Question re 700K investment

[Deleted User]

I'm in the same situation as the op less money though.
I currently locked away 320k in fix rate bonds at average 2.3% for 2 to 3 years.
Is it better the vanguard 60 funds at being stable than 80 which I have only put 15k into stocks and shares so far and 15k into a cash isa.

bostonerimus

sixpence. wrote: »

So person might reasonably put 2 million pounds in a VLS60? Do other people think this is sensible?
I want to do the simplest and most sensible thing possible tbh. I don't feel the need to own funds for the sake it of although I like the idea of a multi-asset fund. Maybe I could do 50% VLS 60 and 50% other funds: multi-asset, REIT, Asia ex Japan income.
Yes but are you unusual? Would a lot of people put seven figures in a single vanguard?

I'm an advocate of simple cap weighted index investing and as my US equity fund contains around 3600 different stocks I don't worry about diversity...you might criticise the cap weighted basis though. My international stock index, bond index and small amount in a multi-asset fund give me some geographical and fixed income diversity.

With VLS60 you will own 7 stock funds and 11 bond funds that are globally diverse. There is a UK stock bias so maybe you should own a separate US equity fund.

You should come up with an asset allocation that meets you needs. If you need advice for that then ask an IFA, but again, this does not need to be complicated.

Alexland

bostonerimus wrote: »

With VLS60 you will own 7 stock funds and 11 bond funds that are globally diverse. There is a UK stock bias so maybe you should own a separate US equity fund.

...and then end up overweight in both UK and US equities. If you don't like the UK bias of VLS you would be better going with the HSBC Global Strategy series.

However once you get into six-figure account valuations then 2 fund portfolios of a global tracker such as HSBC FTSE All World and a fixed income fund such as Vanguard Global Bond Index Hedged can be cheaper depending on your contribution pattern and platform trade fees.

Alex

bostonerimus

Alexland wrote: »

...and then end up overweight in both UK and US equities. If you don't like the UK bias of VLS you would be better going with the HSBC Global Strategy series.

However once you get into six-figure account valuations then 2 fund portfolios of a global tracker such as HSBC FTSE All World and a fixed income fund such as Vanguard Global Bond Index Hedged can be cheaper depending on your contribution pattern and platform trade fees.

Alex

Agreed...a simple portfolio with a few tracker funds would keep fees low, and that's what I do.

sixpence.

bostonerimus wrote: »

Agreed...a simple portfolio with a few tracker funds would keep fees low, and that's what I do.

Okay, I can see how this can be simple. I will go to the IFA with the idea of owning a few passive funds and wanting to get clued up on a drawdone approach.

If they can contribute to this in terms of tax/making things easy then great. I have x3 possible IFAs to "interview" before I pick which one to work with. If I am not sure I might post a seperate "this is what the IFA said" post on the forum as I don't really have anyone in real life I can bounce ideas off.

sixpence.

Does anyone know how many shares are in a VLS 60? It would probably take a while (for me at least) to work out, but it must be tens of thousands right?

I can't believe once upon a time my dad just suggested buying 5-6 ulities. What total madness.

sixpence.

One more question (sorry to triple post!). What do people do if there is a recession, as there was in 2008, in this instance? I mean, if you're dependant on the income do you just take your lumps and spend the money. Do you hope that it has gone up enough over the years to mean that you can still take the same amount of income?

bowlhead99

sixpence. wrote: »

Does anyone know how many shares are in a VLS 60? It would probably take a while (for me at least) to work out, but it must be tens of thousands right?

I can't believe once upon a time my dad just suggested buying 5-6 ulities. What total madness.

The total number of equities will be in the thousands but not tens of thousands. For example their UK all-share index fund has under 600 companies, developed Europe ex-UK 500, Asia and emerging markets will be under 2000, and Vanguard's US index has about 3400.

And actually, for convenience, more than a third of the 'global ex UK' allocation in VLS60 is just done with a simple developed world tracker of ~2000 large stocks, rather than the region-by-region stuff mentioned, so some of the stocks that aren't global giants don't get much of a look in.

Yes you are right, it's more than just a few utilities picked at random, and it's very convenient to have the ability to sort your money broadly at low cost.

Still, while it's true that it's 'diversified', all of the equity allocations within different regions are done based on free float market capitalisation so your money isn't very evenly spread across all those companies.

If you didn't appreciate that point: a layman might assume his £20000 investment in the fund would get him £12000 into the 60% of the fund that represents 6000 stocks, so would be basically putting £2 into each of them...?

In reality, Apple and Microsoft between them are 5% of the 'developed world ex UK' fund (£116), and 6.7% of the US tracker (another £116) so instead of having £4 across those two companies, you have £232. Likewise, Google and Facebook and Amazon between them will be another £200 (instead of £6). This doesn't leave much space for smaller companies, so even with the 'overweighting' to the UK index that you've heard about with VLS: as of the last factsheet you only get 30p in Premier Foods, 10p in Topps Tiles or less than 8p in Thomas Cook.

You might think that Apple is more likely to double in value, or less likely to halve in value, than Thomas Cook. But if nobody knows the future, and the current share price represents a fair price for the risk and growth prospects in each company (because markets are efficient, so no active management or value judgements are used when allocating money in a tracker), do you really think you should put over £100 into Apple or Microsoft for every eight pence you put into Thomas Cook? Who am I to judge you, if you think that's fine. It's a low cost way to allocate the capital.

sixpence. wrote: »

One more question (sorry to triple post!). What do people do if there is a recession, as there was in 2008, in this instance? I mean, if you're dependant on the income do you just take your lumps and spend the money. Do you hope that it has gone up enough over the years to mean that you can still take the same amount of income?

More sophisticated ways of working out a long term 'safe withdrawal rate' for people in retirement will consider the relative strength of the markets when pulling out money.

For example, say you wanted to take £24k a year (real terms) from your £700k pot because you think 3.5% on top of inflation is sustainable long term Imagine markets crashed 30%, your £700k becomes £490k, you put your withdrawals on hold and take nothing out, three years later, markets go back up +42.85%, you have your £700k back (ignoring inflation for the moment).

Whereas if you did three years of taking £24k from the £490k, you would only have £418k, so when the £442k bounces back by 42.85%, you only have £597k, not £700k. So the three years of refusing to moderate your withdrawals downwards at times of low fund value, and just going ahead and taking the £72k anyway ... has 'cost' you £103k from the original investment. Ouch- only three years into a forty year spending phase, with markets no lower than when they started, but you've used up more than a seventh of the capital.

By contrast if the markets had stormed upwards towards £800k or £900k in real terms, you can easily take out that £24k per year in real terms while they markets are booming and be left with more than you started with after the fund portfolio falls back. Because £24k in a bull market is a much smaller slice of the pie than £24k in a bear market.

There are different ways to approach this (more than one way to skin a cat) but many people would advocate having at least a couple of year's money in cash rather than investments, so that you can keep drawing from that cash pot even if markets are bad for a while, and then when markets are relatively better, top up the cash with some investment sales.

Some people with truly large investment balances relative to their spending needs will not bother with a large cash buffer because they know returns on cash are generally lower than investment returns in the long run, and they don't expect to run out because their spending is only a couple of a percent of their wealth each year. But most don't have that luxury, so planning for the downsides is important and a plan to vary the amount drawn from the pot -though more complicated - is sensible.

sixpence.

Thanks for this reply. It’s very informative. Okay so 6000 -10,000 shares is still a pretty extraordinary amount.

A recesssion honestly sounds so stressful in this situation. I actually got a bit tense reading about it. What do people do in a recession? If it’s your income then you can’t just live off air for two years.

I thought you were supposed to keep 1-2 years in cash. Anymore than that feels like quite lot of cash. My savings account is approximately 0.5-.0.75% interest so even by keeping cash one is losing money according to inflation.

If the markets increased by 8% per year for five years that would leave approximately £850,000 (if I was withdrawing 3.5% per year) - note: my maths isn’t very good so this is an approximation - if the value of the fund then dropped 30% in a recession it would be worth £595,000. So it doesn’t seem like growth protects one from a recession? Bearing in mind, the market didn’t fully recover from the 2008 recession until 2013.

Also I know from researching my stocks and shares ISA (which contains a VLS 60) that you always want to keep 10% of your investments in cash in case there is a recession so that you can achieve optimum growth during "recovery".

bowlhead99 wrote: »

The total number of equities will be in the thousands but not tens of thousands. For example their UK all-share index fund has under 600 companies, developed Europe ex-UK 500, Asia and emerging markets will be under 2000, and Vanguard's US index has about 3400.

And actually, for convenience, more than a third of the 'global ex UK' allocation in VLS60 is just done with a simple developed world tracker of ~2000 large stocks, rather than the region-by-region stuff mentioned, so some of the stocks that aren't global giants don't get much of a look in.

Yes you are right, it's more than just a few utilities picked at random, and it's very convenient to have the ability to sort your money broadly at low cost.

Still, while it's true that it's 'diversified', all of the equity allocations within different regions are done based on free float market capitalisation so your money isn't very evenly spread across all those companies.

If you didn't appreciate that point: a layman might assume his £20000 investment in the fund would get him £12000 into the 60% of the fund that represents 6000 stocks, so would be basically putting £2 into each of them...?

In reality, Apple and Microsoft between them are 5% of the 'developed world ex UK' fund (£116), and 6.7% of the US tracker (another £116) so instead of having £4 across those two companies, you have £232. Likewise, Google and Facebook and Amazon between them will be another £200 (instead of £6). This doesn't leave much space for smaller companies, so even with the 'overweighting' to the UK index that you've heard about with VLS: as of the last factsheet you only get 30p in Premier Foods, 10p in Topps Tiles or less than 8p in Thomas Cook.

You might think that Apple is more likely to double in value, or less likely to halve in value, than Thomas Cook. But if nobody knows the future, and the current share price represents a fair price for the risk and growth prospects in each company (because markets are efficient, so no active management or value judgements are used when allocating money in a tracker), do you really think you should put over £100 into Apple or Microsoft for every eight pence you put into Thomas Cook? Who am I to judge you, if you think that's fine. It's a low cost way to allocate the capital.


More sophisticated ways of working out a long term 'safe withdrawal rate' for people in retirement will consider the relative strength of the markets when pulling out money.

For example, say you wanted to take £24k a year (real terms) from your £700k pot because you think 3.5% on top of inflation is sustainable long term Imagine markets crashed 30%, your £700k becomes £490k, you put your withdrawals on hold and take nothing out, three years later, markets go back up +42.85%, you have your £700k back (ignoring inflation for the moment).

Whereas if you did three years of taking £24k from the £490k, you would only have £418k, so when the £442k bounces back by 42.85%, you only have £597k, not £700k. So the three years of refusing to moderate your withdrawals downwards at times of low fund value, and just going ahead and taking the £72k anyway ... has 'cost' you £103k from the original investment. Ouch- only three years into a forty year spending phase, with markets no lower than when they started, but you've used up more than a seventh of the capital.

By contrast if the markets had stormed upwards towards £800k or £900k in real terms, you can easily take out that £24k per year in real terms while they markets are booming and be left with more than you started with after the fund portfolio falls back. Because £24k in a bull market is a much smaller slice of the pie than £24k in a bear market.

There are different ways to approach this (more than one way to skin a cat) but many people would advocate having at least a couple of year's money in cash rather than investments, so that you can keep drawing from that cash pot even if markets are bad for a while, and then when markets are relatively better, top up the cash with some investment sales.

Some people with truly large investment balances relative to their spending needs will not bother with a large cash buffer because they know returns on cash are generally lower than investment returns in the long run, and they don't expect to run out because their spending is only a couple of a percent of their wealth each year. But most don't have that luxury, so planning for the downsides is important and a plan to vary the amount drawn from the pot -though more complicated - is sensible.

atush

sixpence. wrote: »

One more question (sorry to triple post!). What do people do if there is a recession, as there was in 2008, in this instance? I mean, if you're dependant on the income do you just take your lumps and spend the money. Do you hope that it has gone up enough over the years to mean that you can still take the same amount of income?

You have a cash fund of 1-3 years spending, and spend that if markets correct/crash. Top up the funds spent when the market recovers.