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Is a Vanguard Lifestrategy investment all you need
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The price at the end of Jan 2016 was 13,823. On 10th Feb it was 13,100.
Today it is 17,320. So (ignoring sterling devaluation) it is 32% higher than this time last years.
It did not drop by 15% this week (£2.5K on a £16.5K holding). You are mistaken or there was an error on your platform.
im not mistaken hence why i was wondering what had occurred0 -
The price at the end of Jan 2016 was 13,823. On 10th Feb it was 13,100.
Today it is 17,320. So (ignoring sterling devaluation) it is 32% higher than this time last years.
It did not drop by 15% this week (£2.5K on a £16.5K holding). You are mistaken or there was an error on your platform.
The VG and HL site is showing it was 17,320 on the 1st and 17,450.71 as of the 2nd. I'm on iweb and they seem to update a day late for some reason?!0 -
bowlhead99 wrote: »Exactly - with a share you have almost unlimited upside in what the company will pay you in the long term but if things go bad you will get paid last and you could lose everything.
With bonds the company of government commits to giving you a fixed amount of interest and a known amount at the end, and if things go bad you will get paid out before they see what is left for the share holders.
So clearly there will be a very different range of outcomes and one asset class can perform differently to another over different sets of economic circumstances. For example if inflation is higher, because companies are charging more money for goods, then it is better to be a shareholder who is making more profits rather than having given your money to a company for a fixed return. In recessions when companies are making poor profits and their values are worsening day by day it is better to have that company owing you the fixed return.
If you look back over the last hundred years or so, generally bonds go down when shares go up and vice versa so they are clearly diversified. However in recent years while there has been lots of government intervention (money printing, and low base rates so that bonds paying a reasonable fixed interest rates are highly desired and considered valuable), bond prices have been going up at the same time as share prices going up.
Which has reminded people that bond prices don't always go in the opposite direction as share prices, sometimes they can move in the same direction. If the recent economic circumstances unwind, bonds could fall at the same time as equities (like if interest rates go through the roof, the shares market will suffer because businesses can't borrow to expand etc, and at the same time nobody wants the existing bonds paying only 1% on £100 nominal when companies and governments are issuing new bonds paying 3% on £100 nominal).
Still, the fact that the two asset classes can move in the same direction does not mean they would move by the same amount.
If banks are paying 50p interest on £100 cash in a bank account, then a bond paying £2 a year and giving you back the £100 in fifty years is highly prized. If you need £2 a year income from a safe asset you would be happy to pay way more than £100 to buy a bond second-hand from someone else. Maybe you would pay £200, so that the £2 a year income was 1%, still twice as much as the bank, reflecting the risk that the company or government might go bust in the meantime. Although you would only get £100 at maturity when you cash in your bond because that's all it's officially worth, not the £200 you paid to buy it second-hand. But because maturity is decades away when inflation will have made it worthless (whether it's £100 or £200), people don't worry about that bit so much.
But basically people might be quite happy to pay £200 for a long-maturity £100 bond paying 2% a year at the moment. Then in a few years time when the banks are paying 3% interest rates there may be nobody who wants to pay even £100 for a long maturity £100 bond paying 2% a year, because why would you pay £100 to take investment risk and get less than putting £100 in a bank. So the market price of the bond might fall to £50 or less.
You might feel it doesn't matter that you paid £200 for a bond that's now only worth £50 because you are not going to cash it in anyway, you are going to hold it the full remaining 50 years to maturity and get the known £100 maturity amount. But in reality the value of the bond on the open market has dropped, like it or not, because nobody is paying £200 for assets that only yield £2 a year. And you will be frustrated that your £200 is tied up in this dumb asset only giving you £2 a year and having investment risk and maybe the company will go bust and stop paying, when it could instead be in a bank earning you 3%, safe as houses. So the price change does matter really. And investment funds don't sit on their bonds to maturity, they buy and sell them over time.
You can of course buy bonds which have a much shorter lifespan to maturity when there is little time for prices to swing massively because everyone can see the maturity date not far off. However, the yields are commensurately lower.
The bottom line is that if you buy a fund which holds bonds currently valued at £200 and they fall in price to £150 or £100 or £50, your fund is less valuable. So even though you have been earning some interest income, if you want out, you'll get less back. In reverse, if the bonds become worth £200 or £250 or £300 you get some gains, along with all the interest receipts.
The value of the bonds in the fund will change as a result of interest rate changes, currency movements and the creditworthiness of the companies and governments issuing them ; AND their relative attractiveness compared to shares which might be more or less attractive depending on the state of the stockmarket. People have to put their money in something.
If you invest everything into one asset class (shares) you will have a much bumpier ride than if you held some shares and some bonds and kept selling bonds to buy shares when shares were relatively less valuable and selling shares to buy bonds when bonds were relatively less valuable, producing a return that was still reasonable and much less volatile.
If you would have previously been the sort of investor that would have wanted only 60 or 80% shares in your mixed asset portfolio of shares and bonds and properties etc, but some bloke down the pub or on the internet said bonds didn't provide as much diversification as they once did so you might as well just go 100% shares, that is quite a ballsy move to take that 'advice'.
If you really wanted the risk of 100% shares (as an example, within the last decade, the highest peak-to-trough drawdown for the FTSE All-World was 57% in dollar terms) then sure, buy 100% shares, but don't do it in the mistaken belief that there is nothing out there that could provide you any sort of diversification.
I think I remember reading on here a while ago someone describing bonds that you get with VLS (and others) as being "self healing". ie, that the bonds are replaced automatically over time so that if your bonds are at the top of teh price range now, eventually they will expire and be replaced. So you need not do anything about it and just let them do their thing.
Make any sense?0 -
I think I remember reading on here a while ago someone describing bonds that you get with VLS (and others) as being "self healing". ie, that the bonds are replaced automatically over time so that if your bonds are at the top of teh price range now, eventually they will expire and be replaced. So you need not do anything about it and just let them do their thing.
Make any sense?
It's a lot more complicated than that:
If you hold very safe bonds which never mature their price will vary inversely with current interest rates. So if interest rates doubled their value would halve. The amount you receive in interest would remain the same although the rate as a % of the current value of the bond would match the market rate. So if you sold an old bond and bought the equivalent value of new ones with a different interest rate your interest in cash terms would remain the same. In that sense it is "self healing". However the capital value is changing over time.
At the other extreme if you held a bond that was going to mature tomorrow then its price today would be close to its face value, no matter what the prevailing interest rate was doing. So if you sold such a bond and bought a new short dated one you would get the same number of bonds but the new ones would be at the current, possibly very different, interest rates. This is clearly not self healing if your primary concern is the cash value of the interest you receive but is self healing in that it keeps capital value constant.
The safest strategy is for you to buy bonds that mature when you need the money. In this situation you know exactly what interest you are going to receive and exactly how much capital will be repaid at the specified date.
In the real world most bond funds hold bonds with a wide range of maturity dates and so the behaviour is between the two extremes described above. A managed bond fund may focus on bonds of a particular duration, which may change as market circumstances change.
The above description is fine for very safe bonds such as gilts and US treasury notes. However corporate bonds add the complexity of risk of default which make such bonds behave more like shares, the more perceived risk the more close the bond is to a share.0 -
In the real world most bond funds hold bonds with a wide range of maturity dates and so the behaviour is between the two extremes described above. A managed bond fund may focus on bonds of a particular duration, which may change as market circumstances change.
I'm guessing this would include VLS?0 -
It's a lot more complicated than that:
If you hold very safe bonds which never mature their price will vary inversely with current interest rates. So if interest rates doubled their value would halve. The amount you receive in interest would remain the same although the rate as a % of the current value of the bond would match the market rate. So if you sold an old bond and bought the equivalent value of new ones with a different interest rate your interest in cash terms would remain the same. In that sense it is "self healing". However the capital value is changing over time.
At the other extreme if you held a bond that was going to mature tomorrow then its price today would be close to its face value, no matter what the prevailing interest rate was doing. So if you sold such a bond and bought a new short dated one you would get the same number of bonds but the new ones would be at the current, possibly very different, interest rates. This is clearly not self healing if your primary concern is the cash value of the interest you receive but is self healing in that it keeps capital value constant.
The safest strategy is for you to buy bonds that mature when you need the money. In this situation you know exactly what interest you are going to receive and exactly how much capital will be repaid at the specified date.
In the real world most bond funds hold bonds with a wide range of maturity dates and so the behaviour is between the two extremes described above. A managed bond fund may focus on bonds of a particular duration, which may change as market circumstances change.
The above description is fine for very safe bonds such as gilts and US treasury notes. However corporate bonds add the complexity of risk of default which make such bonds behave more like shares, the more perceived risk the more close the bond is to a share.
This is why I prefer to hold active strategic funds as part of my portfolio (and some property) to diversify from my core holding which is an all world index fund.0 -
bowlhead99 wrote: »Exactly - with a share you have almost unlimited upside in what the company will pay you in the long term but if things go bad you will get paid last and you could lose everything.
With bonds the company of government commits to giving you a fixed amount of interest and a known amount at the end, and if things go bad you will get paid out before they see what is left for the share holders.
So clearly there will be a very different range of outcomes and one asset class can perform differently to another over different sets of economic circumstances. For example if inflation is higher, because companies are charging more money for goods, then it is better to be a shareholder who is making more profits rather than having given your money to a company for a fixed return. In recessions when companies are making poor profits and their values are worsening day by day it is better to have that company owing you the fixed return.
If you look back over the last hundred years or so, generally bonds go down when shares go up and vice versa so they are clearly diversified. However in recent years while there has been lots of government intervention (money printing, and low base rates so that bonds paying a reasonable fixed interest rates are highly desired and considered valuable), bond prices have been going up at the same time as share prices going up.
Which has reminded people that bond prices don't always go in the opposite direction as share prices, sometimes they can move in the same direction. If the recent economic circumstances unwind, bonds could fall at the same time as equities (like if interest rates go through the roof, the shares market will suffer because businesses can't borrow to expand etc, and at the same time nobody wants the existing bonds paying only 1% on £100 nominal when companies and governments are issuing new bonds paying 3% on £100 nominal).
Still, the fact that the two asset classes can move in the same direction does not mean they would move by the same amount.
If banks are paying 50p interest on £100 cash in a bank account, then a bond paying £2 a year and giving you back the £100 in fifty years is highly prized. If you need £2 a year income from a safe asset you would be happy to pay way more than £100 to buy a bond second-hand from someone else. Maybe you would pay £200, so that the £2 a year income was 1%, still twice as much as the bank, reflecting the risk that the company or government might go bust in the meantime. Although you would only get £100 at maturity when you cash in your bond because that's all it's officially worth, not the £200 you paid to buy it second-hand. But because maturity is decades away when inflation will have made it worthless (whether it's £100 or £200), people don't worry about that bit so much.
But basically people might be quite happy to pay £200 for a long-maturity £100 bond paying 2% a year at the moment. Then in a few years time when the banks are paying 3% interest rates there may be nobody who wants to pay even £100 for a long maturity £100 bond paying 2% a year, because why would you pay £100 to take investment risk and get less than putting £100 in a bank. So the market price of the bond might fall to £50 or less.
You might feel it doesn't matter that you paid £200 for a bond that's now only worth £50 because you are not going to cash it in anyway, you are going to hold it the full remaining 50 years to maturity and get the known £100 maturity amount. But in reality the value of the bond on the open market has dropped, like it or not, because nobody is paying £200 for assets that only yield £2 a year. And you will be frustrated that your £200 is tied up in this dumb asset only giving you £2 a year and having investment risk and maybe the company will go bust and stop paying, when it could instead be in a bank earning you 3%, safe as houses. So the price change does matter really. And investment funds don't sit on their bonds to maturity, they buy and sell them over time.
You can of course buy bonds which have a much shorter lifespan to maturity when there is little time for prices to swing massively because everyone can see the maturity date not far off. However, the yields are commensurately lower.
The bottom line is that if you buy a fund which holds bonds currently valued at £200 and they fall in price to £150 or £100 or £50, your fund is less valuable. So even though you have been earning some interest income, if you want out, you'll get less back. In reverse, if the bonds become worth £200 or £250 or £300 you get some gains, along with all the interest receipts.
The value of the bonds in the fund will change as a result of interest rate changes, currency movements and the creditworthiness of the companies and governments issuing them ; AND their relative attractiveness compared to shares which might be more or less attractive depending on the state of the stockmarket. People have to put their money in something.
If you invest everything into one asset class (shares) you will have a much bumpier ride than if you held some shares and some bonds and kept selling bonds to buy shares when shares were relatively less valuable and selling shares to buy bonds when bonds were relatively less valuable, producing a return that was still reasonable and much less volatile.
If you would have previously been the sort of investor that would have wanted only 60 or 80% shares in your mixed asset portfolio of shares and bonds and properties etc, but some bloke down the pub or on the internet said bonds didn't provide as much diversification as they once did so you might as well just go 100% shares, that is quite a ballsy move to take that 'advice'.
If you really wanted the risk of 100% shares (as an example, within the last decade, the highest peak-to-trough drawdown for the FTSE All-World was 57% in dollar terms) then sure, buy 100% shares, but don't do it in the mistaken belief that there is nothing out there that could provide you any sort of diversification.
Lol I tend not to take financial advice from blokes down the pub. It was a concious decision that my investments was long term and I was happy taking a higher risk to get more upside. But I definitely appreciate the lengthy explanation on why the yield is not the b all and end all . my cash savings is my diversification and I have 50% of my saving jn each. Then a pension and the property I own is my other . To me these are all diversified investments (accepting pension and. S and shares isas are both shares. ).I'm happy not having bonds if I want another I'll probably do p2p..my pension has bonds in anyway and I pit more in that than anything else0
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