180K Investment

jdw2000

bowlhead99 wrote: »

(VWRL/VLS80 will be perform)... Along the same lines as each other, in terms of yes they will broadly move in the same direction as each other, because most of what they both invest in is global largecap equity.

However, as one is 0% bonds and the other 20% bonds, and one has 25% of its equities in the UK and the other has 6.1% of its equities in the UK, you would certainly not expect them to deliver the same exact return, other than by complete fluke.

Sorry, I see I wasn't very clear when I read what I said.

I was trying to say that I expect VLS/VWRL to perform along the same lines as the market generally. ie, to grow at 7% per year as a rule of thumb.


To be honest, if they (or other investments) don't perform at that kind of level, then there's hardly much point bothering. Inflation is 2% as it is, so it's not a massive amount. Property in London will 100% exceed 7% per year, IMHO. Would be a far better investment.

bowlhead99

jdw2000 wrote: »

Sorry, I see I wasn't very clear when I read what I said.

I was trying to say that I expect VLS/VWRL to perform along the same lines as the market generally. ie, to grow at 7% per year as a rule of thumb.

Well there are two points there.

One, just to reiterate - the market generally is unlikely to grow at 7% a year for the next decade, as I tried to explain in my post. It is quite likely not to grow at 7%, as it usually doesn't. 7% is some artificial long term guesstimate which is not intended to represent any particular 10-year period past or future.

The largest value of companies in the world's stockmarkets is listed in USA. And the largest participant in stockmarkets is USA. And USA investors only made 4% on the world index in the last decade. So, the 'average' investor made a lot lot less than 7%; whether they got 50, 60,70% return the vast majority didn't didn't get the 97% return which would equate to 7% annualised. And that was during a period that finished with the capital value of the Dow and S&P500 at 17200 and 2200 respectively, pretty much the highest capital value ever seen for the US market indices.

So why should 7% be the rule of thumb for the next period that starts from that high point? Answer: it shouldn't really.

The second point is that you are saying that VWRL should do as well as 'the market generally'. Well, that's quite convenient when VWRL is basically your definition of the market generally. Of course it will do as well as itself.

However, the wider point is that there are a great many suitable portfolios that an investor could construct for themselves dependent on their preference for risk and exposure to different asset classes and markets. Left to their own devices they would not need to allocate 1.6% to Apple and 1% to Exxon and 0.7% to each of Facebook, General Electric and Wells Fargo and so on, because they are not trying to deploy $37 trillion of their own ISA cash into the world markets and wondering which companies their money will fit into.

I don't want 9% of my entire wealth concentrated in just ten US listed companies. That's a bonkers allocation, highly concentrated considering there are upwards of ten thousand listed companies in the world and lots of things to invest in which aren't even equities and are battling for a place in the portfolio. Many others would feel the same.

So, while you might think that VWRL performs the same as 'the market generally' - that is because you are thinking of a market being a capitalisation weighted index. VWRL most definitely does not perform the same as "a typical human being's investment portfolio generally" because the typical human being will not want the same sort of exposure as they would get from VWRL, being 100% equities and with 9% of that being just ten specific US companies which happen to be worth a lot of dollars.

To be honest, if they (or other investments) don't perform at that kind of level, then there's hardly much point bothering. Inflation is 2% as it is, so it's not a massive amount. Property in London will 100% exceed 7% per year, IMHO. Would be a far better investment.

If property in London would definitely produce a return larger than your rule of thumb for global equities, then why have you bought two investment funds which invest in global equities rather than investing in property funds or real estate investment trusts that own property in London?

Maybe you already have a lot of privately held London property and so don't want to be eggs-in-one-basket which is why you want to buy global equities as your first foray into fund investing rather than taking any more London exposure. However if you believe that the rule of thumb for the equity return is only 7% and you are "100%" that London property will exceed that, it seems a strange choice to ignore your 100% nailed-on dead cert, and instead use VWRL and invest 94% of your cash outside the UK.

The London property market would only seem to be sustainable at 7%+ p.a. if the UK economy does very well over the coming decade, and if you strongly believe the UK economy will do very well over the next decade, then 94% ex-UK seems a strange choice.

bowlhead99

JohnRo wrote: »

Do you accept that broad market based equity investment is a valid proxy that provides broad exposure to what might otherwise be niche and perhaps illiquid asset classes?

No, it is not a good proxy for niche and illiquid asset classes. VWRL is a proxy for a very non-niche asset class called 'the equity of large capitalisation companies' which all meet the criteria of having a high level of liquidity and are listed on major international stock exchanges. It gives you a heavy exposure to certain of those markets and individual companies. If that is what you want, fine.

Global small caps are correlated with global large caps, so disappointingly there's not much to be gained there if historic patterns remain consistent.

It is true they are broadly correlated - for example if one is up it is unlikely that the other is down. However the pace of value change can be different. In some decades, smallcaps have massively outperformed largecaps (although it does vary from market to market and in certain markets there is not much between them). In other decades, the largecaps performed better. So, we have two types of assets that have a track record of giving different relative performances at different times. That is the sort of thing that can be used in a program of 'buy two asset classes and rebalance' rather than 'buy one asset class and hope it was the best of the two'.

Likewise bonds and equities appear to be increasingly correlated in recent times, even the historic relationship between their fortunes is far from clear or consistent.

But you can look at the concept of those two types of financial instrument and determine that fundamentally they are very different investment products which logically give different financial returns to their investors.

One of them is buying a known fixed return which will continue for a fixed or indefinite period to the extent that the business or government issuing it to you is able to remain in existence, paying you in priority to giving a return to the business owner(s). Meanwhile the other is giving you voting rights to control a company and you get to keep all residual profits or assets after you have paid out the annual contractual returns to the bondholders. The profile of the return and the risks associated with them are fundamentally different.

All that has happened with your 'bonds and equities are getting increasingly correlated in recent times' it seems, is that you are standing in the harbour and observing that as a result of some external factor (e.g. the rising tide), all the boats are getting closer to the height of the moorings. As it is with QE and other stimulus such as low interest rates, making all non-cash assets more attractive and expensive.

The movement of the boats are correlated - as when a wave moves one, another will bobble too, perhaps a different amount because of the different relative sizes and shapes and weights. However the owner of a superyacht is probably going to get to his destination quicker than the owner of a rowboat. Though the owner of the superyacht may attract greater interest from pirates. Consequently you still need to decide whether the best thing for your needs is a superyacht or a rowboat and whether a blend (both) is useful for your fleet. Who knows, they may complement each other, as the superyacht is going to have a heck of a problem docking in some ports, and you may find it useful to take both on your international travels for a blend of speed and versatility.

Assuming business the world over is more or less trying to achieve the same thing, grow a profitable enterprise, and that we're in a world where that's set to continue then you'd surely want geographic exposure broadly in line with where business is being done?

It is true that business is happening everywhere, and the economic returns per unit of currency invested in a particular year might be absolutely excellent in a Mexican fruit-and-veg packing business compared to the returns made by a UK wind farm, so should not be dismissed out of hand just for being international.

However, the output of the UK windfarm is something that I have to pay for when I buy my electricity. Energy production is a regulated industry and the government can change the rules, but I can vote for new members of my government every few years. Ultimately I need to have money to pay my leccy bills whatever the price and production cost is, but it might be nice that a company I own is the recipient of those leccy bill payments.

By contrast if I own the Mexican packer and some other country votes Trump in and he cancels NAFTA which used to cover 85% of Mexico's trade, and the company's revenue falls through the floor and their costs rise because it uses a lot of energy to ship to China instead... maybe I don't want that exposure to risk, because I am not much of an eater of imported peppers and asparagus anyway.

VWRL as one example provides the following equity based exposure

[snip]

That to me looks like a reasonable level of diversification and certainly more than just cheap and cheerful although I'm not disputing it is also both of those things. Internal rebalancing and Vanguard's access to data, analysis and expertise, the likes of which most DIY investors can't even begin to imagine, all add to the appeal imho.

Well,
a) The VWRL fund is not internally rebalanced to a specific level of exposure to anything. If Apple goes up in value 50% overnight and other stuff doesn't, the exposure to Technology goes up and the exposure to USA goes up. As a proportion of the portfolio, the exposure to stuff that is not Apple, goes down.

It is a laissez faire strategy and there will never be any selling of Apple to bank any unrealised profits from year to year. When Apple eventually goes out of business, all the money will have been lost (unless before that time, Apple successfully generate and dividend out all of the value that their market capital currently represents - will take approx 50 years at current dividend rate, and will be a different amount of years for you as a UK investor than for an American or a French investor, because fx rates will fluctuate over that time).

So, forget 'internal rebalancing' as an advantage of VWRL because they are deliberately not rebalancing it because it would take them out of whack with the index they are offering you.

b) You refer to VWRL taking advantage of Vanguard's access to data, analysis and expertise, that we can't imagine, and which should add to the appeal.

Vanguard receive the data (the list of All-World constituents and weights) from FTSERussell or an intermediary each quarter. They conduct no analysis on the likely performance of any of the companies over the forthcoming decade, and do not use their enviable expertise to determine what asset classes, industries or regions the investors may prefer to allocate their capital towards. They buy the index. They do some analysis to see if there are any companies they can get away without buying to still get roughly the same result - but can't really use judgement, analysis or expertise. What you pay for is for them to do as little as possible and deliver the result of any other fund manager's FTSE All-World tracker, with low tracking error and low fees.

To employ a manager to do as close to nothing as possible, and pay him as close to nothing as possible, presupposes that you have already determined that the specific mix of assets offered by the FTSE All-World is going to be suitable for your needs.

jdw2000

bowlhead99 wrote: »

The London property market would only seem to be sustainable at 7%+ p.a. if the UK economy does very well over the coming decade.

Not sure about this bit. London is it's own beast. There is a simple supply/demand issue.


With regards VWRL/VLS, I currently have £15K in each. Come April I will be transferring £20K to my S&S ISA. So I won't have too much in those anyway (until I save more money).


And yes, I am convinced the London property market is destined to keep rising. I will be having a look at ways of getting invested more in it (without the hassle of being a BTL landlord).

atush

commercial property in your Sipp? Reits?

Eldest has just moved to south london.

bowlhead99

jdw2000 wrote: »

bowlhead99 wrote:

The London property market would only seem to be sustainable at 7%+ p.a. if the UK economy does very well over the coming decade.

Not sure about this bit. London is it's own beast. There is a simple supply/demand issue.

No doubt there has been more demand than supply. But there has certainly been a cooling of residential property demand since the spring.

The effect of things such as prohibition on free movement of people from EU and general immigration controls, and employment market changes as a result of UK not being a country from which a business can have unfettered single market access, etc, would certainly have an impact on the levels of demand seen in recent years. And the potential Brexit effect is separate to tech-led changes which can allow people to work remotely for London firms, or Crossrail and HS2 which can enable more practical commuting across longer distances.

Also, you reminded us earlier that 7% year on year return represents a 100% increase over a decade. Yet many economic think-tanks are projecting low real-terms wages growth for 2017/18 and little for the whole of the next decade. So, if London prices are currently 14x average salary it sounds like you are expecting them to go to 25x? With average prices jumping from £500-550k to £1-1.1m?

At the moment with the average apartment.(not necessarily a first time buyer's flat) at £450k+, you would need a £50k deposit plus a mortgage lender who will lend you 5x an £80k salary. While for context, median income is rather closer to £30k than £80k.

Assuming that £450k flat doubles as you suggest, you'd need to have perhaps a £100k deposit and a mortgage lender who's willing to lend you 8x a £100k salary to jump in at that point. As a 5x salary mortgage is only available because it's affordable when interest rates are currently the lowest in all human history, how likely is it that people will be borrowing a higher multiple? Even a £300k FTB flat is close to 10x median income, so £600k is asking rather a lot.

It doesn't stop estate agents claiming that London is a special case and price rises are clearly inevitable, and to buy now is a one way low risk path to riches, and the people who said it wouldn't go to 14x salary are all naive and ignorant so next stop is 28x salary. They are sales people after all.

Although unsurprisingly, the CEOs of the estate agents and housebuilders are more canny when talking to investors than the salespeople are when talking to their customers; they acknowledge the significant uncertainties which have already started to moderate the growth.

Don't worry, you're only a sucker if you buy and don't manage to find another sucker to buy it off you before the music stops.

jdw2000

bowlhead99 wrote: »

No doubt there has been more demand than supply. But there has certainly been a cooling of residential property demand since the spring.

The effect of things such as prohibition on free movement of people from EU and general immigration controls, and employment market changes as a result of UK not being a country from which a business can have unfettered single market access, etc, would certainly have an impact on the levels of demand seen in recent years. And the potential Brexit effect is separate to tech-led changes which can allow people to work remotely for London firms, or Crossrail and HS2 which can enable more practical commuting across longer distances.

Also, you reminded us earlier that 7% year on year return represents a 100% increase over a decade. Yet many economic think-tanks are projecting low real-terms wages growth for 2017/18 and little for the whole of the next decade. So, if London prices are currently 14x average salary it sounds like you are expecting them to go to 25x? With average prices jumping from £500-550k to £1-1.1m?

At the moment with the average apartment.(not necessarily a first time buyer's flat) at £450k+, you would need a £50k deposit plus a mortgage lender who will lend you 5x an £80k salary. While for context, median income is rather closer to £30k than £80k.

Assuming that £450k flat doubles as you suggest, you'd need to have perhaps a £100k deposit and a mortgage lender who's willing to lend you 8x a £100k salary to jump in at that point. As a 5x salary mortgage is only available because it's affordable when interest rates are currently the lowest in all human history, how likely is it that people will be borrowing a higher multiple? Even a £300k FTB flat is close to 10x median income, so £600k is asking rather a lot.

It doesn't stop estate agents claiming that London is a special case and price rises are clearly inevitable, and to buy now is a one way low risk path to riches, and the people who said it wouldn't go to 14x salary are all naive and ignorant so next stop is 28x salary. They are sales people after all.

Although unsurprisingly, the CEOs of the estate agents and housebuilders are more canny when talking to investors than the salespeople are when talking to their customers; they acknowledge the significant uncertainties which have already started to moderate the growth.

Don't worry, you're only a sucker if you buy and don't manage to find another sucker to buy it off you before the music stops.

Median wage being £30K is not a factor. Those people, sadly or otherwise for them, will never get a foot on the ladder unless they get help. They will be part of a generation (at least) of Londoners frozen out of the market.

That leaves all those many people who earn more than that. Plus couples. A couple earning £40/50/60K each can easily still afford to buy. A single person earning £30K will either have to rent or move out of London and buy.

Even if there is a crash next year, give it 5 years and the prices will be more than they currently are in 2016.

bowlhead99

jdw2000 wrote: »

Even if there is a crash next year, give it 5 years and the prices will be more than they currently are in 2016.

I'm not doubting prices in 2021 or 2026 could be more than they are today.

I'm doubting the 7% compound, which you said you were 100% that it would exceed.
:beer:

jdw2000

bowlhead99 wrote: »

I'm not doubting prices in 2021 or 2026 could be more than they are today.

I'm doubting the 7% compound, which you said you were 100% that it would exceed.
:beer:

Well, I don't doubt it at all. My house in east London is £360 in 2016. This house will be worth £600K by 2026. One day it will be worth £1m (probably around 2040 or so).

Three reasons: Supply, demand and inflation.

bigadaj

jdw2000 wrote: »

Well, I don't doubt it at all. My house in east London is £360 in 2016. This house will be worth £600K by 2026. One day it will be worth £1m (probably around 2040 or so).

Three reasons: Supply, demand and inflation.

Good luck with that.

Non prime area, interest rates will rise, not may, and with wage inflation lagging we presume you are relying on a rapid influx of Arab sheikhs, Russian oligarchs or Chinese entrepreneurs into the east end?