Is a Vanguard Lifestrategy investment all you need

Pincher

It always makes me nervous when there is such overwhelming consensus where money is concerned.

Passive funds buy at whatever the price is.
It's fine so long as it's not so big, it's not market moving.
My fear is these passive funds become so popular that their buys push the price up, and then they stubbornly buy EVEN MORE.
More money pour in, because of the self-perpetuating growth.
Obviously it cannot carry on forever. The problem is, the more successful it is, the more believers it creates.

The Chinese are investing their retirement money overseas now.

The trick is to get in before the latecomers, and get out before the nuns start investing their convent reserve fund.

kidmugsy

I'd bridle at the idea of having all of my investments in one vehicle on one platform. In your shoes I'd probably look for a good competitor investment and hold it on a different platform too.

There are limits to how many platforms you'd want, and how many underlying investments, but two shouldn't be too much hassle.

What risks would I be trying to diversify away? Why, the unknown unknowns, of course.

TrustyOven

Pincher wrote: »

It's fine so long as it's not so big, it's not market moving.
My fear is these passive funds become so popular that their buys push the price up,

I thought the VLS was an OEIC, therefore open ended, and they just create new units as per demand? And that closed ended funds are the ones that are sensitive to large volume buy/sell?

This is as per my interpretation of 2nd and 3rd paragraphs of page 91, _The DIY Investor_ by Andy Bell (of SIPP AJ Bell Youinvest fame), ISBN 978-1-292-00066-4.

krish123

Great post Bowlhead, this was a question iv had on my mind but I actually remember you saying in one of my threads to build up a significant amount in VLS (VLS80) for me and then begin thinking about diversifying into different funds.


This is something I want to do in order to capture different markets and maybe increase overall returns, but I think for now my goal is to get my portfolio into the 10's of thousands then see what is viable.

bowlhead99 wrote: »

Have your circumstances changed in the four months since you started investing?

The obvious low cost and lazy option is to stay with what you have. If it was right (on a long term view) for the first £15k or £30k or whatever, of your ISA portfolio as of 2016/17 there is absolutely no reason why it shouldn't be right for the next £20k in 2017/18. If it's not right for that next £20k you would have to ask yourself why it's still right for your existing holdings.

However, this is only true to a point.

When you have only, say, £1000 invested, 10% of your portfolio is £100. If that particular 10% does well or badly, and outperforms or underperforms the average of the rest of the portfolio by 5% growth or loss in a year... that incremental 5% lost or gained on the hundred quid is a fiver. Well done, your labouring over investment decisions for that tenth of your portfolio made you (or lost you) a pint of beer in your local over the entire year. In the grand scheme of things it is not worth worrying about whatsoever. Stick all your money in a simple cheap multi-asset fund and get on with your life.

Once you have several tens of thousands invested, each ten percent of your portfolio is several thousand pounds, and the ups and downs and relative differences in asset classes can make more absolute differences to your returns. So, by the time you have £50k invested, it can be worth evaluating whether the path on which you've set off is still right for *all* your money.

By the time you get there, and have done some research, you may have some other ideas about things that could be useful in your portfolio that Vanguard 80 doesn't cover. Smaller companies, real estate, any particular specialist theme you are interested in for a minor part of the portfolio.

However, to me, it sounds like with your current portfolio size and knowledge levels you don't need to worry about that at the moment.

Another point about portfolio size is that as it goes up, the general volatility becomes much bigger figures and may highlight your true risk tolerance and capacity for losses. For example:

- you have £15k in Lifestrategy 80 and it drops 35%+ with the global equity markets over the year, that's not much more than five grand. Maybe you earn that in a month. Over the next year or so following that, even if the market doesn't recover, or drops a bit more, your next annual ISA contribution will top up your fund back up to where it was or higher. Shrug and move on, because investing is a long term game.

- you have £100k in lifestrategy 80 and it drops 40%, £40k. Maybe that's more than your entire year's net salary. You promptly crap yourself, and sell out to avoid further losses, and stop investing, guaranteeing you are stuck with that loss because the market eventually goes back up without you. It turns out that VLS80 was not the right product for you to invest £100k in, because you couldn't handle a loss like that on substantial amounts of money. You should have been in VLS60 or a fund that was risk targeted and aiming for lower volatility.

So, while I haven't got anything to go on to recommend any changes, as you haven't explained your goals or preferences, the answer is probably that what you have is fine as the building blocks of a long term portfolio, but eventually you will want to make some tweaks. Use the next couple of years (or less, if you are investing quickly) to figure out what they might be.

bowlhead99

TrustyOven wrote: »

I thought the VLS was an OEIC, therefore open ended, and they just create new units as per demand? And that closed ended funds are the ones that are sensitive to large volume buy/sell?

You are right that the price you pay for an oeic is generally just the fair value of the assets held at that point (adjusted perhaps for costs of processing the subscriptions and redemptions and acquiring new assets).

But what he means is that when you come to them with the demand to buy £1000 of VLS100, then the fund manager creates you a bunch of new units in the Vanguard fund, and then he has £1000 in the fund's bank account to spend - he has to deploy that money.

They could decide to deploy that thousand pounds of new cash equally, 10p into 10,000 companies around the world or 5,000 companies for 20p each. However, they don't, they deploy it using their particular model, which is to put 45% of it into USA, and within that £450 allocated to USA they allocate the most money to biggest companies, so if they do that using the S&P500 index they put 3% of the £450 into Apple, which is £13.50.

Likewise with the £250 of your money they put into the UK, they use a combination of the FTSE100 and the FTSE All-Share and the FTSE 250 but basically the biggest companies get the most money. As of last year-end, the oil company Shell is 10.3% of the FTSE100 and 8.2% of UKAll-share, and for every £1000 invested you invest into equities via VLS (i.e. for every £250 in the UK equities via VLS) you will have £20+ in that giant oil company.

So while your £1000 might get you 10p or 20p in some companies, you actually get just over a penny in each of Moss Bros, Game or FlyBe, while you get over £20 in Shell and over a tenner each in Apple, Microsoft and Google.

As index funds become more popular, lots and lots of people are throwing money at the market using them; chucking the most money in their portfolio at the biggest companies as a cheap way to get exposure to the economy. A really active fund manager might decide that based on its prospects, there could be an opportunity to invest your new money into one of those low valued £100m companies like Moss Bros, and go 50:50 on that and Shell. However, using FTSE Allshare index you would be going 1:1900, and using a FTSE 100 index you would be going 0:infinity because those small companies don't appear in the FTSE100 at all.

As a result, a lot of big companies attract money simply because they're big ; the efficient market says it's right to give them your money because they're big and you should prize them highly, as evidenced by the fact they have so much money already invested in them, so they are always in demand, and it becomes a bit of a self-fulfilling prophecy, at least in bull markets.

Pincher's comment is that the growth is self perpetuating and the buys by the passive funds (on your behalf), who will pay whatever the market says the price is, simply pile more money into the biggest companies. Which is not necessarily the 'right' long term result.

Of course mathematically from day to day they are just putting relatively more money into the relatively larger companies and so they are not distorting the markets in terms of who should be bigger than whom. But overall the passive investing without thought, has potential to create a problem. If 99.9% of investors were passive trackers on behalf of individuals and institutions, there would only be 0.1% of the money driving 100% of the investment decisions and it would probably suit the objectives of the 0.1% more than it suits your own.

_CC_

If that were to happen wouldn't you expect to see a divergence of PE ratios between the asset classes included within the popular funds and those that aren't for all to see?

bowlhead99

You do see divergence - shares always get a bit of a bump up once they are on target to qualify for ftse100 or 250 inclusion and everyone knows the trackers will be forced to buy them (albeit in much smaller quantities than they buy the giants of the indices). That boost is linked to the fact that they will be bought to complete the portfolios, and not linked to earnings.

_CC_

bowlhead99 wrote: »

You do see divergence - shares always get a bit of a bump up once they are on target to qualify for ftse100 or 250 inclusion and everyone knows the trackers will be forced to buy them (albeit in much smaller quantities than they buy the giants of the indices). That boost is linked to the fact that they will be bought to complete the portfolios, and not linked to earnings.

Sure, but we're talking about a theoretical situation in which these passive funds become so popular that it entrenches the various constituents and/or causes a bubble in their share price.

Would it really ever get to a situation where the divergence is large enough that the more active investors don't correct it?

Radiantsoul

bowlhead99 wrote: »

You do see divergence - shares always get a bit of a bump up once they are on target to qualify for ftse100 or 250 inclusion and everyone knows the trackers will be forced to buy them (albeit in much smaller quantities than they buy the giants of the indices). That boost is linked to the fact that they will be bought to complete the portfolios, and not linked to earnings.

I often wonder why you don't seem mainstream funds that buy shares on the brink of promotion and perhaps short those that are about be relegated. I suspect the costs of trading and going short probably eat the advantage.

bowlhead99

_CC_ wrote: »

Would it really ever get to a situation where the divergence is large enough that the more active investors don't correct it?

When a bubble finally becomes too big to ignore, yes it gets corrected. This may be seen as a "crash" or a "correction" depending on the distance from which you're viewing it.

It would be nice to think that all the necessary little corrections happen here and there every few seconds as a result of a perfect market so that there is never anything systemic to correct and no large scale ripples in the pond. However, reality doesn't airways follow the "in theory..." unless the theory has a bit that says 'of course, humans, as markets, can be irrational, so anything can happen'.

As Pincher says, ideally you want to be out before it gets to the point that the nuns decide to switch all their convent reserves from cash and bonds and property into leading oil and tobacco and big pharma companies on the grounds that the returns on the index are always awesome and everyone else is doing it so it must be best.