Passive Investor Report - June 2018 (+0.00%)
A Short Term Look on Long Term Investing
This will be the first in a series of monthly reports on the performance of my own passive investment portfolio. Firstly, my investment decisions are exactly that, my own. I based each investment decision on my own research. These are, by no means, investment recommendations. Before making any investment decision, you must do your own research and/or speak to a professional.
Why Do A Report?
Fear of the Stock Market
There are a few reasons I decided to start this series. Firstly, I think my generation is too afraid of the stock market. This is understandable considering we grew up in the wake of the 2007 subprime mortgage crisis. It took years for the market to return to pre-crisis levels. But the market continues, over the long term, to beat money in the bank. Of course there is value in storing savings outside the market. If any of those savings are required in the next 5 or so years, storing them in a high interest bank account (with the highest rate possible) is sensible. But my worry is not with short-term savings. My worry is that we are so afraid of the stock market that we are blind to the benefits of long-term investing. I talk more about this in another article.
A Check on Myself
Secondly, I want to use these monthly reports as a check on my own investing behaviour. No matter what happens in the market today, tomorrow, or next year, my goal is to continuously invest. That is easy to say in a rising, bull market, so I already have a few systems setup to make sure I don’t let my emotions influence my investment decisions. I set aside a fixed percentage of my savings every month, I invest on the same day every month and I will now log my investments every single month through these reports.
The final reason is to share some of my market observations. My investments are all Vanguard tracker index funds. This means that the composition and performance of each fund offers insight into the global stock market. For example, take the global all-cap index fund. The 10 largest companies in this fund should be the 10 largest global companies by market cap. The geographical data keeps me educated on developed and developing markets around the world. The sector data offers insight into the performance of certain markets, like financials and health care, worldwide. Since I have a stake in the market, it drives me to stay informed.
My Passive investment Strategy
Long term, my aim is to invest a portion of my savings every month. An important note here is that the numbers you will see in this report reflect the gains and losses of my invested capital only. When I invest more, for example, I would not state this as a gain in the value of my portfolio. Similarly, if I sell a portion of my investments, this would not be stated as a loss in the value of my portfolio. The numbers simply reflect the performance of the underlying investments. Simply put, a loss/gain does not take into account buying/selling assets.
Vanguard Stocks and Shares ISA
All investments are held in a stocks and shares ISA with Vanguard. This means, when it comes to selling any portion of my investments, any capital gain is tax free.
When you invest in an index fund, you are effectively buying into an already well-diversified portfolio. For example, the ‘Emerging Markets Stock Index Fund’ consists of over 1,099 individual stocks. These funds each represent a market of their own. Illustrated below you can see each fund I own, the target weight of that fund in my portfolio overall, the actual weight and the monthly return.
For June, one market, and therefore one fund (US Equity) was up 1.24%. The other 3 markets, Global, UK and Emerging were down 0.14%, 0.66% and 3.88% respectively.
Since my portfolio is unequally weighted by design, this resulted in no growth or loss this month (effectively a 0% return overall).
Returns Since Inception
Since this is my first monthly report, the returns since inception are exactly the same as my June monthly returns. This will be reported from month 2 onwards (July 2018).
You can see the sector breakdown of my entire portfolio below. Note these numbers are rounded so might not always total 100% exactly. Some sectors are easy to identify and comprehend. ’Health Care’, for example, is pretty self explanatory. Other sectors are more difficult to differentiate. You might ask, for example, what the differences are between ‘Consumer Goods’, ‘Consumer Services’ and ‘Consumer Discretionary’?
Consumer goods are products bought by the average consumer. These products are the end result of a production or manufacturing process. Food would be an example of a consumer good.
A consumer service (a.k.a customer service) is a process which ensures consumer satisfaction. An example of this would be a phone or e-mail interaction.
The consumer discretionary sector is comprised of desirable but non-essential goods. Luxury items, entertainment and leisure would be included in this.
The financial sector is, globally speaking, a dominant market sector. This is reflected in the sector breakdown above. ‘Other Sectors’ might include utilities, materials, energy and real estate. IT currently makes up 28.6% of the emerging markets fund and 24.8% of the US Equity fund, beating financials at 22.9% and 14.6% respectively.
North America continues to dominate geographically. US stocks make up 53% of the global index fund (30% weighting). The US Equity Fund (35% weighting) increases US representation in my portfolio overall to 51.6%. On a side note, the global all-cap index fund offers interesting insight into the performance and influence of various markets around the world. Whilst the US represents 53% of this fund, Japan comes in second at 8.3%, followed by the UK at 5.9% and China at 3.3%. Investment in the UK market makes up a substantial portion of my European investments (31.3% of 36%).
My portfolio is weighted towards the developed world but developing countries are still represented. This is done primarily through the Emerging Markets Fund (5% target weighting). Chinese investments dominate this fund at 32.7%, followed by Korea at 14.6% and Taiwan at 11.6%. Central America, South America, The Middle East and Africa only make up a small percentage of each fund and therefore my entire portfolio.
The prominence of the US market globally can be visualised in the illustration below. Compare the 10 largest investments in the global index fund with the 10 largest in the US Equity Fund. They are hard to differentiate. Apple, the largest holding in both funds, has a market cap of just over $903 billion.
Top 3 Investment Weightings in Each Fund
Global: Apple: 1.73% > Microsoft: 1.41% > Amazon: 1.3%
US: Apple: 3.23% > Microsoft: 2.69% > Amazon: 2.43%
UK: HSBC: 5.67% > Royal Dutch Shell: 4.78% > BP: 4.48%
Emerging: Tencent: 5.46% > Alibaba: 4.1% > Samsung: 3.84%
Whilst brand names in the global, US and UK-focused funds are fairly household in the west, top emerging market investments are less so. Tencent, the top holding in the emerging markets fund (5.46%), is a Chinese investment holding conglomerate focused on internet services. The second, Alibaba (4.1%), is another Chinese multinational focused on e-commerce. Alibaba is commonly referred to as the Amazon of the East.
I am a big believer in dividend reinvestment for long-term growth. The Vanguard Index Funds I own are all accumulating. This means any dividend income is automatically reinvested so I don’t have to process that myself.
Goals For Next Month
I am in the process of drip-feeding an equally divided lump sum into the market over the next year. July will be month 3 of that process. Drip feeding is designed to insure against a falling market. Therefore I will only ‘benefit’ from this insurance if the market experiences a downturn. Any decline (bear market) is difficult to predict but continuing to invest during a fall can actually increase returns over the long term. Drip-feeding insures against a falling market, the system insures against emotion-based decision making.
I am rebalancing my portfolio as I invest to maintain it’s current risk profile. Portfolio drift, where the weightings (ie. 30% in Fund A) can shift from target as time goes on, can occur if this is ignored. I will need to use a different strategy once the drip-feed process is complete. Until then, I will use new capital to rebalance.
That concludes this first update. This is an ongoing series and the next report will be published as soon as the Vanguard in-depth portfolio data is made available next month.That concludes the July 2018 update. If you liked this post, hit the like button down below. If you want me to talk about anything in more detail, or if you just want to contribute to the discussion you can do so in the comments section down below.