Vanguard Life Strategy

As footnote, I wonder what happens when you account for the time to transfer between funds, given that it can take a week or more?

jim8089 wrote: »

Hi, guys. I've just invested £2k in the Lifestrategy100 and I've set it up to pay in £300 a month, and then I'm going to throw in whatever I can every now and again.

I'm now not entirely sure the LS100 was the best choice as I am looking to be investing fairly short term (5 years), with the outlook of having a fairly decent house deposit at the end of the 5 years.

Equity-based investment is best approached with a timescale of 10 years plus. You know that there will be lots of ups and downs over the course of an economic cycle so if you want to have an expectation of getting anything close to the "long term" average (inflation plus a few percent) you need to be able to wait it out for one or two cycles.

If you put money in an index over only the short term, you are basically spinning a wheel of fortune or hitting the start button on a random number generator and saying you'll be happy with the result whatever it is. It could be +25%, it could be -40%.

Also if you're not putting the whole lot in for the whole five years, just doing a little up front and then 3-4k a year, most of your money isn't invested for anything like as much as five years. There will be a couple of thousand at the end that isn't even invested on average five months. That's a long way short of the decade plus timescale over which you might expect to approach an 'average' return.

If you add bonds to the mix, like in the 60% equity product, you'll take the edge off the peaks and troughs and reduce the chance of you seeing the fund's NAV per share halving over a couple of years which would no doubt annoy you greatly if you had a substantial amount invested by the time it happens.

As you say, it's personal preference in terms of saying you would prefer to maximise the chance of gains or potential significant losses versus, not doing that.

Let's say, you invest £6k this year at £100 per share and it increases in value 4%. Then you invest another £5k next year at £104 per share and the whole lot goes down 1%. In year three, you add another £10k and the whole lot goes up 3%. Then in year four while the price is £106 per share, you add £5k while the price falls 45% to £58 per share. Then in year five you add the last £3k and it goes down another 4% to £56 per share. In year six it goes up by 10% to £62.

So, six years in to your five year plan to buy a house, you are at £62 a share and only need the fund to rise by a further 60% to get back over £100 (the level at which the majority of your purchases took place). That might happen over the next year, or over the five to ten years that follow.

If your timescale for buying the house is very flexible, that might be fine. Who knows what mortgage borrowing conditions will be like in a decade from now though. You may think, well who knows what borrowing conditions and house prices will be like in five years never mind ten... Fair point, and another reason not to leave your deposit funds on a 100% equity roulette wheel.