VLS 60 buying more now ok?

Audaxer · 9 March 2017 at 12:09AM

bowlhead99 wrote: »

FTSE All-World peak to trough drawdown within the last decade, in USD terms (which is how they measure the world index), was 58%. That's total return, even accounting for dividends received. So that's the sort of returns you can get from global equities.

That's taking a world index that is majority invested into dollar-based companies (because of the worldwide equity market capitalisation), and measuring it in dollars. So, then consider Vanguard's VLS equity structure holds a mix of companies with considerably in excess of 75% non sterling assets and revenues, but the performance you want to measure will be in pounds sterling terms...

So, it is very clear that the drop in equities in a VLS fund could be in excess of the 58% drop that was measured in the world index between 2007-2009.

It is not to say it will happen, but it couldn't be a surprise if it did.

If you are in doubt that VLS60 could drop by 40% in a few years, consider: if you had invested £6000 in that fund a while back, it would be worth £10,000 now. So, why in a market downturn could it not go back to £6000? That would be a loss of 40% from here.

Just to focus on that last point as an example - although it's no more important than the first one. The fund only launched in summer 2011, and £6000 invested then would have risen by 68% to end of Feb 2017, which is greater than £10000 today. July 2011 was not the trough of a great recession or market crash. It was an OK time, couple of years after a rapid recovery from the bottom of the credit crunch and markets, emerging markets especially were doing well.

In the time since then there has been dividend income earned and bond interest received. That stuff is "one way". But as capital values can drop to much lower than they were in 2011 (as evidenced by the 2009 levels), it's far from impossible for a fund like VLS60 to give back its gains and go from £10000 back to £6-7000.

Thanks, would these figures roughly apply to any active or passive 60/40 fund?

jdw2000 · 9 March 2017 at 12:16AM

Audaxer wrote: »

Thanks, would these figures roughly apply to any active or passive 60/40 fund?

They'd be applicable to any investment fund, I'd imagine.

Jeems · 9 March 2017 at 12:45AM

I've read this thread with interest, some great arguments and counter arguments. Maybe I'm crazy but after reading, it makes me want to invest in VLS100 or similar even more. In a crash, every VLS variant and the majority of funds will dip anyway. If investing really is long term and there is no need to touch the money, and its impossible to time the market...why not?!

bowlhead99 · 9 March 2017 at 12:57AM

It depends whether, although there is no perceived need now to touch the money, when you have lost 60% of the value in the VLS100 fund, will you really still be thinking, "no problem, my £20k ISA allowance from 2017/18 has fallen to £8k, and is still falling week on week, and I told myself it might happen, and there have been absolutely zero unexpected events in my life which tempt me to go and spend some of this £8k on those important other things, I will just sit back and wait five to ten years and then I will have £20k again hopefully, or maybe more".
Or would you panic and sell?

Or perhaps at least find some unexpected event had happened elsewhere in your life which tempted you to cash in the poorly performing investment product in your ISA rather than take out a loan or extra mortgage or forgoe whatever demand or opportunity that was calling for your money.

If you know that you absolutely definitely would not need or want he cash back for 20 years then sure, go 100% equities instead of only 60-70%.

TheShape · 9 March 2017 at 1:11AM

bowlhead99 wrote: »

It depends whether, although there is no perceived need now to touch the money, when you have lost 60% of the value in the VLS100 fund, will you really still be thinking, "no problem, my £20k ISA allowance from 2017/18 has fallen to £8k, and is still falling week on week, and I told myself it might happen, and there have been absolutely zero unexpected events in my life which tempt me to go and spend some of this £8k on those important other things, I will just sit back and wait five to ten years and then I will have £20k again hopefully, or maybe more".
Or would you panic and sell?

Or perhaps at least find some unexpected event had happened elsewhere in your life which tempted you to cash in the poorly performing investment product in your ISA rather than take out a loan or extra mortgage or forgoe whatever demand or opportunity that was calling for your money.

If you know that you absolutely definitely would not need or want he cash back for 20 years then sure, go 100% equities instead of only 60-70%.

Is one possible answer to the 'unexpected event' issue to have an amount of cash available that should cover you for most conceivable major unexpected events?

bowlhead99 · 9 March 2017 at 7:16AM

TheShape wrote: »

Is one possible answer to the 'unexpected event' issue to have an amount of cash available that should cover you for most conceivable major unexpected events?

Yes, if you're going to have a lot of money in high risk investments, also have money in things without investment risk, like cash deposits.

Or have your money in lower risk investments in the first place.

But even lower risk investments which are only 50% equities will still drop substantially when their underlying equities drop by up to half or more. So to ensure you don't need to pull money out during the lean years, have other money elsewhere.

For some people, simply knowing they have cash put aside now for 'the unexpected' doesn't mean they won't pull cash out of their investment at a bad time time. For example, you might have the £5k in the bank for a new roof, or car, or the £40k in the bank to take up the opportunity to move or extend your house, whatever. But once you spend it on the 'unexpected', you'll no longer have as much put away for the next 'unexpected', and might be tempted to cash in the 'poorly performing investment' to help top up those 'for the unexpected' resources.

Or, you might have completely adequate cash resources for whatever life throws at you, but when you bought an investment in your ISA for £20k and the ISA summary says you now only have £11k of value with a big red "- £9k" in the portfolio performance column, the fact that you don't need the money right now is scant consolation really. Some people looking at that ISA summary will still be concerned that they have made a big mistake, and try to extract themselves from that losing situation and avoid further losses, by selling up.

If it were an individual stock, that had lost 45% so far and might be going bust, selling up to cut losses is no bad thing. If it were an investment fund invested broadly that should bounce back if given three to five to ten years, it would likely be a mistake.

Fatbritabroad · 9 March 2017 at 7:32AM

What bowl head said. Hence why i wouldnt now invest in single shares until I have a lot more to play with, (or maybe never!). Dam you Easyjet
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TheTracker · 9 March 2017 at 9:32AM

bowlhead99 wrote: »

But if you only have Vanguard's bond index funds (which have been positively correlated with equities recently) as your non-equity holdings

Do you have a source for this assertion? Remember that a correlation of 1 is totally correlated, 0 is uncorrelated, and -1 is totally negatively correlated. As of November 2016, U.S. bonds had a 12-month correlation with large-cap U.S. stocks of -0.07. Just because two classes are both going up in annual terms doesn't mean they are correlated.

bowlhead99 wrote: »

it stands to reason you could easily expect to see the VLS products bottom of the performance tables in the down years just like they are now at the top in the good years.

I do not see how that stands to reason. Such passive products will generally float in that noisy sea around the 2nd quartile. If a 'bad year' means stock crashes, I don't see your logic that says that changes where in a table such products will land.

I really wouldn't want to trust 60% of my performance to a pile of bond indexes. However if you were to ask me what I have instead, it wouldn't be suitable either, because I'm looking at more like 70% equities anyway, and using a whole bunch of products that aren't suitable for less-experienced investors

There are precious little threads on these forums that aren't about equities, or property/highinterestcash/p2p, and specifically about bonds or other alternatives. There are also many experienced investors. As one of these, with large sums in bond indexes, I am genuinely curious as to how others handle investment in this area.

Such investments ARE very personal, and tailored to circumstances, and not applicable to all, but in my opinion it is healthy for posters to show their hands. It breeds some trust with others. And studies show that public declarations of positions tend to help one stay the course when going gets tough.

coyrls · 9 March 2017 at 12:05PM

Bowlhead, thank you for providing your example of the sort of risk statement that I was suggesting:

" hey, you know investments can go down sometimes, right, and funds with 60% equities can lose perhaps 30% sometimes, they might all do that if they're 60% equities, you cool with that?"...

I agree that this is a poor risk warning. It is also rambling and illiterate.

You may have missed the risk warning example that I suggested in my post:

"Do you understand that a fixed 60/40 bond fund such as the Life Strategy 60 has the potential for a 30% loss?"

I prefer my example; it is more concise, focussed and does not contain terms such as “hey”, “right” and “you cool with that”

[FONT=&quot]I thought I was making the uncontroversial point that you should distinguish between risk warnings that apply to a class of investments and those that apply to a specific fund. There are plenty of risk warnings that would apply specifically to the Life Strategy 60 fund but the potential for a 30% loss is not one of them.[/FONT]

ColdIron · 9 March 2017 at 12:23PM

A cautionary word about bond indexes to consider by Jim Leaviss from M&G's Bond Vigilantes

Let me start by restating our opposition to index investing when it comes to corporate bonds (we would say that, wouldn’t we). An equity index is an index of success – as the company prospers and its market capitalisation rises, its weighting in the index increases. Bond indices are buckets of failure. The more a company borrows, the greater its weighting in the bond index. If you follow a bond index, and a company within it doubles its leverage, making its failure more likely, you will have to increase your exposure to that company.

VLS 60 buying more now ok?

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