Don't multi-asset funds have an inherent flaw?

trustab

I'm a complete newbie to investing, so please forgive this very basic question:

Why would I ever buy a multi-asset fund (e.g. Vanguard LifeStrategy 80%) rather than buying one 100% equity fund and one 100% bond fund, separately, in my desired proportions?

A more long-winded version of the same question:

General investment advice I've read typically suggests that:
(1) Over long periods of time, equities typically provide better returns - so if you can afford to invest for the long term you should choose equities; and
(2) if you have a shorter investment horizon, you should put more of our money into lower risk investments like corp bonds, gilts or even cash.

Most people end up with a combination of (1) and (2).

Then I read a lot on these forums about multi-asset funds like Vanguard LifeStrategy 20/40/60/80 that offer combinations of bonds and equities in a single fund.

I get that single-fund "diversified portfolios" are convenient, but to me they seem to miss the key benefit of diversified portfolios: if you buy them together you have to sell them together (i.e. you can't only sell the bond part).

Surely it's better from a risk risk perspective (and hardly any more hassle) to buy two separate funds: one that is 100% equity and one that is 100% bonds, in whatever proportion suits your risk appetite. That way, if your circumstances change unexpectedly and you need to sell some of your portfolio, you can sell the bond part first - which, being less volatile, hopefully hasn't just tanked 30% forcing you to realise a huge loss.

Given the huge popularity of multi-asset on these forums, I guess I must be missing something. What is it?

dunstonh

Why would I ever buy a multi-asset fund (e.g. Vanguard LifeStrategy 80%) rather than buying one 100% equity fund and one 100% bond fund, separately, in my desired proportions?

one equity fund and one bond fund will not give you ideal diversification. (fixed interest securities need to be diversified just like equities).

Most people end up with a combination of (1) and (2).

Mainly because of attitude to risk, behaviour and knowledge and capacity for loss.

I get that single-fund "diversified portfolios" are convenient, but to me they seem to miss the key benefit of diversified portfolios: if you buy them together you have to sell them together (i.e. you can't only sell the bond part).

If your risk profile changes, you change the multi-asset fund.

You seem to be missing the lack of diversification with your method and you needing to carry out rebalancing and weighting decisions.

Surely it's better from a risk risk perspective (and hardly any more hassle) to buy two separate funds: one that is 100% equity and one that is 100% bonds, in whatever proportion suits your risk appetite. That way, if your circumstances change unexpectedly and you need to sell some of your portfolio, you can sell the bond part first - which, being less volatile, hopefully hasn't just tanked 30% forcing you to realise a huge loss.

What if the bond markets in a negative period at the time but the equity markets are not? Are you suggesting you would sell bonds every time?
If you only sold the bond fund, the investment risk would increase. So, that would be negate the reason most have for using bonds.
Most consumers will not put in the time or effort to rebalance.

Given the huge popularity of multi-asset on these forums, I guess I must be missing something. What is it?

Simple diversified option that requires little or no work by the investor.
Your option lacks diversification as you are only proposing two funds. Requires rebalancing and the method of withdrawal suggests risk management is not being carried out.

trustab

Thanks for the quick reply dunstonh! Help me understand better:

dunstonh wrote: »

You seem to be missing the lack of diversification with your method and you needing to carry out rebalancing and weighting decisions.

Help me understand the lack of diversification you're talking about. The equities fund could be LifeStrategy 100% - which I assume is as diversified as the equities part of VLS80. And I'd assumed there would be something similar to that on the bonds side - so where am I not diversified enough?

I do understand that weightings would drift over time and some rebalancing would be required - but I'd assumed that would be more like a once a year (which I would be comfortable with), rather than something more frequent?

dunstonh wrote: »

Are you suggesting you would sell bonds every time?

I think this is the key point I'd missed, thank you:

No, I'm not saying I would sell the bonds every time - just that if I was forced to sell some of my portfolio earlier than expected, I could choose to sell either the bond part or equity part depending on how they had individually performed.

I'd assumed that gives me more options.

But if I understand your point correctly - then I'd be left 'underweight' in whatever I've sold:
- If I don't rebalance, I'm effectively saying my initial distribution was wrong, or leaving me more at risk than I want to be going forwards.
- If I do rebalance, I end up with the same outcome as just holding multi-asset in the first place.

Did I understand correctly?

Linton

trustab wrote: »

I'm a complete newbie to investing, so please forgive this very basic question:

Why would I ever buy a multi-asset fund (e.g. Vanguard LifeStrategy 80%) rather than buying one 100% equity fund and one 100% bond fund, separately, in my desired proportions?

A more long-winded version of the same question:

General investment advice I've read typically suggests that:
(1) Over long periods of time, equities typically provide better returns - so if you can afford to invest for the long term you should choose equities; and
(2) if you have a shorter investment horizon, you should put more of our money into lower risk investments like corp bonds, gilts or even cash.

Most people end up with a combination of (1) and (2).

Then I read a lot on these forums about multi-asset funds like Vanguard LifeStrategy 20/40/60/80 that offer combinations of bonds and equities in a single fund.

The VLS funds are relatively simple, other providers have multi-asset funds which invest in additional types of asset, such as property.

I get that single-fund "diversified portfolios" are convenient, but to me they seem to miss the key benefit of diversified portfolios: if you buy them together you have to sell them together (i.e. you can't only sell the bond part).

No - the key benefit of asset diversified portfolios is that the different assets will have different performance characteristics thus reducing the sometimes wild fluctuations of 100% equity. Many people, particularly those new to investing, would find the stress of living through a 40% drop in share prices very difficult and could well sell out in order to avoid further loss.



Another benefit is that the % allocations to the various asset types will vary over time because of performance differences. A multi-asset fund will manage this variation without the need for the investor to rebalance regularly. Some funds, in particular the VLS series, rebalance to fixed %s. Some more sophisticated funds rebalance with the objective of maintaining a constant risk whilst market conditions change.



If ones portfolio of individual funds is relatively small the effort to rebalance may not be worth it. In the case of risk-managed portfolios investing in more than equity and safe bonds, most investors would lack the knowledge and access to data to DIY.

Surely it's better from a risk risk perspective (and hardly any more hassle) to buy two separate funds: one that is 100% equity and one that is 100% bonds, in whatever proportion suits your risk appetite. That way, if your circumstances change unexpectedly and you need to sell some of your portfolio, you can sell the bond part first - which, being less volatile, hopefully hasn't just tanked 30% forcing you to realise a huge loss.

Bonds cover a multitude of options - I would doubt that most new investors would have the knowledge to choose the appropriate ones to meet their objectives.



Using a long term portfolio as an emergency fund is foolish in my view. Better to set up enough money in cash accounts before starting to invest beyond employers pensions.

trustab

Thanks Linton!

Linton wrote: »

Many people, particularly those new to investing, would find the stress of living through a 40% drop in share prices very difficult and could well sell out in order to avoid further loss.

Agree, there is a psychology dimension to the conversation. I guess I'm assuming I will be able to logic my way through that, but will only know for sure how I'd cope when it actually happens.

Linton wrote: »

Bonds cover a multitude of options - I would doubt that most new investors would have the knowledge to choose the appropriate ones to meet their objectives.

You're right, I haven't explored this part yet.

Linton wrote: »

Using a long term portfolio as an emergency fund is foolish in my view. Better to set up enough money in cash accounts before starting to invest beyond employers pensions.

Yes, of course: I would have £x in cash (where x is enough to meet most short-term emergency outcomes I can envisage), £y in lower-risk/volatility investments (where y covers another chunk of even less likely emergency scenarios), and remainder in 100% equities (in ISAs, employer pensions and SIPP).

Cash-Strapped.T32

I don't think it's such a strange question from the OP, although in fairness using Vanguard as the example makes it look a lot simpler than it really is.


I guess it's easy to think to yourself buying 60% of a VG equities fund and 40% of a VG bond fund is basically the same as VLS60 - but translate that to some other funds from different providers who use different ways to manage risk and you're now talking a very different makeup to thier own brands of multiasset funds...


But in general principal, I can see where he is coming from - if, despite your best laid plans & wishes, you were forced to cash out some of your assets before you really wanted to, I could see that having some fine-control over exactly which of your "multi" assets to reluctantly sell could be beneficial over having to sell an amalgamation.

It is an interesting topic to ponder.

trustab

Cash-Strapped.T32 wrote: »

if, despite your best laid plans & wishes, you were forced to cash out some of your assets before you really wanted to, I could see that having some fine-control over exactly which of your "multi" assets to reluctantly sell could be beneficial over having to sell an amalgamation.

Thanks for articulating it better than I was able to!

AnotherJoe

trustab wrote: »

Yes, of course: I would have £x in cash (where x is enough to meet most short-term emergency outcomes I can envisage), £y in lower-risk/volatility investments (where y covers another chunk of even less likely emergency scenarios), and remainder in 100% equities (in ISAs, employer pensions and SIPP).

And if you can cope with that and wouldnt bottle out and sell your (say) 60% equity chunk, but would actually buy more to bring it back to 60% then yes VLS isnt for you.
I'd say VLS is aimed at those who want the simple life or indeed dont really understand it all, and just want to buy something that's at a perceived particular risk scale without digging into the underlying complexities.


Yes, in theory if you are investing for say 40 years you shoudl go all in to equities.

OTOH if you will bottle and sell it all when it drops 20% then the theory doesn't work for you!

lpgm

It is, indeed, an interesting topic. I'm 45, and financially independent. I've never owned bonds. But my situation is different from that of someone starting out now - I've got a modest DB pension waiting for me in 20 years' time, and I've always had a good cash buffer, which in the past actually earned some decent interest.

Tom99

trustab wrote: »

I get that single-fund "diversified portfolios" are convenient, but to me they seem to miss the key benefit of diversified portfolios: if you buy them together you have to sell them together (i.e. you can't only sell the bond part).

[FONT=Verdana, sans-serif]With two trades rather then one, you could still effectively sell just the bonds using the VLS funds.[/FONT]
[FONT=Verdana, sans-serif]Assume you start with £1,000 of VLS60 so £600 in equities and £400 in bonds.[/FONT]
[FONT=Verdana, sans-serif]For whatever reason you decide you want to cash in £200 worth of bonds and end up with £600 equities and £200 bonds.[/FONT]
[FONT=Verdana, sans-serif]The two trades would be:[/FONT]
[FONT=Verdana, sans-serif]Sell £500 of VLS60 - £300 equities and £200 bonds[/FONT]
[FONT=Verdana, sans-serif]Buy £300 of VLS100 - £300 equities[/FONT]
[FONT=Verdana, sans-serif]That would leave you with the £600/£200 mix you require.[/FONT]

MaxiRobriguez

I read the ops question as a theoretical one not a practical one.

The example you can use is, is it easier to change investing approach if:
1) You own a diversified fund containing: 80% equity / 20% bonds, which are made up of 8 stocks at 10% each and 2 bonds at 10% each.
2) You own two funds, one containing 100% equity (made up of 8 stocks at 12.5% each) and another containing 100% bonds (2 funds, 50% each), which you split your total investment 80/20 by.

The answer is of course 2 because you could change the allocation split in 2 where as you couldn't do as easily in 1.

The next jump of logic though is that it would be even more flexible if you directly owned the underlying holdings then you'd have even more flexibility. You could change the 80/20 split as per option 2 above but you could choose exactly which holdings would alter said split, rather than all of them.

The answer is: how active do you want to be with your investments? If you're prepared to do more research, proper due diligence etc then you can absolutely not just shove it in a multi-asset one size fits all fund, but there's a reason why they are popular...