Well, well, our Slow & Steady portfolio has taken a little knock back – our first in nearly a year, and our second in nearly three.
It’s worth going back to those earlier posts in the series. They help put things in perspective. This is normal sailing weather.
The market decline of the last three months has knocked just north of 3% from our portfolio. Hardly the stuff of broken dreams, especially if you haven’t been living it every day. To be honest I haven’t looked at the portfolio’s returns since last quarter’s check-in, so I’m pleasantly surprised. The snatches I’ve overheard on the news prompted visions of worse.
Some friends who know that I invest talk to me like knowing how many points the FTSE fell in the last 24-hours is useful information. I think it’s as relevant as yesterday’s weather in Helsinki.
The market has a 50-50 chance of being down on any single day, so I’d rather skip that dose of disappointment and stick to more convivial time frames. Hell, there’s a one-in-three chance the market will kick sand in your face in any given year!
Given these odds, I’d be happy to check back in five years if I didn’t have to show you what a looming trade war looks like in Metric-Centric Compello-vision™:
The Slow and Steady portfolio is Monevator’s model passive investing portfolio. It was set up at the start of 2011 with £3,000 and an extra £935 is invested every quarter into a diversified set of index funds, tilted towards equities. You can read the origin story and catch up on all the previous passive portfolio posts.
Our annualised return is still a very healthy 9.48% over seven years now. Sure it was 10.92% last time I reported and I liked that better. But if you’d offered me 9.48% seven years ago, I’d have bitten your hand off – and then reported for psychiatric treatment.
As it is, the prices we’re paying now look remarkably like the prices we paid at the end of September. We’ve only taken a few steps back.
A few other things catch the eye, apart from the Brexit Britain slow-bleed of UK equities. Conventional UK bonds (not the inflation-linked ones) were a bright spot – okay, not a bald spot – and so we caught a few crumbs from diversification’s free lunch. That is until global property forced us to choke them up again.
Property was a top performer in the portfolio a couple of years ago but it’s been our only losing asset over the last 12-months – down 8.03%. Over five years property is still up 5.84% annualised. I read a few years ago that property was a heavily overvalued asset class that wouldn’t fair well in a rising interest rate environment. So be it, I’m happy to take the pain in 7% of the portfolio, knowing that fortune will swing back, eventually.
Hey, and we know diversification is working when something is causing us pain, right?
The secret diary of T. Accumulator, aged 7 and 1/4
One thing that stands out as I look back through seven years of Slow & Steady portfolio reports is that it’s become the investment diary I would never have written on my own account.
Tracking the perihelion journeys of the asset classes is instructive. They wax, they wane. Emerging markets glow hot, then fizzle out, then catch light again. The US bubbles and boils. How long before we’re burned?
Everything we’re seeing is predicted by the physics of portfolios, although the Slow & Steady has yet to fully fall to Earth.
New transactions
Every quarter we shove another £935 into the cavernous cake hole of the capital markets. Our cash is divided between our seven funds according to our pre-determined asset allocation.
We use Larry Swedroe’s 5/25 rule to trigger rebalancing moves, but all’s quiet this quarter. We’re just topping up with new money as follows:
UK equity
Vanguard FTSE UK All-Share Index Trust – OCF 0.08%
Fund identifier: GB00B3X7QG63
New purchase: £56.10
Buy 0.294 units @ £190.61
Target allocation: 6%
Developed world ex-UK equities
Vanguard FTSE Developed World ex-UK Equity Index Fund – OCF 0.15%
Fund identifier: GB00B59G4Q73
New purchase: £336.60
Buy 1.071 units @ £314.33
Target allocation: 36%
Global small cap equities
Vanguard Global Small-Cap Index Fund – OCF 0.38%
Fund identifier: IE00B3X1NT05
New purchase: £65.45
Buy 0.243 units @ £269.92
Target allocation: 7%
Emerging market equities
iShares Emerging Markets Equity Index Fund D – OCF 0.25%
Fund identifier: GB00B84DY642
New purchase: £93.50
Buy 59.215 units @ £1.58
Target allocation: 10%
Global property
iShares Global Property Securities Equity Index Fund D – OCF 0.22%
Fund identifier: GB00B5BFJG71
New purchase: £65.45
Buy 36.16 units @ £1.81
Target allocation: 7%
UK gilts
Vanguard UK Government Bond Index – OCF 0.15%
Fund identifier: IE00B1S75374
New purchase: £261.80
Buy 1.602 units @ £163.47
Target allocation: 28%
UK index-linked gilts
Vanguard UK Inflation-Linked Gilt Index Fund – OCF 0.15%
Fund identifier: GB00B45Q9038
New purchase: £56.10
Buy 0.299 units @ £187.60
Target allocation: 6%
New investment = £935
Trading cost = £0
Platform fee = 0.25% per annum.
This model portfolio is notionally held with Charles Stanley Direct. You can use that company’s monthly investment option to invest from £50 per fund. Just cancel the option after you’ve traded if you don’t want to make the same investment next month.
Take a look at our online broker table or tool for other good platform options. Look at flat fee brokers if your ISA portfolio is worth substantially more than £25,000. The Slow & Steady portfolio is now worth over £38,000 but the fee saving isn’t juicy enough for us to push the button on the move yet.
Average portfolio OCF = 0.17%
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.
Take it steady,
The Accumulator
What caught my eye this week.
This will be a busy Easter, so I’m getting Weekend Reading out of the way early. And when I say ‘busy’ I mostly mean ‘busy shopping’. I’ll be very glad when my new flat is done. I’m ready to begin laying down the avocado bathroom suite equivalent of the future.
Slightly fewer links than usual, so if you do spot something good I’ve missed, please add it in the comments below. 🙂
Happy Easter!
What caught my eye this week.
You really ought to read You Are Not A Monte Carlo Simulation, an excellent post over at the Flirting With Models blog.
The article tackles a subject a lot of us struggle with – the mathematics behind the distribution of returns that mean the same investment can have a positive expected growth rate and yet wipe out most people who put money into it.
Sounds complicated, right? Fear not, the article makes it all pretty simple. (Not least thanks to some super crisp graphs that made me nostalgic for my Investing for Beginners series.)
As the author, Corey Hoffstein, notes:
Under the context of multi-period compounding results, “risk aversion” is not so foolish.
If we have our arm mauled off by a lion on the African veldt, we cannot simply “average” our experience with others in the tribe and end up with 97% of an arm.
We cannot “average” our experience across the infinite universes of other potential outcomes where we were not necessarily mauled. Rather, our state is permanently altered for life.
Don’t get mauled by a misunderstanding!
What caught my eye this week.
How many more billionaires would there be if the millionaires of yesteryear had embraced passive investing 1 and saved themselves a bundle?
That’s the provocative opener in this short video from Robin Powell, the man behind The Evidence-based Investor blog.
Robin’s subject – Victor Haghani of fund manager Elm Partners – makes plenty of sensible points about keeping costs low and investment aims simple. The video is a nice five-minute introduction to the case for passive investing.
However the class warrior in me is rather glad that the super-rich continue to pour billions into expensive hedge funds.
If we’re to ease wealth inequality, we certainly don’t want the 1% to care as much as us about getting their fees under 1%!
- Of course they couldn’t, over the time period discussed in the video featured here. Which isn’t just pedantry – it’s very possible that making investing easier and cheaper has reduced the expected returns for equities and other assets going forward.[↩]
Consumer champions like ThisIsMoney and Money Box regularly report on people who’ve come unstuck with an investment scam, pseudo-bond, or other moneymaking scheme.
These media outlets do a good job highlighting dodgy financial advice – and outright scammers and crooks.
But too often it appears that neither the punter nor the journalist is aware of the investing risks that were being taking by these hapless members of the public, even when a particular scheme was legal.
Typically the victim – Phil, a 52-year old school teacher, Camilla, a 33-year old care worker, or Basey, a 19-year old student – doesn’t seem to have thought very hard about where they were putting their money.
They wanted easy gains, and they brushed aside any thoughts of investing risk.
I’m not saying there aren’t criminals after our money. Even the legitimate financial services industry has its sharks.
But we have to take responsibility, too.
As I look at the doleful portraits in a newspaper story about an investment scheme gone wrong – perhaps a ripped-off stay-at-home mum miserably holding a tomcat, and being hugged by a supportive but excessively bearded spouse – I have some sympathy.
But often only some.
Many people seem to spend more time deciding how to cast their vote for The Voice than they do thinking about investing their money.
And their aspirations can be crazy:
- “Sure, buying farmland for £10,000 that in two years will be worth £100,000 when it gains planning permission seems like exactly the sort of brilliant investment opportunity I deserve – and that should just fall into my lap via a cold phone call!”
- “I don’t know much about platinum mining in South Africa, but I like the sound of 15% a month!”
- “I work hard! Why should I accept 1% a year in a rip-off cash savings account when I can get this Triple Enhanced Gilt-Reinforced Trusted Society Bond paying 10% with just some technical small print about my capital being at risk?”
- “Better than Bitcoin? Make mine a double!”
Such foolishness makes it harder for the rest of us.
Perhaps even worse is their tendency to go all-in with their life savings.
Never go all in. Assume every investment can fail you.
I wouldn’t even put all my wealth into the behemoth of trust that is Vanguard.
Yet some of these people will apparently sign everything over to a stranger who knocks on their door on a Wednesday night.
One investing risk or another
I’m probably being mean. It’s often pointed out that people who fall victim to scams often do so because they’re otherwise sensible who didn’t realize they’d wandered into enemy territory. In other areas of their life they’re competent, and that breeds a complacency.
There but for the grace of the regulator go I, and all that.
Yes, there are people with a lifelong history of chasing unicorns and rainbows to a steadily impoverishing affect. I’ve met a few.
But other people were just trusting or naive at exactly the wrong moment. The world would be a sorrier place if it was only populated by grizzled financial survivalists like us (I assume every investment I make can fail) who are always looking over our shoulders.
Also, frauds are one thing, but the investing risks that catch people unawares are subtler. Often the promoter transforms a visible risk into a hidden risk, and the mark is none the wiser.
You remember my slightly tongue-in-cheek first law of investing?
“Investing risk cannot be created or destroyed. It can only be transformed from one form of risk into another.” 1
And so Phil, Camilla, or Basey sees one risk, but ignores another:
- Scared of the risk of inflation, Phil invests in a higher-yielding offshore bond, not realizing it’s held in a different territory or that he can’t get his money out with less than 12 months notice.
- After reading about expensive markets, Camilla resolves to start investing in supposedly safer stocks like utilities for the steady dividend, but is oblivious to newspaper reports about tougher government regulation and politicians threatening re-nationalization.
- Terrified that High Street banks might go bust, Basey opens a peer-to-peer account and looks forward to a higher returns, but is surprised when struck by bad debts.
The fact is all investments are risky and can lose you money.
If you can’t identify the risk with an investment in advance, you shouldn’t go near it.
Types of investing risks
There really are innumerable ways for things to go wrong, so please see my bluffer’s guide to the main risks.
Then, next time you consider making an investment, think about which of these risks you’re taking, whether you’re comfortable with it – and whether there’s the potential for sufficient rewards to compensate.
Remember too that if something has an 95% chance of success, it wasn’t necessarily a scam if it fails. You could have just been in the unlucky 5% of dice rollers.
Risky business
The presence of risk does not mean an investment is a bad one. All investments have at least some risk.
What matters is whether price is right for the risk you’re taking, whether you can afford to take that risk, and whether you understand what you’re getting into.
As the great investor Charlie Munger says:
“Tell me where I’m going to die, so I won’t go there.”
Let’s be careful out there.
- I’m convinced I was first to coin this as a play on the law of thermodynamics, incidentally. I have recently seen it credited to someone else on the web who first used it long after me. Anyway, I am not ripping them off and I assume them not me. Great minds and all that! 🙂 [↩]
