VLS80 vs Vanguard FTSE All Cap + Global Bond Fund

patch9495

Morning All,


I currently have investments in Vanguard Lifestrategy 80 and have read comments regarding the overbias in UK companies, around 20%. Would this allocation be acceptable or would it be wise to invest a lesser 5 in the UK?

With this being said would it be worth switching to the Vanguard FTSE all Cap fund combined with a separate low cost global bond fund? How do I compare performance/


I am 24 and saving for long term so as such am after a 80/20 equity/bond split


Thanks in advance

cloud_dog

No one can really answer this, as it is all a personal preference.

What global percentage breakdown do you want? Do you want it to be based purely on a percentage of the country's GDP or do you prefer a slight home bias?

Re asset allocation (equities / bonds) what risk levels are you comfortable with?

You also need to define long-term investments, my long-term and yours could be completely different.

Linton

The best way to compare performances is to set up dummy portfolios. I find trustnet.com the best for the purpose.

patch9495

cloud_dog wrote: »

No one can really answer this, as it is all a personal preference.

What global percentage breakdown do you want?

Re asset allocation (equities / bonds) what risk levels are you comfortable with?

You also need to define long-term investments, my long-term and yours could be completely different.

Hi, thanks for the response answers are below


Do you want it to be based purely on a percentage of the country's GDP or do you prefer a slight home bias? I do not mind the percentage allocation of each country however I have read various reports stating anything from 5%-20% for UK allocation. I simply want the best possible return for my investement and have no bias towards any country


Re asset allocation (equities / bonds) what risk levels are you comfortable with? Medium to High due to my age/goals. I have an emergency fund of 5 months built up and am already overpaying mortgage/making AVC's to my pension which is the reason for a passive investment approach, and the 80/20 bond allocation in place. I have read articles suggesting that bond allocation genrally should be 100 - current age?


Re asset allocation (equities / bonds) what risk levels are you comfortable with? No specific timeframe in mind due to being young however if everything in life goes to plan, this money will not be required for a minimum of 5-10 years


Thanks

Linton

patch9495 wrote: »

I do not mind the percentage allocation of each country however I have read various reports stating anything from 5%-20% for UK allocation. I simply want the best possible return for my investement and have no bias towards any country

No one can possibly know what allocation will give the best possible return in the future. Every year for the past 5 yearsand probably much longer the FTSE100 has significantly underperformed the rest of the world. As to the future.....????

Medium to High due to my age/goals. I have an emergency fund of 5 months built up and am already overpaying mortgage/making AVC's to my pension which is the reason for a passive investment approach, and the 80/20 bond allocation in place. I have read articles suggesting that bond allocation genrally should be 100 - current age?

The sole reason for someone in your position to hold bonds under current economic conditions is to reduce the impact of major falls. If you wont have a nervous breakdown if your investment falls 50% then I see no problem with 100% equity.

Re asset allocation (equities / bonds) what risk levels are you comfortable with? No specific timeframe in mind due to being young however if everything in life goes to plan, this money will not be required for a minimum of 5-10 years

5-10 years is short term in investment terms. If you are going to want to use the money within 10 years then you should not be 100% in equities for much of that period. If there was a crash in say 8 years you may well not have enough time for markets to recover. The bond allocation being 100-current age is not a sensible suggestion but it does make the point of reducing risk as you approach the time when you need the money.

sendu

Per your stated needs and preferences, yes, it makes sense to switch to the Vanguard FTSE all Cap fund.

The non-equity portion could be held as cash in a high interest savings account, since these are doing better than UK Gilts. Since the point of this portion is for crash protection, with cash you're only losing a little spending power due to inflation, as opposed to potentially taking a loss on bonds if interest rates rise. A short term bond fund could also work though. In either case, just be sure to rebalance every year.

BTW, global cap-weighted funds like these do not weight the different countries by GDP, but by where all other investors are placing their money in publicly investable companies. If you don't want to make a bet against what all other investors think, cap-weighting is the way to go. This way you get close to the average return of the market. Whereas if you bet against everyone and overweight the UK, and you lose that bet, then you'll underperform the average.

cloud_dog

patch9495 wrote: »

No specific timeframe in mind due to being young however if everything in life goes to plan, this money will not be required for a minimum of 5-10 years

That's not long-term in my book.

If you are looking to use the money in the next 5+ years then investing takes on a far higher risk profile (as explained by Linton).

It might be worth going back to basics... What is possibly occurring in 5-10 years that means you will need access to this money?

patch9495

Hi All,

The 5-10 years timeframe proposed is a rough suggestion due to my age in life,


There isn't a specific need for this money within that timeframe, but I cant predict what will happen in this timeframe, hence the suggestion.


As things stand I would like to think this money will not be touched until retirement so 40+ years however have to be realistic and acknowledge that unexpected occurrence's may happen along the way

Linton

patch9495 wrote: »

Hi All,

The 5-10 years timeframe proposed is a rough suggestion due to my age in life,


There isn't a specific need for this money within that timeframe, but I cant predict what will happen in this timeframe, hence the suggestion.


As things stand I would like to think this money will not be touched until retirement so 40+ years however have to be realistic and acknowledge that unexpected occurrence's may happen along the way

If you aim your investments for 40+ years you run the danger that if you want the money earlier it will be in the middle of a crash. If you aim to have the money available for the 10 year time period you run the danger that you wont get sufficient return on your investments to meet your retirement goals. So you may wish to increase your emergency fund to cover more short term eventualities.


If you have a definite large expense in the medium term future (eg house purchase) it may be best to have a separate cautiously invested portfolio specifically for that purpose.



Obviously in extreme situations you may have to raid your long term savings and accept the consequences. But you should do everything you can to avoid it.

Alexland

For a 5-10 year medium term investment I would be considering a balanced fund such as VLS60.

Mixed asset funds are good if you have a modest amount of money, are too unreliable to rebalance or if you prefer the fund manager to do the work.

Once the portfolio gets to £100k+ then it's usually worth doing a 2 fund portfolio for the cost advantage. However at that valuation you are probably best on a fixed or capped fee platform so there would be additional trade costs to consider.

Alex

to_jackie_too

sendu wrote: »

The non-equity portion could be held as cash in a high interest savings account, since these are doing better than UK Gilts.

This is incorrect, or at least misleading. What do you mean by "are doing"?

How have gilts done recently? Look at the returns from Vanguard UK Government Bond Index Fund (Acc), over the last 5 years, from 1 July 2014 to 30 June 2019, taking the total return over each one-year period:
+9.27% +14.35% -1.12% +2.02% +5.25%
Gilts did better than a high-interest savings in 4 out of 5 years. And the one year when they did worse (losing 1.12%) was more than made up for by the better years.

How will gilts do in the future? We simply don't know. Perhaps your opinion is that they will do worse than a high-interest savings account. And you may well be right. Or wrong. But in any case, it is misleading to sneak your opinion in under the cover of apparently stating a fact about what gilts are doing.

Going back to the original question ... If the one thing you dislike about VLS80 is its UK bias, then a portfolio with 80% in Vanguard Global All Cap Index Fund, and the other 20% in Vanguard Global Bond Index Fund, would indeed give you something very similar to VLS80 except with the UK bias eliminated.

That is provided that you do rebalance it yourself, every so often (though it's not too crucial precisely how often). Otherwise the 80%/20% allocation will change. Some people may find it difficult to sell some bonds and buy some more equities when equities are plummeting. VLS has the advantage that it will do that for you, if you can just leave it alone (and perhaps don't look at what the markets are doing, if it might upset you).

However, as for which will give higher returns, out of VLS80, compared to 80 Vanguard Global All Cap / 20 Vanguard Global Bond ... we just don't know.

There is a case that it is more rational not to overweight the UK, because overweighting is placing an active bet, and the expected additional return from placing that bet is (arguably) zero, and there is no sense in placing active bets unless (among other conditions) the expected return is greater than zero. But that doesn't imply anything about which portfolio will outperform in the future.

In recent years, the UK has underperformed the global stock market. That might change over the next few years. Or not.