Vanguard LifeStrategy 20% instead of savings?

blizeH

Hi guys,

Just trying to figure out where to invest, since saving account returns are very poor right now. I have the following accounts:

- Lloyds TSB Vantage
- Virgin cash ISA
- HL S&S ISA - 80% Equity

To me, the Vanguard 20% seems like a very good, steady performer, and whilst I appreciate there is a risk involved I'd be much happier with that than I would a secure 2.35% that you can get in a savings account right now

I won't be able to take advantage of the tax free status until April, and to be honest I'd probably prefer to keep my S&S ISA to just the 80% Equity one anyway, but does that mean I should just consolidate and move into a move everything into a 60% Equity one? (one 60% in the S&S wrapper, and one outside it)

Not sure if there are any options I haven't considered - I've tried the P2P money lending sites with varying results, and it seems as they become more and more popular the return actually isn't much higher than savings accounts anyway (only 2.2% on RateSetter for the monthly option right now)

(edit) mortgage is 2.5% so looking to beat that ideally

Thanks

gadgetmind

The Vanguard 20% is (obviously!) very heavy on bonds so has had a great run over the last few years. Will this continue? Well, the performance can't be anything like as good because yields can't get much lower, but positive returns are still likely during 2013 IMO.

Personally, I'm using a mult-asset approach that's heavy on equities but also includes around 20% in corporate bonds, some property via REITs and infrastructure funds, and some preference shares.

It's all down to your timescale and attitude to risk.

blizeH

Thanks gadget, I was worried about the performance of bonds when I initially invested in the 80% equity account (based on your recommendation I believe, thank you!) so maybe a higher equity above 20% is a good idea, especially if I'm in it for the long term.

Almost tempted to put some money into an instant access savings account, and then transfer over to the 80% Equity S&S ISA in April with the new allowance.

gadgetmind

If you are in it for the long term (at least 5 years and ideally 10+) and can handle seeing sudden and drastic drops, then more equities makes a lot of sense.

However, if a 50% drop in value pretty much over night would cause a major panic leading to selling at the bottom, then you need more bonds to smooth things out.

I've personally never had the time or inclination for the P2P lending approach as the reward didn't justify the risk IMO.

bowlhead99

Traditionally gilts and investment grade bonds have been seen as low/no risk and perfect for capital preservation.

However, with the shaky markets, there has been huge demand for these (not just from retail investors like you and me, but from big institutions and pension funds and sovereign funds) and the prices of the bonds are now very high with the yields very low. Off the back of this, the value of bond funds has risen very nicely in the last few years.

A casual observer looking at 3-year return would look at this and think it's producing better returns than cash and has heard that bonds are safe, and may want to dive in. But it has to be seen in a long term context as part of a much bigger cycle. There can't be much growth left, as the prices have gone up to all time highs, and so far as to make some global gilt yields negative.

This is why people are referring to a bond bubble. Not that you would lose 50%+ when it unwinds like you could have done in dot-com bubble or property bubbles, but in the medium to longer term there has to be a downwards normalization of these prices, which means a reversal of the 'all time high' price increases.

So the problem you are facing with bond investing is not that the underlying issuers of the bonds are going to go bust, or that prices will fall in an overnight shock, but that the prices simply normalise as 'safe haven' assets become less demanded, and what you bought at 120p becomes worth 100p again just like it was before the huge wave of demand came in.

Following from this, if you'd been successful with bonds 'having a good run' over the last few years, you would be looking to come out of them at some point and into something else. Whereas investing in something that has recently delivered an abnormal level of growth is not something you should do unless you are confident it will continue.

This is not to say that bond funds will fall in the next couple of years, because we don't know when the recovery will kick in properly and when money printing will cease. People have said bonds are too expensive relative to equities for a couple of years now and yet prices have still stayed high. So far.

But my take on it is that gilt and investment grade corporate bond yields are low and the price may fall. Cash savings account yields are low too, but the 'price' will not fall because every £1 you put in is guaranteed to come back as it's FSCS protected. So for the part of the portfolio where you are not bothered about yield so much as the capital preservation aspect, I would favour cash.

Look at it this way, you have £100 to invest in a lifestrategy fund. In the 20% one, you're saying you want £7 invested in UK equities and £13 in other global equities. Then with the remaining £80 you're investing in a big bag of low yielding UK bonds, all of which are quite pricey, with the biggest component being non-index linked UK government gilts. Those gilts are not going to deliver many percent in interest payments over the next few years, and that amount of underlying bonds has never been worth as much as £80 before and will (probably) not be worth as much as £80 in five years time.

If you only want £20 of equity exposure, then only invest £20 in equities, fine. But don't put £80 in a UK gilt index fund to try and preserve it, when you could always invest it in a completely safe savings account that probably gives you a year's introductory bonus interest rate of some sort.

I agree with gadget there are various other options such as higher-yielding corporate bonds/prefs, real estate and infrastructure which are less volatile than equities but which unlike gilts should perform positively when going through a long term economic recovery and future growth, instead of negatively. Of course if there is no economic recovery or future growth, we're all screwed anyway:)

Linton

blizeH wrote: »

Hi guys,

Just trying to figure out where to invest, since saving account returns are very poor right now.
....

I think you are looking at things from the wrong point of view. Savings and investments are not simply alternatives, they do different jobs.

Can you split your money into different tranches?...

1) Emergency funds of perhaps 6 months living expenses
2) Money you will need for known purchases within the next 5 years.
3) Long term savings - no known reason to access for at least 5 years

For (1) you need instant access. A good return is obviously better than a low one, but its not the purpose of holding the money. (2) is best handled in my view by a fixed term deposit account aligned with the date of the need. A return is useful but the access date is more important.

For (3) you need to look at investments - equity (shares) for the very long term when short term fluctuations dont matter, gilts or corporate bonds to even out the fluctuations and to provide a shorter term chance of a positive return.

blizeH

Thank you all so much for the responses - plenty to think about!

I've tried to make sure I have plenty in an emergency fund (Lloyds TSB Vantage) so am looking longer term, may even considering investing in BTL property although I think it could be a disaster for me, will stick to regular savings whilst I mull it all over.

Thanks again

gadgetmind

If you are serious about BTL then here is another book recommendation.

http://www.amazon.co.uk/Successful-Property-Letting-Buy-let/dp/0716022753

Reading this was enough to convince that it was all far too much like hard work!

coastline

Not sure if this will help as its an American site but it does cover Asset Allocation Models and gives results over 10 years..

http://www.aaii.com/asset-allocation

ctdctd

I have the Vanguard 80% already and was thinking just this morning about what to do with my ISA allowance this year.

The Vanguard 80% is about 20% of my pension portfolio.

I considered the 20% version to bring the overall weighting of my ISA's down a bit from equities but in the end plumped for a few more of a good steady performer - Invesco Monthly Income Plus.

Looking at 10 - 15 year hold and don't trade very often so this is buy and forget unless something major happens.

HTH