WWell, that’ll be wonderful. The company reported growth of 9.5% last 12 months. Not bad for a portfolio on autopilot. I feel it’s fair to say that reports of the death of the 60/40 portfolio are greatly exaggerated.
Here are the newest numbers:
This is a model portfolio for passive investing. It was founded in early 2011 with £3,000. Each quarter a further £1,310 is invested in a diversified range of index funds focused on stocks. You can read the origin story and find all previous passive portfolio contributions within the vaults. You can find the last quarter’s edition here.
With the exception of world real estate, our equity holdings had a spectacular 12 months:
Source: Morningstar Portfolio Manager
Returns for emerging markets, global small cap and the UK’s FTSE All-Share would look great in the event that they weren’t dwarfed by the underwhelming performance of developed market stocks – particularly US stocks.
In fact, the S&P 500 returned almost thrice the return of its nearest developed market competitor last 12 months:
Source: JustETF
And this just isn’t a brand new story. The US has been the portfolio’s major growth driver over its 14-year lifespan:
Charts like this could shake your belief in the ability of diversification.
When it is a free lunch, a significant bout of food envy comes with it.
Where can we go from here?
Want more of what the guy within the cowboy hat eats? Or are you (reasonably) afraid of piling up near the highest?
In my view there are three options.
You could:
1. Fold your non-US cards and assume the present trend will last perpetually. Because that typically works, right?
2. Conclude that the trend is laying the groundwork for its own demise, because the valuation metrics suggest. For example “Research Affiliates” Expected return metric predicts an actual annual return of just 0.04% within the US over the following decade:
If this version of the universe involves pass, abandoning diversification strategies now and focusing entirely on Team America can be precisely the mistaken move.
3. Finally, you can ignore each visions of the long run and consider that the US may very well be years behind the remaining of the world, but in addition that the transition timing is inherently unpredictable:
Data from JST Macro history, The Big Bang, MSCI And Aswath Damodaran. August 2024.
The long run view shown on this graphic shows that longer periods of dominance are quite common.
They do end – or a minimum of at all times did before – but within the meantime, the winners of those eras probably also seemed “locked in” to many investors on the time.
Worldly wisdom
The world index is now 72% occupied by US stocks. If the S&P 500 continues to pressure it, the world funds will pass this on, barely diluted by competitors.
On the opposite hand, if other locations are having a moment within the sun, then with a globally diversified portfolio you’ll a minimum of have some access to those recent sources of momentum.
Personally, I’m uncomfortable concentrating my net value in a single sector, country or asset class.
I prefer to take the time to realize my goal, and that is exactly why we called this project a portfolio quite than a portfolio.
Long story short: step back such as you were.
Fourteen years later, six more
I can hardly imagine it, however the portfolio is now 14 years old.
In 2010, I set a 20-year time horizon – I never imagined the series would ever reach such a goal.
Now it looks like we will.
The initial capital of £3,000 has now multiplied to almost £91,000 due to regular money injections, reinvested dividends and capital gains.
Here’s the story in a diagram:
The first half of the journey was almost a walk within the park, other than the setbacks within the introductory 12 months:
And the portfolio has only suffered one major blow, in 2022. That 12 months saw a nasty 13% loss in nominal terms, but a staggering 20% drop after inflation.
In fact, inflation also threw cold water on the good 9.2% lead to 2023, giving us a tepid real return of 1.8%.
Inflation remained calm for many of my adult life. But old hands – and books – had warned us for years that rising prices were essentially the most fearsome enemy we could face as investors.
Well, now we have experienced it. Hence all of the articles we’ve published about various ways to ward off the rampant money rot.
Land the plane
Still, such setbacks have up to now done little greater than undo the portfolio’s initial promise.
Currently our annual return averages 4.2%.
However, the following six years can have an outsized impact on the final word fate of the portfolio as a result of the sequence of return risks.
If this wasn’t a model portfolio, but quite our life savings – and if we couldn’t afford to take a giant loss any further – then there can be a robust case for allocating more to wealth preservation and short-term inflation. tied bonds than currently.
We rebalance yearly in order that our portfolio doesn’t deviate too removed from our predetermined asset allocation.
Our major split between stocks and bonds is now set at 60/40 for the rest of the portfolio.
With developed markets performing spectacularly in 2024 and bonds giving us one other 12 months of defeat, the rebalancing amounts to selling about 4% of our primary equity fund to speculate in cheaper bonds.
Perhaps we shall be rewarded for this holiness in the following life – or perhaps within the near future when stocks experience a shock in 2025.
In any case, do not forget that rebalancing is about managing your risk, not about achieving returns.
Our final step is to shift our 40% bond asset allocation by 2% per 12 months until this subcomponent is split 50/50 between traditional Treasury bonds and short-term index-linked bonds.
This implies that this quarter:
- Vanguard UK Government Bond Index Fund cuts to 23% goal allocation
- The Royal London Short Duration Global Index Linked (GBP-hedged) fund increases to a goal allocation of 17%
That’s because we imagine short-term index-linked bonds help protect a portfolio’s purchasing power when you’re able to spend it.
(For more on our considering, see our no-cat food decumulation portfolio.)
Inflation adjustments
We increase our regular money contributions through RPI annually to take care of our inflation-adjusted contribution levels.
This 12 months’s inflation rate is 3.6%, so in 2025 we are going to invest £1,310 per quarter.
That’s a rise from £750 in 2011. We’ve increased the quantity we have invested by 75% over the past 14 years, simply to remain ahead of inflation.
New transactions
Every quarter we donate £1,310 to the stalagmites of our funds. This time our trades go like this:
British equity
Vanguard FTSE UK All-Share Index Trust – OCF 0.06%
Fund identifier: GB00B3X7QG63
Purchased recent: £72.87
Buy 0.262 units at £277.74
Target allocation: 5%
Stocks from developed countries (excluding the UK).
Vanguard FTSE Developed World ex-UK Equity Index Fund – OCF 0.14%
Fund identifier: GB00B59G4Q73
Compensation sale: £3222.39
Selling 4.46 units at £722.32
Target allocation: 37%
Global Small Cap Stocks
Vanguard Global Small-Cap Index Fund – OCF 0.29%
Fund identifier: IE00B3X1NT05
Compensation sale: £21.81
Sell 0.048 units at £456.45
Target allocation: 5%
Emerging market stocks
iShares Emerging Markets Equity Index Fund D – OCF 0.19%
Fund ID: GB00B84DY642
Compensation sale: £161.45
Selling 77,532 units at £2.08
Target allocation: 8%
Global ownership
iShares Environment & Low Carbon Tilt Real Estate Index Fund – OCF 0.18%
Fund identifier: GB00B5BFJG71
New purchase: £403.84
Buy 171,789 units at £2.35
Target allocation: 5%
British government bonds
Vanguard UK Government Bond Index – OCF 0.12%
Fund identifier: IE00B1S75374
New purchase: £1434.45
Buy 10,985 units at £130.58
Target allocation: 25%
Global inflation-linked bonds
Royal London Short Duration Global Index-Linked Fund – OCF 0.27%
Fund ID: GB00BD050F05
New purchase: £2804.48
Buy 2653,248 units at £1.06
Dividends reinvested: £196.10 (purchasing a further 185.52 units)
Target allocation: 15%
New investment Contribution = £1,310
Trading costs = £0
Average Portfolio OCF = 0.16%
User manual
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Be calm,
