Vanguard LifeStrategy - which one?

bowlhead99

chockydavid1983 wrote: »

Interesting to see it in tables like that and roughly in line with what I thought.
Is 1931 that much of an outlier does anyone know? I.e. were there many years almost as bad or is that by far the worst in general?

Over a multi-decade timescale there are plenty of bad years. Also, note that their statistics are only for losses across 1-year timeframes when a recession or market depression/slump could continue for much longer than a year. So you could lose 40% one year (your £100 turns into £60), and then you could lose 30% of that £60 the very next year leaving you with only £42, which is a 58% loss from the peak.

Also, for the stats on that link the 'stocks' is a US stockmarket index from the perspective of a US investor investing his dollars. However, the Lifestrategy series gives you an international perspective, with 75% of your equities being companies which are listed on foreign markets. So its not just the returns from one well-performing country that you need to be concerned with, it is the returns from all the other countries ; and also the effect of currrency translation - when your own currency strengthens, all the foreign stocks will be worth less when measured in your own currency because 100 Korean Won of Samsung stock is no longer worth as many pounds, even if the company is worth the same amount of Won and didn't fall in value from the perspective of its board of directors.

A more useful yardstick of 'what could I lose in a crash if I bail out at the bottom' is by looking at the Drawdown figures for some well-known market indices. The 'peak to trough drawdown' basically means how much did it go down from the top, before it hit the lowest point that it got to later.

If you take the FTSE All-World as an example - measured in US dollars - the largest drawdown in the last ten years or so was 57.9%, in the 2007-2009 Credit Crunch / Global Financial Crisis. This is made up of the weighted average of 57.4% FTSE Developed world and an even more painful 64.5% for FTSE Emerging.

http://www.ftse.com/Analytics/FactSheets/Home/DownloadSingleIssueByDate?IssueName=AWORLDS%20&IssueDate=20170929&IsManual=%20False

The loss wasn't as high as that from a pounds sterling perspective, because there was a currency effect which was more favourable to us than to the Americans. But basically as a US person investing your $ into an international index where half your money is in countries outside the US, when everything goes wrong in the world markets and other world currencies go down in value compared to your own, you can lose 58%. That has happened in the last ten years

So, now imagine you are a UK person investing your £ into a set of international indexes where three quarters of your money is in countries outside the UK, when everything goes wrong in the world markets and world currencties go down in value compared to your own. How much can you lose from peak to trough? The live example from within the last decade would suggest 58% or more.

Some would say 'oh it won't be that bad, banking regulations are better now and it wouldn't happen again'. Be careful of complacency. Remember that last time it happened, global governments slammed interest rates down to the floor and implemented a quantitative easing programme to prop up financial markets so that within a few years the markets were back up where they had started, so an investor with a medium to long term view is fine if he didn't bail out at the bottom. If it happened now, when some regions are still doing the QE from last time and some places are already on negative interest rates, there are less options available within the "rescue packages" of world governments.

The point of this somewhat lengthy post is that the stats you are reading would say 40% is the worst and it was eighty five years ago so you could maybe ignore it as being out of touch with modern market dynamics and not something to worry about. Whereas the reality is that 58% has happened within the last decade and a number of world markets are currently at or close to their all-time high, so not particularly cheap (other than by reference to bonds which are also damned expensive).

For the OP investing over a two decade period which will cover a couple of economic cycles, and drip feeding the money in, it really doesn't matter if there's a 60% crash in the equity markets starting next week.

In his situation I would probably go with the 80% equity rather than 60% equity - but I have a high risk tolerance anyway. One thing to note is that when you are investing for 20 years but on a drip-feed basis rather than all the money up front, then only some of the money is invested for 20 years. Some is only invested 20 days. The average pound invested is only there for 10 years and the compounding of returns means that you have quite a bit more exposed to the markets in the second half of the 20 years than in the first.

So, you could start out agressive in the 80 product and then revisit some years down the line in terms of how much you are putting away into what (presumably the £250pm will increase in real terms otherwise actually the early contributions will have a stronger effect on total performance due to being bigger in real terms).

brasso

As others have said, it depends on how disciplined you can remain during a downturn. One's instincts are to flee the market ("why throw good money after bad?") -- but in fact, your drip-feeding will be buying lots of lovely cheap units.

Being something of a stupid investor (according to normal investment theory), I would, with a 20 year timescale, go for VLS100 in the early years. If there's a drop in those early years, as is near-certain, then put the blinkers on and keep buying those cheap units.

But it's very easy to spend other people's cash, so best ignore what I say.

grey_gym_sock

Cactus_Jack wrote: »

I was listening to Max Keiser who said you can insure a portfolio with 'options and futures' for around 2% of the cost of the portfolio but I don't know how this would tie in with LS.

I think his gist was get this 'insurance' if the market starts to show signs of volatility.

i wouldn't look to max keiser for investment advice. it may not be intended as investment advice, anyway - i didn't see this, but it might have been more of a discussion about how there are some investors who are hedging their portfolios like this which implies they think the market might fall.

market chatter like that is all very well, but it doesn't provide any useful guidance about what the market will actually do. yes, it might fall sharply, but OTOH perhaps it will keep rising for a few more years before falling sharply - in which case, you might be better off staying fully invested.

and if you can't time it, there's no point in hedging your portfolio all the time, because you'll have that 2% drag on returns. if you want to reduce the downside in a crash, then it's better (as has already been said) to just start with a lower percentage allocation to shares, and stick with it.

in fact, tuning out from market chatter altogether can help you to be a more successful investor. because the chatter may make you nervous, and prompt you to sell out when markets stumble but will go on to recover.

Cactus_Jack

grey_gym_sock wrote: »

i wouldn't look to max keiser for investment advice. it may not be intended as investment advice, anyway - i didn't see this, but it might have been more of a discussion about how there are some investors who are hedging their portfolios like this which implies they think the market might fall.

market chatter like that is all very well, but it doesn't provide any useful guidance about what the market will actually do. yes, it might fall sharply, but OTOH perhaps it will keep rising for a few more years before falling sharply - in which case, you might be better off staying fully invested.

and if you can't time it, there's no point in hedging your portfolio all the time, because you'll have that 2% drag on returns. if you want to reduce the downside in a crash, then it's better (as has already been said) to just start with a lower percentage allocation to shares, and stick with it.

in fact, tuning out from market chatter altogether can help you to be a more successful investor. because the chatter may make you nervous, and prompt you to sell out when markets stumble but will go on to recover.

Thanks to those who responded :-)

I have actually reconciled myself to leaving the money in LS no matter what, although as someone who was fortunate enough to invest just before Brexit all I've seen so far is a positive return so it might be daunting when the inevitable drops occur (but I am mentally prepared that it will happen).

It thought it'd be best to link to the statement I was referring to by Max Keiser, who I do agree may not be the best to listen to (although I certainly wish I'd listened to him about Bitcoin a few years ago). The video should start where he mentions the hedging.

Max Keiser on Hedging

grey_gym_sock

Cactus_Jack wrote: »

It thought it'd be best to link to the statement I was referring to by Max Keiser, who I do agree may not be the best to listen to (although I certainly wish I'd listened to him about Bitcoin a few years ago). The video should start where he mentions the hedging.

Max Keiser on Hedging

having watched a bit of that, IMHO he's wrong - i.e. i don't think the ability to hedge your portfolio is any advantage.

the effect of a crash on small investors is as he describes it - viz. you just have to wait however many years it takes for a recovery.

but hedging doesn't help you, unless you know when a crash is coming. and if you did know, you could just sell (or sell some of) your shares - you don't need really derivatives (unless you're in some specialized situation, where you can't simply sell, e.g. because they are restricted shares from your employer).

and you can't hedge all the time (just in case there's a crash) without giving up all the gains from shares. in that case, you might as well just stay in cash.

it is interesting to see max keiser say all this, because it fits into the common view that the stock market is so fixed that ordinary people can't make any money from it. which is not the right conclusion. there is plenty of dodgy stuff going on the the stock market, which is a good reason for ordinary people to avoid going for a wheeling-and-dealing approach - always assume there is somebody dodgier than you on the other end of the deal. but a method of long-term buy-and-hold avoids most of that. (you also need to beware about all kinds of charges, explicit or hidden.)

(incidentally, i believe it is possible for small investors to hedge - but i haven't looked into the details, because i don't believe there's any advantage in it.)

bigadaj

Cactus_Jack wrote: »

Thanks to those who responded :-)

I have actually reconciled myself to leaving the money in LS no matter what, although as someone who was fortunate enough to invest just before Brexit all I've seen so far is a positive return so it might be daunting when the inevitable drops occur (but I am mentally prepared that it will happen).

It thought it'd be best to link to the statement I was referring to by Max Keiser, who I do agree may not be the best to listen to (although I certainly wish I'd listened to him about Bitcoin a few years ago). The video should start where he mentions the hedging.

Max Keiser on Hedging

Hedging is effectively just buying an insurance policy, but it's an insurance policy where the net outcome is weighted against you be use overall markets will rise. You pay a premium to someone who almost certainly has more market information than you do, net result is that they profit and you don't.

Prism

A friend of mine offers some hedging options to others. He makes about 10% on top of his shares from doing this. That means others are paying at least that per year which is a drag on their performance. I have never seen the benefit of it myself, although I'm happy that my friend is making a living from providing this kind of insurance

Cactus_Jack

That makes it clearer. Seems it isn't worth being concerned about then. I think the guy does in general have a pessimistic view on stocks which I should bear in mind for future