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%
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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!