Investment period VLS

Albermarle

Are you sure about that? It seems a bit higher: https://www.hl.co.uk/funds/fund-discounts,-prices--and--factsheets/search-results/v/vanguard-lifestrategy-20-equity-accumulation/charts

Past performance  is no guarantee of the future.

aroominyork

You are over-analysing/mathematicing, OP. To put it at its simplest, decide how long it might take a stock market crash to recover, reasonable worst case of between 5 and 8 years, say 6 for this example. And figure how long a bond crash might take to recover, say 2 years. So have 2 years' expenditure in cash, 6 years in bonds, and the rest in equities. Rebalance annually. 

83705628

bowlhead99 said:

tcallaghan93 said:

sixpence. said:

tcallaghan93 said:

sixpence. said:

ANYWAY, back to VLS investment time periods  
I'm not actually a teacher but I was using that as an example. It does seem like thrifty living is the way forward... 
What do people think of a strategy like this. You would split up a larger portfolio say 6-7 figures in this way:

• 1-2 years in cash (emergency fund)
• 3-5 years in VLS 20 (for more immediate use: emergency or if you want to make a big purchase)
• 6-10 years VLS 60
• 11-15 years VLS 80
• 15+ years VLS 100

The number of years is based on a persons yearly spending money. Does that make sense? So If you calculated that you want to live off 25K per year then you would have 50K in cash and 75K in the VLS 20.

/
Ah bucket approach.
Well firstly, a reasonable return expectation after costs for VLS20 is less than NS&I's 1.16%.
Save yourself some work, work out how many stocks and bonds are in the total and you could pick one LS fund closest to that number?

Are you sure about that? It seems a bit higher: https://www.hl.co.uk/funds/fund-discounts,-prices--and--factsheets/search-results/v/vanguard-lifestrategy-20-equity-accumulation/charts

I guess the advance of dividing it up that way is that the investment is structured according to a strategy. I worked it out and it was about 52% in bonds. 

/
20% global equity, Vanguard's reasonable return expectation is looking at 5-7%, so 6%*20% = 1.2% (I think that's optimistic by the way, global equity valuations are back to start of year bubble levels as if we're not in a recession, but anyhoo), less fees of ~0.4% leaves ~0.8%.
80% global bonds, yield is 0.9%, *80% = 0.72%, less fees of ~0.4% leaves ~0.3% - this is before any defaults.
Totals ~1.1%

As an exercise in mathematics, it wouldn't make a lot of sense to decide that the returns were going to be 1.2% of portfolio value from the equities part and 0.72% of portfolio value from the bond part to give 1.92% blended average, and then decide to take off "fees of 0.4%" TWICE to give 1.1%.   There is only one lot of fees for the product (0.37% via Vanguard's own platform including management fees of 0.22% and platform fee of 0.15%) so you would take that from the 1.92% and leave 1.55%. 

Still, whether the 1.92% gross is actually some other number is only a guesstimate, so the point that you wouldn't expect much of a return from a product made of 20% equities and 80% bond indexes, is fair.

/
This is why I need to work it out on paper first!!!
But you missed out the transaction expenses, 0.06% so 1.92-0.43 comes out at 1.49.
Anyhoo that's with what I think is an optimistic expected equity return and the expected return on global hedged bonds after defaults will be a little less than the 0.9% YTM so I basically doing it's worth holding any developed government bonds over cash ATM if you can help it.

sixpence.

tcallaghan93 said:

sixpence. said:

tcallaghan93 said:

sixpence. said:

ANYWAY, back to VLS investment time periods  
I'm not actually a teacher but I was using that as an example. It does seem like thrifty living is the way forward... 
What do people think of a strategy like this. You would split up a larger portfolio say 6-7 figures in this way:

• 1-2 years in cash (emergency fund)
• 3-5 years in VLS 20 (for more immediate use: emergency or if you want to make a big purchase)
• 6-10 years VLS 60
• 11-15 years VLS 80
• 15+ years VLS 100

The number of years is based on a persons yearly spending money. Does that make sense? So If you calculated that you want to live off 25K per year then you would have 50K in cash and 75K in the VLS 20.

/
Ah bucket approach.
Well firstly, a reasonable return expectation after costs for VLS20 is less than NS&I's 1.16%.
Save yourself some work, work out how many stocks and bonds are in the total and you could pick one LS fund closest to that number?

Are you sure about that? It seems a bit higher: https://www.hl.co.uk/funds/fund-discounts,-prices--and--factsheets/search-results/v/vanguard-lifestrategy-20-equity-accumulation/charts

I guess the advance of dividing it up that way is that the investment is structured according to a strategy. I worked it out and it was about 52% in bonds. 

/
20% global equity, Vanguard's reasonable return expectation is looking at 5-7%, so 6%*20% = 1.2% (I think that's optimistic by the way, global equity valuations are back to start of year bubble levels as if we're not in a recession, but anyhoo), less fees of ~0.4% leaves ~0.8%.
80% global bonds, yield is 0.9%, *80% = 0.72%, less fees of ~0.4% leaves ~0.3% - this is before any defaults.
Totals ~1.1%

I dont understand this maths at all. Hmm. 
I know past performance isn't an indication of future returns but it sort of is with a index / bond passive method? I dont know. Help. I'm confused.

83705628

sixpence. said:

tcallaghan93 said:

sixpence. said:

tcallaghan93 said:

sixpence. said:

ANYWAY, back to VLS investment time periods  
I'm not actually a teacher but I was using that as an example. It does seem like thrifty living is the way forward... 
What do people think of a strategy like this. You would split up a larger portfolio say 6-7 figures in this way:

• 1-2 years in cash (emergency fund)
• 3-5 years in VLS 20 (for more immediate use: emergency or if you want to make a big purchase)
• 6-10 years VLS 60
• 11-15 years VLS 80
• 15+ years VLS 100

The number of years is based on a persons yearly spending money. Does that make sense? So If you calculated that you want to live off 25K per year then you would have 50K in cash and 75K in the VLS 20.

/
Ah bucket approach.
Well firstly, a reasonable return expectation after costs for VLS20 is less than NS&I's 1.16%.
Save yourself some work, work out how many stocks and bonds are in the total and you could pick one LS fund closest to that number?

Are you sure about that? It seems a bit higher: https://www.hl.co.uk/funds/fund-discounts,-prices--and--factsheets/search-results/v/vanguard-lifestrategy-20-equity-accumulation/charts

I guess the advance of dividing it up that way is that the investment is structured according to a strategy. I worked it out and it was about 52% in bonds. 

/
20% global equity, Vanguard's reasonable return expectation is looking at 5-7%, so 6%*20% = 1.2% (I think that's optimistic by the way, global equity valuations are back to start of year bubble levels as if we're not in a recession, but anyhoo), less fees of ~0.4% leaves ~0.8%.
80% global bonds, yield is 0.9%, *80% = 0.72%, less fees of ~0.4% leaves ~0.3% - this is before any defaults.
Totals ~1.1%

I dont understand this maths at all. Hmm. 
I know past performance isn't an indication of future returns but it sort of is with a index / bond passive method? I dont know. Help. I'm confused.

/
I'm a bit wrong, Bowlhead will probably explain.

dunroving

All this maths has me stumped (and I used t teach maths!)

In Fidelity, I pulled the performance graph for VLS20% (see below). It shows approximately 68% growth over 10 years - this has already removed the fund charge. 

You seem to be saying the 68% should be multiplied by .20, but this is the overall fund growth, not just the growth of the equities (minus the bonds). Surely fund growth is fund growth? The only thing to remove is platform charge?

(yes, I know past performance, etc., but I'm just addressing the weird maths).

83705628

Oh God what have I done!
I tried to give an idea of the future reasonable return rates over the next decade for L20 using https://www.institutional.vanguard.co.uk/documents/vanguard-economic-and-market-update-uk-en-pro.pdf, which I think is actually a little optimistic for stocks because at the start of the year the outlook was 3.5%-5.5%, higher than the 2018 outlook of 2.5%-4.5% even though 2019 saw significant price appreciation and flat earnings growth. So these numbers are... the least bad we've got. Or you can work it out yourself like I do.

The 20% equities, you can expect 5-7% from them, so call it 6%, multiply by 20% and those 20% equities contribute 1.2% to the fund's return.

The 80S bonds, you can expect 0%-1% according to the outlook, or 0.9% if you look at the yield to maturity of the global bond index fund (https://www.vanguardinvestor.co.uk/investments/vanguard-global-bond-index-fund-gbp-hedged-acc/portfolio-data?intcmpgn=fixedincomeglobal_globalbondindexfund_fund_link) which is essentially what that 80% of LS20 buys. Call it 0.9%, multiply by 80%, and those 80% bonds contribute 0.72% to the fund's total return, before defaults.

So the fund's total return expectation is 1.92%, the fees are 0.43% (https://www.vanguardinvestor.co.uk/content/documents/legal/vanguard-full-fund-costs-and-charges.pdf) if you're using the Vanguard platform, leaves 1.49% total expected return after fees. Or 1.48% if you want to be strictly accurate.

Albermarle

In other words the outlook is much more depressed than the history , on the basis that the non equity 80% of VLS20 will not perform in the same way as it did . In theory at least and probably close to the mark. 

83705628

dunroving said:

All this maths has me stumped (and I used t teach maths!)

In Fidelity, I pulled the performance graph for VLS20% (see below). It shows approximately 68% growth over 10 years - this has already removed the fund charge. 

You seem to be saying the 68% should be multiplied by .20, but this is the overall fund growth, not just the growth of the equities (minus the bonds). Surely fund growth is fund growth? The only thing to remove is platform charge?

(yes, I know past performance, etc., but I'm just addressing the weird maths).

/
Sorry my previous post was confusing, and a bit wrong, and yes you're right.
This past decade just gone has been excellent for both stocks and bonds for UK investors, but it was unusually good. Stock valuations appreciated, interest rates fell to record lows causing bond price gains, corporate earnings grew faster than GDP and so took up a bigger % of GDP which is not inherently sustainable, and the £ depreciated. It's possible that those same returns will repeat over 

the 2020s: 12% from global equity, 8% from UK equity, 6% from UK bonds, 4% from global bonds; I just don't see how. 

bowlhead99

dunroving said:

All this maths has me stumped (and I used t teach maths!)

In Fidelity, I pulled the performance graph for VLS20% (see below). It shows approximately 68% growth over 10 years - this has already removed the fund charge. 

You seem to be saying the 68% should be multiplied by .20, but this is the overall fund growth, not just the growth of the equities (minus the bonds). Surely fund growth is fund growth? The only thing to remove is platform charge?

(yes, I know past performance, etc., but I'm just addressing the weird maths).

The maths was indeed weird, but what he was attempting to do was estimate an annualised return on bonds from here (and say that rate of return will apply to 80% of your assets) and estimate an annualised return on equities from here (and say that rate of return will apply to only 20% of your assets), so 80% of one rate and 20% of another rate will give you your overall rate.  There was an error in taking the full charges off both pieces (thus doubling up the charges).

Regardless of fund running costs though, the principal difference why the number is lower than your expectation is broadly that general expectations going forward are not as high as the actual figures looking backwards over what was a bull market for both equities and bonds. Your 68% over the last nine years could annualised by a maths teacher to be a compound annual return of 5.9% (1.68^(1/9) = 0.059).  However, nobody really expects an 'equities light' portfolio to have a hope in hell of delivering almost 6% a year compound return, unless inflation is through the roof so that the 5.9% annualised isn't a whole lot in real terms.