Which Vanguard life strategy fund will be most suitable for my situation?

Nellie_Dean

Hello

I would be grateful for some investment advise as to which Vanguard life Strategy fund will be best for me and whether it is advisable to have 2 life strategy funds

Background

I am now mortgage free , no debts and have savings of £14000 in a Cheshire BS cash ISA at 2.3% , £4000 in TSB classic accounts at 5%, £2500 in Yorkshire bank current account at 4% and have Santander 123 as my current account. I want to keep this money in cash as my emergency fund. When the rate drops on the ISA at end of November I intend to put it into my Santander 123

I am now 48 years and a nurse and hope to be able to retire when 55 years. My NHS pension will be approx £14,000 per year and will get a lump sum of approx £40,000.

Once I managed to get to the stage where I had some savings and have spare money each month as no longer have to pay a mortgage I realized I needed to learn about investing my savings due to low interest rates.

I read Tim Hales book smarter investing and information on Monevator site. I find it all difficult to understand but have learnt enough to feel Vanguard life strategy will be the best option for me as I need things to be as simple as possible. I do not wish to take large risks with my savings but realize that over longer periods of time the best option is likely to be an index fund.

I am happy leading a relatively simple life . I would like sufficient income to maintain my home, pay bills , holiday in UK , run a modest car, have some savings for any emergencies when I retire at 55. I am confident I can do this on my NHS Pension, but as I have 7 years left to work want to invest monthly until I stop work at 55.

I am able to save £1000 per month , but as I am on the side of being risk averse decided to continue to save £800in cash ISA per month and put £200 per month in S&S ISA - I decided as this was only a small proportion of my savings each month to choose the 80% equity fund . I opened an ISA through Charles Stanley Direct and a direct debit for £200 per month and started to invest in the Vanguard life strategy 80% equity accumulation fund.

After further thought and reading I am considering saving the other £800 per month in to the life strategy fund. I am unsure whether to increase payment into my current 80/20 fund to £1000 per month or whether to open a second life strategy fund of 20, 40 or 60% equity and pay £800.00 per month into that? Would this make a big difference in terms of charges?

Also once i am 55 and retired so will no longer be able to pay into these funds is it an easy process to change these funds from accumulation to funds which pay dividends monthly?

There is also a chance I wont be able to retire at 55 if the NHS service I work for is commissioned out to a private provider which is a distinct possibilty. If this is the case and I am not an NHS employee when I am 55 I will have to wait until I am 60 before I could draw my NHS pension. In this senario I would hope to work part time only and supplement this from any dividends from the S&s ISA.

Any advise would be appreciated

brendon

It depends on when you want to access the money. If you want it in 5 years, then you really should be 40% equities. 10 years, 50%. 15 years, 60%. If you see the money as not essential for retirement, perhaps a LS 60 would be a good option if you can tolerate the risk. Otherwise, I'd recommend the LS 40.

Comparing LS 40 and LS 80, since July 2011 they have returned 25% and 28%, respectively. I don't think it is worth exposing yourself to the huge amount of extra risk that comes with the LS 80.

Is there any reason you want this money in an ISA rather than a pension?

pip895

As you have most of your money in cash I personally think you should go for LS 80 or even LS 100. I would consider your timescale longer than the 7 years you have before early retirement. You would be better off using cash reserves to bolster your early retirement income - save the investments for later on. Even with LS 100 you overall portfolio is very cautious.

I would start with just 1 fund and only consider adding another once you have a larger amount invested. Then you might consider adding a small company fund as this is under represented in the LS series and if bond yields have improved you could also add a bond fund.

Just a personal opinion - the old idea of you are 50 so you should have x in bonds is a real bugbear of mine.:)

ExMugPunter

Personally I would go with the 80%.
Simply because you already have that rock solid NHS pension as the foundations of your future income.

Whilst this may sound and feel like too much risk, when you look at your portfolio overall, the 80% would fit in nicely.

However, having said that, that is what I would do. That doesn't mean it is right for you. Do whatever you feel comfortable with, if 80% doesn't sit right, go for the level that does. The last thing you want to be doing at this stage is worrying about a few % of equity allocation as its unlikely to make or break your plans at this stage.

It looks like you have a very solid platform for the final push to retirement. Good luck whatever you choose to do.

Ryan_Futuristics

I'll just chime in with my perspective, in case you want to research further

Personally: I wouldn't touch a Vanguard Lifestrategy fund with a barge pole at the moment (and if I owned one I'd be selling in the next few months)

Obviously no one knows which funds will do well, and which won't ... but valuations are about the best predictor we have in investing ... And as a valuation-based investor, US shares and bonds are looking very expensive right now

By many measures, UK and Japanese equities are looking overvalued too - and in a VS80 fund, U.S., UK, Japanese equities, and bonds, would be about 90% of your investment

A popular valuation method is the CAPE ratio



Here the Y axis is your average annual return, and the X is the CAPE ratio of the region you invested in ... At the moment the US's CAPE ratio is over 27, while Japan's is 23 ... These both correspond to quite poor long-term returns (possibly lower than a cash savings account)

Bonds (which form the 'safe' part of a LS fund) don't fare well in rising interest rate environments (especially bonds in funds, because as rates rise - as they're going to next year - these old bonds become less appealing because they're still stuck paying low rates over long maturities)

Most professional investors are cutting their exposure to bonds and avoiding broad exposure to US equities ... While Vanguard LS has been a safe investment as US equities rise, and bonds do exceptionally well, the next 5-10 years are very much against it, at least on paper

For me, the best two places to put your money at the moment are probably Neil Woodford's fund (trickle money in over long period) and cash ... Large Cap UK equities and cash are the only things that don't currently have big warning signs flashing over them

collingbone614

Ryan_Futuristics wrote: »

While Vanguard LS has been a safe investment as US equities rise, and bonds do exceptionally well, the next 5-10 years are very much against it, at least on paper

Hi, this is interesting. I come at this as a newbie passive investor. What is it that makes you say the next 5 - 10 years? My own understanding is that there is some sort of a crash due. But what is it that makes us believe things will be poor for those with heavy exposures to the above equities and bonds markets for the next half or full decade?

I appreciate your views.

I read an article yesterday, by the way, which said that Woodford didn't outperform a particular passive tracker:

http://view.ceros.com/citywire/edition-7-september-2014/p/19

Is this because the authors have only taken data from a specific timescale and that, the rest of the time, Woodford was generally doing better than index?

guymo

Note that even Vanguard admit that CAPE has some forecasting power for stock returns, while also pointing out the wide range of actual returns around what CAPE would predict.

https://personal.vanguard.com/pdf/s338.pdf

Essentially CAPE "explains" about 40% of the variation in returns.

ColdIron

Ryan_Futuristics wrote: »

For me, the best two places to put your money at the moment are probably Neil Woodford's fund (trickle money in over long period) and cash

You dismiss bonds as they fare poorly in a rising interest rate environment but recommend cash which hardly performs better? I also have problems with such a concentrated equity profile. You would only be exposed to a fraction of the global market and mostly high caps at that. I have no confidence that the UK is going to outperform the rest of the world

As ever I believe a diversified portfolio is the key, particularly for a novice investor

Linton

omnirife wrote: »

Hi, this is interesting. I come at this as a newbie passive investor. What is it that makes you say the next 5 - 10 years? My own understanding is that there is some sort of a crash due. But what is it that makes us believe things will be poor for those with heavy exposures to the above equities and bonds markets for the next half or full decade?

I appreciate your views.

I read an article yesterday, by the way, which said that Woodford didn't outperform a particular passive tracker:

http://view.ceros.com/citywire/edition-7-september-2014/p/19

Is this because the authors have only taken data from a specific timescale and that, the rest of the time, Woodford was generally doing better than index?

The past 5 years have been unusually good for large dividend paying companies - my Internal Rate of Return for a portfolio based on high dividend shares is something like 13% annually, rather better than the Vanguard fund. A fund like Woodford's with a less single minded focus on income could well have fared worse because of a different remit, one with a higher emphasis on capital gains.

So yes the times were particularly helpful for the Vanguard fund, and in particular didnt include the 2007/2008 crash. To see how passive dividend funds can be caught out look at the IUKD ETF. It fell by over 50% as it included large holdings in the banks. Over the past 9 years for which data is available IP High Income gained 120% whereas IUKD achieved less than 40%.

Also relevent to the discussion is that the Vanguard fund isnt an index tracker like say a FTSE100 tracker or IUKD. The "index" it uses is a highly artificial one for which Vanguard paid FTSE to set up. It for example includes rules preventing major inbalances in sector allocation. So one could regard it to some extent as an algorithmically controlled managed fund.

brendon

pip895 wrote: »

Just a personal opinion - the old idea of you are 50 so you should have x in bonds is a real bugbear of mine.:)

It's not really an old idea. If you wanted a buy an annuity in 2008, after the financial crisis, you could have wiped out 40% of your pension. The idea of diversification is not an 'old idea', it's a very sensible idea.

Like I said, if the OP is 5 years from retiring and the money is essential to her retirement, there is no way you should recommend 100% equities. To suggest that the compositions of a person's retirement pot should not be related to their age is dangerous.

Linton

brendon wrote: »

It's not really an old idea. If you wanted a buy an annuity in 2008, after the financial crisis, you could have wiped out 40% of your pension. The idea of diversification is not an 'old idea', it's a very sensible idea.

Like I said, if the OP is 5 years from retiring and the money is essential to her retirement, there is no way you should recommend 100% equities. To suggest that the compositions of a person's retirement pot should not be related to their age is dangerous.

Diversification is essential for any investnment portfolio, but how much should be in low volatility bonds/cash is more a factor of how soon you need the money rather than age. In the example of retirement your bond allocation would depend on whether you were planning to buy an annuity or not. In the former case it would be sensible to get all ones money in bonds and cash well before the event. However if one is planning on drawdown one needs to have no more than say 5-8 years allocation in low volatility/low return investments. Most of the pension pot would continue to be invested for the long term and so could reasonably be held in equities.