vanguard 40 vs 100

TheTracker

I'm with Freecall.

The question being asked here is whether one should vary their asset diversification based on whether one considers a particular asset to be high or low, overpriced or underpriced. I am firmly of the belief that no, you should not do this. Others would say absolutely yes. But if you do say yes then you need to confident that you can tell if a price is low or high and that means you know better than the market, because the current price is the market. Now given the market is everyone, including joe public, institutions, hedge funds, value investors, etc, I'm not going to say I know better than them.

If there is one area you do have some choice about how to invest it is with fixed priced bonds. If you can buy a rock solid 5 year gilt with a 1% yield then if you can provide a rock solid yield higher than this elsewhere then it's transferable. Some would say if you have under 50k that you wish to put in such a class then consider using UK current accounts where you can get 3% with FSCS protection now and the rate is unlikely to drop quickly. And if it does you can go back to gilts.

Structured passive portfolios like VLS Take some of that choice away from you at the benefit of convenience. The size of your investment therefore matters.

Linton

Only partially agree with freecall. It seems to me that the large market traders whose activities fix the price have a different agenda to me. They are concerned about making short term, often extremely short term, profits. Something is worth investing in if it can get them profits in days (if not minutes!), I am interested in decades. It is not obvious that their and my valuations should match. So I believe I can get an edge on the market, not because I have inside knowledge but rather because its priorities arent appropriate for my investing requirements.

ColdIron

The VLS100 pays divedends and any of Vanguard's bond funds pay interest so presumably any basic rate tax (10% or 20%) is deducted by the fund and if I am a higher rate taxpayer then that's between me and HMRC via my self assessment. Right so far?

I see that the VLS40 pays dividends even though it holds mostly bonds. How does this work for tax purposes?

Presumably any dividends paid to me are dealt with as dividends as above but what about the interest from the bonds contained within the fund. Are they free of income tax deductions within the fund, could they be reclaimed if within the personal allowance and are they free of higher rate income tax entirely?

bowlhead99

I think generalist questions about holdings often go off on tangents about whether a particular market is "worth" investing in now compared to other times.

I think the original question about whether market conditions could make a bond- heavy fund more risky than an equities- heavy fund, has been answered: generally, no. The fundamentals of what a bond is, hasn't changed

But from time to time, bonds will appear relatively cheap compared to equities and at other times, vice versa. It would be nice to know when they had topped out or bottomed out but that is very hard.

The simplest thing to do if you don't know what will happen next is to buy a bit of both in your favoured long term portions which might be 95:5 or 60:40 or 25:75. After the market has moved them both after 6-12 mths, you won't have that favoured long term ratio any more. If you sell some of one to buy more of the other and rebalance back to your preferred ratio, you will have successfully sold high and bought low, relative to initial purchase. You can repeat this process every year.

If you buy VLS or equivalent that has a fixed ratio between asset classes, it will be doing this for you all the time in micro transactions each day or week and you don't need to manually rebalance if you're happy with their standard ratios. Of course whether you are actually happy with the standard ratios and method of getting exposure to each general asset class with those particular funds, is another question that could run and run.

Linton

ColdIron wrote: »

The VLS100 pays divedends and any of Vanguard's bond funds pay interest so presumably any basic rate tax (10% or 20%) is deducted by the fund and if I am a higher rate taxpayer then that's between me and HMRC via my self assessment. Right so far?

I see that the VLS40 pays dividends even though it holds mostly bonds. How does this work for tax purposes?

Presumably any dividends paid to me are dealt with as dividends as above but what about the interest from the bonds contained within the fund. Are they free of income tax deductions within the fund, could they be reclaimed if within the personal allowance and are they free of higher rate income tax entirely?

The internally reinvested income from accumulation funds is taxable as if it were paid to you. I guess but dont know that 20% basic tax on interest is taken off at this point. You should receive an annual tax statement from the fund manager detailing the situation. This is messy and one of the main reasons for holding funds in an S&S ISA. It may not actually gain you much but it cuts down on the paperwork.

Ryan_Futuristics

Freecall wrote: »

As much as I enjoy reading contributor’s opinions on what might happen to markets in the future (bond markets or otherwise), surely this is all just academic chit-chat.

The fact is that for the vast majority of markets that ordinary investors are likely to consider, there is a high level of both market knowledge and liquidity. This means that the price at which an investment trades is the distilled view of the entire investment world on what an investment is ‘worth’.

So unless you really have some inside knowledge that the market as a whole does not possess, trying to second-guess where things are going is futile.

The real issue is picking investments (or a portfolio of investments) that meet your needs.

On the whole, the VLS40 is likely to give lower returns but will be less volatile than the VLS100. It’s up to you, the question is, what are your specific requirements for your investment?

To some extent ...

As Linton says, a great deal of the short-to-mid-term market movements are driven by short-term trades

While predicting what will happen next is often futile, it's relatively easy to assess risk ... In the case of bonds, there is a potential risk to consider now, and there are a few strategies available to you that may help you manage that risk:


- You may consider switching from long-term bonds into short-term bonds (whether bond funds fall a mere 0.5%, or spark investor panic and go catatonic, this should safely mitigate some of that risk)

- You may want to consider a strategic bond fund (this is less certain, and will come down to how the manager handles the transition to higher rates - but you're paying for someone else's insight and experience)

- But the only way to remove the risk altogether is not to hold any bond funds (which is what I've chosen to do - not because I expect the worst outcome, but just because my own simple rule when I'm uncertain is just to go with valuation ... and bonds look expensive)

Mistermeaner

Linton wrote: »

The internally reinvested income from accumulation funds is taxable as if it were paid to you. I guess but dont know that 20% basic tax on interest is taken off at this point. You should receive an annual tax statement from the fund manager detailing the situation. This is messy and one of the main reasons for holding funds in an S&S ISA. It may not actually gain you much but it cuts down on the paperwork.

Off topic in my own thread but an interesting point; if 20% tax is taken off at point of acc dividends being 'paid' should i do anything to recover that deduction? (When fund is held in isa wrapper)

While your platform knows you hold the fund in a cash isa the fund manager doesnt so how does this deductiin get corrected (obvious answr i guess is that your platform does this for you but is that correct?)

Mistermeaner

And thank you for all the input on bonds , very helpful and alot to think about.

Im inclined to reduce my bond exposure in favour of equities. But will sit on it for weekend.

FYI these musings (this and other threads) are all about determining my long term strategy, dont worry ive not been tinkering

dunstonh

Im inclined to reduce my bond exposure in favour of equities. But will sit on it for weekend.

And if you are wrong and the stockmarkets fall 40%, will you accept that your fund will drop by a greater amount?

Maybe instead of going with a fixed bond/equity allocation go with a risk targeted option instead where the fund house will adjust the weightings and the bond type to reflect the views in the market.

TheTracker

dunstonh wrote: »

go with a risk targeted option instead where the fund house will adjust the weightings and the bond type to reflect the views in the market.

What is the difference between "the views of the market" and "the market"?

If there is a difference, where can I find it quantified?

If it can be quantified, where can I see these historical "views of the market" to test them against "the market" at the time to establish whether "the views" held any utility at the time they were made?

If historical views were quantifiable, available, and able to be tested and shown to be accurate and profit making, then wouldn't "the market" follow those views and in effect become "the view" and they'd be one and the same?

Welcome to Logic 101.

Ahhhh I see. "The views" are by some superb fund managers who won't tell you what their view was until it's happened. Come give me your money I have "the view" for just 1%pa. If I'm right you'll make more money. If I'm wrong you'll make less money. But I made more money recently so I know "the view" more than others do. No, of course I can't guarantee "the view" is accurate, it's not always correct, other influences may disrupt "the view". What do you mean if I can't prove my view them you don't want to invest with me? You do realise Bob and Jane and Ryan invest with me and you like them. You read the newspapers and they wrote about me. Newspapers even know why the market went up or down the previous day so you know they are right. Do you think they'd have given me money if I didn't have a great idea of "the view of the market"? Do you think I'd have gotten where I am today if I didn't have "the view"? Don't believe me? Ask an IFA. They're independent. And advisors. Yes yes financial too. Do you think they'd advise to buy my fund if I didn't have "the view". What do you mean they like to convince themselves there is a "view" so that they can also pick up another 1%pa for telling you I have "the view". I'm done with you, all these passive investing vanguard semi-religious zealots are so negative. Just you watch. Just you watch.