Why doesn't everyone just buy Vanguard LifeStrategy?

Apodemus

I understand the view that, with age, we might become more risk-averse, but there can also be a resilience that comes with a long-term equity holding.

My financial goal is to have the capital value of my investments broadly keep pace with inflation, plus giving me roughly 3% of portfolio value in dividend annually. But I calculate my portfolio value on the basis of inflation-adjusted historic cost.

During a bull run, the actual value tends to be ahead of the adjusted historic value, giving lee-way for a market correction to be viewed as exactly that - a return to something closer to historic value. A full-scale crash still sees a loss, but it is likely to be less traumatic than if you had mentally locked in the price at market peak.

The longer you hold, the more this effect takes hold and the lower the perceived ‘risk’.

I accept that with this approach, I may underperform the market and be “leaving money on the table”, but if I am meeting my goals, who cares about the market!

chucknorris

Apodemus wrote: »

I understand the view that, with age, we might become more risk-averse, but there can also be a resilience that comes with a long-term equity holding.

My financial goal is to have the capital value of my investments broadly keep pace with inflation, plus giving me roughly 3% of portfolio value in dividend annually. But I calculate my portfolio value on the basis of inflation-adjusted historic cost.

During a bull run, the actual value tends to be ahead of the adjusted historic value, giving lee-way for a market correction to be viewed as exactly that - a return to something closer to historic value. A full-scale crash still sees a loss, but it is likely to be less traumatic than if you had mentally locked in the price at market peak.

The longer you hold, the more this effect takes hold and the lower the perceived ‘risk’.

I accept that with this approach, I may underperform the market and be “leaving money on the table”, but if I am meeting my goals, who cares about the market!

I share your views, but isn't there an argument for moving or at least partly to another asset class when you get to (say) within 10-15 years of your possible death?

Audaxer

ewaste wrote: »

In my opinion seeing property prices crash and equities crash have some similarities but are also very different, property has that psychological comfort of being a tangible bricks and mortar asset that may also be generating an income. The value may drop and the income may stop temporarily but unlike equities it's not likely to be a total loss of the asset and income.

If investors hold equities in the form a fund as most do, its very unlikely that there will be a total loss of the asset or income in a crash.

chiang_mai

"Every so often, a well-meaning "expert" will say long-term investors should invest 100% of their portfolios in equities. Not surprisingly, this idea is most widely promulgated near the end of a long bull trend in the U.S. stock market. Consider this article as a pre-emptive strike against this appealing, but potentially dangerous, idea".

http://www.investopedia.com/articles/stocks/07/100_equities.asp

TBC15

Bit late in the day, however the reason I don’t invest in VLS is underperformance.

Had a few spankings over the years, still didn’t put me off active fund investment.

chrisgg

TBC15 wrote: »

Bit late in the day, however the reason I don’t invest in VLS is underperformance.

Had a few spankings over the years, still didn’t put me off active fund investment.

Same here. A good active fund will always beat a passive, but the issue with active is it takes a lot more research. My strategy is to loosely copy the asset allocation from the vanguard 100 (due to my 10 year+ time horizon, all equities is right for me) and populate the funds based on strong active managers.

However, for someone who doesn't take too much interest in the research behind it all, I can see why VLS is enticing especially given the fees, although if a friend were to ask me I'd probably recommend using a VLS fund in a core satellite approach.

bostonerimus

chrisgg wrote: »

Same here. A good active fund will always beat a passive, but the issue with active is it takes a lot more research.

Active funds certainly have the potential to beat a passive index fund. If I could know the performance of funds a year ahead I would definitely be 100% active, but as I don't have a working crystal ball I'm 100% index tracker funds and use [strike]guess work[/strike] research and the historical efficient frontier to come up with an asset allocation. In the accumulation phase I did not look to maximize my possible return, I attempt to minimize the probability of investment failure and I chose an allocation that provided my required investment return with the minimum risk.

chrisgg

bostonerimus wrote: »

Active funds certainly have the potential to beat a passive index fund. If I could know the performance of funds a year ahead I would definitely be 100% active, but as I don't have a working crystal ball I'm 100% index tracker funds and use [strike]guess work[/strike] research and the historical efficient frontier to come up with an asset allocation. In the accumulation phase I did not look to maximize my possible return, I attempt to minimize the probability of investment failure and I chose an allocation that provided my required investment return with the minimum risk.

It's about picking the right active funds through an assessment of historic performance, both on a risk/return basis and discrete annual performance. Pick consistent 1st/2nd quartile performers that aren't taking too much risk relative to their sectors and you're onto a winner (in my experience - look at Terry Smith/Nick Train/OM Global Equity vs VLS 100 over the last 5 years).

On the other hand I also see the attraction of passives in the stability they provide - also if there's a crash, you can at least console yourself with the fact you've paid a fraction of the c.1% you pay an active manager.

It's all about preference at the end of the day, as both approaches can yield good returns depending on market conditions - and I don't have a crystal ball either!

bostonerimus

chrisgg wrote: »

It's about picking the right active funds through an assessment of historic performance, both on a risk/return basis and discrete annual performance. Pick consistent 1st/2nd quartile performers that aren't taking too much risk relative to their sectors and you're onto a winner (in my experience - look at Terry Smith/Nick Train/OM Global Equity vs VLS 100 over the last 5 years).

We aren't going to agree about the ability of most people to pick consistent active winners. You might be one of those that does over 10, 20 or 30 years. I think the mathematics and the studies show that the highest probability for most people of meeting a specified investment return with the lowest risk is done with index funds.

brasso

bostonerimus wrote: »

We aren't going to agree about the ability of most people to pick consistent active winners. You might be one of those that does over 10, 20 or 30 years. I think the mathematics and the studies show that the highest probability for most people of meeting a specified investment return with the lowest risk is done with index funds.

Perhaps it's my character / ADHD tendencies, but I'm unable to stick to an investment strategy or long-term investment goal, apart from wanting to grow my savings to a point where I'll feel reasonably comfortable in retirement -- in about 5 years.

So I don't feel that I have to, or have had to, make investment choices that must carry me through the decades. I've dabbled in many trackers, ETFs, Vanguard funds, and still hold several. I sold up nearly all my active funds about 3 years ago, when I decided that charges were everything, but have recently relented, reasoning that I shouldn't care about paying 1% if the fund was earning me 20-30% a year or more (as Fundsmith has done, for instance).

I'll probably change again in a year or two. I quite like the idea of being single-minded about it, but unfortunately can't manage to do it.