The beginning of the year has not been awful. Which is all I ask, really.
You’ll recall that last quarter capped off the worst year ever for the Slow and Steady passive portfolio: a -13% loss. Pretty painful, if really nowt but a light slap on the list of all-time market drawdowns.
The good news today is every asset class bar commercial property has regained ground since then. That’s despite bank runs triggering flashbacks to the Financial Crisis, Britain flirting with recession harder than a couple of Love Island playas, and all of us being afraid of our heating bills.
True, recovering a few per cent under these circumstances feels about as triumphant as winning back 20 yards of No Man’s Land after months of trench warfare. It’s hardly the stuff of overnight victories, but we’ll take what we can get.
Here are the latest results from the Slow and Steady portfolio brought to you by HalfGlassEmpty-O-Vision:
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 £1,200 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.
The wider economic tumult has put me in a disheartened mood. I think it’s because, for me, my own portfolio first and foremost represented a hedge against being crushed by the grinding wheels of capitalism.
Regardless of demand for my particular skills, through focused saving and investing I was able to construct a fast-moving skiff of securities that skimmed over the turmoil and finally beached me in the sunnier climes of FIRE island.
But I now worry the opportunity may be lost for the younger generation battling rising taxes, rising inflation, a rising cost of living, and fears of a rising China.
How can you invest if you can’t spare the change?
And why would you believe in it anyway if the market drifts sideways for years?
The generation game
For all we talk about it being a long-term game, I’m painfully aware that passive investing was an easy sell when returns were advancing at a heady rate, post-Financial Crisis.
But how many would jump onboard or keep the faith during a lost decade? Even if that churn created the conditions for higher expected returns in the future?
Who would buy into that?
It’s not a personal thing. I’m happy and remain optimistic about my own future.
But I was moved by Mrs Accumulator telling me that her young pupils feel terrified of, and despondent about, the climate crisis.
I don’t blame them. Too many of their elders seem to be calculating it’s okay to drive SUVs because they’re not going to be around to deal with the consequences.
So colour me concerned that there aren’t enough reasons to be hopeful about the future right now. It feels like the tube is squeezed from both ends – from a UK and from a global perspective.
My portfolio has helped insulate me to some extent. I just don’t want those who come after me to conclude that even the financial independence escape route has been closed.
Slow & Steady: the sequel
Changing the subject, I’d like to ask your opinion about some ideas The Investor and I have been kicking around.
We’ve been thinking about introducing two new Monevator portfolios to the site. They’d be long-running series, in a similar vein to the Slow & Steady portfolio.
One would be aimed at absolute beginners and the other would plot a course for Planet Decumulation.
It’s crazy but true that the Slow & Steady portfolio is in its 13th year now. This means there are only seven years left on the clock before we hit the model portfolio’s self-imposed 20-year lifespan!
So the question we’ve been asking ourselves is: what would a passive portfolio look like if we were starting from scratch today?
Our model portfolio is meant as an educational exercise, rather than as a default recommendation. And my reading of the feedback is that everybody gets the global equities side of the equation.
All the angst lies on the defensive side:
“Why bother with bonds?”
“Why are my index-linked gilts getting crushed?”
“What about ‘alternatives’?”
“I’ll stay in cash thanks.”
I think a new starter portfolio should work harder to explain its defensive picks. I also believe the Slow & Steady probably isn’t diversified enough to deal with an uncertain world.
I’ve talked before about the all-weather portfolio concept. Harry Browne’s Permanent Portfolio and Ray Dalio’s All-Weather strategy are famed examples.
These frameworks focus first on the principles of diversification, while being built upon solid investing foundations that remain simple and effective.
The value of a model portfolio lies in its ability to confirm or to challenge our preconceptions.
I’d rather the Slow & Steady’s successor tilts more towards the latter, by exploring what happens when we add more volatile but less correlated assets to the mix.
A bond barbell (long bonds and an ultra-short or cash component)
That’s a portfolio which will almost always have a hero and a zero on its books. The contrasting fortunes of those asset classes should provide plenty of food for thought.
To keep it simple, I’m thinking of leaving out some of the elements the Slow and Steady portfolio already deals with. For example, UK home bias, global REITS, and emerging markets.
Index-linked bonds would also stay on the shelf. I think young investors can do without them.
Should the equity allocation be invested in ESG funds? Because my hunch is that more young investors are putting their faith in that label even though I’m wary of the potential for greenwashing.
And should there be a 5% fun money element? Perhaps a naughty punt on tech, a macroeconomic theme, private equity, or some other alternative bet?
Let me know what you think.
The decumulator’s portfolio would be more about the moving parts than the asset price soap opera.
All the action happens when you withdraw cash. Perhaps there’d be two check-ins a year to simulate that. Maybe I’d run two different withdrawal methodologies in parallel to see how each plays out.
Then I’ll try to tease apart the complex interactions of portfolio returns, inflation-adjusted income, tax consequences, dynamic withdrawals, SWRs, and life expectancy.
Rock. And roll.
Along the way, I’d like to look at how to handle unexpected cash demands, equity release, annuities, sustainable withdrawal rate guardrails, and the psychological hurdles of living off a diminishing pot of wealth.
It all sounds pretty ripping, I’m sure you’ll agree!
Anyway, we’ve been musing about it for ages so it’s about time we did something.
Please let me know your thoughts, ideas, and requests in the comments below.
Every quarter we pipette £1,200 into the global market petri dish. Our financial seed culture is split between seven funds according to our predetermined asset allocation. The trades play out like this:
Vanguard FTSE UK All-Share Index Trust – OCF 0.06%
Fund identifier: GB00B3X7QG63
New purchase: £60
Buy 0.247 units @ £242.69
Target allocation: 5%
Developed world ex-UK equities
Vanguard FTSE Developed World ex-UK Equity Index Fund – OCF 0.14%
Fund identifier: GB00B59G4Q73
New purchase: £444
Buy 0.842 units @ £527.11
Target allocation: 37%
Global small cap equities
Vanguard Global Small-Cap Index Fund – OCF 0.29%
Fund identifier: IE00B3X1NT05
New purchase: £60
Buy 0.159 units @ £378.28
Target allocation: 5%
Emerging market equities
iShares Emerging Markets Equity Index Fund D – OCF 0.21%
Fund identifier: GB00B84DY642
New purchase: £96
Buy 53.402 units @ £1.80
Target allocation: 8%
iShares Environment & Low Carbon Tilt Real Estate Index Fund – OCF 0.17%
Fund identifier: GB00B5BFJG71
New purchase: £60
Buy 28.207 units @ £2.13
Target allocation: 5%
Vanguard UK Government Bond Index – OCF 0.12%
Fund identifier: IE00B1S75374
New purchase: £324
Buy 135.381 units @ £135.38
Target allocation: 27%
Global inflation-linked bonds
Royal London Short Duration Global Index-Linked Fund – OCF 0.27%
Fund identifier: GB00BD050F05
New purchase: £156
Buy 146.893 units @ £1.06
Dividends reinvested: £203.38 (Buy another 196.502 units)
Target allocation: 13%
New investment contribution = £1,200
Trading cost = £0
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Average portfolio OCF = 0.16%
If this all seems too complicated check out our best multi-asset fund picks. These include all-in-one diversified portfolios, such as the Vanguard LifeStrategy funds.
Interested in tracking your own portfolio or using the Slow & Steady investment tracking spreadsheet? Our piece on portfolio tracking shows you how.
Finally, learn more about why we think most people are better off choosing passive vs active investing.
Take it steady,
Financial Independence Retire Early
The post The Slow and Steady passive portfolio update: Q1 2023 appeared first on Monevator.