Is Vanguard as core holding Okay?

JohnnyJet

masonic wrote: »

It's worth pointing out that the portfolio you are proposing does not have the 'smaller companies' or 'value' tilts, so the equivalent Smarter Investing Portfolio would contain 7 funds and may underperform the full 11 fund equivalent over the long term. It still makes sense to use VLS 60 to get the large cap and bond exposure if you are happy with the sector allocation of VLS.

Is see that the Vanguard LS 60 already includes allocations in US, UK, Asia, Europe, EM and Bonds, so to further improve the broadness should the portfolio include value and SC's in most relevant sectors?

For example -

Vanguard 60
UK value
UK smaller companies
Developed world value
Developed world smaller companies

I haven't included EM value and SC's, would this be necessary and have I missed anything?

My aim is to keep this simple with a small amount of tinkering around the edges.

masonic

JohnnyJet wrote: »

Is see that the Vanguard LS 60 already includes allocations in US, UK, Asia, Europe, EM and Bonds, so to further improve the broadness should the portfolio include value and SC's in most relevant sectors?

You could try and do smaller companies and value separately, or use an actively managed fund / IT that invests in smaller companies with a value-based approach. Value is pretty difficult to do passively - you normally end up using a high yield index tracker, which isn't the same thing.

I haven't included EM value and SC's, would this be necessary and have I missed anything?

EMs are made up of smaller companies, so you'll tend to get a lot more exposure relative to developed markets anyway. There is also commercial property that you could throw in, so that would give you 4-6 funds depending on how you wanted to play it.

SlapShot

An interesting post. Can I share some observations, hope these are food for thought!

First, there's an elephant in the room and it's the 70% cash holding. Frankly tinkering e.g. with a 5% EM Tracker of a 30% invested whole is not going to make a material difference to the time it takes to reach your goals. The more substantive issue is that you're trying to up the risk you're taking with the 30% invested portion but in the context of the 70% cash weighting, your risk/reward of your entire portfolio is very skewed and likely distinctly non optimal. By this, I mean, if you take a three-asset portfolio, say equity, bonds and cash and play around with different proportions (with rebalancing, etc.), high cash weightings don't significantly change your downside risk, but they do act as a drag on returns. In other words, for the same risk, you can reap the reward of having a far greater proportion invested.

With the diversified portfolio approach, you're onto a good thing. So, I'd take a step back and work out what level of risk you're comfortable with, and aim to invest in a lower risk portfolio, but with a higher proportion of your assets.

Second, looking at what you're trying to do with the satellite holdings, I wonder what your rationale is? I mean, there are two ways of looking at it: 1) you're trying to increase the potential return of your portfolio by assuming extra risk (this is the classic EMH answer, as per Hale); 2) you're taking advantage of cheap prices (this is the value or non-EMH answer). It sounds like the former from what you've said, which is no bad thing, because comfort with the investment approach you're following is really important (if only so you don't make bad investment decisions and sell low having lost faith with a strategy!). But in this case, consider this: if markets are priced fairly, and according to risk, then you can just up your overall equity weighting and achieve the same end; doing so is more efficient and it reduces the risk you mis-balance your portfolio.

(I come from the other camp and have adopted a high EM weighting (~20% at minute in my long-term SIPP) because it's an unloved asset class and likely to be cheap, thus a good long term entry point. Also, e.g. Japan.)

I'd personally suggest dropping the satellite funds and sticking with multi-asset funds. It's only another source of (execution) risk and additional work for you, and it sounds as if you want minimal hassle. However, there are other funds in the world, it's not just VLS. I'm particularly fond of 7IM's funds (they have both pure tracker and mixed tracker/active funds), because they've got a good methodology, and are invested in a slightly wider range of assets the VLS, plus they do some tactical allocation (e.g. overweights in Japan and EM at the minute), which I think has the potential to add long term value. Also note they give you factor exposure (small-cap, value, etc.). L&G Multi Asset do something similar, they have commercial property exposure too. Moving into the active sphere: Ruffer (both the IT and Equity and General fund - big fan of both of these because they're well matched to my investment outlook/philosophy); Troy (Personal Assets Trust, Trojan Fund, Spectrum Fund; Newton Real Return; RIT Capital Partners. I'm sure there are others, these are just ones I know about.

I think a few of these, blended to suit your outlook and risk tolerance, should serve you very well. I'm personally uncomfortable having all my eggs in one pot, so I'd be looking at maybe 4 funds, 25% in each. If they have different (but similarly sound) approaches you'll probably benefit too by not being exposed to one strategy. Some will do better than others but there's no real way of knowing which those will be!

JohnnyJet

Thanks SlapShot for sparring the time to give me a long and though reply.

Your comment regarding having 70% in cash is definitely valid, this is something that I have been aware of but lacked the confidence to invest more. I am planning to change this but did not want to invest all of the money into just one low risk fund. As happy as I am with the Vanguard fund I would still feel more comfortable with more of these types of funds. I will investigate your suggestion of having up to 4 of these types of funds and if I can find 3 more that I am happy with then I will definitely move in this direction. Multi-asset is probably what I need.

Regarding my allocation to EM and Natural Resources funds, I was trying to increase the potential return of my overall portfolio but I was also trying to take advantage of possible low values, specifically in the NR fund.

I should explain that until recently I madly had over 40% of my equity funds invested in NR and I have been reducing this percentage by increasing my overall fund contributions and drip feeding into less risky funds but still holding and adding to my NR fund. I continued to add to the NR fund because this fund was running at a loss and I wanted to buy at the lower price so as to average out the purchase cost. I also believe that this fund is a good long term bet. It is early days but this strategy is starting to pay off and it is very close to being in profit.

My plan now is to investigate other multi-asset funds and continue to reduce my percentages in NR and EM outside of the multi-asset funds.

bowlhead99

JohnnyJet wrote: »

Regarding my allocation to EM and Natural Resources funds, I was trying to increase the potential return of my overall portfolio but I was also trying to take advantage of possible low values, specifically in the NR fund.

I should explain that until recently I madly had over 40% of my equity funds invested in NR and I have been reducing this percentage by increasing my overall fund contributions and drip feeding into less risky funds but still holding and adding to my NR fund. I continued to add to the NR fund because this fund was running at a loss and I wanted to buy at the lower price so as to average out the purchase cost. I also believe that this fund is a good long term bet.

When you see the strong returns that have historically been available from EM and NR funds it is very tempting to get very greedy and pile a lot of cash into them. "You don't get rich by being boring" ; "You've got to speculate to accumulate!"

A problem with this is that the levels of ups and downs you can get compared to someone who stayed in 'traditional' developed world and sectorally balanced funds will be pretty outrageous. The ups are great and the downs are very painful.

Then when you have some 'downs' it is of course logical to think "buy more while it's cheap" so you end up putting even more new cash into them.

Say someone had put £3000 into normal risk funds and £3000 into high risk/high volatility funds because they were a bit of a gambler and relatively new to asset allocation. Then the risky ones drop by two thirds so their asset mix is 3:1. So they put £2000 into the high risk ones again to get back out to £3000:3000 at current values. Hopefully, they think, the risky ones will now shoot back up in value and I will get rich.

Sure, they might go up, making them rich. But for this gamble of getting rich, they've invested £5000 of cold hard cash into some very risky funds, while only investing £3000 into traditional 'normal' equity funds (which are themselves risky of course, but suitable for the average person over a long enough timescale). The normal funds would probably be perfectly suitable for 80-100% of someone's equity allocation. But in his pursuit of riches, the person in this situation has ended up putting less than 40% of his available cash into these normal funds and a massive amount into the crazy risky stuff.

This then becomes a problem because they are caught between two "obviously, you must do this" objectives. Firstly, they think, they 'obviously' should keep buying the stuff that has fallen, when it falls some more. But secondly they 'obviously' must fix their macro asset allocation problem by buying more normal traditional developed balanced equity funds, so that they can move out to about 80-90% of their current asset value being in more normal traditional equity funds.

That sounds like the situation you find yourself in: you want to buy more of the EM and NR stuff because it's cheap compared to 3 years ago, but you also want to buy more normal funds too because you had 40% in NR alone. So if you persist in buying more EM and NR you are going to have to buy a LOT of normal developed funds to change the mix. And if the 'normal' funds are mixed asset funds that contain a component of EM, it will take even longer. By the time you are finished you might end up having piled a lot more cash into equities than you had intended, to fix your problem.

It is early days but this strategy is starting to pay off and it is very close to being in profit

It can be quite easy to be 'close to being in profit' if you throw money at the problem. For example, I invest £100 in a fund which drops in value by 50%. So I am £50 down. Then I dump £10000 into it so I have £10050 invested. The market then randomly goes up by 0.4% the next day. I gain £40 which is most of my previous losses. "Woohooo!" I think, "I was 50% down and now I'm only 0.1% down, only another tenner to go, I'm very close to being in profit!". But it is really just a trick of maths rather than validation of your faith in the fund.

While investing more money into a lossmaking position can make sense, you do need to consider your overall asset allocation all the time and whether you are taking more unnecessary risks. For example, if a risky fund loses 50% more than everything else: arguably if you leave it, it would recover to 'normal' and then the next time it spun a coin to decide where to go next, it would go 50% up instead. So by leaving it, you will still make the profit you had initially hoped to make. Sure, add a bit at the bottom if you have some spare, but you do not need to be rebalancing constantly to get rid of your good funds or your nice safe cash to chase the ones that are underperforming.

A solution, which I guess you're trying to do by getting advice here, is to rip up whatever you had, ignore what the historic cash was that you've spent so far to get where you are now, and simply decide: for my overall asset mix how much is cash, how much is equities, how much is non-equities.

Then within the equities and non-equities areas: In equities, how much is risky niche themes like natural resources, healthcare, emerging markets etc and how much is just regular global largecap, mid cap, smallcap developed equities. In non-equities, how much is gilts, corporate bonds, high yield corporate bonds, property, gold etc etc.

What you should probably find is that you can get 4 or 5 at the most, multi-asset funds or investment trusts to cover all bases. Some people would be happy with 2 or 3. If they are actively managed funds then the fund manager will decide the strategic allocation between types of bonds and geographic regions for equities. There are some passive funds that will cover a large swathe of what you want and allow you to tinker around the side with active stuff in a core/satellite style, but you have specifically said you don't want "a portfolio that you have to keep checking", so Slapshot's ideas of a few basic multiasset funds seems ideal.

Some would say that checking in once a year to rebalance is not exactly a huge burden. But if you are not convinced by passive investing and do not want to do the allocation / reallocation work yourself (and get dragged into feeling emotional about funds and piling more and more money into them as they fall), then just pay a few guys to run a few funds, like Slapshot says, and have it be your whole portfolio. Or you could continue along the lines of Masonic's suggestion and keep the VLS and add those missing sectors around the side. There isn't a right answer.

Back on your points about putting more money into NR funds as the sector went down. A couple of graphs of some funds I hold in these areas might be of interest.

In this first one we have the brown line showing FTSE All-Share total return, making money over the last 3 years, and then we have EM funds in blue and red (Templeton Emerging Markets and JPM India investment trusts) and at the bottom the green and yellow of JPM Natural Resources and City Natural Resources High Yield.


If you had bought all of them in Jan 2011 as above, you might say to yourself, "right, the NR funds are getting hammered so I need to get more money into those. The EM funds are getting less hammered but I should probably get more money into those too. While the All-Share is my single bit of prosperity, giving me a reasonable 8% compound return, and is the one I'm going to have to dump, and sacrifice maybe half of my holding to give me the buying power to get more and more of all these risky funds which have lost 20-60% of their value."

Intuitively that sounds OK, buy low sell high etc. But it is taking quite a big punt. The commodities funds fell from a high because prices had been surging up driven by huge EM demand growth which has well and truly plateaued for a while. The EM funds fell because of these declining growth rates (IMF now projects 7% p.a. for China over the next 5 years vs the average 10%+ seen over the last decade; Russia is projected lower growth than UK/US, and Brazil not much better than US). And because frankly, with developed economies coming out of recession and western markets doing well, there is no need to take monster risks to recover all your credit crunch losses like people were trying to do for the two years after the March 2009 bottom.

So, if you hurl more and more money into these volatile funds to 'grab a bargain' you might be waiting for quite some time for it to come to fruition and the rewards might not be fully justified by the risks. As it happens, buying more of them earlier this year would have been validated by the JPM india trust going up 29% in the last 6 months which I'm pretty happy with (!) but you can't annualise it or make a projection that it will continue without a crystal ball for the world's economy. I'm happy to be 'overweight' in both EM and NR at the moment on a very long term view, but 10-15% in EM would be easily enough for most people.


This graph shows why people don't need more than 10-15% in volatile niches like EMs and NRs. We can see that actually by extending the graph back three times as far as the first graph, NRs are not down at all and the yellow and green lines have ended up pretty much on pace with FTSE All-share which itself has given a decent return of over 100% in under ten years. Along the way there were lots of jumping off points where a 200, 300, 400% gain could have been cashed out as part of an ongoing rebalancing program.

The EMs have done even better; suffered since early 2011 but strongly up overall with the active Indian fund giving twice the return of the All-share and the active largecap EM fund almost three times. What this hopefully shows is that of course, there are better and worse times in the cycle to pile in and buy more of such volatile funds, but merely having them as 5% of your portfolio would have given ample opportunity to rebalance out and trim back at profitable levels. You don't need to top up to 40% of your portfolio like a madman to try to catch the bottom and make a killing.

So you don't have to keep throwing more money at them while they are 'looking cheap' - merely being lower than they once were is not necessarily 'cheap'. Even if it is, the last two boom cycles in the 2000s are not necessarily going to be repeated from here and so it's dangerous to overweight a portfolio to one asset class in pursuit of riches which may not materialise.

SlapShot

If I may add to bowlhead99's excellent post...

A solution, which I guess you're trying to do by getting advice here, is to rip up whatever you had, ignore what the historic cash was that you've spent so far to get where you are now, and simply decide: for my overall asset mix how much is cash, how much is equities, how much is non-equities.

This is an excellent suggestion. The temptation not to sell an position/investment idea till it's "in profit" and instead average down is, generally, a bad idea because the emotional need to "win" skews your judgement. As bowlhead99 says, what's gone down is not necessarily cheap. Try to make the effort to periodically mentally (or actually, if you can do this without cost/taxes!) liquidate your portfolio and start with a blank sheet. It's a good exercise and good discipline!

Which brings me onto my second point, which bowlhead99 explains in a slightly different way. If you're embarking on a strategy of tactical asset allocation, unless you have a very clear idea of what you're trying to achieve and how, you're likely to fail. You need to be systematic in investing to win. It doesn't sound like you have the time or want the hassle to do this.

But it is worth considering, when looking at multi-asset funds, what they're trying to achieve and how, because you can find elements of this in different funds. E.g. (and very simplisitically, this ignores the detail of how the funds do this as their approaches can vary quite a lot):

VLS - passive index investing + passive asset allocation
L&G MultiIndex - passive index investing + tactical asset allocation
7IM AAP - passive + factor index investing + tactical asset allocation
7IM MM - passive + factor + active + tactical asset allocation
Ruffer - active + tactical asset allocation
RIT Cap - active + tactical asset allocation + private equity

etc. Picking funds in picking which "games" to play. If you don't believe there is value in tactical asset allocation, then stick with VLS or equivalent. So, by saying "I want to invest in EM because it's cheap and thus good long term" you're accepting the tactical asset allocation proposition - instead of doing it yourself, get someone to do it for you.

Hope this helps!

Reactor_2

I'd just stick with the VLS and keep it simple.

I lost £20k on the Natural Resources Fund last year, thinking it was cheap before bailing out at the lows. If I had waited until now, I would have only broken even, but that is with the benefit of hindsight. I'm now about £50k behind the index, which realistically will never be bridged.

JohnnyJet

Some excellent replies which I have read and will definitely be adjusting my planning. Thankfully I have been reducing my percentage of high risk funds for a while and have a decent profit at the moment. I hadn't risked a fortune but percentage wise my high-risk allocation was to high to sustain and if I carried on in this way then it would have made me uncomfortable.

From what has been said it looks like I have been looking at it the wrong way and rather than trying to gain further profit from high risk funds, what I should be doing is using some cash to buy lower risk funds to increase my potential gains at the bottom end of the income scale.

I've looked at some of the funds suggested and I am unable to find exact matches at HL but will continue to look for suitable multi-asset funds. I don't mind looking at the portfolio every 6 months but don't want it to become a part-time job.

I have been looking at some Excel calculations and I would be happy with a 4-5% return after inflation, maybe slightly less if I choose to retire later, if this is not possible then I could add more cash at an earlier stage to increase my chances of reaching my goal. I do have concerns about where the bond market will go when interest rates start to go up and also the height of the equity markets right now.

I like to hold a few different funds because my long term plan is to start selling off the better performing funds several years before retirement and move them to low risk funds or even cash. Maybe savings rates will have improved by then. If this is a daft idea then please say.

JohnnyJet

In light of the issue with bonds at the moment does anyone have any views on whether it is worth adding to the VLS 60 fund or whether it would be better to add to a strategic corporate bond fund for my bond allocation?

ChopperST

I'm using P2P lending as an alternative to bonds at present. They are higher risk as there is no FCA protection (will come under their governance in the near future) at present but I am happier with the risk / return profile in comparison to current gilts and bond yields. Also drip feeding is helping spread the risk across multiple borrowers and sites.