volatility in the future. But I’m in the same ballpark.