VLS80 + What else?

blue_eyes

defensive equities ?

I haven't looked at lindsell train's specifics, but the general idea is that some companies and therefore their shares are more dependent on where you are in the economic cycle (cyclical) so that they rise faster when people have more money to spend, and then fall in a recession when the companies find it harder to sell their stuff and make a profit.

Other companies - well people still need their stuff when they don't have so much to spend, so the company has more stable earnings, perhaps a water company for example. They are more defensive and thus some sellers might bail out of the cyclical and into defensive eq in a downturn.

Of course that gets into market timing, as well as losing the upside of cyclical, so i'm not suggesting that as a specific strategy.

bowlhead99

DennisTenus wrote: »

It shouldn't matter whether OP has £2 or £200000000 it's all relative. A lot of money for one person is different for another so I don't see the difference in only considering non multi asset funds if you have a larger portfolio.

To use your exaggeration to prove the point, let's say the OP did only have £2. And let's assume the long term return from an equities-heavy portfolio such as VLS80 is inflation plus 4% a year, or perhaps 7.5% total.

On the £2 invested, the OP is destined to get an average return of 15p for the year (some years a lot more, some years a lot less, or a loss).

If the OP wanted to go to a lot of trouble, he could construct a bespoke portfolio where he splits the money over ten asset classes, each with 5-30% of his overall allocation, so that instead of investing £2 in a fund, he invests £0.10 to £0.60 in each of ten funds. This is assuming for the sake of argument that the fund platform accommodated 10p contributions just as readily as £2 contributions

If he puts in all those hours of learning and research and is diligent about monitoring and periodically rebalancing his ten-fund bespoke portfolio, he might get his average return up from inflation-plus-four to inflation-plus-four point five, or even inflation-plus-five, without significantly changing the risk. Hoping he doesn't get unlucky and make inflation-plus-three instead.

When he looks at the results, making a 8.5% annualised return instead of a 7.5% return, he would be pleased to see that his two pound investment over four years turned into £2.77 instead of the £2.67 he was going to get from the off-the-shelf solution... Yippee! Ten pence over four years! Is that a reasonable return for the hours of filtering and research, knowledge gathering, self-teaching of portfolio allocation theory, the time taken to perform the annual rebalances of the ten funds to keep them in his preferred ratios based on his investment model and risk target?

I would put it to you, that no, it isn't worth it for ten pence.

However if the starting pool of capital was £200m instead of £2, the return from successfully implementing the portfolio with the same percentage returns is not ten pence, but ten million quid. The OP might be scared witless by the prospects of investing £200m and maybe losing a chunk of it to poor decision making, but he could see that there may be tangible rewards for doing it. Ten million can make the effort worthwhile. Ten pence doesn't.

So, the recommended investment solution for a £2 investor is not the same as a £200m investor

You really think its likely that a crash would drop funds by 40%?!

Without wanting to sound like a broken record (I generally mention every month or so), you can look at a global stock market index to see what happened in the last major crash.

Take FTSE All-World as a barometer for world stock markets, covering over 40 trillion dollars of market capitalisation. The biggest peak-to-trough drawdown (top of the market to bottom of the market) experienced in the ten years ending 2017, on a total return basis for that index (ie including the value of dividends received and reinvested along the way) was 57.9% in US dollar terms. This was between 2007 and 2009. (factsheet link here)

So, 100% equities can lose you 50-60%. If you hold bonds as well as equities, the blow will be cushioned as your gilts and corporate bonds won't decline so far so fast. Some part of them might even rise a bit as people look for a 'safe haven' and have to invest in something. But 80% of a 57.9% crash is still over 46%. So it's not overly dramatic to suggest 40% paper loss is quite possible in sterling terms from here, on VLS80. On your riskier funds, perhaps substantially more.

If you doubt the numbers, look at the price of your funds five years ago. VLS80 has given a total return of 60% in the five years to 31 July. If over the next couple of years it went back to its price of five years ago (which wasn't the bottom of a deep crash, so is perfectly possible), £160 would turn back into £100. That's a loss of 38.5% if you invested at today's price. You mention your funds have gone up further/faster than VLS80, as they're higher risk. So, good luck.

aroominyork

Alexland wrote: »

An equities fund could drop 50% when an 80/20 fund 'only' drops 40%.

LTGE is interesting case as the defensive equities may 'only' drop like an 80/20 fund.

Given the mention of index funds and also LTGE in the context of 80/20 spilts, it's maybe worth pointing out the three ways to construct an 80/20 portfolio; partly because it affects the idea that when an equities fund drops 50%, an 80/20 fund 'only' drops 40%. That last statement assumes that when the equity element falls 50% the bonds don't move at all, whereas if the bonds rise say 5% the overall portfolio falls 19%.

Method 1. An 80/20 index fund such as VLS80.
Method 2. An 80/20(ish) actively managed multi-asset fund such as Baillie Gifford Managed or Royal London Sustainable World.
Method 3. 80% in an active equity fund, eg LTGE, and 20% in an active bond fund, eg a strategic bond fund.

Or you could mix and match... one active and one index.

Alexland

I just assumed the bonds wouldn't move for simplicity and with current bond valuations it's not clear if bonds would increase or decrease when equities drop. On some days the only place that's safe is cash. Shame we don't know which days.

DennisTenus

aroominyork wrote: »

Given the mention of index funds and also LTGE in the context of 80/20 spilts, it's maybe worth pointing out the three ways to construct an 80/20 portfolio; partly because it affects the idea that when an equities fund drops 50%, an 80/20 fund 'only' drops 40%. That last statement assumes that when the equity element falls 50% the bonds don't move at all, whereas if the bonds rise say 5% the overall portfolio falls 19%.

Method 1. An 80/20 index fund such as VLS80.
Method 2. An 80/20(ish) actively managed multi-asset fund such as Baillie Gifford Managed or Royal London Sustainable World.
Method 3. 80% in an active equity fund, eg LTGE, and 20% in an active bond fund, eg a strategic bond fund.

Or you could mix and match... one active and one index.

I'm using all 3 methods!

Can you suggest a strategic bond fund?

bowlhead99

DennisTenus wrote: »

I'm using all 3 methods!

Can you suggest a strategic bond fund?

What are your criteria? If you don't have any and are open to all strategies and methods you could start with all the funds in the sterling strategic bond sector (filter by that sector on a site like Trustnet) and then research each one in turn

DennisTenus

bowlhead99 wrote: »

What are your criteria? If you don't have any and are open to all strategies and methods you could start with all the funds in the sterling strategic bond sector (filter by that sector on a site like Trustnet) and then research each one in turn

I'm probably missing the point but I do have Artemis Strategic Bond in my portfolio already, had it around 10+ months and down 0.44% but looking at the figures 08/17 - 08/18 it's only +1.36% so what is the point.... could have got that with my tesco saver (or more actually because of fees)!

bowlhead99

DennisTenus wrote: »

but looking at the figures 08/17 - 08/18 it's only +1.36% so what is the point.... could have got that with my tesco saver (or more actually because of fees)!

Maybe you are missing something, as a ten month or one year timeline isn't very suitable for evaluating an investment strategy. The ten year return is +83.3%, or 6.2% annualised, and that's after dropping 24% in the first eight months of that period.

So, it doesn't behave like your Tesco saver account behaved (which didnt drop by a quarter at any point, and didn't return over 80% for the decade) and unlike your Tesco saver account it can be held in an ISA or SIPP.

This is not to say you should expect to get close to 83% over the next ten years from here, but bonds and cash are not the same product.

DennisTenus

I see, 6.2% annualised is pretty poor though.

aroominyork

DennisTenus wrote: »

I see, 6.2% annualised is pretty poor though.

Hands up all those who would take 6.2% pa for a strategic bond fund (let's say on rolling five year periods), every year for the rest of their lives and beyond? I'm the first.