About to invest in S&S ISA for the first time!

bowlhead99

lpgm wrote: »

Do you understand what the LifeStrategy funds are? They are funds of other funds that Vanguard rebalances back to predetermined proportions over time. They may or may not be right for you.

Basically a one-stop-shop so that you don't need to choose a whole load of specialist funds covering company equities and company and government bonds from all the different parts of the investing world and build your own portfolio. There are a number of reputable providers which sell these 'mixed asset' funds at different levels of risk.

Any tips on how to choose a fund, beyond risk/length of time you plan to invest, or is it much of a muchness between funds offered by experienced/reputable providers?

These experienced / reputable providers will have fund offerings which vary from very specialist (japanese small companies ; biotechnology) to generalist (global fund with a mixture of asset classes like equities, bonds and properties).

In any one year, the returns (positive or negative) from the different specialist funds will diverge from the average specialist fund by many tens of percent. Whereas the more diversified, generalist, mixed asset funds will not be so different from each other if they have a good old mix of everything ; but the ones aiming for higher risk or higher performance will still go up and down a lot more than the ones aiming for lower volatility or lower performance.

But even between these generalist global multi-asset funds at a roughly similar part of the scale from most risky to least risky, there are differences in what the managers are aiming for and how they will try to achieve it when building a portfolio.

For example, Vanguard VLS80 aims to deliver whatever level of performance you get from a pretty constant mix of 20% bond indexes, 20% UK equity index, 60% overseas equity indexes, and rebalances its portfolio from time to time as the different components grow or shrink in value, to stay on track with that mix. Whereas L&G Multi Index 6 aims to deliver a particular level of volatility that suits people who want to be at position 6 on their risk scale, and when it does its internal rebalancing it may change the mix of equities and bonds and property from time to time in line with what the boffins tell them will qualify as level 6 overall.

So, there are plenty of ways to skin a cat.

You could keep it at that, or add one or two other funds to 'spice things up', like a smaller companies fund, an emerging markets fund (although the HSBC fund above includes emerging), or a global active fund like Fundsmith Equity or Lindsell Train. This is called a core and satellite approach.

A core and satellite approach involves coming up with your own formulas for how to construct your asset allocations, selecting various specialist investment options for how to tilt and balance the overall objectives of risk and reward away from what you would have got with just the core on its own, to move it towards your particular goals.

Most people who have never invested before will probably find it difficult enough to determine what their preferred risk level is (how much loss could you handle seeing in your portfolio before selling in a blind panic and actually making the loss real) or what level of long term total returns they need to achieve their goals, and whether they prefer the construction methods of one mixed-asset fund over another.

So, without any investment experience it is probably going to do more harm than good if they make it more difficult for themselves by trying to bolt-on other specialist funds on the side to build some kind of perfect allocation... which they have pretty much made up in their head because they are not an investment professional anyway... and as they look at more and more specialist funds they fall for slick marketing because they like the sound of making profits and can see that such and such fund has had a good last few years without evaluating how it performed in 2000-2003 or 2007-9 etc or will perform in the next crash or correction.

While many people on here do build their own heavily-customised portfolios, a relative 'newbie' is probably best suited looking at the options around mixed assets funds (passive or active alternatives to the Lifestrategy ones mentioned) rather than wondering which satellite funds to stick into his mix to 'spice things up'.

Cruixer

lpgm wrote: »

Do you understand what the LifeStrategy funds are? They are funds of other funds that Vanguard rebalances back to predetermined proportions over time. They may or may not be right for you.

To be completely honest, a couple of months ago I didn't even know what a 'fund' was, so no I am fairly ignorant to how different funds are made up. I say Vangaurd is a default because it was recommended by someone on a previous thread, the company are mentioned on the MSE site, and so I felt at very least I wouldn't be putting my money with a new or disreputable organisation.


Thanks for the other tips, I will look at these.

Cruixer

AlanP wrote: »

Essentially a "decent portfolio" in one package. They are designed to be easy to invest in and aimed at middle of the road investors not looking to spend hours searching for the next big thing. Fire & Forget as is sometimes said on here........

Whatever you choose I would suggest going for one of these "all in" options at the start whilst you do more research. You can always change funds later, getting started should be your focus at the moment.

monevator.com is a good place to research general principles and will lead you to other places.

Fire and forget does seem to fit with where I am at right now. I am not going to be able to learn everything about funds an investing in a couple of weeks, so as you say it probably makes sense to pick something middle of the road just now to get me started, then make a more informed choice next year once I have learned a bit.

Cruixer

bowlhead99 wrote: »

probably going to do more harm than good if they make it more difficult for themselves by trying to bolt-on other specialist funds on the side to build some kind of perfect allocation... which they have pretty much made up in their head because they are not an investment professional anyway.

This would be me. I have no illusions that I will be in a position any time soon, if ever, to build a portfolio myself. The attraction of a fund for me is that I am investing with a company in whose interest it lies to make me a profit. The thing that I can figure out is that as people will look at past performance as a guide, these companies will operate in the knowledge that their continued performance will be the key to future business.





If I am understanding these funds correctly, the risk mix of bonds and shares, is that while bonds are not risk free, they are essentially loans that pay a rate of interest so they are low risk and lower return. Taking the Vanguard set as an example, this makes me think that investing £20k in say the LifeStrategy 60 would be akin to just investing £12k in the LifeStrategy 100 and leaving the other £8k in an interest bearing bank account.



I know this is not an exact analogy, but looking at annualised past performance of those two funds (8% versus 11% respectively), and doing the maths below, it doesn't work out hugely different.



20000 x 0.08 = £1600.0
v.
(12000 x 0.11) + (8000 x 0.015) = £1440.0



I suppose what I am saying here, is that I am starting to think that if I am going to do this I might as well go the whole hog and go for something that is higher risk/return, for example putting the full £20k into the Lifestrategy 100:



20000 x 0.11 = £2200.0 PA


For me the idea is to build up funds for the future, with no specific target date. So while I can't know for sure, i don't expect to need it by any specific date. My thinking is that if the fund that I build up is healthy I might use it as an excuse to take a mini or early retirement, or if it needs longer it might end up becoming part of my daughters house deposit in 15-20 years. As I have no mortgage and expect to keep working for some time, I think that means I can afford to ride out bumps in the market.

eskbanker

Worth bearing in mind that it's often easy to evaluate investments only on the positive side, i.e. comparing their performance during growth years, of which there have been many recently. Especially when considering higher risk options, it's wise to consider the psychological impact of the correspondingly larger losses in the negative phases, which some struggle to handle....

ColdIron

Cruixer wrote: »

To be completely honest, a couple of months ago I didn't even know what a 'fund' was, so no I am fairly ignorant to how different funds are made up. I say Vangaurd is a default because it was recommended by someone on a previous thread, the company are mentioned on the MSE site, and so I felt at very least I wouldn't be putting my money with a new or disreputable organisation.

You might usefully spend a little time reading these

https://monevator.com/vanguard-lifestrategy/
https://www.vanguardinvestor.co.uk/investing-explained/what-are-lifestrategy-funds

bowlhead99

Your simple example makes sense but bonds are not quite the same as fixed cash in a bank account for a couple of reasons.

The bond issuer can go bust and not pay out, for example. But more importantly, although the bonds have a fixed contractual amount which they pay out (e.g £6 per year on a £100 bond) the bonds have market value which fluctuates like the value of shares (based on the credtworthiness of the issuer, but also on what other rates are available from comparably 'safe' investments elsewhere). So they don't change hands for a fixed price.

Example - when interest rates are very low, a bond paying a reliable £6 a year is quite attractive and people might pay £150 to buy the bond (it's still 4% income on what they just paid to buy it); yet when interest rates rise to 5% for super-safe cash in a bank account, nobody wants to buy a bond that pays only £6 a year for £150. They might not even want to pay £80 for it. So, the fund can take a loss on holding bonds over its period of ownership. Though the drop may be slow and drawn out, rather than the sort of crashes that can occur over a couple of months in the equity markets.

The idea of a portfolio approach of holding some stocks and some bonds is that they offer diversification as they are not going to rise and sink at the same speed at the same time. When stocks and the income received from stocks have risen in value relative to bonds and the income from bonds, you can sell some of the stocks and buy some more bonds. And when the bonds become relatively more valuable (even if not absolutely more valuable than equities, which will usually 'win' in the long term) you can sell off some of the bonds to buy some of the equities.

In this way you are always 'selling high' one asset class to 'buy low' another, and this enhancement to your returns means that you might hope to achieve total returns closer to the better-performing asset without having the same extreme volatility along the way. Mixed asset funds will be periodically selling or buying one class or the other to maintain their target mix for whatever risk or performance target they have.

Cash is not really much of an asset class because it doesn't really shrink and grow with market forces, it just sits there and pays an interest rate less than inflation, so it is not as useful as other asset classes like bonds and property which can shrink and grow at different times to equities.

However, people will say that certain types of bonds do not have great prospects from their current prices because a lot of them are 'over priced' compared to their usual long term price and will be suffering the effect of £150 falling back to £100, and the yearly income coming in might not fully cover the inevitably loss of capital. So stick with cash, they say, as you mentioned in your example about replacing bonds with cash and getting broadly similar returns in the short term.

Others say that this is a simplification and there are lots of different types of bonds, and they are not all overpriced, just like there are lots of different types of company share and they are not all overpriced.

When you don't need the money for 15-20 years and you know you are definitely not going to be fazed by seeing the sort of drops you might see on equities at some point in those 20 years, it is fine to invest mostly into equities and less on the other parts of the non-equities portfolio. Diversification does have a benefit though, and you never know what's round the corner - so I'm not 100% in equities in my pension even though I know I won't be spending it for two decades.

In terms of 'bumps in the road', you should probably think of a 100% equities fund dropping 30-60% from peak to trough in a major crash, with the falls and rises being relatively more volatile (but still within that band) if relatively more of your holdings are in foreign assets - because of exchange rate effects on top of the underlying market effects in those countries. As mentioned by eskbanker, it is hard to avoid the psychological effects of seeing that, even if - up front and with no investment experience - you assumed you would be fine because you don't need the money at the moment.

Cruixer

Thanks bowlhead99, great explanation. I think my inclination is to either go full 100% equity or close to. Although I may be over simplifying, I know that my work pension will be a mix of bonds and stocks, managed for that diversity. I also plan to keep a fair lump of cash back in the bank, or in a cash ISA, not because I think this is a good investment, but because it gives me options without having to dip into funds that I have invested.



It also sounds like in many ways bonds are more complicated than stock.



In this sense I feel like I have enough of the lower risk, and the purpose of investing in a stocks and shares ISA is growth. I would't say that I would be 'comfortable' with a 60% drop, but I think I could handle it and wait it out. We had a former home in Dublin that dropped to 50% of its peak value in around 2008, instead of selling at the time we toughed it out with a higher mortgage on the house we bought after moving back to the UK in 2010, and then sold it to near to peak value last year, paying off our mortgage here in the process. So I think my instincts are reasonable in terms of understanding that if you wait long enough investments usually come back eventually.



From your explanation it sounds like there may be good and bad times to buy bonds, and I would be a bit concerned by that, because if a percentage of the fund is bonds then it sounds like that means the fund would have to invest in bonds whether the timing was good or not. I suppose the same might be said of shares so maybe I am going in circles!

Alexland

VLS60 and VLS80 are both very good funds but if you go 100% equities then forget VLS100 as you don't need the slightly higher cost of a mixed asset fund when dedicated equity funds such as the HSBC FTSE All World have lower fees and declared internal transaction costs.

The other thing to remember about the VLS series is that the bonds are currency hedged to flatten out the impact of exchange rate movements.