VLS80 + What else?

ValiantSon

aroominyork wrote: »

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.

Count me in too!

ValiantSon

DennisTenus wrote: »

I see, 6.2% annualised is pretty poor though.

Compared to what?

DennisTenus

bowlhead99 wrote: »

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

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.

Ok so bearing in mind the doom and gloom just around the corner.... why do so many people go for VLS80 rather than VLS60? Surely 60 would be safer.....

Alexland

DennisTenus wrote: »

Ok so bearing in mind the doom and gloom just around the corner.... why do so many people go for VLS80 rather than VLS60? Surely 60 would be safer.....

The VLS60 fund is more than twice the size of the VLS80 despite the higher equity fund having had better growth during the recent positive market conditions. VLS80 is good for young people with many years of acumulation ahead and VLS60 is better for people who are more interested in steady growth or may now be starting to draw from their investments.

Alex.

ruperts

bowlhead99 wrote: »

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

Presumably though you wouldn't advise a newbie investor to ignore an additional 1% in platform fees on the basis of "it's only a few quid"? Or an additional 1% in fund management fees? On a £2 investment maybe you would, but on a £5k investment that's £50 they didn't need to spend. £50 that if saved every year and invested at inflation + 4% would be worth nearly £3k in today's money in 30 years' time.

Earlier in the thread, dunstonh said it wasn't worth chasing performance with a portfolio of "even 6 digits". Many people will never have a seven figure portfolio. Is the advise really to never worry about a percent gain here or there? On a six figure portfolio, ignoring a potential 1% gain over 30 years would cost you tens if not hundreds of thousands of pounds. This seems to fly in the face of conventional advice we get about the long term impact of keeping fees and charges low.

Obviously savings on fees are much more certain than improvements in performance, but if a newbie investor genuinely believes that they can optimise their portfolio and by doing so generate an additional 1% of return then, provided the additional fees and charges don't wipe out the gains, I don't see why they should be advised against doing so. If nothing else the learning involved in managing a more complex portfolio would be great preparation for when they have larger sums to play with.

bowlhead99

DennisTenus wrote: »

I see, 6.2% annualised is pretty poor though.

Hey, you're the one who thought it would be a good thing to buy when you were shopping for funds last year . But as others have implied in their replies, you can't expect the same returns as equities when you're investing in assets offering fixed income at a lower risk than buying equity in the same company

If you look at its return from 15/8/2007 to 15/8/2017 instead of 15/8/2008 to 15/8/2018, its total return was slightly lower, more like 6.0% instead of 6.2%, with maximum drawdown from high to low a little bit over 25% instead of a little bit under. So, the ten year performance is better now than it was last year. If you think this rate of return is "pretty poor" for what it offered, it doesn't make sense for you to have dived in ten months ago.

DennisTenus wrote: »

Ok so bearing in mind the doom and gloom just around the corner.... why do so many people go for VLS80 rather than VLS60? Surely 60 would be safer.....

The reason 'so many' go for them is

a) a function of what risks people are willing to take; 80% equity should deliver more long term return accepting the greater volatility so it's not irrational to buy it

b) depends where you get your ideas on what 'so many' people do; users of MSE's investments and pensions boards might reasonably be expected to be more experienced than the average person across the nation, and investing in higher risk assets can be less appropriate with less experience. Maybe you see more people talking about 80 here than you would elsewhere. For the country as a whole, 80% assets in equities with 75% of the equities overseas is higher risk than average (anecdotally, per IFA comments on here)

c) not really the case anyway; there is £2 billion in the 80 fund Acc class and £4 billion in the 60 equivalent.. Two thirds of the money is going for the lower risk choice. Less goes in the 80 and 100.

bowlhead99

ruperts wrote: »

Presumably though you wouldn't advise a newbie investor to ignore an additional 1% in platform fees on the basis of "it's only a few quid"?

Is the advise really to never worry about a percent gain here or there? On a six figure portfolio, ignoring a potential 1% gain over 30 years would cost you tens if not hundreds of thousands of pounds. This seems to fly in the face of conventional advice we get about the long term impact of keeping fees and charges low.

There is a difference between a £2 investment and a £5k investment and a £500k investment, hence some things can be worth more to certain large investors than they are to medium investors and worth more to the medium investors than to the small ones. So that might warrant different types of solution.

If you tell me I can probably save £50 on my car insurance by shopping around a few hours and putting up with spam reminder emails every year from the comparison sites - if I am only averagely wealthy, ok maybe I'll do it..

If you tell me I can save £50 on platform fees by spending a few hours and some hassle changing from one that wants £62.50 a year to one that wants £12.50 a year, ok maybe I'll do it.

If you tell me I can *maybe* make some tangible improvements to the tune of £50 by putting in a lot of hours of knowledge gathering, self-teaching of portfolio allocation theory, filtering and research, ongoing time taken to perform monitoring and rebalances of a double digit number of funds to keep them in my preferred ratios based on my investment model and risk target, etc etc. Then ok maybe I'll do it if I want a hobby. That's not the same as saying 'do you want this or do you want the £50 better option for nominal effort' in which case I'll take the £50 for nominal effort please.

However, creating a fund with a bespoke asset allocation to outperform the of the shelf solution designed by professionals, is not a nominal amount of effort, it is a challenge..

If you are Dennis you can slap together any number of funds without really understanding what they each do or what the potential outcomes might be, just pick them off a marketing list or league table and it won't take you any longer than the car insurance renewal phonecall that makes you £50. The gain from doing it might be a lot more than £50.

However, in that situation you're unlikely to have a *reasonable expectation* of making the extra £50 if you don't know a lot about what you're doing. You might be taking more risk than you want for the £50, or you might wreck the portfolio and miss out on a few hundred quid of returns which takes years to catch up once you've learned what you ought to have been doing.

If a newbie investor genuinely believes that they can optimise their portfolio and by doing so generate an additional 1% of return then, provided the additional fees and charges don't wipe out the gains, I don't see why they should be advised against doing so

A healthy dose of scepticism should be applied though. There are some people that 'genuinely believe' they can fly when they are standing on tall buildings under the influence of drink or drugs; and others 'genuinely believe' they shouldn't vaccinate their children because they'll get probably get autism, based on a magazine article they read. Others think that some blatant scams are not in fact too good to be true.

So it can still be good to advise that they don't in fact follow their dreams and 'genuine' beliefs until they have re-reviewed and evaluated all the counterpoints you offer.

But fundamentally I agree that investors should not be told that they mustn't do their own well researched DIY job if they want to. There can be good value gained for the DIYer by going through the process of explaining to a sceptic how and why the DIYer will improve upon the best packaged products, and there is some value in making your own mistakes rather than reading about them in a book or online and assuming you'd never make them yourself.

If nothing else the learning involved in managing a more complex portfolio would be great preparation for when they have larger sums to play with.

In a sense this is true, a 5% loss is much less serious on £100 than on £100k. You can learn to ride out the crisis when the numbers are relatively nothing in terms of your total ending retirement wealth. The only problem is where the amounts involved are so small as to not be meaningful for you and then there's no real learning because it's just play money.

However there is an argument to say: learning from your mistakes is all well and good, but isn't it better to not even make the mistakes, learning the theory from mistakes of others instead while plugging away with your easy off-the-shelf funds. A problem is that in "the good times" as we've had for almost a decade, mistakes are easily glossed over and the people investing badly are still making profits, so newbies might get the impression than most people make their own bespoke allocations and most do well enough at it.

It's harder to go wrong when choosing from five risk bands in a product range, than from mashing together 2000 funds in almost infinite combinations. If you think you can get the 1%, fair play, have a crack at it, but if that 1% is on £10k instead of £100k the effort may not be rewarded with life-changing profits.