Vanguard Life Strategy

TCA

hennerz wrote: »

All I want is to invest in cheap trackers that will give average performance.

The returns from the VG LS fund seem to be on the lower side, so I felt like I might be able to put money in that and be diversified to a degree, then put more in a fund that has may have a better chance of higher returns.

Is this flawed? Not really sure what else to do other than plunge money into the VG LS and be content with the lower risk and lower returns.

It's a bit flawed. You're not getting average performance with these funds, you're getting the market performance, for better or worse.

Saying that VLS has lower returns isn't quite right either. Maybe historically, but nobody knows which way markets will go. By investing in VLS you get the market return for the various indexes your fund invests in. A UK tracker may very well do better but it also may do less well. Saying the UK has a better chance of higher returns is a judgement, which you're entitled to make, but past performance is not a guarantee of future returns. Depending on your weightings towards a UK tracker (in comparison to your VLS) might actually mean you're taking on more risk by being heavily dependent on the UK for your returns.

dunstonh

The returns from the VG LS fund seem to be on the lower side

The point of index trackers is they track the market and you get just below average returns (on a consistent basis). Some sectors will perform differently at different times. Developed economies often perform better/worse than emerging markets at different times due to different issues.

so I felt like I might be able to put money in that and be diversified to a degree

You are diversified with VLS. However, you are actually reducing that diversification by using a single sector fund.

.....put more in a fund that has may have a better chance of higher returns.

Yet the UK equity fund has lower potential than the 100% gobal equity fund.

Not really sure what else to do other than plunge money into the VG LS and be content with the lower risk and lower returns.

VLS100 is not lower risk. It is top of the risk scale as far as 100% equity multi-sector funds go. The average consumer would be closer to VLS40 or VLS60.

principa

dunstonh wrote: »

VLS100 is not lower risk. It is top of the risk scale as far as 100% equity multi-sector funds go. The average consumer would be closer to VLS40 or VLS60.

...depending on their other debts / assets. it is perfectly low risk to hold VLS100 if you have 10 times that in cash, but higher risk if you have debt to service.

bowlhead99

dunstonh wrote: »

VLS100 is not lower risk.

We all have our own assessment of what types of risk we are willing to bear but in context, personally I think a portfolio of largecap country trackers (mostly developed markets but a single digit percentage in emerging markets) is lower risk than the other option of having half your money in such a portfolio and the other half in a largecap single country tracker.

As you mentioned earlier, the former option gives you better diversification, and if you are spread more evenly across geographies you are much more likely to get a reasonable result than if you put your eggs into one basket. As our lives become more globallised I think that is more important than biasing your portfolio extremely heavily to the market in your home country.

I accept that investing outside the UK generally has to be perceived as 'higher risk' because you're adding currency risk to asset performance risk, which brings volatility. But volatility is less important on a longer term view. If you take a global view we are competing with the investment portfolios of everyone else out there in the wider world, and if you concentrate on just one country, then in 25 years time you will have a greater risk of falling short of the average return which is available.

So, by going global and having more in the VLS mix than in the FTSE tracker, you are exchanging one set of risks for another but I generally think it is a good tradeoff.

It is top of the risk scale as far as 100% equity multi-sector funds go. The average consumer would be closer to VLS40 or VLS60.

I think this is worth expanding on.

- I agree, the average consumer would be closer to the 40 or 60 and so any 100% equity fund would be top of the risk scale as far as multi asset funds go.

- Then out of those "100% equity" fund options, the VLS with its largecap bias is probably not as high up the risk scale as an equivalent with a smallcap bias or with an emerging market bias, IMHO.

- However once you are looking at how the equities are split across sectors, it seems inherently risky to construct a portfolio using a market-cap weighted index to give you a high exposure to, say, oilers and miners and big pharmaceutical companies and banks/financials, rather than the broader mix you could get from a fund manager buying a bit of everything in more even proportions. The diversification of something like the FTSE100 or FTSE All-share index is low. So there are other 100% equity multi-sector funds which would be lower on the risk scale.

This effect of a bad sector mix does go away a bit as you look globally like the VLS does - because while the UK's major index doesn't really have much in the way of, say, tech firms or car manufacturers, you would find them in the US and Japanese and European indexes and so you will still get exposure.

I do have the VLS100 in my portfolio for some cheap global exposure, it's a pretty efficient way of getting money working for you in multiple markets. But it's important to realise that simply following an index up and down doesn't necessarily translate as 'low risk', even if you consistently get the same returns as the famous indexes you hear about on the news.

smnberryman

Are the 3yr performance figures for the LS funds released tomorrow?

nyruz

Hi there I am 24 and have just started a graduate job in London.

I am thinking about buying a house in 10 years and want to invest in the 60% fund. I will initially put about £7000 and then put monthly contributions of £600. At about 9% return a year I would be looking at around 85k at the end of the period which I would then get an interest only mortgage for a period of 20 years

I would then open the fund again and continue to make contributions as well as pay the interest on my mortgage so at the end of the term I would have more then enough to pay the lump sum and then some. I understand this is quite the risk as I could end up homeless but I think coupled with the 60% fund it's balan

Or would it be better just to open a 60% fund and make monthly Contributions of £600 till I retire at 65 which at 9% a year would give me over 3 million?

Am I being native? Would this work?

bowlhead99

nyruz wrote: »

I am thinking about buying a house in 10 years and want to invest in the 60% fund. I will initially put about £7000 and then put monthly contributions of £600.

OK, so you will have contributed £7000 plus 10 years of £7200 a year equals £79k

At about 9% return a year I would be looking at around 85k

Good news is, your maths smells off. By drip feeding a total amount from today for the next 10 years your £79k cash is invested for about 5 and a half years on average (i.e. some of it is invested for 10 years, some of it is invested for only one month at the end). A 9% compound return on this, you would be looking at £130k not £85k.

The bad news is that this is in today's money and the ravages of inflation will mean the buying power of £130k in ten years is unlikely to buy you what £130k would buy you today, whether in beer, loaves of bread or London properties. Maybe you have done some rudimentary calculation already which is why you are saying only £85k at the end of the period (but that seems like a pretty huge cut)?

The second bad news is that 9% return is pretty unrealistic from a portfolio of 60% equities and 40% bonds over most historic decade or multi-decade periods you could mention. Add that to the fact that global bond markets are now reasonably close to all-time highs, and equities in the UK and the US (the two largest equity components of the Vanguard fund) are also at historic highs (some would say they are not overvalued but they are definitely not cheap by historic measures). So it's not like you're going in at the bottom of a price crash and have any reason to expect a monster return on the early contributions. The opposite, really.

I think most people would agree you should not be projecting anything like 9%, even if you were not going to be so bond-heavy.

Sure, over a long enough timescale you should achieve 'inflation plus a few percent' but if you are thinking of making 9% total return then you should probably assume 5%+ inflation. Alternatively, just knock your total return down by several percent to do the maths with a more realistic return, i.e. in real terms.

.. at the end of the period which I would then get an interest only mortgage for a period of 20 years

Firstly, who is doing interest-only residential mortgages for first time buyers at the moment and what deposit percentages and salary multiples do they want and what interest rates are they charging compared to regular repayment mortgages?

You will struggle to find them. How do you expect the market to develop over the next 10 years of unknown economic conditions? I wouldn't plan on being able to get an affordable interest-only mortgage from the relatively weak position of being a first time buyer without a massive deposit.

I would then open the fund again and continue to make contributions as well as pay the interest on my mortgage so at the end of the term I would have more then enough to pay the lump sum and then some. I understand this is quite the risk as I could end up homeless but I think coupled with the 60% fund it's balan

In theory, if you can find someone to give you an interest only, non-repayment mortgage and put your funds into an investment opportunity that grows very successfully (yielding an after-tax return higher than the mortgage interest saving you would make by simply paying off the mortgage loan), you may be able to 'profit', or at least afford to pay off the mortgage on maturity without too much shortfall.

In reality, this was what thousands of people tried to do a decade or two ago, with 'endowment' mortgages. They had an investment plan that should mature and cover the mortgage principal that they owed. For masses of people, the endowment values did not get close to hitting their optimistic projection leaving people with a large hole in their finances that some spotted early and tried to address, and others didn't or could not. Unsurprisingly you do not see endowment mortgages nor many interest-only mortgages now (apart from people with existing products who are allowed to keep them).

So yes, if your home is your life and your retirement plan, it would be 'quite a risk' as you say.

You do not really mitigate all that risk by saying 'well 40% of my money is in nice safe low risk low reward bonds'. Bonds still carry risk. Likely more downside risk relative to reward at the moment than at other times in history, because interest rates are low and bond prices are high. This will improve over time as interest rates rise and bond yields go up, with the obvious side effects that any bonds you already hold will be come less valuable even if the new ones you are buying with your £600pm are getting cheaper.

But even if the bonds do indeed turn out to be low risk and low reward as you hope, this doesn't really help you achieve 9% on your overall combined portfolio, given nearly half of it is giving you low reward. You'd probably need 15% + from your equities component if the bonds are only giving you 2 or 3 or 4 or 5. Is 10-15% in pounds sterling terms from global largecap equities sustainable for the next 10 years? Hint: it never has been before.

Or would it be better just to open a 60% fund and make monthly Contributions of £600 till I retire at 65 which at 9% a year would give me over 3 million?

Again your maths might be a little off and the 9% is unsustainable anyway but the crux of the question is what does £3 million buy you in 40 years if the going inflation rate is high enough for your returns on medium risk assets to be yielding 9%? Is it enough to retire on? Where will you be living if the money that was going to pay off the house equity was instead spent on a portfolio with the aim of building up a monster share portfolio instead of accommodation?

Life is about balance so there are no right answers at one extreme or another - you should aim to have a mix of cash, tax protected investments, pensions and property or other material assets, by the time you hit retirement (and you probably want to think about being retired from 60 to 100+). Balancing that with living your life and raising a family or whatever floats your boat, is a challenge and we should all think about goals as soon as possible. But planning now to use a specific vanguard lifestrategy fund to fund the capital bit of an interest-only mortgage on a property you plan to buy and own between 2024 and 2044, seems a bit extreme.

If it were me, I would look at saving/investing the £600pm in an S&S ISA if I had it available and a suitable cash emergency fund, but seeing how my life and career developed over the next 5+ years before coming up with a grand plan.

Of course, £600 a month of new money will be costing you very little in real terms, but adding virtually anything to your retirement pot, if that is still the monthly amount you are putting into the pot in the year 2054 just before you retire.

If you go back 40 years to 1970-1974 you would have thought yourself pretty prudent putting away £5 per week or per month because it would have got you 30-50 pints of beer at 10-15p a pop. Now a crisp fiver will only get you one drink of a mainstream euro lager in a London pub. So whatever approach you take, make sure you are increasing the £600 every time you get a payrise or you see the prices of things are rising.

Am I being native? Would this work?

Not so much native , but I know what you mean.

Bottom line, it's flawed. But investing money that you can genuinely live without for multi-year periods is a fine thing to be thinking about at 24, so good luck to you. The general concept of funding a far off house purchase or a retirement using a portfolio of investments is not in itself a crazy idea, but has nothing specifically to do with Vanguard Lifestrategy or any other brand of fund.

If you are working towards a target 10 years away you have to accept you might miss the target because equity and bond investment returns are unpredictable, but if you do not mind the risk in pursuit of rewards you may find it does better than cash - as long as your portfolio is well balanced and you do not get disheartened when you've lost 30% causing you to sell in the bottom of a recession.

mark55man

Hey nyruz


What a great positive attitude. However as ever things are not easy - one point that is overlooked when starting a 10 year plan is that 10 years is typically the shortest period over which equities can be "reliably" be expected to return +ve results with a reasonable likelihood


So your lump sum and initial payments are OK on that basis. However your monthly payments will have successively shorter time until you need the money and investing in equity for say a 3 year target may leave you significantly short.


You need to explore other alternatives - eg buying a smaller home earlier - in a different location, or you need to accept that your 10 year goal will have to be flexible if conditions turn against you


Also even as a sensible 24 year old are you going to dedicate your every penny to this goal - you would be surprised at how much you can cut of a budget - each cut reducing fun but rapidly building up into a useful addition to your deposit.


So good luck with your plan - I wish I had been more savings / investment oriented when I was your age. If you carry on reading these boards, and some on Motley Fool forums (investment strategies) you will learn a lot that will be immensely beneficial both for you house and other objectives

nyruz

Wow thank you guys for you responses that put a smile on my face this morning.

Yeah I knew my maths was off that was due to me being lazy as I had done all the sums beforehand but could not quite remember the numbers.

I got the 9% from the past 3 year track record for the fund as it has averaged 9% however I know that the past performance is not an indication of future performance and especially if your saying that the fund are at all time highs at the moment.

There are interest only mortgages available and they require a 40% deposit that I found on this site.

£600 is a comfortable monthly contribution for me but yes I do plan to increase this contribution of I get a pay rise or promotion.

I'm would be using Charles Stanley as they are the cheapest and it would allow the fund to be in a s&s isa wrapper. However I don't understand how much he they charge as it says on their website that they charge 0.25% but the vanguard 60% fund has a AMC/TER of 0.29%? So what would I be charged? Also is the compound interval for the fund on a daily basis?

gadgetmind

nyruz wrote: »

I got the 9% from the past 3 year track record for the fund as it has averaged 9% however I know that the past performance is not an indication of future performance and especially if your saying that the fund are at all time highs at the moment.

The last three years have seen assets such as equities rebounding from one of the largest drops in recent memory. Do you remember 2011? Tail end of the credit crunch, first strong whiffs of the sovereign debt crisis and even the USA losing its AAA rating, and riots and looting on the streets of London?

Is it any wonder the years slowly recovering from this, as QE continued to pump money into the economy, have looked more rosy?

So saying, it's never the wrong time to start drip feed investing, but don't expect things to go up steadily, as they never do, and be prepared for large drops from time to time.