This is no easy time to be a passive investor. Sluggishness and sloth are on the run, hounded by the January urge to FIX EVERYTHING NOW! Gym membership is soaring, joggers are pounding the streets, and the magazines are touting 10 easy steps to a faster, fitter, slimmer you.

Well, you won’t find any of that nonsense here. Instead, let’s kick back down a gear with the world debut of the Slow & Steady passive investment portfolio.

The Slow & Steady portfolio is a model portfolio for Monevator that aims to illustrate how new private investors can overcome some of the difficulties associated with passive investing in the UK. In particular, we’ll use the portfolio to offer clear strategies for investing relatively modest sums without incurring injurious costs.

I’ll report back periodically on the portfolio’s performance, and hopefully it will develop into a useful long-term project.

Note: This is just an exercise. It’s no more than my own response to the practicalities of passive investing in the UK, according to the assumptions laid out below. The Slow & Steady portfolio is not intended as a real-world solution to any individual’s investing needs (including mine). You can see an archive of all the posts in this model portfolio series, including the latest updates.

The assumptions

No model portfolio would be complete without a set of assumptions to make it dance. Here are mine:

• Time horizon: 20 years.

• Initial contribution: £3,000 lump sum.

• Regular contribution: £750 per quarter.

• Investment vehicle: Index funds only. No trading fees incurred. ETF/Vanguard trading fees are prohibitive at this level of contribution.

• Fund selection: Index funds are chosen on the basis of availability to UK retail investors on an execution-only basis. The cost of the portfolio will be kept as low as possible by choosing funds with the lowest Total Expense Ratio (TER) available without paying trading fees.

Each fund will track a benchmark index that is appropriate to its role in the portfolio’s overall asset allocation.

• Asset allocation: The portfolio will not cover every asset class due to its relatively small size and the lack of suitable tracker products available. The core of the portfolio is invested in UK equities and developed world equities.

The Developed World ex-UK allocation is split into four separate funds because a single, suitable fund is not available. Further explanation here.

Emerging markets are included for additional geographic diversification and as an expected returns booster. UK Gilts should help to diversify the equity risk inherent in the portfolio.

The 80% allocation to equity should be considered aggressive and is a reflection of the long time horizon and my personal risk tolerance. The allocation to equity will be adjusted as the time horizon shrinks.

• Purchases: All funds can be purchased from TD Direct Investing or iWeb.

• Rebalancing: the portfolio will be roughly rebalanced to the target asset allocations whenever new money is added.

• Tax: The portfolio is assumed to be held in a tax-sheltered stocks and shares ISA. Fund ISAs from Interactive Investor are fee-free.

• Dividends: All funds chosen are accumulation funds. Accumulation funds automatically reinvest dividends back into the fund (in contrast to income funds which distribute dividends back to the investor).

• Performance: I shall report back on the portfolio’s performance once per quarter.

The Slow & Steady passive portfolio

Here’s the portfolio mix that these goals and assumptions have delivered:

UK equity: 20%

HSBC FTSE All Share Index – TER 0.27%
Fund identifier: GB0000438233

Initial purchase: £600
Buy 173.31 units @ 346.20p

Developed World ex UK equity: 50%

Split between four funds covering North America, Europe, the developed Pacific and Japan.

North American equity: 27.5%

HSBC American Index – TER 0.28%
Fund identifier: GB0000470418

Initial purchase: £825
Buy 439.77 units @ 187.6p

European equity ex UK: 12.5%

HSBC European Index – TER 0.37%
Fund identifier: GB0000469071

Initial purchase: £375
Buy 77.4154 units @ 484.4p

Japanese equity: 5%

HSBC Japan Index – TER 0.28%
Fund identifier: GB0000150374

Initial purchase: £150
Buy 222.7171 units @ 67.35p

Pacific equity ex Japan: 5%

HSBC Pacific Index – TER 0.37%
Fund identifier: GB0000150713

Initial purchase: £150
Buy 60.88 units @ 246.4p

Emerging market equity: 10%

Legal & General Global Emerging Markets Index Fund – TER 0.99%
Fund identifier: GB00B4MBFN60

Initial purchase: £300
Buy 557.7245 units @ 53.79p

UK gilts: 20%

L&G All Stocks Gilt Index Trust – TER 0.25%
Fund identifier: GB0002051406

Initial purchase: £600
Buy 379.03 units @ 158.3p

Total fund purchases: 7

Total cost: £3,000

Trading cost: £0

Right, that’s all there is to the Slow & Steady portfolio for now. We’ll check back in a few months time to see how things are going.

Take it steady,

The Accumulator

I am not so foolish as to expect anything from any asset class in 2011. All markets are unpredictable, especially in the short-term.

That said, a money blogger is duty bound to make a stab on the outlook for asset classes, however futile. Otherwise he risks losing all his readers to more excitable blogs that promise gold will hit $10,000.

Also, while expensive looking assets can always get more expensive and cheap ones even cheaper, in the medium term these things tend to revert to the mean.

Mechanically rebalancing your portfolio is a sensible way to take advantage of this. If you’re a more active investor though, you’re forced to employ your judgment. So with all these caveats in mind, here’s some thoughts:

• UK shares look reasonable value, with the FTSE 100 on a forward P/E of about 13, and not too pricey on a longer-term basis. I’m worried by growing fund manager optimism, rising gilt yields, and potential sterling strength. Set against that there’s clearly plenty of retail money sat on the sidelines, and corporate earnings are strong.

• Overseas shares are a mixed bag. US shares have done well in 2010 – they’re more expensive than the FTSE 100, but arguably more exposed to mid-cycle growth. European shares might be a decent contrarian bet; Germany has done very well, but Spain and Italy have slumped. Japan looks cheap as ever. Please do remember currency risk if you invest abroad.

• Emerging markets are starting to look frothy, but as I wrote in my article on emerging market funds, such trends can take years to play out. I’m not chasing performance, but I’m not selling the exposure I’ve got, either. Beyond that I think buying the likes of Diageo and Caterpillar offer a cheaper way to benefit from global growth.

• Government bonds have looked expensive for two years: I was right in 2009, and wrong for most of 2010. With the 10-year UK gilt yield now up to 3.6%, they’re becoming better value. I’d probably have a nibble at 4% (previously I wanted 5%, which incidentally you can now get on perpetual Consols).

• Corporate bonds don’t offer much appeal – I’d rather buy shares. Some of the bank preference shares may still be bargains, if you’re after long-term income, but make sure you know the company-specific risks you’re taking on.

• Cash isn’t returning much compared to inflation; even Zopa interest rates have crashed. Nevertheless I can see myself saving more cash in 2011, particularly as I’m over-invested in shares. Cash is the king of asset classes.

• Gold fans talk a great game, but it’s a complete wild card. I wish I hadn’t sold my Gold and General Fund back in 2007 – not so much for the performance since then, but so I wouldn’t have to worry about whether I should buy some now to protect me from the indisputable currency games going on. There’s a lot of fear and momentum in the gold price, in my view.

• Commercial property didn’t do much in 2010; bellwether Land Securities is flat on the year, though some of the smaller outfits have done better. I continue to think the big REITs are an attractive asset class that offer some protection from inflation, plus an income, for a fair price. The headwind is fears that banks will dump their written-down property at bargain levels, but I think that’s probably in the price.

• Residential property remains my bête noire, with the London bubble seemingly immune to even global recession. If I was buying a home outside London, I’d probably buy now on a ten-year fix to lock-in low rates. But whereas the froth has come off in the provinces, prices in London are already back to 2007 levels. It seems unsustainable, but I’ve been wrong about that for years. I wouldn’t buy an investment property anywhere in the UK at current yields, but parts of the US might get attractive if the pound strengthens.

For me then it’s a murkier picture than at the start of 2010, in that the big fears are still around, but it’s harder to buy cheap assets that reflect those uncertainties in their price.

Personally, I’m minded to stay near-fully invested, but to save new money and dividends into cash and to possibly rebalance my portfolio towards more sensible asset allocation as the year progresses.

As ever, Monevator house policy is that the average investor will do better with a cheap and largely passive diversified portfolio from day one. Please take all this speculation therefore with a pinch of salt, wherever you might read it.

Reflections on the year just gone, and links to some of its highlights on Monevator.

With a sprightly 2011 bowling through the front door even as 2010 is stretchered out the back, I’m reflecting it on a good 12 months for UK investors:

• The All-Share index is up 12% on the year ¹, or 15% with dividends. Take that bears! Optimists like me were rare for most of 2010.

• We’ve got a Coalition Government and a Central Bank striking a balance – however acrimoniously – between cuts and stimulus.

• Europe threatened to blow up, but the countries that matter didn’t, and Germany and France are now on notice.

• Lord Young was right: If you’ve not lost your job, you’ve never had it so good. Mortgages are very cheap, and UK house prices haven’t crashed like they should have – they’ve actually risen in London. UK PLC recovered, at least compared to what most expected in 2009.

• The emerging world is growing great guns.

There were disasters, of course, from the BP oil leak to formerly high-flying FTSE companies going bust and shareholders losing the lot (see Rok and Connaught).

High unemployment, especially among the young, remains a big worry, and a personal disaster for those affected. We better hope it’s not structural, and do something about it if it is.

Personally I expect reducing benefits will help in the medium term, but then I’m often called a right-wing old duffer in waiting by my overwhelmingly Labour voting friends.

Please Sir, I’d like some more

Sensible investors would happily take 15% returns every year. Such a result in 2011 would hardly be outrageous given current valuations, improving sentiment, and stronger growth.

As ever though, emotions and stock market volatility makes short-term prediction a mug’s game. Anything could happen.

2011 will certainly not be plain sailing, for all the well-known reasons – Europe’s woes, weak US house prices and state indebtedness, and tax increases and spending cuts in the UK.

Then there are the ‘unknown unknowns’ – perhaps an emerging market meltdown, a new conflict, or a big terrorist attack in the West (I fear we’re overdue the latter).

As for the longer term, the truly huge issues – energy transition, over-population, and environmental concerns – still lurk in sight but generally ignored, like wrinkly Grandmas poised to steal a toothy kiss. Agreements on deforestation reached in Cancun in December are a start, but biodiversity (including that in the sea) should be at the top of the agenda for everyone’s sake, especially the poor.

Finally on the future, despite the futility of making short-term predictions I’ve written up my outlook for specific asset classes in 2011 in a separate post to go live next week. Please do pop back to check it out.

My 28 favourite articles from 2010

Now a confession: I am engaged in year-end hedonism this weekend, and so I’m not around to do my usual Saturday morning media wrap.

Instead, I’m going to offer up 28 articles posted on Monevator in 2010 that I humbly submit are still worth reading if you missed them.

[continue reading…]

1. As of 29th December, which is when I’m penning these words.[↩]