Vanguard Life Strategy

savingsaving2015 wrote: »

Thank you again for your help.

I think i am going to go with Charles Stanley Direct and try the Vanguard 60 acc first and then look into one of the following funds to sit alongside it -

CF Woodford Equity Income C Fund

Jupiter India I Fund

BlackRock Gold & General D Fund

Aberdeen Global Chinese Equity R Fund GBP

Anyone with any experience with these funds or caution words?

Thank you!

First you buy a multi-asset fund that holds shares in large companies in all major regions of the world, and some bonds too. You have less than £10k invested. Less than £1k invested in fact... Why would you try to make it more complicated for yourself?

You are thinking to yourself, "I am a new investor. I will be contributing £100 a month. So by the end of year 1 I will have £1200 invested. So as an average over this first year I will have only about £600 at work."

"I already intend to have my money allocated in a sensible way across multiple types of assets around the planet by using Vanguard or L&G or some other multi-asset global fund. How can I break this allocation, by splitting off some of my money and buying a specialist fund?"

"I have reviewed and almost randomly come up with 4 entirely different types of funds that I could use to break the nice easy even allocation that Vanguard are giving me with my £100 a month. One of them invests specifically in UK income-paying companies. One only in shares in India. One only in natural resources / mining companies. One only shares in China. Which one of the 4 is 'best'. Does anyone have any experience in investing in those funds?"

So, in response I have three points to make:

1. You do not need 'experience' investing in those 4 funds to see how they have performed over the last 20 years and what they invest in, and read all the information published by the fund managers and the internet at large. Does it really help if someone says "yes, I invested in one of those, it went up x% in a year"? You can look it up. But what you can see is they are all specialist funds designed for specific goals.

For example you could invest in a fund that only invests in India
Unless you thought that was exclusively the best place in the world to invest, you would also have to buy more funds that invest in the other 200+ countries in the world. Ah, as it turns out, you already do have a fund that invests in all the countries in the world, including India. So why do you need another separate India one unless it is going to be the best place in the world to invest, which you cannot know?

Or you could invest in the Blackrock sector specialist gold and general fund which predominantly holds gold miners. Unless you thought that was exclusively the best type of company in which to invest, you would also have to buy more funds that invest in all the other types of companies in the world. Ah, as it turns out, you already do have a fund that invests in all the types of companies in the world, including gold miners. So why do you need another separate gold mining one unless it is going to be the best sector in the world to invest, which you cannot know?

2. When you have relatively small amounts of money, there is nothing wrong with just investing in one simple multi-asset fund. Vanguard didn't use the sum total knowledge and expertise of their 40 years in fund management to come up with a global allocation of equities and bonds suitable for UK investors, just so that you as someone who has never invested in anything before could come along and decide it wasn't good enough for you, and that even though it already has a relatively high weighting to the UK, you think it needs more and that it should specialise in dividend payers so you need to put some of your money in Woodford too. Or perhaps it doesn't have enough China. Or it doesn't have enough India. Or it doesn't have enough gold mining companies.

3. Forget adding random extra funds there is no point and you will have a weirdly unbalanced portfolio if you take a balanced fund and start to add a bunch of specialists without a damn good rationale. As your portfolio increases from £0 to £1200 over the next year, what do you think the extra return will be on the £600 you've got invested on average over the year, if you had instead £500 invested in VLS and £100 in Woodford? Or instead £400 invested in VLS and £100 in India and £100 in gold mining companies. If you think it is worth doing this, and that by doing it you will somehow have a 'better' allocation, instead of a less-balanced one that is skewed towards the specialism of your choice: you are dreaming.

To the untrained observer, one might think that points 1, 2 and 3 are all pretty much saying the same thing. You're right. There is only one point to make but it is worth saying it several times because it is important.

enthusiasticsaver wrote: »

The other is that I am a new investor who has no experience in picking funds and I was just flitting from one to the other every time I read something good about a particular fund.

No shame in doing that - everyone does that when they start out. Many people will look at the myriad of choices and even if they have read some theory, will still feel they are 'taking a punt' with their final selection.

It is likely much easier if you get a windfall and having never invested before just go straight to an IFA and have them make the decisions! If you don't have the luxury of that, you probably just need to do what you can to invest in a bit of everything while you learn a bit more and try to make it as balanced as possible for the level of volatility you're comfortable with, and then revisit when you have a bigger pot.

If there is an off-the shelf solution (like VLS, L&G, Blackrock consensus) which you find acceptable, you can use that for starters without adding frilly bits to mess it up, and then develop it into a 'core and satellite' approach when your pot is much bigger (or throw it out and start again)

savingsaving2015 wrote: »

[FONT=&quot]I think the theory i was going with, was to have the Vanguard 60 as my primary fund and then sit a "high risk / new to market fund" next to it. [/FONT]

[FONT=&quot] Having done some more reading, the CF Woodford Equity Income Fund sounds promising, showing some growth and has an experienced manager working on it. Also the Unicorn UK income fund sounds interesting.[/FONT]

elwy wrote: »

My (inexperienced) personal take on CF Woodford Income is that it would complement well since it focuses on income rather than growth and the income provides a nice extra boost in periods when growth is slow. On the other hand there is little benefit to funds which focus on specialised areas of growth unless you have inside knowledge about that specialised area.

OK, say you were doing £100 a month into the LS60. And then you added £50 a month of Woodford Income or Unicorn income.

The 'before:' picture is just Vanguard LS 60, so your asset mix is £40 bonds and £60 equities.

Of the equities 'before', £15 (a quarter) was UK and £45 (three quarters) was international. As a long term investment, that mix within your equities piece might feel about OK, because although UK listed companies only make up a little under a tenth of world equity markets by value, you do after all live in the UK so a bit of home bias is normal. The Vanguard mix is quite conventional in that respect (i.e. 20-30% equities in your home country even though world market share might imply 10% or less).

And presumably you are OK with the 40% bonds, 60% equities in terms of overall volatility of the fund, so that when the equities crash in value by two fifths in a bad year you won't feel quite so much pain as that, because the bonds will cushion your fall and save you from disaster.

So, what happens if we add Woodford. Of the new £50, 86% (£43) of it is UK equity and the other £7 is US and European equity.

If you stack that with the previous LS holding:

40 bonds
110 equity
150 total

Your bonds is now only 26% of your total. Almost three quarters of your holdings are equities. That is definitely a notch up the risk scale.

If you look at the UK/international split

£15 UK equities inside LS, £43 UK equities inside Woodford
£52 diversified international equities
Total £58 UK equities of £110 equities total = 53%.

So you had a portfolio that was 60% equities of which a quarter was UK. You now have a portfolio that is 74% equities of which more than a half is UK.

If you had gone with Unicorn UK income, it is the same story except the types of companies being invested in are generally smaller and more volatile than Woodford's favourites and your UK component would now be 59% of your equities instead of 'only' 53%.

So, that is how much you wreck your initial allocations by adding the smallest amount possible (£50 a month) of Woodford or Unicorn UK to a reasonably balanced off the shelf porfolio.

As 100% equities fund either substantially or entirely focussed on UK listed companies, I don't see that Woodford or Unicorn 'would complement well' unless you had chosen the rest of your portfolio to already be low on UK and low on equities, which the LS funds are not.

But of course it might be that you had already considered the effect that something like a Woodford would have on the portfolio, and were happy with ending up over 50% exposed to the UK and almost 75% equities instead of only 60% equities, and the only reason you went as low as 60% equities on the Lifestrategy fund choice was so that you could 'fit' a whole dedicated equities fund on the side too, and get back up to your target of 75% equities? If that was the case, perhaps that is fine.

I am certainly not trying to say that the Woodford fund will not perform well and would not work in anybody's portfolio. But it is an example of people putting together a portfolio based on funds 'they like the look of' rather than thinking about what portfolio construction actually entails for professionals and people who want to do a decent job of DIY.

When considering how your funds might perform, make sure you look at data going back 15 years rather than just the last 5 years when equities and bonds are generally all going up quite nicely. If the data for (e.g.) Woodford or Lifestrategy does not go back 15 years then you can look at Woodford's previous funds and his prospectus to try to figure out what happened to funds he ran in the last major crashes in 2000-03 and 2007-2009, and for Lifestrategy you can look at major world shares and bond indexes to see what happened to them over time as well.

Cheers.