Moving off VLS 80 for a long-term plan

collingbone614

Hi Bowlhead, thanks very much for your response. I'll respond on the points which need some further explanation from me. Hopefully this will explain my thoughts.

OK, so you are not 80% equities 20% bonds you are (say) 64% equities 16% bonds 20% cash, depending on your definition of 'small amount of cash stacked aside' compared to the value of the £8k portfolio; that would be guessing £2k cash on the side, and presuming it is really 'spare' and not needed for living your life so you could throw it into investments as and when, but are choosing not to for now.

I have about £1k cash on the side which is most definitely spare, but I'm not adding to it. It is there as a psychological crutch – if there is a crash, I will be able to blob the money in. It's there to reassure the monkey-in-the-mirror more than anything else. There are certainly flaws here – when would I know when precisely to chuck the money in, etc. Nonetheless it provides me with some reassurance, flawed as it is.

If it genuinely bothers you and you can't get comfortable with it, change it until you can. Five £2k pots each with protection up to £50k does not seem much safer than one £10k pot with protection up to £50k.

Yes. The reason I'm thinking about it now is because it seems I have two options:

1. I could re-start from scratch now, set it up with the different allocation (i.e. using VLS 100 or something similar) then just forget and keeping feeding the money in, returning to re-balance.
2. Or I could take the other option of doing nothing. Keep the VLS and just add the extra funds around it some considerable way down the road, such as when I have closer to £50k.

My goal here is to have a simple, very long-term portfolio that I can just forget and keep feeding money in, returning to just up amounts where my income increases, and to re-balance. When I think about it, if I were to re-start it with VLS 100 instead of VLS 80, it would only change 20% of the ultimate allocation. What I mean is that I'd only be going from VLS 80 to VLS 100. So, if the thing I'm worried about happened – fund collapse – and I had to use the FSCS scheme, it wouldn't have a very large impact between my two proposed portfolios.

That is one approach. If you reduce one risk imperceptibly, you will be imperceptibly safer overall. I can't tell you that you should not bother, because then you would hate me if you followed my suggestion and then something went wrong. But I personally wouldn't bother.

It's because I nearly faced losing a large chunk of money due the Icelandic banking system melt-down. It was a black swan event, for sure. I see that it wouldn't reduce risk much, though, if I just had 20% of my money in a different fund.

So, instead of holding most of your portfolio in a set of global largecap equities and a variety of global corporate bonds, global government bonds, and index-linked government bonds, you would instead hold most of your portfolio in a set of global largecap equities and then one simple global government bond fund, with no allocation to investment-grade or higher-yielding corporate bonds or index linked bonds? Interesting choice, if a bit of a gamble.

Yes, it does not seem to be a good idea – it would reduce the diversification I've got by holding the VLS 80. I've been reading Lars Kroijer's articles which are scattered around various places around the internet – he advocates this particular idea, and it has a certain appeal.. Though as you point out it would seem to reduce the diversification I have access to currently.

Of the above, only p2p lending is not available within traditional mixed asset funds. Do you want the 5% to be p2p lending, or would you prefer the 5% to be cash?. There is no such thing as "p2p cash". You either have cash or you have an investment in p2p borrowing.

Thanks for pointing that out – I do mean p2p rather than “cash”. It seems that having it in at this stage, any way, would be a very small amount and that I should probably let go of that idea until I'm closer to £50k as described above.

VLS already includes inflation linked bonds as a category within its 20% bonds. Why do you want multiply your allocation to them specifically, by five to ten times over? Just curious whether that particular type of bond is really going to be so awesome for you over the longer term that it should be more than 10% of your total 25% bonds?

What's happened here is that I've read in various places about a rule of thumb for bond allocation – which in the passive sphere is this: divide your bond allocation 50/50 between vanilla gov bonds and inflation-linked gov bonds. I've seen this in the usual suspects, my usual sources of info – Tim Hale and Monevator, etc. That's what has brought this particular idea on. At some point I am going to want more bonds. So that I can “lifestyle” my allocation with age. Index-linked bonds are my attempted solution. The reason is that the lion's share of the VLS' allocation to bonds is comprised of vanilla world gov bonds.. there are corp bonds, index-linked, etc, in there, but most of it is world gov. So, going off the rule of thumb, it seemed like a reasonable solution to propose that the next fund I buy is an index-linked fund. Perhaps it is not the optimum idea.. Happy to hear other suggestions.

However, fear can make people do irrational things so I would look to enquire why you think it is better to have £5k FSCS-covered investment with manager A in sector X and £5k FSCS-covered investment with manager B in sector Y, instead of £10k in a mixed-asset FSCS-covered investment with manager C.

This is because I wished to set it up and then just put the money in. However as you've pointed out, it seems pointless until I have £50k and that it seems like it would make sense to re-examine all of this once I'm nearer to that amount.

The tax bit about UK multi-asset funds above does not seem a massive issue, so if you are just spreading money around to avoid counterparty risk, some would think you OTT. You are after all only investing a third of your ISA allowance each year, while some have millions in such vehicles.

Yes, point taken, it probably is OTT. I think it makes sense to leave things to roll along as they are and then add the other stuff I'm interested in (property fund, another bond fund, p2p) once I've got more money to actually worry about. Do you think that this long-term allocation seems reasonable? The L&G Multi-Index has property built in, but then I've increasingly warmed towards keeping with my VLS 80.

VLS 80

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75%
World gov bond fund inflation-linked

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10%
P2P cash

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5%
Property fund

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10%

I'm unsure about what kind of bond fund I'd go with, if it's not an inflation-linked gov bond fund.

bowlhead99

If you look at the actual yields on gov bonds and gov index linked bonds, they are on the floor. For retail customers who can access bank accounts which carry promotional rates at 2%, 3%, 4%, 5%, there are plenty of options which are simply unavailable to institutional investors who face sterling 1-month LIBOR at 0.5% or 1-year LIBOR at 1%.

So, unlike an institutional investor you do not need to buy an investment like a government bond which has limited upside and large downside.

For many parts of a normal economic cycle, bonds are a solid holding as you can get capital growth and the safety of a fixed annual coupon. Unlike equities you shouldn't expect monster capital growth but perhaps a little and compared to equities you are buying safety, usually. However in the last 5 years, government bond prices have gone up and bond yields gone down to extremes not previously seen for a century.

This means actually if you'd held bonds you would have received monster capital growth together with a decent but declining coupon. But now, the coupon is rock bottom and the capital growth opportunity much much less likely. Yields of medium term index linkers are negative in some countries and the German 10-year non-index linked bond is paying only 0.5% (which is higher than it was a couple of weeks ago).

So, cash (with a reasonable interest rate and nil risk of reduction in capital value), or corporate bonds or p2p lending (with more risk of default but better headline yields) seem to have better risk/reward tradeoffs than government paper. Government bonds are something which I have no doubt will have a long term place in ones portfolio, as has historically been the case, but I am not rushing to buy lots of them now.

An inflation linked government bond bought today is priced on what everyone thinks inflation is going to be over the next x years. So if inflation goes up, you don't necessarily get any extra return; you only get a return if inflation is actually significantly higher than people were already expecting when they sold you the bond for the price you paid. They should not be confused with something like a NSANDI index linked saving certificate. They do have a useful role in a broad portfolio and are perhaps more useful than a plain vanilla non-linked gov bond. But at current prices, cash products are probably just as good in terms of the returns you can access.

At £8k invested increasing by £450 a month you are growing your portfolio by over 5% a month just by contributions. Even with no growth, after a couple of solid years of doing this you are growing the portfolio at 25-30% a year. So, you can afford to make mistakes and not hold a lot of 'safe' stuff, and the actual return on your £8k at the moment does not impact your life greatly. So, it doesn't matter that you don't have any real-estate exposure or you are not sure what bonds to get; pretty much anything will be fine.

It makes sense to try and nail down a long term plan as you are doing. Whether the proportions are right for your long term goals, I don't know - that's personal. But I think your focus on index linked gov bonds is OTT given Vanguard or L&G would construct a portfolio with a 20-30% bond component of which only a portion is government bonds and a portion of the government bonds is index linked bonds: you end up with a single digit percentage of ILs; but you want to hold that sort of portfolio fund and THEN slap another 10% of IL bonds on top, changing the ratio to be over half your total bonds.

I think IL bonds are no worse than regular gov bonds at the moment given the rewards on offer from the two classes; I would probably favour the IL versions. But that's a 'current state of the market' judgement; if you are not looking for that, but instead for a long term plan that you can set and forget with some periodic rebalancing, I don't see why they should warrant such prominence as being over half your total bond allocation amongst all the global developed and emerging, government and corporate, high yield and investment grade, bonds that are out there.

I'm unsure about what kind of bond fund I'd go with, if it's not an inflation-linked gov bond fund.

Being unsure about what kind of bond fund to get is a good cue to buy a strategic bond fund or two, where the manager has free reign to vary the mix of bonds held across classes and maturities and countries using his knowledge and understanding and experience of the bond markets which you or I do not possess.

This would invariably be higher potential risk than sticking to the govt bond stuff, because the holdings will include bonds that are not govt bonds, but if you already have some govt bonds and you have plenty of high interest cash and a little p2p I don't see any problem with that.

tejero23f

The contributor mentioned Kaupthing Edge in his opening thread, a salutatory lesson indeed.
In 2007 Kaupthing edge were offering almost 7% gross on it's savings account. It was almost worth taking out a Mortgage to invest with them and watch the money grow!
There is nothing like logging into your account and seeing a blank screen then calling the number to hear a recorded voice. I sweated it out for a few weeks and eventually got my investment back....

Not so lucky overseas investors (ex-pats) who only this year have have got back almost all they invested (96%). In that time (7 years) many of the investors have passed away, in the first year there were numerous suicides and bankrupts. Marriage's and families were broken apart as lifetime savings were wiped out in an afternoon.

The lesson to learn? if it looks too good to be true...it probably is!

greenglide

The contributor mentioned Kaupthing Edge in his opening thread, a salutatory lesson indeed

But the Iceland fiasco did also show that the protection DID work, although this was on the basis that the FSCS actually went far beyond the limits they actually had to.

We had money in fixed interest with Ice Save at the time and FSCS paid out when the fixed period ended (four years later) along with all the interest at 7.5%.

I was "fairly confident" during this that we would get our money back, I was absolutely staggered that "the bank of FSCS" paid the full interest at the end of the term as well!

noh

tejero23f wrote: »

The contributor mentioned Kaupthing Edge in his opening thread, a salutatory lesson indeed.
In 2007 Kaupthing edge were offering almost 7% gross on it's savings account. It was almost worth taking out a Mortgage to invest with them and watch the money grow!
There is nothing like logging into your account and seeing a blank screen then calling the number to hear a recorded voice. I sweated it out for a few weeks and eventually got my investment back....

Not so lucky overseas investors (ex-pats) who only this year have have got back almost all they invested (96%). In that time (7 years) many of the investors have passed away, in the first year there were numerous suicides and bankrupts. Marriage's and families were broken apart as lifetime savings were wiped out in an afternoon.

The lesson to learn? if it looks too good to be true...it probably is!

Mortgage rates were higher than 7% at that time. Other institutions were offering similar interest rates. I had fixed term accounts with Nationwide at the time paying 7%.