Vanguard LS60 risks ?

jamesd

Audaxer wrote: »

jamesd, I'm retired and have some money invested in VLS40 and VLS60. Although VLS60 is a bit more volatile and will fall more in a crash than VLS40, do you think they would take approximately the same time to recover from a crash?

If you think about it you'll recognise that both must take exactly the same amount of time to fall and rise because the underlying investments and their movements are the same. The depth will differ.

I accept the premise of Guyton's sequence of return risk reduction approach so I reduced my equity holdings below my usual a while ago.

Audaxer wrote: »

I was more worried about the VLS40 with the greater percentage of bonds, as most people do not seem to have much faith in bonds at present.

I have little in bonds. Prefer P2P and cash in current conditions..

Audaxer

jamesd wrote: »

If you think about it you'll recognise that both must take exactly the same amount of time to fall and rise because the underlying investments and their movements are the same. The depth will differ.

Thanks jamesd, that's what I thought, although I'm sure I read somewhere that the VLS60 would take longer to recover than the VLS40 because it would require a bigger percentage rise to get back to pre-crash levels. If they do both recover at the same time it seems definitely better to have the VLS60. However if you didn't have a cash buffer and had to sell units in a crash, I assume you would be better served by a VLS40 as you would be selling units that have not lost as much as VLS60 units?

Linton

Audaxer wrote: »

Thanks jamesd, that's what I thought, although I'm sure I read somewhere that the VLS60 would take longer to recover than the VLS40 because it would require a bigger percentage rise to get back to pre-crash levels. If they do both recover at the same time it seems definitely better to have the VLS60. However if you didn't have a cash buffer and had to sell units in a crash, I assume you would be better served by a VLS40 as you would be selling units that have not lost as much as VLS60 units?

If you want a cash-like buffer VLS <anything> is the wrong product.

cfw1994

jamesd wrote: »

If you think about it you'll recognise that both must take exactly the same amount of time to fall and rise because the underlying investments and their movements are the same. The depth will differ.

I accept the premise of Guyton's sequence of return risk reduction approach so I reduced my equity holdings below my usual a while ago.
I have little in bonds. Prefer P2P and cash in current conditions..

P2P? We have a tiny smattering (sub £2k) in Kuflink, just playing really....but they do offer it as an IFISA, and I have been tempted to put more in.
Mind me asking what kind of P2P you favour?

jamesd

cfw1994 wrote: »

Mind me asking what kind of P2P you favour?

At the moment I favour Ablrate for likely returns and Unbolted for hands off ease of use with lower returns and a very different type of investment.

Both offer ISAs with the full flexible ISA withdraw and pay back in during the same year feature. I've used it at both. Last tax year I first subscribed to Ablrate then near the end of the tax year withdrew the current year subscription and used that to subscribe to Unbolted. Then in the new tax year flexibly withdrew most from Unbolted and returned it as the money was invested.

Remember the only one of each type rule for newly subscribed money in the current tax year. No restrictions for transferred old money.

jamesd

Audaxer wrote: »

I'm sure I read somewhere that the VLS60 would take longer to recover than the VLS40 because it would require a bigger percentage rise to get back to pre-crash levels.

How about proving it yourself with a little experiment? Have equities and bonds fall at 25% and 5% for two consecutive months. Then recover at 10% and 2% a month for six months. For 60:40 and 40:60 mixtures.

Audaxer wrote: »

If they do both recover at the same time it seems definitely better to have the VLS60. However if you didn't have a cash buffer and had to sell units in a crash, I assume you would be better served by a VLS40 as you would be selling units that have not lost as much as VLS60 units?

If you want to follow Guyton's thoughts and like 60 normally, 40 would be a better choice now, moving back into 60 when the cyclically adjusted P/E goes sufficiently lower.

No fund that contains significant equity holdings is a good choice for selling when equities are down because you're selling low. It's where pure fixed interest things belong: bonds, cash and perhaps some P2P.

Linton

jamesd wrote: »

How about proving it yourself with a little experiment? Have equities and bonds fall at 25% and 5% for two consecutive months. Then recover at 10% and 2% a month for six months. For 60:40 and 40:60 mixtures.

.......

Have you taken into account the fund rebalancing the allocations? I think audaxer is correct:
To make the maths easier let’s say that equity falls by 50% and bonds are constant:
£100 at 60:40 becomes 30:40
After rebalance 42:28. So to get back to 100 we need 42 to rise by 30=approx 70%

£100 at 40:60 becomes 20:60
After rebalance 32:48. So to get back to 100 we need 32 to rise by 20=approx 60%

Audaxer

Linton wrote: »

Have you taken into account the fund rebalancing the allocations? I think audaxer is correct:
To make the maths easier let’s say that equity falls by 50% and bonds are constant:
£100 at 60:40 becomes 30:40
After rebalance 42:28. So to get back to 100 we need 42 to rise by 30=approx 70%

£100 at 40:60 becomes 20:60
After rebalance 32:48. So to get back to 100 we need 32 to rise by 20=approx. 60%

I understand that the VLS funds are automatically rebalanced every day, so because of that I've taken the example a bit further and assumed on a £100k fund the 50% loss occurred over 5 days, dropping 10% a day and rebalancing each day. For the VLS60 after the fifth rebalance after loss 5, the fund value is £73k (£44k equities and £29k bonds). For the VLS40 after the fifth rebalance after loss 5, the fund value is £82k (£33k equities and £49k bonds). I then assumed a gain of 10% a day on each fund and rebalanced each day for the next 5 days. For the VLS60 after these further 5 days of gains, the fund value was £98.2k (£58.9k equities and £39.3k bonds) and for the VLS40 the fund value was £99.2k (£39.7k equities and £59.5k bonds).

So I think that shows that because of the daily rebalancing, after both funds have recovered only by 50%, they are both almost back at the original £100k value, with the VLS40 only slightly ahead of the VLS60. For both funds that shows the clear benefits of the daily rebalancing of VLS - do you agree?

Linton, in your earlier post you said if you want a cash buffer VLS is the wrong product. Why is that?

Linton

Audaxer wrote: »

........
Linton, in your earlier post you said if you want a cash buffer VLS is the wrong product. Why is that?

Because the idea of a cash buffer is to use it for your income instead of selling equities when selling equities is a bad idea. If your "cash" is linked as a fixed % of your equity you cannot sell one without selling the other. Better to start of with say 60% in an equity fund and 40% in cash or a bond fund and then in the bad times for equity let the bonds or cash fall as a % of the total. Once equities are returning more than bonds you can replenish the buffer.

jamesd

Linton wrote: »

Have you taken into account the fund rebalancing the allocations?

No, and it is possible for 40 to recover faster if rebalancing happens at convenient times and enough. As you illustrated and can be done with independent funds.

Audaxer wrote: »

I understand that the VLS funds are automatically rebalanced every day, so because of that I've taken the example a bit further and assumed on a £100k fund the 50% loss occurred over 5 days, dropping 10% a day and rebalancing each day. For the VLS60 after the fifth rebalance after loss 5, the fund value is £73k (£44k equities and £29k bonds). For the VLS40 after the fifth rebalance after loss 5, the fund value is £82k (£33k equities and £49k bonds). I then assumed a gain of 10% a day on each fund and rebalanced each day for the next 5 days. For the VLS60 after these further 5 days of gains, the fund value was £98.2k (£58.9k equities and £39.3k bonds) and for the VLS40 the fund value was £99.2k (£39.7k equities and £59.5k bonds).

So I think that shows that because of the daily rebalancing, after both funds have recovered only by 50%, they are both almost back at the original £100k value, with the VLS40 only slightly ahead of the VLS60. For both funds that shows the clear benefits of the daily rebalancing of VLS - do you agree?

VLS doesn't use strict daily rebalancing. More here on what they and target date do.