Please critique my UK portfolio and how can I backtest

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Topic Author
Samunitions
Posts: 7
Joined: Thu Sep 09, 2021 3:11 am

Please critique my UK portfolio and how can I backtest

Post by Samunitions »

Hi,
I’m 44 years old with a family, making a reasonable income. Getting a windfall soon from selling a property I was letting out. I’m comfortable with risk but also realize I’m half way to retirement now.

My allocation is as follows
60% Developed World Índex. VHVG
5% Emerging Markets. VFEG
5% Global Small Cap WSML
15% Vanguard Global Bond Index FundGBP Hedged Acc
15% Inflation Linked Gilt Index Fund GBP

I’m debating whether I should replace or split the global bond fund with a 3-7;Year Treasury ETF as a better hedge for a crash in equities

How can I backtest this uk portfolio? There’s a really good backtesting site but it’s for US equities and I can’t find UK equivalent fund. For example their developed world etf is ex uS which doesn’t match at all
I actually have no clue what return I should expect from this portfolio on average.

Thanks for reading this, any advice welcome
Sam
minimalistmarc
Posts: 1636
Joined: Fri Jul 24, 2015 4:38 pm

Re: Please critique my UK portfolio and how can I backtest

Post by minimalistmarc »

Personally, I would simplify the portfolio to two ETFs

Vanguard all world (VWRL or VWRP)
Vanguard all bond (VAGP)

after that just keep adding and rebalancing as required
Topic Author
Samunitions
Posts: 7
Joined: Thu Sep 09, 2021 3:11 am

Re: Please critique my UK portfolio and how can I backtest

Post by Samunitions »

minimalistmarc wrote: Sat Oct 23, 2021 3:17 am Personally, I would simplify the portfolio to two ETFs

Vanguard all world (VWRL or VWRP)
Vanguard all bond (VAGP)

after that just keep adding and rebalancing as required
Thanks Marc
I didn’t go with VWRL because I think it has a higher fee and that combining a developed world and emerging etf would be cheaper.

I would need to add a small cap etf as well anyway as vwrl doesn’t cover that

For VAGP ,since that includes corp bonds, don’t you worry it will correlate with equities? I’ve been wondering about that
minimalistmarc
Posts: 1636
Joined: Fri Jul 24, 2015 4:38 pm

Re: Please critique my UK portfolio and how can I backtest

Post by minimalistmarc »

Samunitions wrote: Sat Oct 23, 2021 4:18 am
minimalistmarc wrote: Sat Oct 23, 2021 3:17 am Personally, I would simplify the portfolio to two ETFs

Vanguard all world (VWRL or VWRP)
Vanguard all bond (VAGP)

after that just keep adding and rebalancing as required
Thanks Marc
I didn’t go with VWRL because I think it has a higher fee and that combining a developed world and emerging etf would be cheaper.

I would need to add a small cap etf as well anyway as vwrl doesn’t cover that

For VAGP ,since that includes corp bonds, don’t you worry it will correlate with equities? I’ve been wondering about that
I have a huge bias towards simplicity and the simplicity of the 2 fund outweighs any minor worries, which really aren’t likely to be a big deal.

I’m actually 100% equities and just hold vanguard all world.

Yes it is slightly more expensive. My portfolio is 1.5 mil so I could save almost 2k a year by breaking it up, but then I’d have to mess around with rebalancing (and presumably associated extra cost of this) and I’m far too lazy for that!

In my taxable accounts I do have to juggle between all world and developed to harvest annual CGT allowances.
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mrpotatoheadsays
Posts: 546
Joined: Fri Mar 16, 2012 2:36 pm

Re: Please critique my UK portfolio and how can I backtest

Post by mrpotatoheadsays »

Historically, over the long-term (i.e 25-30 years), Large Cap Blend (e.g. VHVG) has an inflation-adjusted return of ~6.6%. The developed market (i.e. world, US, UK, Euro, etc.) is irrelevant.

Historically, over the long-term, Small Cap Blend (e.g. WSML) has a 2-3% better annual return than Large Cap Blend. More risk; more reward.

Historically, over the long-term, Emerging Markets Large Cap Blend (e.g, VFEG) has a return similar to Small Caps, but it is more volatile. I do not invest in pure emerging market funds because I cannot stomach such focused investing in places like China and/or Russia. To achieve greater return in this class, you need to invest in Emerging Markets small and/or value.

I view my bond partition as a means of stability; therefore I invest purely in short and intermediate, regular and inflation-adjusted Treasuries. I do not add risk by mixing in foreign, corporate, agency and/or junk bonds. If I wanted more risk, I would own more stocks. I would not own the global bond fund you specified.

For your age, you have too much of your equity position in Large Cap Blend. You have little Small Cap and no focus on Value. Historically, Value beats Growth and Blend. Just looking at equities, 30 to 40% of that equity position could be in Small Cap (blend and/or value).

Remember, all of this analysis is long-term based. You need a plan and you need to stick to it. You need to expect 50% downturns in an equity class. You need to expect a decade or more of under performance in an equity class. Only being widely diversified has historically shown to provide stability. Reference: https://paulmerriman.com/wp-content/upl ... Charts.pdf
Valuethinker
Posts: 49035
Joined: Fri May 11, 2007 11:07 am

Re: Please critique my UK portfolio and how can I backtest

Post by Valuethinker »

Samunitions wrote: Sat Oct 23, 2021 1:42 am Hi,
I’m 44 years old with a family, making a reasonable income. Getting a windfall soon from selling a property I was letting out. I’m comfortable with risk but also realize I’m half way to retirement now.

My allocation is as follows
60% Developed World Índex. VHVG
5% Emerging Markets. VFEG
5% Global Small Cap WSML
15% Vanguard Global Bond Index FundGBP Hedged Acc
15% Inflation Linked Gilt Index Fund GBP

I’m debating whether I should replace or split the global bond fund with a 3-7;Year Treasury ETF as a better hedge for a crash in equities

How can I backtest this uk portfolio? There’s a really good backtesting site but it’s for US equities and I can’t find UK equivalent fund. For example their developed world etf is ex uS which doesn’t match at all
I actually have no clue what return I should expect from this portfolio on average.

Thanks for reading this, any advice welcome
Sam
There's nothing wrong with that, except, arguably it has more funds than you need.

5% small cap seems to be about market weight. 5% EM is about 8% of your total stocks, so underweight. It's not enough to have a huge impact on your final portfolio.

On bonds:

- indexed linked gilts have lousy yields (c -2.5% real) and very long duration (so if interest rates go up, they will go down - but real interest rates, not nominal (the 2 tend to move together, but not in perfect correlation)

- Global Bond index fund, hedged into GBP is fine. You basically want high credit quality. However UK gilt index has a 13 year duration (nearly 14?) so is much more sensitive to interest rate movements than the global fund (should have duration around 7 years)

I don't know of a good UK monte carlo investment simulator.

Assuming you have c. 20 years to retirement, that looks in pretty good shape. Remember you will have periods when the equity proportion is down 25-50%. It's pretty scary when it does (2008-09 comes to mind as the most scariest, ever, in my investing career; however 2000-03 actually cost me more money, because my employer's stock fell by so much).

I would *not* rely on approaches w rely on past relationships holding-- I mean the small and value effects. Value has underperformed for most of the last 30 years, for example. In other words once the effect was discovered & documented by academics, it seemed to become less pronounced. Same for small cap effect - revisionist work suggests there is not actually much of a small cap effect. (Rolf Banz's original work in the 1980s was in error - a misunderstanding of how stock prices worked before 1950).

Your proposed small cap weighting is a reasonable estimate of the market weight of small cap (depending on which index you choose).

There is very big tracking error risk in being off index. It's fairly clear that if Small Cap & Value effects work, it's because in certain macroeconomic and financial market conditions (like the Crash of 2008/9) they are much riskier than the market as a whole.

(I should disclose I was 25% value indexed/ 75% FTSE All-world. Until Vanguard UK closed its Value ETF in February).
Topic Author
Samunitions
Posts: 7
Joined: Thu Sep 09, 2021 3:11 am

Re: Please critique my UK portfolio and how can I backtest

Post by Samunitions »

Thanks @mrpotatoheadsays and @valuethinker
That was very helpful.

I think one thing that needs to be changed is the inflation linked bonds. I hadn’t realised how overpriced they are
Valuethinker
Posts: 49035
Joined: Fri May 11, 2007 11:07 am

Re: Please critique my UK portfolio and how can I backtest

Post by Valuethinker »

Samunitions wrote: Mon Oct 25, 2021 12:42 pm Thanks @mrpotatoheadsays and @valuethinker
That was very helpful.

I think one thing that needs to be changed is the inflation linked bonds. I hadn’t realised how overpriced they are
And yet they will have done well.

Because inflation has been well above market expectations (in the UK in particular).

That makes it really, really hard. I have struggled with this and decided *not* to hold them. Yet for fixed income, they are a far preferred investment compared to ordinary bonds.

I say this because the real risk for a personal investor is that savings do not meet future needs. By holding ILGs, one guarantees buying power (in a pension).

I took a view that because UK financial services regulation requires pension funds to hold ILGs to hedge liability to retirees (which is also inflation indexed) they are fundamentally overvalued-- particularly at the moment. So far, that view has been pretty much totally wrong.
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