The Slow and Steady passive portfolio update: Q3 2022

Aaargh! [Breathes deeply. Thinks about dolphins.] That’s better. [Peeks through fingers and looks at portfolio again.] Aaaaaaargh!

If you enjoyed the disaster movie Don’t Look Up, you’ll love the sequel: Don’t Look Up Your Portfolio.

Bad things are happening in there.

The Slow & Steady passive portfolio is taking its biggest run of beatings ever. For the first time in a dozen years we’re down for three calendar quarters in a row.

Our UK government bond losses are especially grim. Government bonds are on course for their worst year in history.

But let’s not get too despondent. For all the drama, the portfolio is still only down 15% in 2022.

And less – 11% – over one full year.

Step back and we’re up 6.26% for every one of the 12 years we’ve been tracking the portfolio. Call it a 4% real annualised return.1

Admittedly, if you add inflation to this year’s nominal losses then for sure we’re deep in bear market territory this year.

But previous generations of investors have come back from worse.

First we have to get through the present. And it’s natural to second-guess your decisions in the midst of market declines like we’ve seen in 2022.

In particular, you may be questioning why you bought bonds in the first place.

We do need to talk, but first let’s face up to the results. They’re not pretty:

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 £1,055 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.


Nothing is working right now. Rapidly rising inflation and interest rates are scalping everything in sight.

But it’s most unsettling that bonds – supposedly our refuge in difficult times – are plunging like equities.

Our gilts tracker is down -28% year to date.

Previously the worst annual return for gilts was -33% in 1916 – recorded in the year the British army was scythed down at the Somme.

That was a real return though and they were extremely long bonds.2

This year UK long gilts are cratering even harder than their World War One counterparts. They’re down -45% year-to-date3. With inflation raining hammer blows on top.

This matters because if you’re cursing your choices it’s important to know you’re caught in the cross-hairs of history.

On one front we’re suffering the withdrawal symptoms that accompany the world giving up its negative interest rate meds.

On another we’re dealing with a needless act of economic quackery by our own prime minister, Liz Truss. Like an ill-qualified psychiatrist she’s determined to unleash her experimental electro-shock therapy while the patient lies strapped and terrified on the table.

As Truss fiddles with the voltage, gilts’ vital signs have deteriorated faster than their global peers. Culminating in a cardiac arrest that only the Bank of England could step in to relieve:

Source: justETF: intermediate gilt ETF vs intermediate global gov bonds (GBP-hedged)

This is a self-inflicted wound. It’s also a political choice.

Which means much of the harm can be undone by another political act. Polls point to a Tory rout. The party will force Truss to recant, or it will decapitate yet another leader if she won’t. They’ve got form.

Hence the UK-only damage suffered by government bonds may yet be reversed – at least in part.

But even then the wider global sell-off would make any holder plenty miserable.

Buy high, sell low?

We all know that buy high, sell low is a classic blunder. So why is your hand still magnetically attracted to the sell button next to your bond ETF?

Offloading bonds during their darkest hour is probably a mistake. Swearing off them for life is probably a mistake.

Falling prices have certainly inflicted a short-term defeat on most bond funds. But lower prices equate to higher yields. That’s bond maths 101.

Moreover as yields are up across the board, investors will demand higher coupons4 in exchange for buying the future debt issued by the government.

It takes time but these improved cashflows will actually set our bond funds on a higher growth path than they were previously taking.

As your fund sells off its old bonds, the proceeds are ploughed into the new higher-yielding variants that are coming on to the market.

And as those new bonds pay more interest, it gets reinvested (if you own an accumulation fund or do it yourself), ratcheting up the transition from low income assets to higher income ones.

Pound-cost averaging accelerates the process. New money buys more of the higher-yielding debt.

The upshot is your bond fund will eventually deliver a higher annualised return – after interest rates stabilise – than if we’d never gone through this.

How long that will take depends on the average duration of your fund. The longer duration your bonds, the longer it takes – but the greater the potential reward.

Carry on regardless?

It’s the same principle as when equities are on sale. High-quality government bonds are now a better deal than they were.

Plus, if the wind changes direction again and the economy goes into recessionary convulsions, then nominal government bonds are still the best diversifier you can buy.

Big picture it’s a bit more complicated.

We flagged problems with a simple 60-40 portfolio in 2021. Because no asset class always works, we argued for greater diversity on the defensive (40%) side:

60% Global equities (growth)10% High-quality intermediate government bonds (recession resistant)10% High-quality short index-linked government bonds (inflation hedge)10% Cash (liquidity and optionality)10% Gold (extra diversification)

Those were reasonable calls:

In the passive portfolio, our short index-linked bond fund is down 6% year-to-date. Not down -30% like a long-dated UK index-linked gilt tracker. (We took evasive action back in 2019).

Cash is currently yielding 2% and gold is up nearly 13% so far this year.

I’d still urge that level of diversification for a baseline portfolio, although we’ll continue to track the Slow & Steady as it stands, sans gold and cash.

Note your optimal allocation to equities may be higher if you can handle the risk.

Relegation form

I’d like to advocate one more change for us to think about.

I used to be ambivalent about whether to pick intermediate gilts or intermediate global government bonds (currency-hedged back to the pound) for recession protection.

Gilts were the obvious choice for a UK investor, and as a proud Brit I was happy to hold them. I bought into the idea that we belonged in the premier league of nations.

Well, the last six years and one month have smashed that delusion.

We could argue about Brexit and probably will forever. But you can’t argue with the decline of the pound and the gilt market’s verdict on Trussonomics.

If you want to know what hard-headed, independent operators think of the UK’s recent performance then just consult the charts. Money talks and it’s telling us this country is in a relegation battle.

And so I wish I’d chosen to diversify my fixed income risks with a global government bond fund.

Other countries may put maniacs and shysters in charge, but I thought it couldn’t happen here.

Come to Jesus.

New transactions

Every quarter we throw £1,055 into the market wishing well. Our hopes and dreams are split between seven funds, as per our predetermined asset allocation.

We rebalance using Larry Swedroe’s 5/25 rule. That hasn’t been activated this quarter. Thank heavens.

These are our trades:

UK equity

Vanguard FTSE UK All-Share Index Trust – OCF 0.06%

Fund identifier: GB00B3X7QG63

New purchase: £52.75

Buy 0.245 units @ £215.18

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: £390.35

Buy 0.791 units @ £493.64

Target allocation: 37%

Global small cap equities

Vanguard Global Small-Cap Index Fund – OCF 0.29%

Fund identifier: IE00B3X1NT05

New purchase: £52.75

Buy 0.145 units @ £362.80

Target allocation: 5%

Emerging market equities

iShares Emerging Markets Equity Index Fund D – OCF 0.2%

Fund identifier: GB00B84DY642

New purchase: £84.40

Buy 47.209 units @ £1.79

Target allocation: 8%

Global property

iShares Global Property Securities Equity Index Fund D – OCF 0.17%

Fund identifier: GB00B5BFJG71

New purchase: £52.75

Buy 23.656 units @ £2.23

Target allocation: 5%

UK gilts

Vanguard UK Government Bond Index – OCF 0.12%

Fund identifier: IE00B1S75374

New purchase: £305.95

Buy 2.344 units @ £130.52

Target allocation: 29%

Global inflation-linked bonds

Royal London Short Duration Global Index-Linked Fund – OCF 0.27%

Fund identifier: GB00BD050F05

New purchase: £116.05

Buy 110.84 units @ £1.05

Target allocation: 11%

New investment = £1,055

Trading cost = £0

Take a look at our broker comparison table for your best investment account options. InvestEngine is currently cheapest if you’re happy to invest only in ETFs. Or learn more about choosing the cheapest stocks and shares ISA for your circumstances.

Average portfolio OCF = 0.16%

If it 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.

Take it steady,

The Accumulator

The real return is the gain once inflation has been subtracted. It is a measure of the growing spending power of your money.Government bonds at the time were undated. That is, they paid interest in perpetuity or until they were eventually called and repaid.SPDR Bloomberg 15+ Year Gilt UCITS ETFThe fixed interest rate paid by a bond.

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This is what a historic bond meltdown looks like
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