Any sense in two similar portfolios?

ian-d

Still researching like crazy investment funds. Large amount of money sitting in a Cash ISA, willing to put aside 50% for investments, filtered into funds slowly, with a view to utilising the other 50% too. I will also be opening up a LISA.

I'm considering a Vanguard LifeStrategy 100% or 80% for the LISA, as the money will be relatively small and tied for potentially longer. Higher risk but I figure that with 25% interest from the government, at least in the first years, any downturn in the market may be partially covered by this (maybe illogical but...).

For the large amount (upwards of £50k eventually), I'd like to play it slightly safer. I could just pick a Vanguard LifeStrategy 40% or 60%, but their retirement funds look interesting with rebalancing the closer you get to the desired year (with a bond increase as time goes by).

Does it make any sense to have competing funds that share very similar approaches, just at different risk levels?

The reason I pick these funds is because of their multi-asset structure. I could do it myself, but don't have the knowledge to 'play' the market, though maybe I will once I'm more confident.

claire111

Link for the Retirement fund if anyones interested

https://www.vanguard.co.uk/documents/adv/literature/trf-adviser-guide.pdf

masonic

It can certainly make sense if some of the money is needed at a different time to the rest of the money. Using the target retirement funds alongside LifeStrategy would give you a lump sum in low risk assets ready to withdraw and spend (for example on an annuity, but perhaps on something else) at that target date, while the rest of your investments would remain in higher risk assets since they would not be used in that way.

Audaxer

ian-d wrote: »

Still researching like crazy investment funds. Large amount of money sitting in a Cash ISA, willing to put aside 50% for investments, filtered into funds slowly, with a view to utilising the other 50% too. I will also be opening up a LISA.

I'm considering a Vanguard LifeStrategy 100% or 80% for the LISA, as the money will be relatively small and tied for potentially longer. Higher risk but I figure that with 25% interest from the government, at least in the first years, any downturn in the market may be partially covered by this (maybe illogical but...).

For the large amount (upwards of £50k eventually), I'd like to play it slightly safer. I could just pick a Vanguard LifeStrategy 40% or 60%, but their retirement funds look interesting with rebalancing the closer you get to the desired year (with a bond increase as time goes by).

Does it make any sense to have competing funds that share very similar approaches, just at different risk levels?

The reason I pick these funds is because of their multi-asset structure. I could do it myself, but don't have the knowledge to 'play' the market, though maybe I will once I'm more confident.

How long to you have to go to retirement? I'm retired and just invested in a VLS40 and thinking that I've maybe been a bit too cautious.

From what I've read it's not a good idea to try and play the market or time the market even if you have a lot of knowledge - better to invest for the long term and hold even in times of volatility.

AnotherJoe

ian-d wrote: »

For the large amount (upwards of £50k eventually), I'd like to play it slightly safer. I could just pick a Vanguard LifeStrategy 40% or 60%, but their retirement funds look interesting with rebalancing the closer you get to the desired year (with a bond increase as time goes by).

Thats old fashioned thinking because practically no one is getting an annuity at retirement these days they are staying invested (because they need to) for another 10-20 years.

They came out with that fund just as most are backing away from that strategy (for example at my company which had that type of scheme as default they are now going to everyone who is within 5 years of retirement and checking with them if they really want to be in that type of arrangement)

Going into bonds isn't especially regarded as playing it safe any more either

Of course, if at retirement your funds are enough to give you an income that you want through simple low very risk investments or even cash drawdown then yes perhaps it makes sense to take this "lifestyling" approach but for most, especially with the £1M cap on pension funds that wont cut it.

No reason you cant start with a VLSxx now and shift into a lifestyling one when near retirement if you still feel that way

If you are a high rate taxpayer then a LISA isnt the right choice for you, if you are not then maybe its a better choice than a pension (though IIRC doesn't it lock the money away for an extra 5 years?) but perhaps you should just stick with a lower risk fund like VLS40 to start with anyway.

Thrugelmir

AnotherJoe wrote: »

Thats old fashioned thinking because practically no one is getting an annuity at retirement these days they are staying invested (because they need to) for another 10-20 years.

Still a place for guaranteed income. Draw down is simply the latest fad. Will remain so until the markets become more volatile or the expected outcome doesn't materialise. Low cost endowments promised the sky and failed to deliver. As investment performance faded away. Recall when pension mortgages were a fad around 30 years ago.

bowlhead99

ian-d wrote: »

I'm considering a Vanguard LifeStrategy 100% or 80% for the LISA, as the money will be relatively small and tied for potentially longer. Higher risk but I figure that with 25% interest from the government, at least in the first years, any downturn in the market may be partially covered by this (maybe illogical but...).

For the large amount (upwards of £50k eventually), I'd like to play it slightly safer. I could just pick a Vanguard LifeStrategy 40% or 60%, but

If you get a LISA, and you're not using it for house purchase (the no-brainer thing to use if for if you don't have a house), then the money is locked up for 20+ years unless you want to give back the bonus and pay a penalty to release it, which would imply something has gone very very wrong with your life planning.

The LISA comes with a bonus, but that shouldn't be used as an excuse to take a higher risk as if 'the downturn especially in the first years would be covered by this'. If you need the money back at some point in the next decade or so while markets are low, you can only access the money by paying a penalty and giving back the bonus, so the bonus is no protection at all against a market downturn. So if you think realistically you might take the money back, you should use lower risk investments or use traditional S&S investments which can be accessed penalty-free.

Similarly some people might feel the bonus should be used to buy higher risk assets simply with the attitude of 'hey, it's free money, so I might as well put it in something super risky, if it goes wrong I'm no worse off than if I hadn't had it'. But that's wrong because you could have taken the bonus and use lower risk investments; the comparison for taking the bonus and gambling it and getting nothing shouldn't be 'not having got the bonus in the first place', it should be 'got the bonus and invested it in something with lower risk'.

So, don't let the existence of a bonus drive you to higher risk. The money you are putting into the LISA comes from your after-tax salary, and for retirement planning purposes you can generally get that 'bonus' from other conventional sources such as using a pension and deferring / eliminating income tax on that salary. Such 'bonuses' have existed for decades.

But people don't use higher risk assets in pensions because there's a bonus. They use higher risk assets in pensions because the long lock-in timescale and very far-away investment timeline means that they will ride out the ups and downs of the market and are likely to get something approaching a 'fair' long term return rather than a short-term random result.

If they spread their money as investments in a very diversified way across large and profitable companies across the stockmarkets of 30+ countries, even if there is a crash tomorrow or next month or in five years, the value of those companies is very unlikely to be worth less in pounds terms in 20 years than it is today; because a 'fair' return would be a positive return, as compensation for the average risk taken on each individual company within the 5000 companies to which they were exposed.

So, if you are investing for the long term 20+ year timescale (and potentially the rest of your retirement which could be another 40 years on top of that) there should be no real issue investing 75-80%+ into equities. Regardless of a bonus available for doing so. It is sensible to have a high equity component. If you were mostly cash or 'low investment risk' assets, your risk is that the eventual pot falls short of meeting your objectives and is hammered excessively by inflation.

So, for the 'locking my money away from age <40 to age >60', it's quite sensible to use investments with higher investment risk, and an off-the-shelf multi-asset solution is fine for that (plenty of them exist, whether Vanguard's products or the stuff everyone was already using before Vanguard launched their products).

As a LISA only takes £4k a year you will be naturally 'dripping' your cash into it over time, ie £4k invested this year, £4k next, £4k next etc etc so will buy assets at all sorts of prices, some high some low. The same with pensions funded from your ongoing salary. High risk is fine until / unless you get to age 50+ and decide you definitely want the cash back to pay off your mortgage or fund a supercar at age 60; at which point you should de-risk. If you get to 50 and decide the supercar or house payment can wait to age 70+ you can stay invested and not de-risk.

But getting back to the title of your post - any sense in two similar portfolios. For LISA as discussed you can go high risk because you are not going to be using the money any time soon. But for other objectives like paying for a wedding in five years or going on a family holiday of a lifetime in six years or moving to a bigger house in eight years or buying a car in ten years or funding a child's driving lessons in twelve years or university in fifteen years or giving up work in sixteen years without waiting for the LISA and pensions to be available in 20 years... well, all of those things are things that will happen within one to two economic cycles from now and your investments will not have time to produce their average 'long long term' results, so high risk will not necessarily product high reward, it could produce mediocre or negative reward.

As such, high risk is not so appropriate. You don't want to be in a position where you're drawing on your investments at the bottom of a market slump and only getting paid some fraction of what you paid for them or what they're 'worth' long term.

So, people will have different 'pots' of money earmarked for different objectives, with one being retirement money from age 60 and one being something else at age 40-50 or 50-60.

Each of those pots can use multi-asset solutions containing company shares, company and government bonds, commercial property, a bit of cash etc ; but you would likely prefer those multi-asset solutions to be at a different risk level to match the timescale or likelihood of needing the money earlier. For example you might use Lifestrategy 80 in your LISA/ pension, but Lifestrategy 60 in a different pot. Or you might use L&G Multi Index 7 in the LISA and Multi Index 5 in the S&S ISA.

There is certainly no need to see your entire wealth as one big 'savings/investment pot' and then try to find one generalist fund that matches your 'average' risk for everything. For example you might want to take 6 out of 10 risk on medium term stuff like your next home in a decade or so's time and 9 out of 10 risk on super-long term stuff. If you average that out to 7.5, and try to use just one product with a risk level of 7.5 for everything, you might find that to be excessively volatile for your eight to ten year objective, while the return may not be as high as you want for your "won't touch this for 30-years" retirement goal.

Long story short, two (or more) products for two (or more) goals is absolutely fine.

dunstonh

Statistically, you would expect the risk reduction funds to underperform over the term in most periods. In a small number of periods, they could outperform. So, I would look more at your objectives and decide whether you need risk reduction or not.

ian-d

Blown away by the replies, thank you, especially for the chapter and verse by bowlhead99

For a bit of clarification/background, though I suspect the outcome would be similar, I'm 37, targetting semi-retirement at 55, myself with partner and young son own our home, our family car and my beautiful Porsche (which has profit in it currently, so isn't a wasted opportunity). We have enough funds set aside for day to day, or event requirements (£50k in premium bonds etc), and I'm paid just under the higher tax band deliberately to avoid 40% tax; I own a company. My companies ability to make the same level of profit is decreasing though as the industry I'm in fades away, however, my company can pay me a modest salary to cover expenses for the next 10-15 years.

I need to consider it further, but both pots, LISA and S&S ISA can have a target withdraw at 60, though I would be more comfortable with a bit more flexibility in the S&S ISA, especially if I keep adding funds to it from my Cash ISA (which has the maximum contributions since they began).

You are right that I shouldn't treat the 25% interest from the LISA as a safety net for losses in the investment market, that is foolish, but with the LISA offering a smaller annual contribution, it does allow me more flexibility to take higher risks with fund selection. On the S&S ISA, I'd like to play it safer. Not sure a VLS60 and VLS80 offer that much difference to justify, perhaps VLS60 and VLS100?

I've always been risk adverse, hence the languishing Cash ISA that would have made £x++++ more in the past few years, but now I need to start taking some risks to make it work for me.

cashbackproblems

would you say an emerging market bond fund e.g. below, is less risky than VLS 100/80 for example, as governments as less likely to default on a big scale as required to lose big on a bond fund?

http://www.hl.co.uk/funds/fund-discounts,-prices--and--factsheets/search-results/l/l-and-g-emerging-markets-govnt-bond-us$-index-i-accumulation

whats difference with above and local currency version, I'm guessing USD is safer?

http://www.hl.co.uk/funds/fund-discounts,-prices--and--factsheets/search-results/l/l-and-g-emerging-mkts-govnt-bond-local-curr-index-i-income

Snakey

Not sure this is the same as what you're doing, but I am about to re-jig my investments as follows:

£920k pension - no further contributions possible as I have taken FP16 - I'm putting it into lower risk (40% stocks, 40% bonds, 20% property/other). The logic behind this is that, assuming I cannot touch it until 57 (12 years' time) it's going to be above the LTA anyway even using a low-risk strategy, meaning that if I increase the risk I suffer pretty much the whole of any downside while the Government takes 25% of any upside (in the form of the LTA charge). Plus I can't just shovel more and more in there in the times when the market drops.

£110k ISA - I'm taking higher risk with this (70% stocks, 10% bonds, 20% other) because I am adding £20k a year and so I'll be benefiting from buying low during drops, and because in a tax-free wrapper and tax-free on the way out I am getting 100% of any gains.

I'm still thinking my way around whether this makes logical sense. I mean I could, for instance, mirror the pension investments within the ISA so that I am still adding money to "the pot"... to be honest although I don't think of myself as a stupid person it all starts to go round in circles after a while and I never get to a conclusion.

My extra problem is psychological. Last time the market crashed I didn't have a whole lot invested, and in fact had only just started piling in the dough to the tune of £50k+ pension contributions per year. I've massively benefited from the steady increase in the markets over the last eight or nine years since then. I've been in ~95% equities and it's really paid off. And never really experienced a crash. This means that while I say that I could shrug off a drop because there's loads of time and it's only losing money I wouldn't have otherwise made in the first place etc etc blah blah, I don't know how I would actually feel if I lost £300-400k over a three-month period, and the gore-crows were saying that was just the start, and there was no sign of it going back up any time soon.

So while it might make sound sense to have everything in stocks because what the hell I'm still young - which was my attitude ten years ago when I set up my current fund selection - maybe for me personally that's no longer true and I'm better off with lower returns but less likelihood of it all going wrong.

You, OP, sound like you're on a higher income than I am and since you're also a few years younger it makes sense to take more risk.