100% Equity vs Equity/Bond

StellaN

I will choose VLS funds and a pension pot of £100K, purely as an example for this thread.

After reading about the possible downside on investing in 100% Equity (VLS100), a few people have mentioned that it could lead to a potential 50% loss in case of a crash and may take 5 to 10 years to recover from the losses so the £100K would be £50K - that's a big loss!

Therefore, my question is if I decided to go with either VLS80 or VLS60 I believe that would make my losses in the case above at £40K and £30K respectively? The bit I'm not sure about is the bonds - will they also drop as well as the equities or will they perform better in a crash and how does this work?

I'm sorry if this sounds totally ridiculous however as you can tell I'm new to all this but would welcome any comments regarding the bond part of a multi asset fund? Thank you.

dunstonh

After reading about the possible downside on investing in 100% Equity (VLS100), a few people have mentioned that it could lead to a potential 50% loss in case of a crash and may take 5 to 10 years to recover from the losses so the £100K would be £50K - that's a big loss!

There have been two occasions in the last 16 years where losses in excess of 40% would have occurred.

If you think its a big loss and it scares you then you do not have the risk tolerance for VLS100.

Therefore, my question is if I decided to go with either VLS80 or VLS60 I believe that would make my losses in the case above at £40K and £30K respectively? The bit I'm not sure about is the bonds - will they also drop as well as the equities or will they perform better in a crash and how does this work?

Bonds typically drop at different times to equities. However, in major economic depressions, everything tends to head down. The difference is that bonds tend not to drop in value anywhere near the same rate of equities. Equally, they do not tend to go up at the same rate either.

There does seem to be a trend that sees new DIY investors investing above their risk profile. You have to have the knowledge and understanding of the scale of losses you are leaving yourself open to as well as the growth potential. You need the capacity for loss and an accepting behaviour. i.e. its one thing saying you will accept the loss but whether you really will when it happens is a different matter when you see the value online or on your statement.

I just had a discussion with someone that contacts us nearly every 6 months. He moans when it goes down. He moans when it doesnt go up as much as what he reads in the paper. He wants all the upside of high risk but none of the downside. He can barely handle 5% losses. I have him in a low risk fund. Close to VLS20 in risk. If he went DIY, he would probably go VLS80 but then pull out after a drop has occurred. So, you must be clear in your own head what downside you can accept.

BLB53

Just tap into Vanguards free tools and play around with the returns over the past 30 yrs for the asset mix you are interested in comparing

https://www.vanguard.co.uk/uk/portal/investor-resources/learning/tools#Asset

dunstonh

BLB53 wrote: »

Just tap into Vanguards free tools and play around with the returns over the past 30 yrs for the asset mix you are interested in comparing

https://www.vanguard.co.uk/uk/portal/investor-resources/learning/tools#Asset

That chart is good but be wary that it understates the losses as it only measures over a year. So, a loss of 45% and recovery of 13% within that year will not sure that there was a drop of 45%. Also, the equity content is UK equity for that chart. Global equity would be higher risk due to currency fluctuations and including areas of lesser regulation and compliance with law (e.g. emerging markets).

If you are the type to look at only the 6 month statements, then the scale of losses will likely be somewhat reduced. If you are the type that is likely to check far more frequently, ignoring that checking more frequently can indicate a nervous investor, then the scale of the losses, when they happen, are likely to be more obvious to you.

AlanP_2

Don't forget a REAL LOSS only occurs if you need to withdraw the cash when it is worth less than you paid for it, anything else is just today's valuation of what your holdings are worth.

That isn't meant to be facetious but needs to be borne in mind.

For a 30 year old's pension plan a 40/50% drop in "value" is likely to be recovered by the time they needs the money in ~30 years time. They would also benefit greatly from buying more "units" at a much lower price for a few years whilst it goes up in value again which could work to their advantage.

Buying things "cheaply" whilst you build your pot and selling them "expensively" when you withdraw cash is the ideal scenario!

For a 55 year old it is a bigger issue as they would have less time for it to recover.

Other things to consider:

Is it the "Only Pot" or are there alternatives that could be used whilst it is left to recover?

What / How Much do you need each year?

As this is a Pension Pot you have already "gained" from the tax incentives and (maybe) an employer contribution so the amount of "your own money" that would be lost is a lot less. My wife is a 40% tax payer so as long as her pot doesn't lose any more than 20% she is still ahead overall (40% relief given LESS 20% tax paid in retirement).

The trouble with bonds over recent years is that they have performed so well that, as inflation & interest rates rise, the capital value will fall as the price is calculated by the "yield" they offer which need to stay inline with what "other bonds" are offering.

I think a lot of DIY investors are put off by this and so are going heavier into equity rather than the traditional 60/40 split.

jimjames

AlanP wrote: »

For a 55 year old it is a bigger issue as they would have less time for it to recover.

I think even that is an out of date assumption. Age 55 you could be drawing on that pension for 30+ years and if doing under drawdown rather than annuity then you'll be drawing income rather than needing to worry about capital value all the time.

dunstonh

I think a lot of DIY investors are put off by this and so are going heavier into equity rather than the traditional 60/40 split.

Not just DIY but everybody.

Bonds were overpriced. They almost certainly still are despite recent declines. Yields are low and growth potential low. So, they dont look attractive.

However, when bonds crash, its usually single digits. The downside is still less than an equity crash. So, bonds are giving you better than cash yields but a risk of a crash happening sometime soon (noting that the soon bit has been said constantly since 2009)

Nothing really looks attractive at the moment. cash, bonds, equity all looks a bit poor. That is why bonds are still being used. I have noticed a trend to high yield bonds in the asset allocation models.

jdw2000

jimjames wrote: »

I think even that is an out of date assumption. Age 55 you could be drawing on that pension for 30+ years and if doing under drawdown rather than annuity then you'll be drawing income rather than needing to worry about capital value all the time.

This is what I've been wondering. People from now on should factor in that they might very well live to 80,90, even 100 years old.

Why would you want an annuity at the age of 55/60/65 when you could just leave your money in the markets and live on the income?

Makes no sense.

jdw2000

dunstonh wrote: »

There does seem to be a trend that sees new DIY investors investing above their risk profile. You have to have the knowledge and understanding of the scale of losses you are leaving yourself open to as well as the growth potential. You need the capacity for loss and an accepting behaviour. i.e. its one thing saying you will accept the loss but whether you really will when it happens is a different matter when you see the value online or on your statement.

I just had a discussion with someone that contacts us nearly every 6 months. He moans when it goes down. He moans when it doesnt go up as much as what he reads in the paper. He wants all the upside of high risk but none of the downside. He can barely handle 5% losses. I have him in a low risk fund. Close to VLS20 in risk. If he went DIY, he would probably go VLS80 but then pull out after a drop has occurred. So, you must be clear in your own head what downside you can accept.

Must admit I am one of these people. My true risk profile is right in the middle, but I am drawn to the 80%+ risk bracket. I have now brought myself down to 70% (other than my pension which is on 90%, but I am fine with that as I am way behind schedule and I am still 40 years old).


btw: isn't the point of bonds that they pull in the other direction when equities go down?

StellaN

dunstonh wrote: »

Not just DIY but everybody.

Bonds were overpriced. They almost certainly still are despite recent declines. Yields are low and growth potential low. So, they dont look attractive.

However, when bonds crash, its usually single digits. The downside is still less than an equity crash. So, bonds are giving you better than cash yields but a risk of a crash happening sometime soon (noting that the soon bit has been said constantly since 2009)

Nothing really looks attractive at the moment. cash, bonds, equity all looks a bit poor. That is why bonds are still being used. I have noticed a trend to high yield bonds in the asset allocation models.

I think I'm looking at a 60/40 risk exposure so I was doing some research into a passive all world tracker (most probably an OEIC rather than ETF) with 60% and then looking to invest the other 40% in bonds?

Should I really be looking at a mix of active Strategic, High Yield, and Corporate Bonds or just look for another passive fund such as the Vanguard UK Investment Grade Bond (or keep it simple with VLS60 for the whole portfolio)?

Linton

jdw2000 wrote: »

This is what I've been wondering. People from now on should factor in that they might very well live to 80,90, even 100 years old.

Why would you want an annuity at the age of 55/60/65 when you could just leave your money in the markets and live on the income?

Makes no sense.

Guaranteed income is very worth having especially if it's index linked. Rather than investing a large pot cautiously to ensure that you do get the steady income you need over the long term it may be worth considering an annuity covering basic essentials as the "bond" part of a balanced portfolio - it enables you to invest the remaining pot much more aggressively.