Why doesn't everyone just buy Vanguard LifeStrategy?

BananaRepublic

bowlhead99 wrote: »

You are right, the last 8 years have broadly been the returns of a bull market. We also get flat markets and down markets and very down markets.

VLS60 is up about 60% in five years, i.e. £10,000 invested five years back is worth £16,000.

And clearly that '£10000' point was not the bottom of a market trough; both equity and bond markets were quite a bit higher then than they'd been three and a half years prior, in March 2009.

So, if you take your £16000 and imagine we have a big crash, but being generous assume it doesn't go lower than the £10000 point. That's not overly generous because of course some of the return since the £10000 point was the fixed interest earned from the bonds and dividends earned from the equities, rather than capital fluctuation. Let's just assume the investment goes back from £16,000 down to a more modest £11,000. That's a loss of about a third of the £16,000.

I agree with your caution but would suggest that 'possibility of falls of 5% a year for several years' (which would imply you would cumulatively lose 22.5% of your investment over five years as it slowly dripped away, if the downturn lasted that long) is well undercooking it. You should probably brace for losses of maybe 33% and over a shorter timeframe of, say, three years.

Not to say it would happen, but it could happen, and investing is about knowing what could happen. But that's why people don't use investments for three year timeframes unless they don't care about giving away their cash. The longer you invest, the closer you get to the 'long term' expected result in which a mixed portfolio of equities and bonds would be reasonably assumed to make you a positive return.


That is nonsense. Even if it were true that property has 'always been' the best investment (which is something that's demonstrably false over a number of timescales); the idea that something 'is' considered the best investment now just because it once 'was' the best investment, is a logical fallacy.

You are of course quite correct that someone should be prepared for a 33% drop over 3 years. Five years is often said to be the minimum investment time scale for unit trusts etc.

Regarding property, there are two key distinctions between property and stock market investing, and that is gearing and the tenant. You invest £50,000 and borrow £150,000. And you borrow at a very low interest rate, at least for the past decade or two. That asset then grows substantially in value. And your tenant is paying off your mortgage for you. In the past this has workd so well because you could set the mortgage interest payments against your personal tax at the higher rate. This is now changing, so it is much less lucrative. I can't be bothered to work it out, so I don't know whether BTL is still worthwhile. But in the past it was very lucrative, although you needed to deal with maintenance, and bad tenants can trash house. I know as I've worked with people whose house was trashed by a tenant.

Eco_Miser

brasso wrote: »

10 days! Oh dear -- clearly an appalling faux pas in your eyes. I will have to recheck the forum rules.

Don't bother. you're allowed to revive totally dead discussions - I just don't see the point.

brasso wrote: »

You persist in being too literal.

Occupational hazard.
But what do we tell people who don't read the T&Cs of a product and rely on waffle? "What matters is what is written".

brasso wrote: »

Of course there is no "guarantee" over any arbitrary time period. But it's a general truth that the long term trend is upwards in nearly all indices, though you're right that it's not plain sailing. There are dramatic dips, lengthy plateaus and snail-paced recoveries like post-1929, or Japan in recent years.

And that paragraph is similar to what I posted.

brasso wrote: »

But look at the bigger picture.

But the post I objected to didn't say there is a generally upward trend, it didn't say 'in the long term', it said markets always go up.

But they don't:

John_Maynard_Keynes wrote:

The market can stay irrational longer than you can stay solvent.

bostonerimus

The most important things is actually investing and doing it regularly through ups and downs. Whether you go active or passive or follow some big indexes or overweight EM are nice discussions for us all to have, but far less important that spending less than you earn so you can put spare cash to work while the capitalist system still survives.

bowlhead99

bostonerimus wrote: »

The most important things is actually investing and doing it regularly through ups and downs. Whether you go active or passive or follow some big indexes or overweight EM are nice discussions for us all to have, but far less important that spending less than you earn so you can put spare cash to work while the capitalist system still survives.

Can't disagree with that.

However, changing the title of the thread to "Why doesn't everyone just spend less than they earn so they can put money into investment products and grow their wealth" is probably a different type of discussion.

I agree we can say that similar to how the specific choice of investment firm is less important than the asset classes and sectors in which they invest, the mix of asset classes and sectors are less important than deciding generally to invest your money over the long term, instead of not investing at all and spending your money instead or just sticking it in cash.

brasso

Eco_Miser wrote: »

But what do we tell people who don't read the T&Cs of a product and rely on waffle? "What matters is what is written"....

But the post I objected to didn't say there is a generally upward trend, it didn't say 'in the long term', it said markets always go up.:

This is a discussion forum, not a legal contract. Saying "the markets always go up" is like saying "in the UK, Public transport is always late". Not true on a micro level, but understood as a general truth.

BananaRepublic

brasso wrote: »

This is a discussion forum, not a legal contract. Saying "the markets always go up" is like saying "in the UK, Public transport is always late". Not true on a micro level, but understood as a general truth.

Except that it might take twenty years or more before you get your money back if you invest at a peak before a crash. And during that time your money could have been invested elsewhere. An example is Japan, where it took decades for the markets to recover, with numerous false dawns along the way. Those who bought into the tech boom will have lost a fortune, have they even recovered their money yet, ignoring inflation? I am sure their are even better/worse examples. So to say that markets always go up is misleading.

Type_45

BananaRepublic wrote: »

Except that it might take twenty years or more before you get your money back if you invest at a peak before a crash. And during that time your money could have been invested elsewhere. An example is Japan, where it took decades for the markets to recover, with numerous false dawns along the way. Those who bought into the tech boom will have lost a fortune, have they even recovered their money yet, ignoring inflation? I am sure their are even better/worse examples. So to say that markets always go up is misleading.

Japan and tech. Fine. That is why products such as VLS (I cite that one all the time because that what I have and I don't know many others, but passive funds generally) are spread across sectors.

It's pretty obvious that if you are country (Japan) or industry specific (tech or tulips) then you are asking for trouble.

If you don't know what you are doing (and I am in this category) then investing in a passive, diversified fund is the way to go. It is also far less labour intensive than monitoring the data everyday not really knowing what you are looking at or what timescales are important.

chiang_mai

Recovery times following a market crash vary enormously and are dependent on a series of factors, there's lots of information on the web on this subject so it's well worth a peek.

In broad terms, average recovery times following the Great Depression was 7 years, 3 years after the 1970's recession and 5 years after the Dotcom bubble burst. However, within those timeframes is a series of variables based on the type of investments held with some combinations faring much better than others. It's also worth pointing out that a market crash in one geographic region has different impact and recovery times from others, twenty years for portfolio recovery is however extreme and suggests the investor wasn't too interested in risk avoidance at any point!

bostonerimus

bowlhead99 wrote: »

Can't disagree with that.

However, changing the title of the thread to "Why doesn't everyone just spend less than they earn so they can put money into investment products and grow their wealth" is probably a different type of discussion.

I agree we can say that similar to how the specific choice of investment firm is less important than the asset classes and sectors in which they invest, the mix of asset classes and sectors are less important than deciding generally to invest your money over the long term, instead of not investing at all and spending your money instead or just sticking it in cash.

I agree that I might have gone off on a bit of a tangent, but the question could be interpreted as why doesn't everyone just buy VLS rather than spending too much. Yeah I know I'm reaching with that one. The fact remains that buying VLS60 rather than, say, an actively managed investment trust is probably way down on the financial action item list of most people. I really wish that it was a relevant question for the majority of people in the UK.

Type_45

bostonerimus wrote: »

I agree that I might have gone off on a bit of a tangent, but the question could be interpreted as why doesn't everyone just buy VLS rather than spending too much. Yeah I know I'm reaching with that one. The fact remains that buying VLS60 rather than, say, an actively managed investment trust is probably way down on the financial action item list of most people. I really wish that it was a relevant question for the majority of people in the UK.

You give people way too much credit. Most men pee on toilet seats rather than lifting it up. Most people wouldn't be able to point to Germany on a map. A good % of people won't know which is greater: 1/2 or 1/3.

In London (and probably elsewhere in the country) people earn about £2K a month. £1K of that goes on rent/mortgage/bills (possibly more than £1K). £500 a month goes on socialising/alcohol/cigs. That leaves £500 for eating and clothes.

Investing isn't something people budget for. Most people live month to month.


If you have money to invest, and you are investment-minded, you're a rare beast.