Passive Investor Report - October 2018 (-6.33%)

Passive Investor Report - October 2018 (-6.33%)

A short term look on long term investing

Disclaimer

Happy Halloween! This is my fifth monthly report on 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.

 
Passive Investor Pin - October 2018
 

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 2007/2008 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 log these investments every single month through these reports. 

MARKET OBSERVATIONS

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. You can contribute anything up to the limit of £20,000 for the 2018/19 tax year. This means, when it comes to selling any portion of my investments, any capital gain is tax free. 

October Returns

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. Buying into an index fund is effectively the same as 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.

These are rounded figures so sometimes they will not add up to 100% exactly.

 
October - Monthly Investment Returns
 

The complete monthly return for October was -6.33%. All funds were down from last month. The global fund was down 6.78%; The US fund was down 6.13%; The UK fund was down 6.79%; and the Emerging Markets fund was down 7.99%.

I invest around the 22nd of the month and I rebalance with new cashflow. As a result, my fund weightings are very close to target.

October saw global stocks shift into correction territory. There are one of two ways you can react to this. I wonder if you can guess which box I fit into.

Option 1: Run For The Hills!

It’s all over. The stock market will continue to fall. You made a short term gamble and you lost. You choose to withdraw all money from the market, trade half of your cash for gold (in case currency no longer becomes viable), stock up on supplies from B&Q and make your way to a secluded cabin in the woods.

The statement above, if unclear, is to be read in a sarcastic tone. Although it sounds like a fun movie, it probably isn’t the route I will be taking.

Option 2: Stay on course, enjoy the sale!

You are a long term investor. It doesn’t matter what the price is today because you are in it for the long term. The underlying businesses will continue to produce valuable assets and income over the long term, for customers and shareholders respectively. You are actually happy, because after a long market bull run, stocks are on sale.

The stock market is an odd institution. One in which “investors” tend to buy when prices are high and sell when prices are low.

Make the decision right now that you will thank yourself for later on in life. Buy regularly, stick to a schedule, dismiss the dips, dismiss the bubbles and be a diligent, intelligent long-term investor.

If you are like me, option 2 is the preferred course of action

Returns Since Inception

Below are my returns since inception. Inception being the end of May 2018. The total portfolio return is -3.78%. The US (+1.28%) fund is positive and the Global (-3.26%), UK (-8.43%)and Emerging (-11.66%) funds are negative.

 
October - Returns since Inception
 

I am in the process of drip-feeding an equally divided lump sum into the market over the next year. October was month 6 of that process. I decided to drip-feed my lump sum as insurance against a market decline. I will only benefit from this 'insurance', over investing all at once, if the returns remain negative at the 12 month mark.

Drip-feeding, if the market declines, will effectively mean I will have bought more for my money over the course of that year, than if I would have invested everything in month 1.

I made the decision to drip-feed rather than invest the lump sum for a few reasons. I took a few factors into account, bearing in mind that there is no magic indicator. Any decline (bear market) is difficult to predict. I simply looked at a few factors, took into account my conservative nature, and decided drip-feeding was the right approach for me.

1. Long Market Bull Run

Most experts would agree that we have enjoyed a bull run post the 2007/08 recession. Total stock market capitalisation has continued to rise. Some would say to the point of overvaluation at the current point in time.

2. Shiller P/E Ratio (CAPE)

Invented by the Nobel Prize winning economist Robert Shiller, this ratio takes the price divided by the average of 10 years of earnings, inflation adjusted. A higher than average ratio implies lower than average long term returns over the next 10 to 20 year period. The long running average for the S&P 500 index is just over 16.5. It is currently sitting at 30.29 (31/10/18).

3. High Market Cap to GDP Ratio (The Buffett Indicator)

This ratio gained popularity after Warren Buffett stated it was "probably the best single measure of where valuations stand at any given moment." Any result between 75% and 90% is said to indicate fair valuation. Anything over 115% indicates extreme overvaluation. Looking at the US market as an example, as of today (31/10/18), the ratio is sitting at over 132%.

Taking All Factors Into Account

Stock market valuation ratios are controversial but something I take into account nonetheless. I combined these factors with my conservative investing nature, my regular investing approach and my long term outlook. Regular, drip-feed investing was the best choice for me.

SECTOR BREAKDOWN

You can see the sector breakdown of my entire portfolio below. Note these numbers are rounded so might not always total 100% exactly. This month, most sectors saw some movement. 

Financials decreased from 20.3% to 20% of my portfolio. Industrials stayed the same. Health Care increased from 11.3% to 11.4%. IT decreased from 10.2% to 8.6%. Consumer goods fell from 7.6% to 7.3%. Consumer services stayed the same. Oil & Gas increased from 6% to 6.3%. Consumer discretionary decreased from 5% to 4.2%. Technology grew from 4.7% to 4.8% and the percentage of other sectors in my portfolio fell from 16.4% to 18.9%. 

October - Sector Breakdown

Sector definitions can be confusing so here are some definitions.

IT vs Technology: IT is valued for the delivery of information (eg. a phone/computer). Technology is broader and can be valued for the delivery of transportation or energy etc. 

Consumer Goods/Services/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’ can include utilities, materials, and real estate.

Top Sectors In Each Fund

Not including ‘other sectors’, here is a more detailed breakdown of the top 3 sectors in each fund.

Global: Financials (21.38%), followed by technology (15.08%) and Industrials (13.98%).

US: IT still dominates the top spot (20.8%), followed by Health Care (14.61%) and Financials (13.8%). 

UK: Financials (25.2%) is the largest sector, followed by Oil & Gas (14.5%) which has replaced Consumer Goods in the 2nd top spot(now at 13.8%).

Emerging: IT (26.911%), followed by Financials (23.09%) and Consumer Discretionary (9.04%).

GEOGRAPHY

Figures are rounded for simplicity so might not total 100% exactly.

North America accounts for 52.3% (the same as last month). Europe (including the UK and Eastern Europe) remains the same (36.2%). Asia pacific remains the same (9.7%). Central/South America is up from 0.9% to 1% and The Middle East/Africa remains the same (0.8%).

October - Top Investment Regions

My portfolio is weighted towards the developed world. However, for greater diversification I have included an Emerging Markets fund (5% target weighting). This gives me greater exposure to developing markets which include China, South Korea, Taiwan and India.

Individual Investments

This section looks at the biggest individual investments in my portfolio overall. There has been a little movement in the top 10 this month.

Royal Dutch Shell has increased from 2.6% to 2.9% of my portfolio overall. Apple has decreased from 1.9% to 1.8%. HSBC has decreased from 1.7% to 1.6%. Microsoft remains the same (1.5%). Amazon and Alphabet are now almost equal in my portfolio (1.4%) but have switched position due to small percentage point changes. Alphabet is down from 1.3% to 1.2%. B.A. Tobacco is down from 1.1% to 1%. AstraZeneca and GSK have remained the same (0.9%) but have switched position, also due to small percentage point changes.

Despite the correction this month, my top investments haven’t moved that much (in terms of percentage allocation).

 
October Top Investments
 

DIVIDENDS

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. I am huge advocate of dividend reinvestment for long term wealth-building. 

Goals For november

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 next year. In all likelihood I will continue to use new capital to invest and rebalance at the same time. But until then, I use a portion of my lump sum and new capital to rebalance. 

That concludes the October 2018 update. If you liked this post, hit the like button down below. Also, in the comment section down below, let me know if there’s anything you want me to include in next month’s report. I’d love to hear about your investing experiences as well. I read and reply to every comment.

References

Shiller PE Ratio

US GDP (Q3 2018)

Vanguard FTSE Global All-Cap Index Fund (Accumulation)

Vanguard US Equity Index Fund (Accumulation)

Vanguard FTSE UK All-Share Index Unit Trust (Accumulation)

Vanguard Emerging Markets Stock Index Fund (Accumulation)

Wilshire 5000 Total US Market Index