Questions on Using Vanguard Life Strategy

JSCB

Hi everyone,

I currently hold 5k in National Grid and 3k in Taylor Wimpy shares, which I plan to hold, however, going forward after being advised on this forum and reading a lot about it, I'm planning on holding back on any further individual share investments and push further into using funds instead.

With a goal of having £15k in share by April, I have another 7k to go. However, my question is, is Vanguard Lifestrategy the best to pick?

It seems the simplest, can be brought through vanguards own platform and I like how the range is split into the different blends of equities/bonds, meaning I could put some into a low equities, high bonds account, which is in theory more stable and secure over the shorter term, for any immediate needs which could come up.

However, my questions are:

1. Is vanguard a good investment? While it seems the most recommended for its simplicity and the most well known, I've also read that their Lifestrategy funds overly focus on the US market which is currently at record highs, meaning now would mean buying in at the top, not the best with your first investments and no others to average it out.

Does this matter? Should I avoid vanguard altogether? Or if not, would you suggest adapting to it in some other way, using their other funds?

2. Are their 20 or 40% funds, comprising more bonds and less equities actually more stable and secure? And if so, how?

I've also read that since bonds have done well over previous years, that this has given a false sense of expectation for them and meant their values could fall going forward. Is this possible? Or could someone explain how the 20% is safer than the 80%?

3. Finally, my plan would be to put 5k in the Lifestrategy 100 and 2k in the life strategy 20, and then to maintain this going forward, putting 8k pa into the Lifestrategy 100 and 2k pa into the Lifestrategy 20, planning not to touch what goes in for a long time if ever, but remaining some of it in a fairly secure fund to give me confidence and just in case. Does this sound right/a good match/a good idea?

Thanks everyone, I'm pretty new to all this, love hearing your views and want to make sure I get it right before I start!

Cheers,
Joe

oz0707

I think it's actually weighted to U.K. From what I've read. The reason for the large us holding is I think to do with market cap of equities there. Whereas U.K. Allocation is higher than the value.

As for being near the top it depends on timespan and goal. Isn't the whole point of passive not to try time the market? I'm definitely no expert though

ValiantSon

JSCB wrote: »

1. Is vanguard a good investment? While it seems the most recommended for its simplicity and the most well known, I've also read that their Lifestrategy funds overly focus on the US market which is currently at record highs, meaning now would mean buying in at the top, not the best with your first investments and no others to average it out.

Does this matter? Should I avoid vanguard altogether? Or if not, would you suggest adapting to it in some other way, using their other funds?

I'm afraid no one can really answer the first part of your question. Only you (and time) can tell if it is a good investment. Unfortuantely, that's the nature of investing.

However, LIfeStrategy funds are not overly focused on the US market. The allocation is proportionate to the relative size of the US stock market. It is overweighted towards the UK. Some will consider this a benefit, while others will disagree. I doubt you will get anything close to a consensus.

There are lots of us who do use Vanguard LifeStrategy funds and lots who don't. Prepare to get no conclusive answer! If you like the diversity of aset allocation and the costs seem good then you are unlikely to be very disappointed, unless you expect it to outperform the market as it is designed deliberately not to do so, but rather to track it, delivering average returns.

JSCB wrote: »

2. Are their 20 or 40% funds, comprising more bonds and less equities actually more stable and secure? And if so, how?

Sort of. A higher proportion of bonds in a pportfolio should help to mitigate against downturns in the equities markets, so in theory this reduces the risk. No guarantees can be given, however. In the event of a market downturn you should expect to smaller proportional losses with VLS 20 or 40 than with the higher equity funds, but you should also expect to see smaller returns as the markets rise and, long term, the overal growth of your investment will almost certainly be lower than if in VLS 60, 80 or 100.

JSCB wrote: »

I've also read that since bonds have done well over previous years, that this has given a false sense of expectation for them and meant their values could fall going forward. Is this possible? Or could someone explain how the 20% is safer than the 80%?

They might, but they might not. There really is no hard and fast way to say. Sorry.

3. Finally, my plan would be to put 5k in the Lifestrategy 100 and 2k in the life strategy 20, and then to maintain this going forward, putting 8k pa into the Lifestrategy 100 and 2k pa into the Lifestrategy 20, planning not to touch what goes in for a long time if ever, but remaining some of it in a fairly secure fund to give me confidence and just in case. Does this sound right/a good match/a good idea?[/QUOTE]

I'm not sure what proportion of bonds and equities you hope to achieve doing this. Do you have a proportion in mind.

Also note that you may well want to reduce the risk in your portfolio over time, so that could mean changing the funds invested in. e.g. someone who is 20 may decide to invest in VLS80. At 30 they may decide to reduce risk a little and split their investment between VLS80 and VLS60 (to give a 70% equity weighting). At 40 they may decide to move everything to VLS60. At 50 to split the funds between VLS60 and VLS40. At 60 put them all in VLS40 etc. The purpose of doing this is to reduce risk as you approach retirement. It is only a rule of thumb, however, and many people may choose to buck this trend at diferent times, so many people may still hold VLS80 at 40 and not reduce at all until 60, when they switch to VLS60, perhaps. The whole point is that is all depends upin you attitude to risk.

JSCB wrote: »

Thanks everyone, I'm pretty new to all this, love hearing your views and want to make sure I get it right before I start!

Cheers,
Joe

I'm not sure how old you are, but if you are in your 20s to mid 30s, then at t this stage I might consider putting the investent in VLS80 and then reviewing i tin 10 years.

Eco_Miser

JSCB wrote: »

1. Is vanguard a good investment? While it seems the most recommended for its simplicity and the most well known, I've also read that their Lifestrategy funds overly focus on the US market which is currently at record highs, meaning now would mean buying in at the top, not the best with your first investments and no others to average it out.

Any fund allocating regions by market cap will have a large exposure to the US. VLS deliberately overweights the UK, so will actually be underweight in the US.

Being at a record high does NOT mean being at the top. This could be the lowest the index ever goes from now on. In a world without volatility, each day would see a new record high, and also a lower value than any future one. The real world has volatility, so there will be dips, but the expectation is there will be a long-term rise. Of course, a twenty year bear run could start tomorrow, no-one knows.

JSCB wrote: »

2. Are their 20 or 40% funds, comprising more bonds and less equities actually more stable and secure? And if so, how?

I've also read that since bonds have done well over previous years, that this has given a false sense of expectation for them and meant their values could fall going forward. Is this possible? Or could someone explain how the 20% is safer than the 80%?

Bond funds are less volatile, perhaps losing 10% where an equity funds would lose 50%. Same sort of proportions for gains.

Bond values will fall as interest rates rise because bonds pay a fixed interest (the coupon), so buyers will only be willing to pay enough to get the same yield as the new interest rate.

JSCB wrote: »

3. Finally, my plan would be to put 5k in the Lifestrategy 100 and 2k in the life strategy 20, and then to maintain this going forward, putting 8k pa into the Lifestrategy 100 and 2k pa into the Lifestrategy 20, planning not to touch what goes in for a long time if ever, but remaining some of it in a fairly secure fund to give me confidence and just in case. Does this sound right/a good match/a good idea?

5k in the 100 and 2k in the 20 means 5400 in equities and 1600 in bonds and is equivalent to 7k in a theoretical VLS77.
8k pa into the 100 and 2k pa into the 20 means 8400 in equities and 1600 in bonds and is equivalent to 10k in a theoretical VLS84.

Perhaps just put it all in VLS80?

JSCB

Thank you ValiantSon & EcoMiser for your in-depth replies!

I'm 21 and looking to invest what I can afford (whilst also saving some cash reserves and into a lifetime isa for a first home too) with no planned need to withdraw it. I work a lot and earn quite well for my age and am happy to put away without expecting to touch it again for 15-20years when I plan to retire early, so I guess you could say I'm a long term investor and a higher risk fund would suit me fine.

However, my idea behind putting a small percentage of my annual investments, say 20% to begin with and reducing further in future years, into something like a VLS40 is so that if I did need some immediate, unplanned cash for whatever reason in the next 10 years outside of what I have saved or can save quickly from earnings, I could access the small pot placed into the supposedly less volatile VLS40, with hopefully no or less losses than if I had it all fully invested in a VLS100 fund and had to withdraw from that during a dip period.

While I'm in a good position for my age and want to start now to benefit from cost averaging and compound interest, I'm also conscious that my adult life is only just beginning and still pretty volatile itself and I don't want to corner myself completely just yet incase things change in such a way I can't predict. As my life becomes better planned out and my low risk pot built up enough, I'd put all new investments into something like the VLS80 or 100 until I were older and wanted to reduce my risk again for retirement as ValiantSon suggested.

Does that make sense or am I over complicating things?

Also, you both mentioned and suggested the VLS80, is there a reason for this over the VLS100? Is the 100 much more risky? In for a penny, in for a pound and all that?

And on another note, do people invest only in VLS funds or is it better to diversify by using funds from different providers as well?

Thanks again for your really helpful replies!

dunstonh

do people invest only in VLS funds or is it better to diversify by using funds from different providers as well?

The whole point of using multi-asset funds is that someone else is doing it for you based on a proper strategy. Mixing your multi-asset funds up has merit but if you start introducing single sector funds then you may as well go fully single sector as it would be cheaper (but not necessarily better).

Also, you both mentioned and suggested the VLS80, is there a reason for this over the VLS100?

VLS100 is not that attractive an option as it sits with other global equity funds which offer better value.

VLS80 does reduce the typical short term loss potential. I you are quite happy accepting a 50% loss in value (i.e. £10,000 in April statement and £5,000 in October statement) then you may as well go 100% equity.

ValiantSon

JSCB wrote: »

Thank you ValiantSon & EcoMiser for your in-depth replies!

Always glad to help in whatever small way that I can. EcoMiser (and several other posters) also offer some excellent ideas and food for thought, so you are in the right place to get some input.

JSCB wrote: »

I'm 21 and looking to invest what I can afford (whilst also saving some cash reserves and into a lifetime isa for a first home too) with no planned need to withdraw it. I work a lot and earn quite well for my age and am happy to put away without expecting to touch it again for 15-20years when I plan to retire early, so I guess you could say I'm a long term investor and a higher risk fund would suit me fine.

However, my idea behind putting a small percentage of my annual investments, say 20% to begin with and reducing further in future years, into something like a VLS40 is so that if I did need some immediate, unplanned cash for whatever reason in the next 10 years outside of what I have saved or can save quickly from earnings, I could access the small pot placed into the supposedly less volatile VLS40, with hopefully no or less losses than if I had it all fully invested in a VLS100 fund and had to withdraw from that during a dip period.

To be honest, if you are thinking about a fund to cover unexpected costs then you are better keeping that proportion of your portfolio as cash. It is always a good idea to have a reserve of cash on hand. Many people would advise around six months of expediture as a figure to aim for. I'm a little more cautious and would suggest six months of expenditure (to account for potential periods out of work) and a separate pot to cover bg ticket items like new cars or boilers. My suggestion, therefore, would be to split your savings and investments between cash and VLS, rather than trying to hedge our bets with VLS40. You could easily find that when you most needed it the VLS40 was at a low point due to turns of the market.

Build up the cash fund using a combination of the best paying current accounts, regular savers and easy access savings accounts to maximise the interest. This does need a bit of management, but is not that difficult as long as your are methodical about doing it.

JSCB wrote: »

While I'm in a good position for my age and want to start now to benefit from cost averaging and compound interest, I'm also conscious that my adult life is only just beginning and still pretty volatile itself and I don't want to corner myself completely just yet incase things change in such a way I can't predict. As my life becomes better planned out and my low risk pot built up enough, I'd put all new investments into something like the VLS80 or 100 until I were older and wanted to reduce my risk again for retirement as ValiantSon suggested.

Does that make sense or am I over complicating things?

No, I don't think you are overcomplicating in principle. I think you show a healthy attitude towards risk (i.e. that taking some is needed to get reasonable returns, but that taking too much may bite you at a later date). I would suggest, however, keeping the "rainy day" money as cash. Cash will always be there and maximising the interest paid (as outlined above) will minimise the erosion of value due to inflation. With careful management of your cash you can probably keep pace with inflation at its current level.

JSCB wrote: »

Also, you both mentioned and suggested the VLS80, is there a reason for this over the VLS100? Is the 100 much more risky? In for a penny, in for a pound and all that?

I'm almost double your age so my attitude to risk is different. That will affect how I see things, but equally that atitude is partly the result of life experiences that have highlighted the volatility that you may experience over the next twenty years (and more). So any thoughts I have on which funds to use are coloured by this.

Equally, however, I am taking a view of the stock market at present and speculating that it may see a downturn in the next year or two. If it does then VLS100 will experience a greater fall in value than VLS80, so my view is that VLS80 may be a better bet and that, when the recovery starts (which it will), the 80% equity will be well placed to ensure significant growth once again. At your age, I think you are well-positioned to ride out the dips through a VLS80 investment (and potentially VLS100, but I just don't like the idea of holding everything in equities - a bit too "aggressive" for me).

I suggested VLS80 because a good rule of thumb is to hold around your age in bonds In other words, you might look to hold 20% bonds at your current age, but increase that at 30 to 30% bonds, and so on. This is only a rule of thumb, however, and you might decide to hold VLS80 throughout your thirties and only re-balance at 40 by moving to VLS60 (or possibly go for the 70% equities then by combining VLS80 and VLS60 in equal proportions). It really does come down to your attitude to risk at the end of the day, and your appreciation of the potential for losses, combined with your willingness and ability to ride the rough periods out. (This is one of the reasons why I suggest holding cash rather than VLS40 as a fund for potential use due to unexpected costs).

JSCB wrote: »

And on another note, do people invest only in VLS funds or is it better to diversify by using funds from different providers as well?

Different people take different approaches, but, personally, I consider a fund like Vanguard LifeStrategy to be suitable to hold as a single investment because it is well diversified across asset classes and geography. You need to remember that in reality it is actually a basket of lots of different funds, so you actually would be investing in several different funds, but all under one banner.

If you do go down the Vanguard route then be aware that the cheapest way of holding those funds (at least for the first few years) is by using Vanguard's own platform, which only charges 0.15% platform fee (and no other fees). You'd want to review this every 12 months, but to start with it would definitely be the cheapest option.

JSCB

Hi ValiantSon,

Lots to consider again, thanks for taking the time and I'll make sure I bookmark the thread to read through it all again in future.

With regards to keeping 'rainy day' money as cash, I'm already doing that and using various current accounts and monthly savers, as you suggest. In fact, I'm predicting by April this year I'll have 10.5k in cash, on top of my 8k in the lifetime ISA and 15k in shares, and by April next year, have increased this to 13k in cash, even with putting a further 4k into the lifetime to 12k, 10k into shares up to 25k and a final 6k to pay off my student loan.

With this in mind, it's not that I'm suggesting putting all of my rainy day money into the markets, but rather would like to spread my risk, having holdings with low risk and volatility e.g. cash in high interest current accounts which I'll probably need, holdings with higher risk and potential for long term returns, e.g. investments into VLS80/100 and individual shares which I won't plan to touch for 15 years+, and a small buffer zone in the middle just in case, e.g. my thinking being a lower equities fund. However, I guess like you say, even the VLS40 funds could show large volatility if I did ever come to need the cash.

Would you therefore suggest reducing my planned share investments to 8k per year and increase the cash reserves further as I will be in need of a change of car in a few years and possible other expenses when eventually getting a first home, or putting the entire 10k into the VLS80 as apposed to my previously suggested 8k into a VLS80 and 2k into a VLS20/40?

With regards to your advice on the VLS80 over the 100, from what you say and what else I've read, perhaps that little less volatility with the 80 would be better for me, since as a new investor, although I'm expecting it to happen and then rebound, those initial losses are I know going to be a hard kick to deal with and ignore at first.

Thanks again,
Joe

ValiantSon

JSCB wrote: »

Hi ValiantSon,

Lots to consider again, thanks for taking the time and I'll make sure I bookmark the thread to read through it all again in future.

With regards to keeping 'rainy day' money as cash, I'm already doing that and using various current accounts and monthly savers, as you suggest. In fact, I'm predicting by April this year I'll have 10.5k in cash, on top of my 8k in the lifetime ISA and 15k in shares, and by April next year, have increased this to 13k in cash, even with putting a further 4k into the lifetime to 12k, 10k into shares up to 25k and a final 6k to pay off my student loan.

Glad to hear you've got a decent cash fund available already. £10, 500 is a pretty respectable sum and should easily cover you if the worst happens and you lose your job. It is unlikely that you would be out of work for as long as six months, so there is plenty there.

JSCB wrote: »

With this in mind, it's not that I'm suggesting putting all of my rainy day money into the markets, but rather would like to spread my risk, having holdings with low risk and volatility e.g. cash in high interest current accounts which I'll probably need, holdings with higher risk and potential for long term returns, e.g. investments into VLS80/100 and individual shares which I won't plan to touch for 15 years+, and a small buffer zone in the middle just in case, e.g. my thinking being a lower equities fund. However, I guess like you say, even the VLS40 funds could show large volatility if I did ever come to need the cash.

Would you therefore suggest reducing my planned share investments to 8k per year and increase the cash reserves further as I will be in need of a change of car in a few years and possible other expenses when eventually getting a first home, or putting the entire 10k into the VLS80 as apposed to my previously suggested 8k into a VLS80 and 2k into a VLS20/40?

I think what you propose with splitting the £10,000 between investments and cash savings is quite sensible. As I say, I'm fairly cautious and tend towards ensuring that my cash reserves are enough not only to cover me for six months (plus) out of work, but also cover potential big ticket items. I'm fortunate to have never needed to call on the money due to unemployment, but I have had to buy new cars and boilers! (I would always avoid buying a new car with finance - dreadul waste of money - and I would always buy nearly new, i.e. 12-18 months old to avoid the massive depreciation in the first year).

If you did split the money as you suggest then in five years time you would have £10,000 for those big ticket items and could start putting all of the money into your S&S ISA. However, you may decide that putting it all in now is what you want to go for. As I've said, these are just suggestions for consideration.

At £8,000 a year, particularly at your age, you would be looking at realising a very healthy return later in life. Keep in mind also that you may well see increases in your income over that time and could put more into your investments in quite a short timeframe.

JSCB wrote: »

With regards to your advice on the VLS80 over the 100, from what you say and what else I've read, perhaps that little less volatility with the 80 would be better for me, since as a new investor, although I'm expecting it to happen and then rebound, those initial losses are I know going to be a hard kick to deal with and ignore at first.

Thanks again,
Joe

It has to be your choice. I think 100% equities is a touch too much, really, and as dunstonh says, there are possibly better options available for 100% equities funds. So, if I were you then I would go for the VLS80 for the next ten years and then review. Do try to keep strong through any downturn though and don't sell! Doing so would turn a paper loss into a real one.

Best wishes.

Eco_Miser

JSCB wrote: »

Thank you ValiantSon & EcoMiser for your in-depth replies!

Happy to help.

JSCB wrote: »

However, my idea behind putting a small percentage of my annual investments, say 20% to begin with and reducing further in future years, into something like a VLS40 is so that if I did need some immediate, unplanned cash for whatever reason in the next 10 years outside of what I have saved or can save quickly from earnings, I could access the small pot placed into the supposedly less volatile VLS40, with hopefully no or less losses than if I had it all fully invested in a VLS100 fund and had to withdraw from that during a dip period.

That does make sense, given you've also got substantial cash holdings, so you would only need this if several emergencies came along at once.

JSCB wrote: »

While I'm in a good position for my age and want to start now to benefit from cost averaging and compound interest, I'm also conscious that my adult life is only just beginning and still pretty volatile itself and I don't want to corner myself completely just yet incase things change in such a way I can't predict. As my life becomes better planned out and my low risk pot built up enough, I'd put all new investments into something like the VLS80 or 100 until I were older and wanted to reduce my risk again for retirement as ValiantSon suggested.

Does that make sense or am I over complicating things?

It makes sense. I was over 30 when I started investing, and my life had just taken an unpredicted twist (nationalized industry - formerly job for life - started closing whole works, and laying thousands off, including me). All subsequent planning, if any, has been on the basis that employment may terminate any time.

JSCB wrote: »

Also, you both mentioned and suggested the VLS80, is there a reason for this over the VLS100? Is the 100 much more risky? In for a penny, in for a pound and all that?

The main reason I mentioned VLS80 is that it was similar in total to your two fund suggestion.

badger09

OP

Apologies if I've missed it, but I don't see any discussion about pension provision. Have you considered this?

The benefit would probably be free money from your employer, plus the bonus of tax relief.

I'm not suggesting all your savings should go into your pension, but some almost certainly should.