Why doesn't everyone just buy Vanguard LifeStrategy?

dunstonh

Does anybody know what type of bonds VLS60 has and whether they are the type that will take a hit when interest rates start going up?

yes and yes.

I've recently invested a lump sum in VLS60 so would be keen to know whether it's best to trade some for VLS80 etc.

A bond crash is 5-10%. A stockmarket crash is 20-50%. If you are worried about downside (and putting upside to one side ) then which worries you more?

Type_45

Thank you very much for that, dunstonh. 5-10% is fine by me. I was under the impression from reading the forum/thread that the bottom was about to fall out from under bonds and that I'd lose far more than that.


Regarding BoE rates going up, obviously none of us have a crystal ball on this and can only speculate. But I personally can't see rates going up to circa 8% (to quote a figure someone used earlier in the thread) for a very, very long time. I personally do not feel that factoring such a rise in to my planning is necessary. Just my opinion. I do not feel that the BoE can or will do such a thing for many, many years. And who know where I'll be in many, many years time. I might have spent my savings by then!

dunstonh

I was under the impression from reading the forum/thread that the bottom was about to fall out from under bonds and that I'd lose far more than that.

Higher risk bonds (such as high yield) could see figures closer to 40% in an extreme case (such as the credit crunch). So, it is important to know that not all bonds (and bond funds) are the same.

If we had a conventional period where interest rates rise slowly, then the bonds will take small hits in the unit price but the yield will mitigate that somewhat (if reinvested).

If you look at various bond funds with income withdrawn and income reinvested, you will often find that the unit price (with income withdrawn) floats around the same range as a wavy line over time. It doesn't really go anywhere. it is effectively supply and demand (or fear/elation) that creates that wavy line.

A good example of that is HSBC Corporate bond fund. Launched in 96. The income unit price is just 6% higher than it was at its previous peak in 1999. Between 1999 and 2009, the unit price fell by 21.95% (a 10 year peak to trough). However, with income, the total return was a gain of just over 18% in that period. Not a good 10 years but when you measure peak to trough, you expect that. If you invested at the high of 1999 and withdrew at the low of 2009 (when the unit price had fallen nearly 22%), you still made 18% with income.

You cannot predict anything but with interest rates likely to rise slowly, you would expect to see a slow drawn out decline in unit price (possibly similar to that 10 year period after 99). However, the income coming in would negate some of that and you would see it zig zagging between some gains and small losses but not really going anywhere. Of course, it is never as easy as that as some unknown, unpredictable event will happen which could create a short term boost or a short term sharper drop (such as credit crunch did).

Despite the low growth potential of bonds, they are still valuable to have in a rebalancing portfolio as the gains on the equities are moved into the bonds during growth periods and then out of bonds back into equities after a negative period on equities.

Audaxer

dunstonh wrote: »

Higher risk bonds (such as high yield) could see figures closer to 40% in an extreme case (such as the credit crunch). So, it is important to know that not all bonds (and bond funds) are the same.

If we had a conventional period where interest rates rise slowly, then the bonds will take small hits in the unit price but the yield will mitigate that somewhat (if reinvested).

If you look at various bond funds with income withdrawn and income reinvested, you will often find that the unit price (with income withdrawn) floats around the same range as a wavy line over time. It doesn't really go anywhere. it is effectively supply and demand (or fear/elation) that creates that wavy line.

A good example of that is HSBC Corporate bond fund. Launched in 96. The income unit price is just 6% higher than it was at its previous peak in 1999. Between 1999 and 2009, the unit price fell by 21.95% (a 10 year peak to trough). However, with income, the total return was a gain of just over 18% in that period. Not a good 10 years but when you measure peak to trough, you expect that. If you invested at the high of 1999 and withdrew at the low of 2009 (when the unit price had fallen nearly 22%), you still made 18% with income.

You cannot predict anything but with interest rates likely to rise slowly, you would expect to see a slow drawn out decline in unit price (possibly similar to that 10 year period after 99). However, the income coming in would negate some of that and you would see it zig zagging between some gains and small losses but not really going anywhere. Of course, it is never as easy as that as some unknown, unpredictable event will happen which could create a short term boost or a short term sharper drop (such as credit crunch did).

Despite the low growth potential of bonds, they are still valuable to have in a rebalancing portfolio as the gains on the equities are moved into the bonds during growth periods and then out of bonds back into equities after a negative period on equities.

Thanks dunstonh, that's good to know. It sounds like it is still better to have a percentage of bonds in your portfolio than replace them all with cash, as some people seem to think.

Type_45

Thank you very much for that, dunstonh. I very much appreciate that explanation. Think I'll stick to what I have in that case and see how I go.

Many thanks :beer:

chiang_mai

On the subject of beating the index and passives:

I'm not an experienced investor by any means but circumstance has dictated I get involved and that has meant much learning. One of my learning tools has been to watch my portfolio's in detail, daily, and gather data, useful since I was considering passives at one point.

I haven't taken it to the fund level but my portfolios beats the index over every time frame I've looked at, longer than fourteen days that is, for example: over the most recent fourteen day period I looked at the index had risen by a net 0.79% whereas the value of my portfolios had increased by 0.94%. Interestingly the index outperformed on a majority of upturns whereas my portfolio's beat the index significantly on downturn days (I'm 60/40). I tried to calculate the effect on my earnings if my portfolio's had followed the performance of the index and it showed my earnings would be 18% lower over the period.

As said I haven't examined the above at the fund level (I hold 13 funds) and I doubt that I shall, the important thing for me to know is that overall my assets outperform a tracker, regardless of what individual funds may be doing. I do accept however that the sampling I have done is not representative of a fair comparison over an extended period. But I don't think I care about that since I tend to change funds from time to time plus the braking effect on the downturns is for me a bonus.

Type_45

Have you factored in the OCFs of your portfolio? That is where the passive trackers have an advantage. They are cheap to run.

They are also less labour intensive. And time is money!

chiang_mai

No I haven't done a detailed financial analysis. My objectives were to see if there was a clear case for trackers or not and what I found in my samples is that trackers would have reduced my income by almost 20% - had the outcome been more borderline I might have done that analysis but as you say, time is money! (I'm retired BTW)

FWIW my OCF's average 0.65.

bostonerimus

chiang_mai wrote: »

No I haven't done a detailed financial analysis. My objectives were to see if there was a clear case for trackers or not and what I found in my samples is that trackers would have reduced my income by almost 20% - had the outcome been more borderline I might have done that analysis but as you say, time is money! (I'm retired BTW)

FWIW my OCF's average 0.65.

FWIW my total fees are <0.1%. Index tracker portfolio is up 13% YTD.

chiang_mai

Not related to cost or performance - can you tell me which trackers you hold? I was considering MSCI ACWI and Emerging Markets.