In our last post we looked at the results of our survey of asset allocation amongst FI bloggers. The results demonstrated the average portfolio favoured allocations to equities (68%), bonds (9%) and money in property (15%). The remainder comprised of cash, P2P lending, commodities and other investments.
We know that the power of the many can outperform that of the individual in quantitative tasks. Let’s say you were stuck trying to figure out your asset allocation. Instead of copying the investing strategies of one person, why not use an approach aggregated from the ideas of many different people? What would happen if you invested using the ‘Average FI Blogger’ Portfolio?
Let’s look at some issues before we crack on with the number-crunching. Firstly, our data represents only about a third of the community we wanted it to – it’s far from a perfect average of all FI portfolios. Secondly, assessing the performance of some of the asset classes is tricky. We suspect the ~15% allocation to property is predominantly people’s home equity rather than property investing per se, which makes it difficult to model. Similarly, the performance of cash (decreasing value from inflation), P2P (variable) and un-qualifiable ‘other’ assets can’t be easily represented. Lastly, the performance of equities, bonds, property investments and even cash will be highly variable depending on the vehicle in which they are invested. This further muddies the waters. But let’s give it a shot and see what happens.
We modelled a few different portfolios to see how an Average FI portfolio would perform. The portfolios came from Portfolio Charts (the PC portfolio), Trust Net (the TN portfolio) and Portfolio Visualiser (the PV portfolio).
The PC portfolio comprises of 67.6% total stock market equities, 8.9% long-term bonds, 0.6% commodities and 15.3% property [real-estate investment trust; REIT] investments. The missing wedge (8%) represents the holdings of cash, P2P and other investments in our PC portfolio. We did also model a portfolio without REIT’s just to see if that made a major difference to the results (see below).
The TN Portfolio comprises of investments as show above, though P2P (1.4%) was included with cash and the 1.5% of ‘other’ investments was spread amongst all the classes. We chose a selection of assets that might reasonably be chosen by an investor (see below).
The PV portfolio is similar in make-up to the other two. The equities portion is split into 55% US (VTSMX) and 45% ex-US (VGTSX) equities as there’s not a ‘global stock market’ option. We chose unhedged global bonds (PIGLX) for the bond allocation. Cash (CASHX) is weighted at 6.2%, while the tiny grey sliver labelled ‘other’ represents the commodities (GSG) allocation for the portfolio (0.6%).
As with the PC portfolio, we did the modelling both with and without the REIT (VGSIX) portion.
If you’d invested using a strategy akin to the PC portfolio from 1970 until 2020, you’d have averaged annual real returns of 5.8%. Your portfolio would have made money nearly 70% of the time and provided >10% real returns in over 45% of those fifty years.
On occasion, however, it lost 20-40% of its value. For 1 in 10 years it’s annual real return was between -10% and -20%!
If we removed the REIT component of the portfolio, the portfolio became more volatile (SD 15.9% vs. 14.4%). The portfolio still made money most of the time, though returns were marginally greater at 6.3%. Indeed, real returns were over 20% in a quarter of years!
Losses were a tad harsher in a REIT-less portfolio, however, as it lost 20-40% of value more often. The higher equity allocation in a PC Portfolio without REIT’s would account for both the greater returns and higher volatility.
The Portfolio Charts site allows you to do some FI calculations too. With a 25% savings rate, to fund a PC portfolio that could provide a 3.5% SWR for 40yrs you’d need to work for 23-33yrs. If your savings rate was 50%, if would be 12-20yrs. These broad time ranges make the numbers slightly unhelpful, but we’ve included them for demonstration.
The TN portfolio provided annualised returns of 10% (from 2011-present). The cumulative gain was 139%!
The ride was mostly smooth – overall volatility was only 8%. There were dips though, losing 20-30% of value in 2015/16 and 2018/19 due to a fall in equities and/or property.
Unsurprisingly, you can see that equities do the heavy lifting in terms of portfolio performance.
In terms of annualised returns in the past five years, the TN portfolio (10.1%) outperformed both the FTSE All-Share index (7.6%) and the ‘aggressive’ advisor fund index (8.6%). It lagged behind the FTSE World index (12.5%), however.
Simulating the PV portfolio led to an average return of 7.3% (2007-present). The standard deviation of returns was 13.9%, which is similar to the PC portfolio. Taking out the REIT portion had minimal effect on both returns (7.1%) and volatility (13.1%).
Once again equities did the heavy lifting. The cheeky 8.8% annual returns from REIT’s came with a hefty 23% volatility, while it’s fortunate that commodities (annualised -4.3% returns and 22% volatility) are such a small wedge of the portfolio pie.
On average, the most value your portfolio would have lost at any one time was was about 40%. The portfolio commonly (i.e. more than 50% probability) lost up to 10% of its value, though the chance of it having lost value by the end of the 40 year period was <2%.
If you started off with £1,000 and contributed £100/month your portfolio would, on average, be worth over £20,000 by the end of 10 years – much more than the £12,000 if you’d just stuck the money in a bank account. By 20 years the gap has widened as your £60,000 portfolio is worth more than double the ‘stick it in the bank approach’!
Overall it seems an investment strategy based on the ‘Average FI Blogger Portfolio’ netted you real returns in the region of ~7%. Whether REITs were a part of the portfolio or not seemed to have little effect on the overall outcome. Commodities/gold seemed a bit of a liability although their impact was minimal as they made up <1% of the portfolio.
We came up with this idea for interest, but in reality you shouldn’t use an averaged approach. We said at the beginning that asset allocation is important because it will tailor your portfolio to your individual needs. An averaged portfolio is tending to everyone’s needs and yet nobody’s at the same time. You suffer from all the compromise and idiosyncrasies of others’ portfolios. Instead, it’d be better to sit down and outline your own plans, your own goals and your own strategy for investing.