Vanguard LS vs buying the underlying funds

MPN

bowlhead99 wrote: »

Generally most would consider that it could produce higher returns over time than cash, and therefore say it had more utility as a diversifier.

I suppose the same can be said with any WP fund/IT such as Capital Gearing or its OEIC equivalent? However, if the market crashes then surely the bond or WP fund will lose money although not as much as in equities. Therefore, holding cash in a portfolio at that time would be 'better'.

cloud_dog

bowlhead99 wrote: »

It's ok ZPZ, we can tell when you're being trolled.

I apologise, I was a little bored... and as logic didn't seem to be helping I thought sarcasm might.

bowlhead99

MPN wrote: »

I suppose the same can be said with any WP fund/IT such as Capital Gearing or its OEIC equivalent? However, if the market crashes then surely the bond or WP fund will lose money although not as much as in equities. Therefore, holding cash in a portfolio at that time would be 'better'.

Generally what you look for when building a portfolio is a diversified set of assets which have the potential to go up over time, but are not fully correlated with each other. E.g. stocks vs real estate vs various types of bonds. They all have different risks and rewards of ownership and can provide a real return, but may do so at different times.

By incorporating those different types of assets into a portfolio you will smooth returns, without losing as much performance as might intuitively be expected from incorporating the lower-returning assets - due to the buy low sell high effect when rebalancing.

Cash does not generally have the same potential of providing real growth. Sometimes, better than inflation returns can be had, depending on economic conditions - but not a substantial return akin to 'growth' or 'profit' because of the lack of investment risk being taken; there is no risk being taken that deserves someone rewarding you in excess of the risk-free rate, so you shouldn't expect it to produce 'returns'.

As cash is not going to provide a long term real return, it doesn't bring the same opportunities to the table as a 'proper' investment would (ie one that offers income or growth or speculative return potential, as a reward for risk). So generally it doesn't have much of a place in a 'portfolio' of 'investments'.

That's not to say that one couldn't tactically choose to have a smaller portfolio of investments while holding cash in a bank account waiting on the sidelines to increase or top up your portfolio when you think the outlook is rosier for the type of investments you want to hold. If everything in your portfolio goes down, you will be glad that you have a bunch of cash outside your portfolio. Holding cash rather than holding an investments portfolio will, over that short term period, have been 'better'.

But that's just a short term tactical thing. Long term, the lack of investment risk with cash means it can't provide much in the way of real growth and if you include it in a portfolio of assets with actual growth potential it will be a drag on that portfolio. It's effectively like having a smaller portfolio. As it doesn't grow, you can't use it to 'sell high, buy low' - it doesn't go high. You can still use it to 'buy low' if something has crashed; but that is not very powerful as a long term strategy because by staying in cash and not being invested you have missed gains, due to having a smaller portfolio at work.

That is a bit of a different concept to having a portfolio properly stuffed with assets with actual profit being generated which are less than fully correlated. For example developed vs emerging markets may peak at different times (some components more correlated than others) but they are still generally each going up over time. Stocks vs bonds or real estate likewise (again, some bonds or properties will be more correlated than others); they are all generally producing an economic return over time. As you rebalance among them you will catch different parts of the growth cycle but there is usually growth coming from somewhere (albeit there can be some negative periods).

Whereas cash on deposit is not really producing economic profits (as no real incentive for banks to give you a decent share of their own profits if you can demand your cash be returned), so by choosing to divert your portfolio into cash, you are just shrinking the proportion of your net wealth that's in a portfolio. Whether the aim of the portfolio is long term growth or long term real terms wealth preservation, cash is not great at those things. It hinders them. So it's just for helping with liquidity (being able to pay bills as they fall due) or for tactically changing the size of your investment portfolio if you are a market timer. I wouldn't say it is part of the portfolio, per se. Though others may dismiss that as semantics.

There will be some parts of the bond spectrum that are relatively less attractive than others from time to time. Some bonds will be priced now at a very low return to maturity and if you are not in the same position as other market participants (e.g. pension funds and insurance companies required to buy bonds for liquidity and liability hedging, because they can't get 1.5% from an instant access bank account on their billions) you do not have to buy what those other market participants choose to buy for their own purposes. So, not all of what is held by a 'global bond' tracker will be attractive to you. So you might choose not to buy such a tracker, and instead buy something you see as having better potential.

But fundamentally, a diversified bond fund will contain a bunch of assets with investment risk and return characteristics that could be useful in a portfolio (even if some of the fund's assets are less useful) while cash does not typically have real return characteristics at all. So a bond fund may be of more use to the portfolio than cash holdings, especially if some of your wealth is in tax wrappers like pensions where it can't access short term excess return opportunities (like promotional marketing rates on retail banking accounts) and bonds become the least worst option for a downturn.

To summarise I would say bonds could be "in the portfolio" and cash should generally not be "in the portfolio" other than perhaps for relatively short term tactical effects; but feel free to disinvest and hold cash "outside the portfolio" if you (temporarily or permanently) don't like the prospects for risk assets that others would use to construct their portfolio. Like I say, some will see the distinction between cash being considered as an integral part of your 'investment portfolio' rather than being in your net worth in a bank but outside the 'investment portfolio', as just semantics. But to me, understanding what the portfolio should do for you and why and how is all part of planning.

ColdIron

MPN wrote: »

I suppose the same can be said with any WP fund/IT such as Capital Gearing or its OEIC equivalent? However, if the market crashes then surely the bond or WP fund will lose money although not as much as in equities.

Checkout CGT between 01/07/2008 and 30/06/2009 during the GFC. It barely skipped a beat, of course next time it could be different

https://www2.trustnet.com/Tools/Charting.aspx?typeCode=T_FITCGT

Alexland

Sally57 wrote: »

So are you a fully passive investor now Alex (I seem to remember you holding Monks in the past)? Sorry another question, is holding this type of bond (Vanguard Global Aggregate Bond) better than holding cash in a portfolio? Thanks again.

You have a good memory yes I have given up with stock pickers for now to focus on managing asset allocation with low cost funds/etfs. I still think that in the right circumstances an active manager could add value by deploying leverage or smoothing income in the decumulation phase.

Alex

thickasabrick

"The suggested RESET portfolio"

"Reset by David Sawyer" Chapter 32 "Section 3: Investing (RESET's 10-Point Investing Plan) "section 7.

25% UK
45% US
13% Europe Ex-UK
7% Japan
7% Emerging Markets
3% Pacific Ex-Japan


Fidelity
Fidelity Index US Fund P Accumulation.
Fidelity Index UK Fund P Accumulation.
Fidelity Index Europe Ex-UK P Accumulation.
Fidelity Index Emerging Markets P Accumulation.
Fidelity Index Japan P Accumulation.
Fidelity Index Pacific Ex-Japan Fund P Accumulation Shares.

or
Vanguard
US Equity Index Fund - Accumulation.
FTSE UK All Share Index Unit Trust - Accumulation.
FTSE Developed Europe Ex-UK Equity Index Fund - Accumulation
Emerging Markets Stock Index Fund - Accumulation
Japan Stock Index Fund - Accumulation.
Pacific Ex-Japan Stock Index Fund - Accumulation

"Stash: the suggested RESET portfolio is based on a 100% equity allocation, invested in six index-tracking funds across six different geographies (there is a super-easy option, too). No bonds (until we reach FIRE, when it moves to an 80% equities / 20% bonds split), no cash. To some, this might seem risky. But as we've seen from the past 150 years, if you're investing over 10-15 years plus, this approach is going to make your money work hardest for you."

He does have a disclaimer "RESET is a book. I am not giving personal financial advice to you, the reader, for a fee. Instead you paid for the information in the book, you can do with it what you like, and I'm not responsible for the consequences"

Only made it to chapter 5 before getting distracted but can see some stuff explaining his reasoning which I'll probably read at some point.

Alexland wrote: »

Obviously rebalance, but why does he suggest 6?

snip
I am genuinely interested in why he thinks 6 is better?
Alex

Alexland

If you wanted a similar asset allocation you could just get an All World fund plus a UK fund for the home bias. The weighted average OCF might be a little but more but you would save on trade fees from trying to maintain a 6 fund portfolio.

NedS

Alexland wrote: »

If you wanted a similar asset allocation you could just get an All World fund plus a UK fund for the home bias. The weighted average OCF might be a little but more but you would save on trade fees from trying to maintain a 6 fund portfolio.

Absolutely, 75% FTSE All World ex-UK and 25% FTSE UK (100 or All Share) would give you almost exactly the asset allocation described above.

StellaN

I have to agree with Alexland. i personally feel there is absolutely no point in holding 6 funds when 2 funds such as an All World Index Fund/ETF and UK Fund/ETF for home bias will have the same effect on a portfolio.

wiseonesomeofthetime

As this thread features Vanguard LifeStrategy Funds quite heavily, I thought I would ask my question here, rather than start another thread on Vanguard.

I am looking at investing £10k in LS60 or LS80 in April under the ISA wrapper.

I am trying to get my head around how this all works as I have only ever held Cash ISAs before.

It looks like you don't actually invest your £10k and forget about it for ten years as there appears to be regular costs or charges that need to be paid.

I have read all the documents and they talk about a 0.15% account (platform) fee. I read this as I will need to pay an additional sum to them each year to avoid an automatic reduction in my fund's value by it being taken from it directly.

So that could be £15 (based on £10k @ 0.15%). I can obviously manage that from my bank account.

Is that correct?

I feel I need to dip my toe in the market as my savings at the moment are not even worth face value, with interest rates below inflation .

This looks the "safest" bet.

I am aware that my capital is at risk. Never won on anything yet where it has been (e.g. the old endowment policy promises), however, my luck has to change some time, yes?