Back in July 2015, I published The Simplicity Portfolio as my free gift to The People of Britain.
And what a gift it turned out to be! In its first year, the Simplicity Portfolio delivered a total return of +12.5% for the version that included 25% cash and +16.3% for the all-equities version.
Heroically, The Escape Artist managed this without being paid a fat $$$$ bonus, deducting 2% from your portfolio value each year or requiring a taxpayer funded bail out.
Granted, the excellent performance of The Simplicity Portfolio was boosted by the fact that its a global portfolio measured in sterling and the £ fell against other currencies after the EU Referendum. That won’t happen every year.
But to me, the whole Brexit thing is an example of why investors should diversify and avoid home bias. To put it crudely, shit happens. And none of those talking suits on CNBC / Bloomberg / the financial news really know what is going to happen in the future. Which raises the question of why broadcasters put those clowns on TV…other than to fill up airtime.
I regret to have to inform you that before The Simplicity Portfolio was published, many people in the UK had not been managing their own portfolios but rather relying on financial advisers and wealth managers to look after their money for them. This is a bit like giving Dracula the keys to the blood bank and asking him to look after it while you go on holiday.
Fortunately, now that The Simplicity Portfolio is out there there is no excuse for The People of Britain not to take control of their own investing (and yes, that includes your pension). All the information most UK investors would ever need is available free on the excellent Monevator site.
This short video from Lars Krojer makes the point nicely about how simple investing can be.
Lars will be pleased to note that the Vanguard All World ETF (VWRL) outperformed The Simplicity Portfolio in its first year. By my calculations, a portfolio of 100% VWRL delivered a total £ return of about 19.7% over the same period.
The relative performance of The Simplicity Portfolio in its first year is a reminder that valuation is not a reliable predictor of short term returns. In other words, shares or indexes that start expensive can, at least over the period of just one year, get more expensive. And cheap assets can get cheaper. But, over the long term, lower starting valuations lead to higher future returns. That’s why value investing has historically provided a performance advantage.
The reservation that I have about just chucking everything into VWRL is that the US equity market looks expensive. And the USA makes up ~53% of VWRL. US small caps and tech / social media stocks look particularly pricey. Maybe for good reasons, maybe not.
This chart from Research Affiliates illustrates the point nicely. Research Affiliates expect US small company shares to deliver zero real returns over the next 10 years, with US large companies not much better. The expected returns for international stocks are more positive.
It’s important to understand the limitations of these guess-timates of future returns. Whilst these forecasts are based on sound logic, stock market prices exhibit randomness and no one has a crystal ball that can accurately predict the future.
But it is possible to predict stock market returns roughly. And we do know that in investing, lower starting valuations mean higher future expected returns (all other things being equal) over the long term.
This concept links to the safe withdrawal rate (SWR). As I’ve said before, I’m not a fan of long and boring debates about the SWR. That’s because a number of the assumptions of the SWR studies are unrealistic. That’s not a criticism, just an observation of the truth.
Most obviously unrealistic are the assumptions that you won’t ever earn anything after financial independence and you wont ever get any state benefits (e.g. no pension, child benefit). The studies tend to assume a constant withdrawal rate…as if there were no scope to flex spending on living expenses nor earn some extra money after quitting your day job.
The SWR studies also usually assume fixed asset allocation percentages. For example always holding: 50% equities : 50% bonds over a long period such as 30 years….regardless of valuations. Again this is unrealistic because in real life you are allowed to sell expensive asset classes and buy cheaper asset classes. In other words, you can flex your asset allocation in response to valuations.
To take an extreme example, if you were setting your asset allocation in January 2000 (the height of the dotcom boom) you would have been well advised to underweight US tech stocks and overweight emerging markets. And back then you would have done well had you included some index linked gilts (or TIPS in the US) on a real yield of 4%. But at current valuations (index linked gilts at negative yields anyone?)…not so much.
I’ve been investing for 20 years now and, during that time, there have always been asset classes that are popular (and relatively over-priced) and others that are unpopular (and relatively under-priced). Imagine an American High School. The popular assets are a bit like the quarterbacks and cheerleaders (popular now but doomed to future under-achievement) and the unpopular assets are a bit like the geeks (that go on to start tech companies and get rich).
The Simplicity Portfolio responds to prevailing valuations and tilts towards value. I selected indexes that looked like they offered better value based on metrics like the Shiller PE, price: book value and dividend yield.
And, living here in Britain, I used Vanguard’s UK product range for the portfolio. But about half of the readership of this site is based outside the UK. According to my WordPress stats, the site traffic recently passed my target of one million page views (remember: the first million is the hardest) and about half of those were outside the UK.
Its interesting to see where the site is being read….including countries such as Mongolia, Macedonia, Mozambique and Moldova….and that’s just some of the “M”s. I can’t cater for all these countries but I’ve had a quick look at the countries that provide the bulk of the international readers to see whether its possible to replicate The Simplicity Portfolio using the local Vanguard product range.
And, for the most part it is! Before researching this article, I hadn’t realised that the Vanguard ETF product range is available right across Western Europe. So the same ETFs that I used to construct the Simplicity Portfolio are available from Vanguard in Ireland, Germany, Finland, Switzerland, Italy, Netherlands, Belgium, Sweden, Denmark, Norway, France, Spain etc etc
Its a bit more complicated in the USA, Canada, Australia etc where the Vanguard product ranges are a bit different. But for each of those countries I had a look at the local Vanguard website and had a go at seeing how closely I could replicate The Simplicity Portfolio using only Vanguard ETFs. And here are the results:
If you have suggestions on how to improve on this, let me know and, if these are improvements in terms of cost / valuation / simplicity, I’ll update the table.
This is provided for information and is not regulated investment advice. These are model portfolios and have not been tailored for any individual, including me. My portfolio is different, not least because it contains a large slice of actively selected shares. So think about your risk tolerance and asset allocation preferences when constructing your own portfolio. If you’re working towards financial independence and saving via monthly automatic payments and able to ride out volatility, feel free to take your % of shares up towards 100%.
One final word. If you are struggling to start, by all means keep it simple with a single all world ETF (or a LifeStrategy Fund in the UK). Or if you are in the US, you could just follow Jim Collins guidance. Remember, there is no single right answer in investing. So don’t sweat the small stuff obsessing about micro differences between different Vanguard products.
The most important thing is to get started.
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Image credit: Morgan Housel