Vanguard Lifestrategy funds - performance?

Ryan_Futuristics

bowlhead99 wrote: »

So, if I can summarise the key takeaways from these two posts on Sunday afternoon:

1) The simplest piece of investing advice to give to a new and casual investor - who should not be taken in by marketing hype or distracted by popular opinion on how to construct a portfolio [or led particularly strongly by one man's opinion of valuation?? ] is that the UK is not too expensive. As it is not too expensive, you can invest in it. You would be thinking "50% and maybe higher" allocated to UK equities.

2) The sheep invest in a portfolio of equities and bonds and after a long time of holding them they will expect to make money. While the market professionals - who a) do not invest in a way that is realistic for the common man, because they spend 50 hours a week being employed to do the investing rather than having to fit it into a spare 5 minutes at the weekend; and b) are incentivised by short term performance - are currently moving heavily into cash, this particular month.

3) A weekend newspaper article apparently provided a useful reminder of why the sheep may be wrong to think that they can invest money in the market and hold it for the long term. If we cherry-pick dates and say they had put all their money in one particular UK index in December 1999 (which with the benefit of hindsight, is the absolute high point that the capital value of the index ever reached in the century before or the decade and a half afterwards), then we can see that the amount of money which that unfortunate investor would have now, is no more or no less in real terms than it was at the start - it would not have been a particularly successful investment.

Unless, presumably, the investor only held that one index as part of a wider portfolio and periodically rebalanced (e.g. topping it up with sales from other holdings as it fell) and kept investing on an ongoing basis while it was at a whole range of different prices. In which case buying some assets at the wrong time would not have been a big deal. The same article mentions that another part of the same UK stock exchange, the FTSE 250, grew to over 3x cost in real terms in the same time period that the FTSE100 had its 3% (but zero real terms) annualised performance.

So clearly, investing in a wide set of assets is important, given you don't know which ones are going to be the dogs. IMHO the article is not really a 'useful reminder that buy and hold investing may not work' so much as common sense to keep diversified.

4) The west has peaked and is now probably over invested. So by implication you should not be investing there. Seems at odds with point (1), and the comment that only 10-15% should go to emerging markets.

- - -
IMHO, buying and holding a broad range of asset types and locations is not really a foolish sheep-like mentality, even though it will not produce returns as high as if you had taken more of a risk and concentrated on specific areas with potential and were right about those instincts.

Certainly some companies in some markets are trading at generous multiples of annual profits though this has been the case for many years and investors with broad portfolios have still made money, some years more than others of course. My take is that the casual investor who cannot cherry pick companies should have a broad portfolio and not try to time their investments into each asset sector to 'buy cheap' based on some inevitably imperfect valuation methodology for a broad geographic market or asset class as a whole.

In suggesting a broad portfolio I am not saying do it all by indexes because capitalisation-weighted indexes are indeed heavily concentrated in some industries or regions. So, a portfolio should be properly broad in terms of region and asset class and industry of underlying investment within equities.

My problem with replying to Ryan's posts is there is a lot of them and there is some of it that appears at least in some way self-contradictory or not fully thought through. It can then take a lot of patience to go through all the research and graphs to point out why something could be misleading or flawed or does not strongly point to a conclusion after all; while some will engage in doing this, ultimately most of us don't have the luxury of not having a day job to be able to do our own blog via this site nor reply in intimate detail to someone who is doing that.

"The test of a first-rate intelligence is the ability to hold two opposing ideas in mind at the same time and still retain the ability to function" ... Every decision is contradictory - you're always weighing risk vs return

Now the reason I wind up writing a lot of posts is because whenever I offer a caution against Vanguard Lifestrategy, I get a lot of responses ... There are blogs telling you simply to hold an index, hold a LS fund, hold a 60:40 portfolio, and be guided by a mystic wind ... These same blogs tell you not to trust anyone in the financial industry or media ... They don't currently involve chanting or wearing robes, but I expect this to follow


1. If the UK wasn't reasonable value, I wouldn't have money in it ... But if you want to benefit from the UK's reasonable valuation and relatively strong economy, you need decent exposure to large, medium and small-cap companies ... A FTSE All Share tracker doesn't provide this

2. Fund managers are employing investment strategies and objectives on a completely different scale, and of a different nature, to a private investor ... We don't have to chase year-on-year returns, sell assets at inopportune times, or make purchases so large they instantly inflate valuations

3. You talk about cherry-picking dates, but a long-term investor may already have been holding the FTSE All Share in 1999, and would simply have had to endure 15 years of poor returns ... As it's been cyclical, if they'd held bonds too they'd have missed out on upside ... Much better for Vanguard to cherry pick a 10-year period which started at the bottom of the tech-crash

4. 10-15% Emerging markets, 40% in alternative fixed income, 10-15% cheap Developed Europe, 10% Asia Pacific, 5% Frontier markets ... Leaves 15-25% for some home/global market exposure - sounds reasonable


I think our conclusions re: broad and varied assets, perhaps without the bias to cap-weighted funds, are congruent enough

Vanguard Lifestrategy seems, to me, like the perfect fund for a high-stimulus environment ... It's seems like the fund you'd design for the past 5-10 years

But to ignore the potential headwinds, to me, seems like taking an idea - based on a very debatable observation of managed funds, generally dealing with fractions of percentages - and turning it into a belief ... The kind of belief that once saw saints walking into fires (not to put too melodramatic a spin on it)

Ryan_Futuristics

gadgetmind wrote: »

Yes, those who bought on that (carefully!) chosen date will have failed to beat inflation. However, in the real world (remember that?) people tend to buy a chunk per month. All of these different chunks will have seen differing returns, many of them very good, and none of them worse than the worst case example the paper chose to look at.

Take as a whole, someone who invested steadily even over the difficult decade and a half we've had, into a balanced portfolio, will have seen returns that easily beat cash in the bank.

As I said, anyone holding long-term may have already been holding in 1999 ... Vanguard's research has shown drip-feeding over this period would've generally reduced returns

If the US is 60% overvalued, and the UK's likely to remain correlated to the Dow, then where does the next dip leave you?

Yeah, you should beat cash ... But there have been people making consistent 10-20% returns over this period too ... I'll always maintain: You have to invest for the world you're moving towards, not the one you're moving away from

Kendall80

I've personally been researching the best global growth fund for my boys JISA. I was intending to go for the lifestrategy 100 but then I added the Baillie Gifford Global Alpha to the graph. Then I added Lindsell train global equity. Over the max comparison period the LS100 fund looked very poor. I realise there are other factors (ie cost and geographic spread) but on this metric alone the LS100 idea was discarded.

gadgetmind

Ryan_Futuristics wrote: »

drip-feeding over this period would've generally reduced returns

But over every other period?

But there have been people making consistent 10-20% returns over this period too

But over every other period?

Sorry, but we need to look at investment strategies that have worked over multiple cycles rather than just given periods.

ColdIron

Kendall80 wrote: »

I've personally been researching the best global growth fund for my boys JISA. I was intending to go for the lifestrategy 100 but then I added the Baillie Gifford Global Alpha to the graph. Then I added Lindsell train global equity. Over the max comparison period the LS100 fund looked very poor. I realise there are other factors (ie cost and geographic spread) but on this metric alone the LS100 idea was discarded.

Very different funds though, just one example - VLS comprises thousands of holdings vs Baillie Gifford Global Alpha's 97 and Lindsell Train's mere 27

Kendall80

ColdIron wrote: »

Very different funds though, just one example - VLS comprises thousands of holdings vs Baillie Gifford Global Alpha's 97 and Lindsell Train's mere 27

Indeed. The actively managed funds don't want to dilute their potential by adding in the chaff but I take your point. However, after the 12-14 year investment ends I'm going to be looking at the gains not the amount of holdings

Ryan_Futuristics

gadgetmind wrote: »

But over every other period?

As we've generally had more upside than down in the past, over most periods lump-summing has proven superior

The upside of drip-feeding is that you take an element of risk out of the equation (of buying at the wrong moment)

In typical Vanguard fashion, the conclusion is reductive: Lump-sum if you want the best returns ... I say drip-feeding is a pretty worthwhile insurance policy

But over every other period?

Sorry, but we need to look at investment strategies that have worked over multiple cycles rather than just given periods.

Well the likes of Buffett and Soros have been consistently making those kind of returns for many decades

But apart from "super investors", there probably is no strategy that works consistently over very long periods - I often mention the "permanent portfolio"'s 25% gold allocation as an example of how impermanent sensible portfolios actually are

The one consistent thread you find in all good investment strategies is some process or system to ensure you're avoiding expensive assets and buying cheap ... While 60:40 portfolios have been a very simple way to tap that system, with both bonds and global equities looking expensive, it's certainly not the "no brainer" solution it once was

Thrugelmir

Ryan_Futuristics wrote: »

Well the likes of Buffett and Soros have been consistently making those kind of returns for many decades

Both have the firepower to directly influence share prices in the the markets. Buffet t in particular. As Berkshire Hathaway as an insurance company generates excess capital with which to take strategic positions and ultimately buy companies. Totally different to you or I buying £10k of a company's stock.

Ryan_Futuristics

Thrugelmir wrote: »

Both have the firepower to directly influence share prices in the the markets. Buffet t in particular. As Berkshire Hathaway as an insurance company generates excess capital with which to take strategic positions and ultimately buy companies. Totally different to you or I buying £10k of a company's stock.

Absolutely - although Buffett started off just managing money for friends and family on the same scale any of us started on

As a fund grows, the scale of involvement as a shareholder obviously changes, but I don't think many would argue it gets easier to keep making those returns

In many ways it's easier to invest £10k in a start-up and turn a 20% profit than it is to invest £billions in a supermarket and expect to do the same ... For the first time in history Buffett's actually failed to beat the S&P500 over 5 years ... Never had that problem when it was $10k stock deals

gadgetmind

Ryan_Futuristics wrote: »

Lump-sum if you want the best returns ... I say drip-feeding is a pretty worthwhile insurance policy

Lump sum is best if you have a lump sum. If your money arrives steadily, then investing steadily is better than waiting until you have a lump sum. (Ignoring dealing costs)

The one consistent thread you find in all good investment strategies is some process or system to ensure you're avoiding expensive assets and buying cheap

Ah, but how do you measure this? For instance, some of the best investments that I've ever made have been in companies on p/e ratios that would make your nose bleed!