OhThe more discrepancy between my daily diet in the media-amplified fear and the loss of our slow and steady passive portfolio amazes me.
The portfolio has shrunk by just 3.5% from the peak of the last quarter. Basically, we’re back to where we were six months ago.
This is despite stagnant inflation, the economic crisis and the threat of a geopolitical winter on our position.
We count our blessings on private investors who sleep well at night. As always, to get an accurate idea of the proportions you just need to look at the fear conveyor belt in the news.
Nothing to be down about
Written about a rare down period for S&S – When nothing in the portfolio gives too much pleasure – I think I rarely had to report knock back.
The table below shows how many times a World Equity Portfolio has historically registered a loss, depending on how many times you have checked into it. (See the ‘Look Frequency’ column on the left):
Albion Strategic Consulting is the firm of passive investing champion Tim Hale. This table was published in the regular newsletter of asset manager BRWM.
Of the 45 Slow and Steady portfolios, only a quarter of the time had a nosebleed, which is only 22% of the time. This compares favorably with the 31% probability of quarterly losses suggested by the table.
Twice in eleven years our portfolio parade has had a negative year rain. This is the expectation of 18% vs. 23% of the time.
We have lived through a majestic age, which only exacerbates our fears that it may be undone.
Bond-o-Gadon
Indeed, the long-awaited bond calculation seems to be upon us. Our bond fund has lost 8% in the last three months. This is a poor 2021 compound.
DystopiaVision brings you this quarterly portfolio engraving:
The Slow and steady Is the portfolio Of the monitor Model Passive Investing Portfolio. It was set up in early 2011 with 3,000. An additional £ 1,055 is invested each quarter in a varied set of index funds, which leans towards equity. You can read the original story and find all the previous passive portfolio posts Monitor vaults
Our one year return on UK government bond funds is -6%. The current annual inflation level is above 5.5% (CPIH) and you are looking at a real return loss of 11.5%.
Conventional UK gilt is capable of double-digit annual losses.
Both 2013 and 2021 returned a -10% inflation-adjusted loss.
Prior to that, 1994 Bond Pay brought in -14% value.
However, to see large bond losses in successive years, you have to go back to the 1970s stagnation. UK government bonds pasted a -47.6% real term between 1972 and 1974.
Nasty, but it’s not a wealth destroyer on the scale of the UK stock market storm, for example:
Furthermore the bond loss quoted above is a measure of long gilt injury. If you hold medium or short-term bonds, you suffer less.
This post on bond pricing explains how bond loss (and profit) works.
It is always dark before dawn
When it comes to equity, people seem to understand intuition, but miss out on how bonds sow the seeds of their own recovery.
Capital loss today means your bond holdings will reinvest in high-yielding varieties tomorrow.
This process will ultimately put you further ahead than not increasing the yield.
Inflation-linked bonds go to AWOL
In particular, our global inflation-linked bond funds are not covering themselves in glory – despite rising prices in front of stores and petrol stations.
Our funds somehow managed to repay -0.26% over the last quarter. How could that be?
The data below shows that investors have been bidding for index-linked bonds since 2019 – before the official inflation rate starts in 2021.
Source: Royal London Asset Management
The market has seen inflation coming and our funds have been fine for the last three years. Although it is still lagging behind all our equity funds in the same period.
The problem is that short-term government bonds only offer so much juice. And inflation-linked bonds are battling a negative yield headwind before registering a profit.
Also keep in mind that our funds may be depleted if the market expects lower inflation, even when we grind our teeth while filling the car.
Such a short-term fundraiser is not going to make you rich. It’s about saving capital.
If inflation explodes, it will protect an angle of your portfolio when equities and conventional bonds suck their marrow.
From that point of view, our inflation-linked fund is doing its unhappy job.
If I were a primary to mid-level saver, I would probably use this asset class. Instead, I will rely on equity to beat long-term inflation.
Investing in index-linked bonds is probably something you can wait for until you move on to deductions. Probably ten or even just five years out.
We have an upcoming post on inflation hedging that will explore why.
Leave it alone
We only need to rewind the clockwork a few years to remember that inflation concerns were as fashionable as a mutton-cut general preparing to fight the last war.
Make it one more piece of evidence that can hardly predict what will happen next.
Conventional bond losses may mount. On the other hand, if a huge recession is around the corner, they may be your best refuge.
It is always advisable to maintain a Bond dry powder store to reduce your losses and buy equity on sale.
That’s why in terms of risk balance, in recent years we’ve suggested capping bond exposure rather than throwing it overboard.
If you own a 60/40 portfolio you will probably be able to afford a 65/35 or 70/30 equity / bond mix.
It is difficult to judge the allocation of your defense assets. Be careful, and assume your risk tolerance is lower than you think.
New transactions
Every quarter we bought জন্য 1,055 worth of ammunition for the skit shoot which is the world market. According to our pre-determined asset allocation, our shots at Glory are divided into seven funds.
We balance using Larry Swedro’s 5/25 rule. It was not activated this quarter.
These are our business:
UK equity
Vanguard FTSE UK All-Share Index Trust – OCF 0.06%
Fund Identifier: GB00B3X7QG63
New purchase: £ 52.75
£ 236.50 @ Buy 0.223 units
Target allocation: 5%
Former UK equity in the developed world
Vanguard FTSE Developed World X-UK Equity Index Fund – OCF 0.14%
Fund Identifier: GB00B59G4Q73
New purchase: £ 390.35
Buy £ 536.24 @ 0.728 units
Target allocation: 37%
Global Small Cap Equity
Vanguard Global Small-Cap Index Fund – OCF 0.29%
Fund Identifier: IE00B3X1NT05
New purchase: £ 52.75
Buy £ 395.58 @ 0.133 units
Target allocation: 5%
Emerging market equity
iShares Emerging Markets Equity Index Fund D – OCF 0.19%
Fund Identifier: GB00B84DY642
New purchase: £ 84.40
Buy £ 1.88 @ 44.858 units
Target allocation: 8%
Global property
iShares Global Property Securities Equity Index Fund D – OCF 0.17%
Fund Identifier: GB00B5BFJG71
New purchase: £ 52.75
Buy £ 2.60 @ 20,303 units
Target allocation: 5%
UK gilts
Vanguard UK Government Bond Index – OCF 0.12%
Fund Identifier: IE00B1S75374
New purchase: £ 305.95
£ 167.17 @ Buy 1.83 units
Target allocation: 29%
Global inflation-linked bonds
Royal London Short-Term Global Index-Linked Fund – OCF 0.27%
Fund Identifier: GB00BD050F05
New purchase: £ 116.05
Buy £ 1.13 @ 102,608 units
Target allocation: 11%
New investment = £ 1,055
Trading costs = £ 0
Platform fee = 0.35% per year.
This model fund portfolio is conceptually held with Charles Stanley Direct. If you use a different mix of funds, check out our online broker table for cheaper platform options. InvestEngine is cheaper if you are only happy to invest in ETFs.
Average portfolio OCF = 0.18%
If all of this sounds like hard work, you can buy a diversified portfolio using an all-in-one fund like Vanguard’s Lifestyle Series.
Interested in tracking your own portfolio or using the Slow and Steady Investment Tracking spreadsheet? This part of portfolio tracking shows you how.
Hold on,
Saver
