VLS 60 buying more now ok?

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  • masonic
    masonic Posts: 22,998
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    Audaxer wrote: »
    If there was a 50% fall in equities, that would be a 30% fall in a VLS60, but would only be a 20% fall in a VLS40.
    That rather depends what happens to bonds. You can't assume they'd be unaffected by whatever caused a 50% fall in equities.
  • Audaxer
    Audaxer Posts: 3,505
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    masonic wrote: »
    That rather depends what happens to bonds. You can't assume they'd be unaffected by whatever caused a 50% fall in equities.
    That's true, but I was just assuming an example of a sudden drop in equities with bonds staying stable.
  • bowlhead99
    bowlhead99 Posts: 12,295
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    Audaxer wrote: »
    That's true, but I was just assuming an example of a sudden drop in equities with bonds staying stable.
    Right, but somewhere 30 or so posts up the thread I was pointing out that bonds have been going up significantly with equities going up even more (especially in sterling terms). And that therefore it was perfectly possible for bonds to go in the same direction at the same time as equities.

    If interest rates rise significantly, that's a negative for equity markets because access to cheap credit is lost (for both businesses borrowing to expand, and for prospective customers to be able to afford to maintain or increase business and consumer spending) and there is reduced demand from investors to take risk to get an income. Similarly it is a negative for all bonds currently in existence because the yield they offer can only match the new ones being issued with equivalent risk, by reducing the price of what people are currently paying for bonds. So it's quite easy to imagine a scenario where equities drop significantly and bond indices fall too.

    So, there's no point only mapping out for yourself a scenario where equities go down and bonds stay static. When equities doubled, bonds didn't stay static or only deliver a total return equal to the 2-3% a year they were yielding. They went up by more than that, due to market conditions - despite equities also rising substantially in that time period. The market conditions can change.
  • bigadaj
    bigadaj Posts: 11,531
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    Audaxer wrote: »
    That's true, but I was just assuming an example of a sudden drop in equities with bonds staying stable.

    Yes but it's an assumption based on historic data and at no point in history have we had near zero or even negative interest rates and huge amounts of quantitative easing.

    Bonds and funds have risen dramatically over the last few years and what goes up certainly can if not must come down.

    This is the problem with teh classic problem of what those with low risk tolerance do, classically the answer would be to go into bonds rather than equities but I personally think there's more risk in bonds than shares, and certainly less upside as well.
  • Type_45
    Type_45 Posts: 1,723
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    @bowlhead

    If UK interest rates go up, how much will that affect VLS60 (which this thread pertains to)? UK interest rates will presumably only have a limited impact on the equities/bonds within a VLS product.

    Recently, US interest rates went up. And they are forecast to go up again soon. That didn't seem to have a major impact on VLS's value (that I can remember)?
  • Type_45 wrote: »
    @bowlhead

    If UK interest rates go up, how much will that affect VLS60 (which this thread pertains to)? UK interest rates will presumably only have a limited impact on the equities/bonds within a VLS product.

    Recently, US interest rates went up. And they are forecast to go up again soon. That didn't seem to have a major impact on VLS's value (that I can remember)?
    While you're at it can you let me know this Saturdays winning lottery numbers :rotfl:
  • Type_45
    Type_45 Posts: 1,723
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    While you're at it can you let me know this Saturdays winning lottery numbers :rotfl:

    Just pointing out that the UK element of the VLS is only 20% or so. It should not be the case that a BoE hike in interest rates will spell doom for VLS...
  • bowlhead99
    bowlhead99 Posts: 12,295
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    edited 11 April 2017 at 5:50AM
    Type_45 wrote: »
    Just pointing out that the UK element of the VLS is only 20% or so. It should not be the case that a BoE hike in interest rates will spell doom for VLS...
    Type_45 wrote: »
    @bowlhead
    If UK interest rates go up, how much will that affect VLS60 (which this thread pertains to)? UK interest rates will presumably only have a limited impact on the equities/bonds within a VLS product.
    1) Around a third of the bonds are UK government or corporate bonds. An increase in UK interest rates would, other things being equal, directly damage the value of those bonds.

    2) Three quarters of the equities are listed in foreign countries and therefore implicitly valued in a currency other than sterling. Of the remaining quarter of the equities which are of companies listed in the UK, probably 60%+ of their assets, revenues and profits are held or earned in a currency other than sterling because the VLS range uses the FTSE UK cap-weighted index to select its UK listed stocks which is heavily skewed to multinationals in certain industries. So you could perhaps say that 90% of the valuation of VLS's equities are non- sterling.

    So, if UK interest rates rise, providing a relative boost to the strength of sterling over other world currencies, that is a negative for the open market valuation (in pounds sterling terms) of those internationally-held assets.

    3) A UK rate rise is negative for the value of UK equities in the equity markets for reasons noted in the earlier posts.

    4) Markets are global. Nothing happens in a vacuum. We were doing QE and reducing interest rates at the same time as US was doing the same, and Europe followed suit along with Japan. At present both the Eurozone and Japan have negative interest rates, along with non-Eurozone Europe-region countries such as Switzerland and Sweden, while the UK rate is on the floor and the US rate is not much higher but is finally signalling that it will go up. So, clearly the risk is not just the negative outcomes in items 1), 2), 3) above, linked to 'only' the UK interest rates going up on their own.

    So, a significant holder of bonds and global equities such as VLS 60 could get a worse result if all the interest rates around the major markets rose at the same time than if just UK rates rise. So don't make the mistake of thinking your risk is just what the BoE does.

    And in such a scenario the fact that some of the VLS global bond holdings are hedged to sterling does nothing much to save the value of your bonds because there is no major sterling strengthening and the hedge proves to be an unnecessary cost - as global bond markets tumble on global increased interest rates, together with global equities, without currency being to blame.
    Type_45 wrote: »
    Recently, US interest rates went up. And they are forecast to go up again soon. That didn't seem to have a major impact on VLS's value (that I can remember)?
    The market knows that it doesn't know everything. It does have some consensus views of what might happen because there are trillions of pounds and dollars and Euros and Yen and RMB etc placing bets every day.

    The stuff that's "priced in" is the stuff that's either viewed by an average number of people as 'most likely to happen', or viewed as 'perhaps likely to happen' by a larger number of people. If people are expecting a tick up in US interest rates and have a view on how much and when (another couple of them this year perhaps), then the market will not shock and shudder when it eventually happens, as long as the magnitude and timing is no harsher than already signalled - because it's already partially positioned for the outcome. So, as the US rate ticked up recently, people weren't really surprised, and it was seen as a vote of confidence in the US/world economy by the Fed, so no major crash.

    Still, the fact that pre-positioning exists doesn't save you from losing money; because you may easily lose money as the market moves to reflect its next expected position rather than on the day itself when the event actually happens. And you can certainly lose money as the market moves to reflect a position that *wasn't* averagely expected by a majority, or wasn't most expected by an average number of people - but was instead unexpected by the majority of the money that was at work.
  • masonic
    masonic Posts: 22,998
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    Type_45 wrote: »
    If UK interest rates go up, how much will that affect VLS60 (which this thread pertains to)? UK interest rates will presumably only have a limited impact on the equities/bonds within a VLS product.

    Recently, US interest rates went up. And they are forecast to go up again soon. That didn't seem to have a major impact on VLS's value (that I can remember)?
    Vanguard has published an opinion piece tackling this issue:
    https://www.vanguard.co.uk/documents/adv/literature/bond-investing-in-a-rising-rate-environment-tlor.pdf

    A gentle rise in rates is unlikely to do much more than stunt growth. However, the effect if there were some shock to the economy, or interest rates had to be raised more aggressively to head of inflation, could be much more dramatic.
  • Audaxer
    Audaxer Posts: 3,505
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    bowlhead99 wrote: »
    Right, but somewhere 30 or so posts up the thread I was pointing out that bonds have been going up significantly with equities going up even more (especially in sterling terms). And that therefore it was perfectly possible for bonds to go in the same direction at the same time as equities.

    If interest rates rise significantly, that's a negative for equity markets because access to cheap credit is lost (for both businesses borrowing to expand, and for prospective customers to be able to afford to maintain or increase business and consumer spending) and there is reduced demand from investors to take risk to get an income. Similarly it is a negative for all bonds currently in existence because the yield they offer can only match the new ones being issued with equivalent risk, by reducing the price of what people are currently paying for bonds. So it's quite easy to imagine a scenario where equities drop significantly and bond indices fall too.

    So, there's no point only mapping out for yourself a scenario where equities go down and bonds stay static. When equities doubled, bonds didn't stay static or only deliver a total return equal to the 2-3% a year they were yielding. They went up by more than that, due to market conditions - despite equities also rising substantially in that time period. The market conditions can change.
    Okay, if say equities fell by 40% and bonds fell by 10%, that would mean that a VLS60 would fall by 28% and a VLS40 would fall by 22%. In comparing say the same investment in a VLS40 and a VLS60 before the fall, once the equity and bond markets recovered, would the VLS40 recover to it's original investment level before the VLS60 did?
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