My Passive Investments - November 2018 (+2.83%)
A short term look on long term investing
The advent calendar is ready to open and the Christmas tree is already up. It’s the end of November and that means it’s time to talk investments. This month saw some significant changes to my portfolio. Changes which should make things simpler and easier to manage going forward.
Firstly, my investment decisions are exactly that, my own. As as UK-based investor, 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.
Firstly, A Reminder Why I Do These Reports In The First Place
You can read more about this in my first passive investor report, which I made back in June 2018.
My Passive Investments 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.
November Portfolio Changes
Simplifying My Investments even Further
November was all about simplifying my portfolio. In order to do that, I altered the makeup of my portfolio significantly. Previously, I held 4 of Vanguards tracker index funds. A UK all-share fund, an emerging markets fund, a US Equity fund and a global all-cap fund. The global all-cap fund is comprised of large, mid and small-cap stocks in developed and developing markets around the world. Since I also owned the UK, US and Emerging market tracker funds, this effectively increased my exposure to those markets, since they were already represented in the global fund.
When I first made those allocations I wanted greater exposure to those markets. The US, since it is one of the most diversified and liquid markets in the world. Emerging markets which, despite short term volatility, have a lot of growth potential going forward. And the UK, to give me greater domestic exposure.
I have decided to shift all of my capital to the global all-cap index. I did this for 3 major reasons, outlined below.
I am an advocate of simplicity. Any allocation other than a total market cap index allocation turns me into my own active fund manager. Although I enjoy predicting the performance of markets around the world, I can do that and be sensible about my actual asset allocations. I think a lot of people fail in their attempts to produce greater returns because they overcomplicate their portfolio.
2. No Home Bias
Home bias is the tendency for investors to allocate a large portion of their investments domestically, rather than internationally. In my case, I allocated a large portion of my investments to UK equities, where I am based. When I was researching home bias recently, I saw little to no realistic advantages of this.
This is where I ran into the big debate: “Global All-Cap Index vs Vanguard LifeStrategy”
Vanguard offer a LifeStrategy fund. Basically a fund of funds which has a portfolio of their own index funds inside. The idea being that investors can place all their capital in a well-diversified LifeStrategy fund that tracks various indices that, as a whole, cover the global market. The issue I had with this fund was the UK bias.
As of the 31st of October, 2018, the LifeStrategy fund contains two index funds which track the UK market. The UK-All Share Index Unit Trust and the FTSE 100 ETF. Both of these funds together comprise 24.1% of the index (as of 31/10/18). This, despite the UK market only accounting for around 5.5% of the global market.
A 2016 interview in The Telegraph with Dr Peter Westaway, one of Vanguard’s own, explains the reasoning behind the UK Bias in LifeStrategy.
“We think investors prefer to hold more in their home markets but we believe it’s of benefit in terms of diversification for investors to more closely reflect the global market weightings.”
I go into this in more detail in a dedicated article on home bias. But overall, I believe the integrated home bias in LifeStrategy is there for investor preference rather than for diversification purposes. I opted instead for the single global all-cap index approach.
This is the last reason on the list because, to me, it is the least important. When I allocated my investments previously, I had to deposit the money in the account, calculate how much I should invest in each fund to rebalance and invest in the four funds accordingly. Now, when I invest, I simply deposit the money into the account and allocate it to the global all-cap index fund.
This makes my investments easier to manage since I don’t have to rebalance. In future, I will add fixed income assets, like gilts, to my portfolio to reduce volatility. But, since I am only 24 years old, I have a 100% equities allocation.
I can afford to be riskier and ride out periods of volatility since I am young. When I eventually add fixed income assets to my portfolio, I will likely start rebalance at that point, to keep my risk profile in line with where it should be. See my article of portfolio rebalancing here.
November Returns (+2.83%)
Below you can see the monthly return for November. Since I have opted for a single Global all-cap fund, the target weight of that fund in my portfolio is now 100% . Buying into this index is effectively the same as buying into an already well-diversified portfolio. The global all cap fund includes over 6000 large, mid and small-cap companies in developed and developing countries across the globe.
The complete monthly return for November was +2.83%.
I invest around the 22nd of the month.
Returns Since Inception (-0.53%)
Below are my returns since inception. Inception being the end of May 2018. The total portfolio return is -0.53%.
I am in the process of drip-feeding an equally divided lump sum into the market over the course of a year. November was month 7 of 12. 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.
My decision to drip-feed was based on 3 major reasons.
We’ve Been In A Long Market Bull Run
High Shiller P/E Ratio (CAPE)
High Market Cap to GDP Ratio (The Buffett Indicator)
I talk about these factors in more detail in October’s report.
The figure below displays how my portfolio is broken down, by market sector.
Since I reallocated my investments this month to the global all-cap fund, the breakdown deviates substantially from last month. I have ordered them from largest to smallest.
Financials increased from 20% to 21.8%. Technology increased from 4.8% to 14.8%, putting it in 2nd place overall. Industrials increased from 11.5% to 13.5%. Consumer Services increased from 7% to 11.3%. Health Care decreased from 11.4% to 11.1%. Consumer Goods increased from 7.3% to 10.9%. Oil & Gas stayed the same at 6.3%. Basic Materials (4.6%) and Utilities (3.1%) weren’t included in the top 10 sectors list last month. The IT and Consumer Discretionary sectors have been removed from the list. Other sectors account for 2.6% of my portfolio.
But how are some of these sectors differentiated from one another?
Technology and IT: Technology is broad and can include delivery of transportation of energy. IT relates to the delivery of information (eg. a smartphone/tablet).
Consumer Goods vs Services vs Discretionary: Consumer goods are products bought by the average consumer. These products are the end result of a production or manufacturing process (eg. food)
A consumer service (a.k.a customer service) is a process which ensures consumer satisfaction (eg. phone/email interactions).
The consumer discretionary sector refers to desirable but non-essential goods like luxury items, entertainment and leisure.
Figures are rounded for simplicity so might not total 100% exactly. This month, I have broken some regions down even further to give you a greater understanding of the geographical breakdown of my investments.
North America accounts for 58.2%. I have differentiated the UK from Europe (any political irony here is a sheer coincidence, I can assure you). The UK accounts for 5.5% of my investments and Europe accounts for 13.3% of my investments. Eastern Europe accounts for 0.5%. I have also differentiated Japan from the Asia/Pacific region.
Japanese investments make up 8.1% of my portfolio and Asia/Pacific investments make up 11.6% of my portfolio. Investments in the Middle East/African regions stand at 1.5% and investments in the Central/South American regions account for 1.3%.
This section looks at the biggest individual investments in my portfolio overall. Again, due to the reallocation of my portfolio, there has been a lot of movement in the top 10 this month.
Apple is now my largest investment (2.1% of my portfolio overall), up from 1.8% last month. Microsoft is the next largest, up from 1.5% to 1.6%. Amazon, now up to number 3, now accounts for 1.3%, down from 1.4% last month. Alphabet stays the same at 1.3%. Berkshire Hathaway, chairmanned by Warren Buffett is new to the top 10 at 0.8%. JPM Chase, Johnson & Johnson, Facebook and Exxon Mobil are also new to the top 10, all at 0.7%. Royal Dutch Shell, is down from 2.9% of my portfolio to 0.5%.
Previously, I was heavily invested in the UK (30% of my portfolio was a UK-All Share Index Unit Trust). As I mention in my article on home bias, the UK market index is quite concentrated in its top companies. Since I was greatly exposed to this concentrated market, this investment concentration was transferred to my portfolio overall. A large number of my top holdings were companies traded on the London Stock Exchange.
My top investments last month included Royal Dutch Shell at 2.9%, HSBC at 1.6%, BP at 1.4%, British American Tobacco at 1%, AstraZeneca at 0.9% and GSK at 0.9%. Overall, the top 10 companies last month accounted for 14.6% of my portfolio. This month, the top 10 account for 10.4%.
Since the Global All-Cap Index Fund is so well diversified, I am less concentrated in my top 10 investments and more diversified overall.
The Vanguard Global All-Cap Index Fund is an accumulating fund. This means the dividend income is automatically reinvested back into the fund. I don’t have to process that dividend reinvestment myself. I am huge advocate of dividend reinvestment for long term wealth-building.
Goals For December
I will continue to invest my equally divided lump sum into the global all-cap index fund.
That concludes the November 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.
If you’re looking for resources to better your own personal finances, here are some of my recommendations:
Facebook - UK Passive Investing Group - Join A Like-Minded Community
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Rich Dad, Poor Dad by Robert Kiyosaki
The Little Book of Common Sense Investing by John C Bogle
The Intelligent Investor by Benjamin Graham