Passive Index Portfolio

ogletshore

Hello everyone,
This is my first post on here and I am seeking advice on investing 200K in a purely passive portfolio.
I am in my mid 50's and ideally would like a very simple 60% Bonds 40% equities mix.
I've looked at Vanguards Lifestyle products but would prefer separate funds.
I understand how equities work. I also understand what Bonds are but I have no idea what to look for when researching a Bond fund.
My time horizon for any investment would be 10+ years depending on health.
I've read and heard so much about potential Bond bubbles, I'm anxious not to buy into the wrong product.
Also,I would prefer if possible not to put all my eggs in the one Vanguard basket, but don't know where to start to look for other low cost Bond index funds.
Many thanks.

dunstonh

I've looked at Vanguards Lifestyle products but would prefer separate funds.

Surely the vanguard 40% fits your needs?

I understand how equities work. I also understand what Bonds are but I have no idea what to look for when researching a Bond fund.

So, why complicate it buy trying to do something you are not ready to do when there is an option available to you which meets your criteria?

Also,I would prefer if possible not to put all my eggs in the one Vanguard basket,

Is the amount you are investing particularly high?

mf78

Is the amount you are investing particularly high?

200k I think the OP mentioned.

I'm only commenting as I'm also interested in peoples views on bond funds.

dunstonh

200k I think the OP mentioned.

yes, i saw that but I wondered if there was more as the Op indicates there may be vanguard holdings already.

ogletshore

Firstly thank you for your reply.
I have about 10k in the Vanguard FTSE 100 Index fund.
I Was advised by my IFA that the Vanguard Lifestyle Fund has too much exposure to Gilts and should be avoided. Not understanding the intricacies of Bonds, I did not feel in a position to argue. Hence my original post.

dunstonh wrote: »

Surely the vanguard 40% fits your needs?



So, why complicate it buy trying to do something you are not ready to do when there is an option available to you which meets your criteria?



Is the amount you are investing particularly high?

koru

Good discussion of bonds here:
http://monevator.com/shares-deliver-the-best-long-term-returns-so-why-invest-in-bonds/

But bear in mind that when interest rates rise (as they surely will, one day), bond values WILL fall. With rates at historic lows, there's only one direction they can go, so bonds will crash at some point. There's a good long term case for including bonds in your portfolio, but if there has ever been a time not to buy bonds, it is now.

redbuzzard

ogletshore wrote: »

Also,I would prefer if possible not to put all my eggs in the one Vanguard basket, but don't know where to start to look for other low cost Bond index funds.
Many thanks.

On the eggs point, from a diversification point of view they are far from being in one basket. Are you worried about Vanguard?

It's a passive fund. It will have a spread of bond exposure both in terms of credit quality and duration, and yes that will take a hit when yields rise. A bit of that is unwound already.

It's not easy to see what's in specialist bond funds. Some, especially the ones that label themselves strategic or tactical, say they are focused on short durations for now which are less sensitive to interest rates and bubble popping. Or they have gone for high yielders, but even the high yields are low, for the risk. But somebody must be holding all those long bonds!

If you wanted to spread the risk a bit you could spread your fund purchase over a year. But the more you fiddle, the less "passive" it gets! And my experience is that the more I fiddle, the worse it gets...some of the pros have that problem too.

At least you have a 10% starter on the equities, compared with a few weeks ago.

You could I suppose invest directly in bonds - one or two years, in low risk corporate bonds, at c 3% YTM? Hold to redemption then switch the proceeds into Vanguard? It probably wouldn't make a lot of difference but you'd have more visibility of what's happening with your bond exposure. But that wouldn't really be passive And it would raise your (credit) risk profile - being much less diverse than Vanguard's bond trackers.

redbuzzard

ogletshore wrote: »

Firstly thank you for your reply.
I have about 10k in the Vanguard FTSE 100 Index fund.
I Was advised by my IFA that the Vanguard Lifestyle Fund has too much exposure to Gilts and should be avoided. Not understanding the intricacies of Bonds, I did not feel in a position to argue. Hence my original post.

You could aim off for that a bit by using the 80:20 version. EDIT - sorry I misread your 60:40 as equities:bonds, but you get the idea...you could reduce the bond proportion

That would give you more overall volatility, but with ten years you could think in terms of phasing to 60:40 and further if appropriate over the next 5 years which which give you some sort of strategy to deal with the supposed bond bubble.

I say 'supposed' not because I don't think there's more downside than upside in bonds - I do - but 18 months ago I was expecting the bubble to burst, and all it did was get bigger. Nobody can tell you for sure what will happen when.

JohnRo

It's worth considering that corporate and more so high yield bonds, won't be affected by small upward interest rate increments in anything like the same way that gilts will. Not that the Lifestrategy funds address that issue.

ogletshore

Thanks red buzzard.
I have my suspicions that my IFA is trying to cloud the issue to make the subject of asset allocation appear to be more complex than it is.
To answer your question about Vanguard,yes I am concerned about investing all of my money with one company. It's probably irrational as I know they are huge,but so were Lehman Brothers.

redbuzzard wrote: »

On the eggs point, from a diversification point of view they are far from being in one basket. Are you worried about Vanguard?

It's a passive fund. It will have a spread of bond exposure both in terms of credit quality and duration, and yes that will take a hit when yields rise. A bit of that is unwound already.

It's not easy to see what's in specialist bond funds. Some, especially the ones that label themselves strategic or tactical, say they are focused on short durations for now which are less sensitive to interest rates and bubble popping. Or they have gone for high yielders, but even the high yields are low, for the risk. But somebody must be holding all those long bonds!

If you wanted to spread the risk a bit you could spread your fund purchase over a year. But the more you fiddle, the less "passive" it gets! And my experience is that the more I fiddle, the worse it gets...some of the pros have that problem too.

At least you have a 10% starter on the equities, compared with a few weeks ago.

You could I suppose invest directly in bonds - one or two years, in low risk corporate bonds, at c 3% YTM? Hold to redemption then switch the proceeds into Vanguard? It probably wouldn't make a lot of difference but you'd have more visibility of what's happening with your bond exposure. But that wouldn't really be passive And it would raise your (credit) risk profile - being much less diverse than Vanguard's bond trackers.

SnowMan

I can't see anything wrong with holding separate gilt (bond) and equity tracker funds rather than using the Vanguard Lifestyle products. While you get the automatic rebalancing with the Lifestyle funds there is nothing stopping you rebalancing when using separate funds. Using separate funds can help on occasions in using ISA investment allowances; you are generally better holding your gilts within the ISA wrapper rather than equities.

But whether you hold 60% in a gilt fund and 40% in an equity fund or hold an equivalent Lifestyle fund you are still holding 60% in gilts.

Your IFA seems to be making a reasonable point that you are over-exposed to bonds. There does seem to be only one way bonds can go, that is for yields to increase and prices to fall. Koru makes that same point earlier. This may happen suddenly or gradually. If it happens suddenly then that is the bubble bursting, if it happens gradually then you are still locked into low interest (coupon) payments from the gilts.

So you could consider say substituting savings for the bond proportion. This may be more difficult if you are saving/investing through a pension. Worth talking to your IFA about the options.

In terms of cheapest mainstream (clean) trackers then a mix of Vanguard, HSBC C class, Black Rock D class, and L&G I class trackers can be used if you are concerned about investing with one company. Also HSBC and Vanguard ETFs could be considered as tracking options as they are very cheap.