A good balance of funds within my Vanguard account

dllive

Hi

Ive completely neglected my investments over the past few years, so I thought now would be a good time to revisit this!

I currently have 2 funds in my Vanguard account:
FTSE Developed World ex-U.K. Equity Index Fund (Accumulation)
LifeStrategy® 100% Equity Fund (Accumulation)

Im not very interested in investments (although I do like a little dabble in company shares which I treat like gambling) so ideally I want to make it very easy and dribble a monthly amount into Vanguard (ISA allowance) and - largely - forget about it.

Are the 2 funds I hold fairly balanced? Or should I add an emerging markets fund?

With an ISA allowance of £20k, does it make sense to pay £1,666 per month (20,000 / 12 months) into 2 or 3 funds within my Vanguard account?

I did look at their Target Retirement 2045 Fund, although it seems the only difference is that - every few years - they rebalance the portfolio in bonds/equity. This is something I can do myself (unless someone can give another argument as to why Target Retirement 2045 Fund is a good idea).

Many thanks for any opinions/tips/advice.

A_T

In your position I would probably merge both into their FTSE Global All Cap Index fund.

pip895

Unless you are going to buy an annuity then forget the target Retirement fund. there is a lot of overlap between your two funds both 100% equity one with slightly more UK exposure. Adding a little EM & small company might be good but Vanguard are not the perfect place for either. Could you add such exposure else ware?

Possibly changing LS100 for something with a bit of bond exposure LSA 60 or 80?

dllive

pip895 wrote: »

Unless you are going to buy an annuity then forget the target Retirement fund.

Why do you say this? (please excuse my patent ignorance! )

pip895 wrote: »

Possibly changing LS100 for something with a bit of bond exposure LSA 60 or 80?

I have about another 25 years til retirement. Surely (again - please excuse my patent ignorance! ) thats a lot of time for markets to fall and then rise again.(?)

Ive just been reading this article: https://www.financialthing.com/best-tracker-funds/ which suggests just investing in 2 funds: Vanguard US Equity Tracker Fund and Vanguard Global Bond Index Fund . Seems like a good strategy?

As you may tell, Im getting overwhelmed with all the different articles/options/funds out there. I think the only thing Im sure about is wanting to use Vanguard (because of low OCF and simplicity).

bowlhead99

dllive wrote: »

pip895 wrote:

Unless you are going to buy an annuity then forget the target Retirement fund

Why do you say this? (please excuse my patent ignorance! )

The 'target retirement date' funds are mixed asset funds which have a bit of a 'glide path' for their asset allocations over time rather than a fixed ratio of e.g. equities to bonds. As we get nearer to the target date, they will smoothly reduce the equities component of the fund (which provides growth) and increase the bond component (which provides stability / lowers volatility).

So when you get closer to retiring you'll find your fund has more allocated to stable investments which hold up better in a crash, rather than growth investments growing your wealth, compared to what the fund holds today.

That sounds nice in theory but really, it's of most use to people who expect that as soon as they retire they will want to exchange all or a large portion of their investment for an annuity which will just pay out a fixed income for life. Such people would want to ensure that coming up to that point they didn't have any nasty surprises and would give up on growing the pot to defend against falls in value ahead of them doing that big important purchase.

These days, people do not use annuities so much as they used to (ie back in the old days when annuity was the standard thing for people to do with their retirement pot). Some of that is due to low interest rates but it's also because you are giving up growth potential to 'cash in' your investment for a fixed known value. Many people instead realise that might be retired from (e.g.) 2045 to 2075+, and instead of giving up on investing altogether, it can be more sensible to stay invested, gradually spending the money in your pot, drawing from it over time.

It's true that people do tend to favour relatively lower levels of equities and higher levels of bonds when retired and 'decumulating' rather than working and 'accumulating' investments, unless they have very large pots of investment and can afford to take plenty of investment risk.

However, when you think about your personal risk tolerance and how it might change over time to favour bonds more and equities less... it's very unlikely that your changing preference over time would exactly match the path that Vanguard 2045 puts you on. Almost inevitably, it would be moving you towards bonds at either a faster or slower pace than you really wanted. You would do better to buy (e.g.) Lifestrategy 100% equity or 80 equity now and reduce to a lower level equity product later when YOU want to do that.

I have about another 25 years til retirement. Surely (again - please excuse my patent ignorance! ) thats a lot of time for markets to fall and then rise again.(?)

There could be two or three or four significant crashes in that time and various minor shocks, corrections, dips and blips.

If you are not familiar with how it feels to have lots of money tied up in an international portfolio of equities at the time there is a global stock market collapse which drops the value of major indexes by 35-55% and takes several years to recover - because we haven't seen one for over a decade and you didn't have much invested 15-20 years ago - then you might think you will be fine, and being rather disinterested in investments, will just shrug and 'ride it out'.

However, people with more experience will tell you that they also *thought* they would be fine, but were almost scared off investing for life when looking at their account and it showed that they had 'lost' a third to a half of the value of their life savings in the course of a year or two. They then sold out to avoid the losses getting steeper, and consequently missed the rebound, permanently damaging their wealth.

If you know you have a strong stomach and will definitely be happy to keep holding your investments, not cash them in at low values, and perhaps even add more and more investments as your Vanguard account shows your funds being worth less and less every month, then great. Investing in a 100% equity product is fine for you. However, behavioural analysis and a lot of anecdotes from friends, acquaintances, loved ones, colleagues, etc etc tells us that some people say that they would be fine, but then think differently when the £10k, £50k or £200k paper loss is their real life savings and not some theory they're reading on a blog.

Ive just been reading this article: https://www.financialthing.com/best-tracker-funds/ which suggests just investing in 2 funds: Vanguard US Equity Tracker Fund and Vanguard Global Bond Index Fund . Seems like a good strategy?

It is all very well for bloggers or financial websites to try to keep it simple for their target audience, and over the long term, investing rather than not investing at all is a positive thing to do.

However, just because some American blogger is ignoring international stock markets and just using a cheap and cheerful tracker of US listed stocks, does not mean you should do that. The US index is currently the most valuable in the world but that will not necessarily always be the case - some decades it performs well, some badly - and you don't live your life in US dollars.

Thirty years ago during the Japanese asset price bubble, the Japan stock market was the most valuable in the world. After a big crash, Japan's Nikkei index has still not recovered to where it was in December 1989. So don't be so shortsighted as to invest in just one foreign index with a few bonds on the side. There are ready-made portfolio products out there (e.g. Vanguard lifestrategy or other rivals) which mix a whole load of UK and international stocks with bonds and other assets, which you can buy off the shelf. You would not be doing yourself a favour by investing in a single market like 'US equities' even if it looks like the costs may be a tiny bit lower.

I currently have 2 funds in my Vanguard account:
FTSE Developed World ex-U.K. Equity Index Fund (Accumulation)
LifeStrategy® 100% Equity Fund (Accumulation)


Are the 2 funds I hold fairly balanced? Or should I add an emerging markets fund?

The developed world ex UK tracker fund essentially just duplicates most parts of the non-UK, non- emerging markets holdings of the Lifestrategy 100% fund that you have. It's not clear why you would want to do this.

Perhaps you think that you want more than 75% of your equities to be listed on stock markets outside the UK (25:75 is the ratio of UK to non UK in the Lifestrategy product). But it is a strange choice to only use a developed ex UK tracker as the second fund, because your Lifestrategy fund already had some emerging markets exposure which you will be diluting if the fund you add to it is 'developed' world only.... and then you will be thinking, should I add yet another fund stuffed with emerging markets holdings to try to balance it up again...?

Generally if you want 100% equities rather than some lower ratio of equities to other stuff, and are somewhat disinterested in how they are allocated, the lifestrategy product is probably fine to hold on its own. I would dump the developed ex-UK fund.

If you want to mess with the allocations of the lifestrategy and dilute the UK element because you believe you know better than Vanguard's target UK customer, you could add a small amount of their global small cap fund (which is mostly ex-UK and holds small-to- medium size companies which are too small to be picked up by the trackers used inside the lifestrategy). This may change the result for the better over the long term while increasing the volatility; though from year to year it may be up or down with no apparent consistency.

dllive

Thanks @bowlhead99 for the informative/comprehensive response!

There was a reason why I picked those two Vanguards funds, but for the life of me I cant find the article which suggested them. Im pretty sure it was a Monevator article. On searching for

the article I found this one which Ill include as it may be of interest to people reading this post: https://monevator.com/9-lazy-portfolios-for-uk-passive-investors-2010/

I am a bit concerned about LifeStratgey's weighting in UK stock, so feel I should add a non-UK fund in there. Perhaps each month proportion 70% to LifeStrategy100 and 30% into Global Small-Cap.

So hard to know what to do!

I do like FinancialThing's reasoning regards holding Vanguard Global Bond Index Fund. "... When markets are falling, you can exchange some of your bond fund holdings into stock funds when the worst is over. Think of bond funds like insurance, you hope you won’t need them but you’ll be glad you have them when the markets are falling out the sky."

stephenadarglas

Legal and General do a world tracker excluding the uk. Cheap to manage too being a tracker.

stephenadarglas

https://www.hl.co.uk/funds/fund-discounts,-prices--and--factsheets/search-results/l/legal-and-general-international-index-trust-c-accumulation

Here's a link with further info

SonOf

There was a reason why I picked those two Vanguards funds, but for the life of me I cant find the article which suggested them. Im pretty sure it was a Monevator article. On searching for

There is more to life than Vanguard and Vanguard do not have the best options in every area. So, do not restrict your choice to Vanguard only. HSBC and iShares for example.

Relying upon articles means you accept the bias that exists with the journalist or individual writing it.

I do like FinancialThing's reasoning regards holding Vanguard Global Bond Index Fund. "... When markets are falling, you can exchange some of your bond fund holdings into stock funds when the worst is over. Think of bond funds like insurance, you hope you won’t need them but you’ll be glad you have them when the markets are falling out the sky."

Most fluid asset allocations have global bonds out of favour at the moment with little or no allocation to them. If you are going to build a bespoke portfolio then you need to understand how you build it, how much you place in each area and then adjust it over time (typically once a year is fine).

If you do not have that level of knowledge and understanding then you should not build a bespoke portfolio but instead use a multi-asset fund. Or in your case, as you are speculative with investment risk, a global tracker is all you need.

Thrugelmir

dllive wrote: »

I am a bit concerned about LifeStratgey's weighting in UK stock,

The more exposure you have to international holdings the greater the potential volatility. As not just market movements to be concerned with but currency ones as well.

bowlhead99

stephenadarglas wrote: »

stephenadarglas wrote: »

Legal and General do a world tracker excluding the uk. Cheap to manage too being a tracker.

https://www.hl.co.uk/funds/fund-discounts,-prices--and--factsheets/search-results/l/legal-and-general-international-index-trust-c-accumulation

Here's a link with further info

That L&G fund tracks the FTSE World (ex UK) Index. The same index which is being tracked by the "FTSE Developed World ex-U.K. Equity Index Fund" offered by Vanguard, which dllive already owns. So it doesn't improve or change the portfolio for the better.

The regular clean share class of the L&G fund has basically the same running costs as the Vanguard version, although according to the Hargreaves Lansdown link, HL offer class C units which have an annual discount of 0.05% on the running costs, compared to buying it at most other places. But if dllive already has a Vanguard account costing a 0.15% annual platform fee, it would not make a lot of sense to open up an account at HL with a 0.45% annual platform fee just to get access to a 0.05% saving on the running costs.

It would be like going to a shop which charges £30 for parking or delivery, just because the one item you want to buy there has a £5 discount compared to the shop which has parking or home delivery for free.

dllive wrote: »

I am a bit concerned about LifeStratgey's weighting in UK stock, so feel I should add a non-UK fund in there.

The allocations are through stock market indexes which weight the holdings to individual companies by their free float market capitalisation. So a big wodge of the allocation is to the giant companies in the UK FTSE index which happen to be listed on the London stock markets but are very much global businesses.

For example at end of November, Royal Dutch Shell was 7.7% of the UK All Share index, HSBC 5%; BP, AstraZeneca and Glaxo about 4% each, Diageo and British American Tobacco a little over 3%, then Unilever etc etc. These are global multinationals which happen to be headquartered here, but do most of their business outside the UK. Probably 70% of the revenues of the FTSE100 companies come from outside the UK. So your fear that Lifestrategy has too much allocated 'to the UK' is maybe somewhat overblown.

Secondly if you are still looking to dilute the UK index allocation from 25% to something lower, you don't need to use a fund with 0% UK allocation. Any fund with under 25% to the UK would dilute it. So the Global Small Cap or Global All Cap, each with <5% in UK companies at end of November, could do that job. Of those, the Small Cap makes more sense as it is a universe of companies which have only a very small allocation in the LifeStrategy, though it's a little lighter on emerging markets than the All Cap.

I do like FinancialThing's reasoning regards holding Vanguard Global Bond Index Fund. "... When markets are falling, you can exchange some of your bond fund holdings into stock funds when the worst is over. Think of bond funds like insurance, you hope you won’t need them but you’ll be glad you have them when the markets are falling out the sky."

Most investors with a 'portfolio' of investments for whatever reason (most commonly for retirement, but other goals too) will have a mix of asset classes, because different types of assets will perform better or worse at different times, and a benefit of diversification is that you will reduce the volatility of your overall pile of investments.

You can also benefit from being able to use excess allocations from high-performing assets to rebalance the weights of lower performing ones (to avoid the 'eggs in one basket' problem ahead of a crash) and when markets have fallen, you can rebalance out of the assets that have risen (or fallen less far) to pick up more of the assets that have become relatively cheaper.

So, while going equities-only is one way to build a long term portfolio (you can afford bigger crashes if you make bigger gains before and after), it is not the most common way to do it, and most would include non-equity assets among their holdings.

The line you're quoting sounds nice and clever, but when left to your own devices you may not end up being very disciplined at knowing quite when it is 'a good time' to sell bonds to buy equities, and are likely to do it too early or too late and be disappointed.

Also, there are lots of different bonds with different characteristics which can be grouped in different ways - government bonds, corporate bonds, short-dated bonds, long duration bonds, index-linked bonds, high yield bonds, domestic bonds, international bonds, emerging market bonds etc etc. The idea that the best mix of all these types of bonds for your needs from time to time is just 'the weighted average mix of all bonds that happen to exist in the market in large quantities', seems optimistic, so I would not personally buy the Vanguard Global Bond Index as a standalone product to try to integrate into my portfolio.

Instead if you recognise that going 100% equities is a bit 'gung ho' and want a balanced mix, just use a mixed asset fund where the fund manager periodically rebalances the allocations. Either with Vanguard's Lifestrategy method of rebalancing to a fixed ratio of equities and bonds (eg 80% equity or 60% equity products), or the method employed by other managers who make a more active periodic choice on how to allocate the holdings to target a risk range (L&G Multi Index, HSBC Global Strategy, Architas MA, BlackRock MyMap etc etc). The latter group of managers offer tracker-based solutions so are relatively low-cost just like Vanguard, even though their allocations are different. There are of course products which have more expensive actively managed components within the portfolio which might give a better (or at least, not worse, net of costs) result.

For someone who's "not very interested in investments", it would be a strange choice to use a Vanguard '100% equity' version of the LifeStrategy fund range and then buy a single bond index and try to juggle been the two products from time to time. Vanguard UK already offer 'proper' simple mixed asset solutions, such as Lifestrategy 60% equity and Lifestrategy 80% equity.

They have a lot more money in those products (over £10bn in those two against £1.7bn in the 100% equity version) because most customers seeking an off the shelf product like this don't want it to just cover their equities, and embrace the idea of letting the fund manager auto-rebalance between equities and bonds. Those products also have a more complex mix of bond holdings than the simplistic 'global bond' fund (a portion is in the global bond fund, but there are specific allocations to index linked gilts, and corporate and government bonds from different regions, hedged to sterling).

If you are generally disinterested in researching and monitoring investments it makes sense to buy something off the shelf that's 'good enough' rather than trying to build and maintain a two- or three- or more fund portfolio without fully knowing what you are doing, while being influenced by ideas from blogs or media or marketing from fund companies or platforms. If you don't want any bonds at all and just want to ride the equity rollercoaster up and down (not an outrageous attitude if you don't want to access the money for decades and you like risk), that's fine too. Either way, you could do it in one fund.