The Simplicity Portfolio : now available in your country

vanguard

So easy a child could do it…

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.

vampireI 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.equity-returns

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.

1m-page-views

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.

You can follow The Escape Artist on Twitter here

Image credit: Morgan Housel

26 comments

  1. Vanguard distributes dividends rather than automatically reinvesting them, in some countries this involves paying 25-27% extra taxes 😦 MSCI IWDA for example avoids these costs.

  2. chausson8a · · Reply

    Hi TEA,

    Rookie question. We’ve just paid off our mortgage so are in a position to start investing again. I’m looking at Vanguard LifeStrategy Funds and also their ETFs. We plan to drip feed £1270 each per month into a S&S ISA. My question really is over the costs of drip feeding funds into LifeStrategy vs ETFs. I’ve looked at the various charges (considering the Charles Stanley Direct platform for our S&S ISAs) but I’m still not clear on the difference in costs between the two products if feeding them on a monthly basis. We’re aiming to invest the money for at least 5 years.

    Thanks,

    Paul

    1. Hi Paul

      Congratulations on paying off your mortgage, that’s a fantastic achievement. Re investing costs, you could either pay a financial adviser or an accountant a fixed fee to do the (very simple) sums for you. Or you could dust down your calculator and Google and do it yourself. I think you’ll find that, compared to paying your mortgage off, it’s an absolute doddle. 😉

      This reminds me of a story told by 80s snooker legend Jimmy White. White left school early, without having learned how to read. In his early 20s, he arrived at the rail station in a city centre. He needed to get to his hotel where he was staying for a tournament. Because he couldnt read, he got in a taxi and asked to be taken to the hotel.

      The cabbie drove to the other side of the road and, in less than 100 yards, stopped outside the hotel and asked White for £5. White said that it was in that moment that he realised he needed to learn how to read. Which he then did.

      All the best

      TEA

      1. Thanks for the helpful analogy. I’ve found the useful and generic advice I was looking for (as a rookie) from Monevator – linked here in case any non-IFAs or accountants also read this article: http://monevator.com/etfs-vs-index-funds-differences/

    2. Hi Paul,

      Have a look at the comparison table on Monevator and look at the entry for Charles Stanley:
      http://monevator.com/compare-uk-cheapest-online-brokers/

      Regards, Pinch

      1. Hi Paul,
        Sorry, forgot to mention this last night:

        You also need to be aware that providers (though not all of them) charge holding fees for various investments some of which may be capped/uncapped.
        The table on Monevator does mention these charges and their conditions – although this is not a cost per purchase it does play a role in how cheap the portfolio as a whole can be run.

        Good luck with your investing!

        Regards, Pinch

  3. Hey TEA,

    I’m one of your many “outside UK” fans (Poland it is). We can buy Vanguard ETFs only through a few brokers, who allow investing via foreign stock exchanges. I use your London Stock Exchange for that. The nice advantage of investing via LSE is that we receive full dividends and once a year (in April) we pay 19% tax to polish tax office from the dividends received in the year before, so I pay the taxes with “less worth” money (since the money is losing it’s value overtime). I can receive the dividend in January 2016 and I won’t have to pay taxes until April 2017.

    My simplicity portfolio is the one the Lars Krojer is talking about, made of just 2 assets:
    1. world equities as VWRL (TER 0.25%)
    2. low risk investment as a polish investment fund (denominated in PLN currency), investing mainly in polish government bonds (TER 1% – it’s impossible to find anything cheaper)

    Hope you have (and will have) many more readers from Poland!

    Cheers

    1. Thank you…I appreciate the comment and think it may be useful to other readers

  4. bellabeck · · Reply

    May be interested in The School of Life, can you post some more information?

    1. Yes, I’ve emailed you with this

  5. Mark Stephenson · · Reply

    I buy both VHYL (div fund) and VUSA living here in Amsterdam on the NL stock market. However, buying the fund in Euros has meant that the overall gains were much lower than the same fund in Sterling. (plot VHYL.AMS and VHYL.LDN YTD and the difference are clear!) I completely support the use of index funds for simplicity and cost, but there is a partially-hidden currency cost that the buyer needs to understand. Your gains are primarily down to the currency moves, not the underlying index. Thanks for the post. Mark.

  6. The Rhino · · Reply

    why the missing ticker for short term gilts? Is it because you propose to buy them direct or something? or did you mean to add VGOV or somesuch? or maybe you are thinking just stick with cash?

    1. There is no Vanguard ETF for short term gilts….VGOV tracks the wider gilt market with longer duration…so that leaves either cash or buying short dated gilts direct (which most people don’t realise is actually super simple to do)

  7. Hi TEA,

    Thanks for the update. I’ve followed the let’s just chuck everything into an index fund and forget about it mantra for my first few years of investing but am finally coming round to actually looking at value as well now. It totally makes sense! I wouldn’t buy a loaf of bread for £3 so why would i overpay for stocks. Just need to learn more about how to value things correctly now. I’ll be dipping my toes slowly into some attempted value investing soon. In the meantime I’m glad I stuck some money into VWRL and the dividend equivalent VHYL I think a year or so ago when markets valuations seemed pretty low all round.

    1. Thanks TFS….your way makes a lot of sense…start early and start simple with a global tracker…focussing your attention on frugality and getting your savings rate up. As you know, the main driver of the time to FI is savings rate (rather than investment returns). I’m a great believer in value investing as a path to better returns but no need to spend too much time on fancy investing in the early years when people could be using that time to earn more and optimise their spending.

  8. Have you seen the work that Abraham Okusanya at FinalytiQ has done on risk rated multi-asset funds? Probably best to stick to a world tracker and a bond tracker (in a proportion appropriate for your risk tolerance) rather than anything fancy.

  9. a Lawrence · · Reply

    Is there a Vanguard offering in Ireland?

    1. Yes! Ireland now added to the list of countries in the article

  10. The Rhino · · Reply

    Hmm – is the Norway sovereign wealth fund a client of yours TEA?

    ‘A budgetary rule stops the government from drawing down more than the fund’s expected annual returns (set at 4% a year). The capital, in theory, is never touched’

    http://www.economist.com/news/business-and-finance/21707435-norways-global-fund-its-tough-small-democracy-run-worlds-biggest

    1. Sadly not. If I were running their portfolio, I reckon the good people of Norway would have enough for a big party in Oslo and still take 4 – 5% a year out on top 😉

      1. give them a call – it could be the best £190 those Norwegians ever spent (I reckon thats roughly the price of a beer and a bag of nuts in Oslo)

  11. sounth_bound · · Reply

    Hi, thanks for another interesting article – big fan here and another regular reader from overseas, in my case France.

    One of the issues to deal with is the different tax treatment in different countries which can influence choice of investing strategy. For example, in France the equivalent of the ISA, called the PEA, is limited to stocks (or stock based funds or ETFs) from European registered companies. I’m sure that if it wasn’t for the EU, this would be limited to French companies. Synthetic ETFs tracking world indices seem to get through by investing in European shares then having swap deals with counter parties offering the international index performance. That means that Vanguard VWRL and VHYL might not be the best option for French residents for tax efficiency purposes – and French taxes are high in all cases, not least on investment income.

    Another comment in response to SunnyBoy above, I always thought that withholding tax is based on where individual shares are domiciled rather than where the ETF calls home? Most trackers aim to replicate the net returns (after dividend withholding taxes) although some (non-synthetic) can claim back partial tax credits to lift actual returns. Or are you talking about a further tax on dividends paid out as part of the ETF distribution? If so, this sounds like a punishing double taxation scenario. Any insight into this from someone more knowledgeable would be helpful.

  12. Federico · · Reply

    Very interesting article. I am looking at the UK version of your SP and your total exposure to US shares seems to be around 20% (10% from VHYL and 10% from VUSA).

    Is this not a bit on the high side for what you consider a seriously overvalued market? Do you use a formula (based on CAPE, etc.) to decide exposure to different countries (or sectors)?

    1. Thanks! You are allowed to have a lower US exposure if you want. I don’t use a single mechanical formula…investing is more art than science.

  13. donaldtramp1 · · Reply

    Hi EA. With regards to the 25 % invested in gilts, is there a vanguard fund or equivalent that can do that job. I see people on here saying it’s easy but I have no idea where to start with this part! I take it that the idea of investing this part in bonds and gilts is to keep this 25% safe but still keeping track with inflation?

    1. See my answer to The Rhino’s question re gilts above

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