Investment period VLS

dunroving

bowlhead99 said:

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.

Thanks, that makes a lot of sense. 

sixpence.

The reason that VLS has done so well is that the fund was started on the back of the 2008/9 recession.
However, there is going to be a recession soon. The value the stock market is currently estimated at doesn't reflect the economic losses that have come about as a result of the global pandemic. Boom and bust. It just depends what side of it you enter the market on, right? It's impossible to time the market though (we know this). So this leaves the question: what would an average 20-30 year time span for a VLS 20 (or any VLS) look like, all things considered? 

83705628

The maths isn't weird at all, it's a completely standard way of working out the kind of return you expect.

bowlhead99

tcallaghan93 said:

The maths isn't weird at all, it's a completely standard way of working out the kind of return you expect.

Yes, once you take your errors out of it, it is a completely standard way of doing it, so he was able to understand it when I explained it 

sixpence. said:

So this leaves the question: what would an average 20-30 year time span for a VLS 20 (or any VLS) look like, all things considered? 

Well, the 'average' time span involves some consideration of the average returns of all the 20-30 year timespans that have ever existed. and will include some periods in which there has been a seachange of economic markets, so the numbers could be quite different to what they happened to be over the last 20-30 years, and not necessarily incorporate the bond returns we saw in the 30+ year bull market since the mid 80s, etc.  Over long periods, a mix of bonds and equities (even bond-heavy) has generally exceeded inflation by a decent amount (by 5%+ for equities, lower percentage if bond-heavy),  but when both asset classes have risen at the same time such that you start from a relative high point in both asset classes, one would expect the returns to be somewhat depressed.  

And remember that the returns you see on a chart are the returns in pound terms, but pounds get less valuable over time, so you should probably think of the returns as being 'inflation plus x%' rather than just y%, and acknowledge that if we have high inflation equities may give large nominal returns and interest rates may increase to cool the economy causing bonds to be offered at high coupons too, so the exact measurement dates may give you quite large nominal returns without necessarily giving you enough to retire on.

Thrugelmir

Albermarle said:

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. 

40+ year bull market in bonds suggests little else as matters stand. Likewise will the 60/40 model stand up to scrutiny as time moves forward. 

83705628

Thrugelmir said:

Albermarle said:

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. 

40+ year bull market in bonds suggests little else as matters stand. Likewise will the 60/40 model stand up to scrutiny as time moves forward. 

/
Well Bogle always said that was before you take social security into account, that's the state pension for us, and we have the NHS (thank Christ) and a lot of people coming upto retirement nowish will have some defined benefit too.

83705628

sixpence. said:

The reason that VLS has done so well is that the fund was started on the back of the 2008/9 recession.
However, there is going to be a recession soon. The value the stock market is currently estimated at doesn't reflect the economic losses that have come about as a result of the global pandemic. Boom and bust. It just depends what side of it you enter the market on, right? It's impossible to time the market though (we know this). So this leaves the question: what would an average 20-30 year time span for a VLS 20 (or any VLS) look like, all things considered? 

/
This is almost a fantasy question but I'll give it a go. The short answer is - maybe 4-6% real total growth from equity, and maybe bond yields will get back up to match or do a little better than inflation.

Firstly, I define the boomers as the big 1960s boom, Gen X as the 1970s dip, Millennials as the generation of boomer kids born roughly 1980-2000, and Zoomers as anyone born to date.

The current dividend yield on global stocks is 2.5% with a 40-45% payout ratio.
Most reasonable long-term global economic forecasts are looking at 2-3% inflation + 2-3% real growth out to 2050, nominal GDP growth tends to act as a cap for earnings growth, and at least in the US, corporate earnings as a % of GDP are exceptionally high (https://fred.stlouisfed.org/graph/?g=1Pik), which, together with a small but significant speculative return, explains the above GDP capital growth of recent decades. So if we're in fantasy question land I'll call it 4% earnings growth. I suspect the developed world is correllated but I wouldn't know about emerging markets.

We know valuations are high, we know a lot of the cause is demographics (1960s boomers), with a peak in the mid 1960s, if their retirement age is 60-65, then the peak time when the capital supply will reverse is the mid to late 2020s. It's not as clear how much of that will affect equity or bond prices, in what markets, or globally in general. What we also know is to expect another bubble in the 2050s as the Millennials, peak year of birth about 1990, move into retirement. At the same time, at least in the developed world, half the boomers will still be alive and creating health/care demands on a scale the world has never seen, and generating economic activity is going to be left to Zoomers and whatever we call the ones after them (https://ourworldindata.org/age-structure). 

These changes are fundamental and structural, so I think the current norm of low dividend yields and interest rates is set to continue. However, boomers decumulating their capital and their state benefits will be an equivalently huge boon for consumption. So who really knows. Anyway, a period of lower dividend yields, and another bubble around or after 2050 is likely if you believe in the theory that demographics affects markets. So I guess an average 3% dividend from equity over that whole period, 2020-2050.
Add that onto the 4% earnings growth and bingo, suddenly a 7% return, or 5% real return sounds sane and exactly the same as the long-term historical average!

Sailtheworld

sixpence. said:

The reason that VLS has done so well is that the fund was started on the back of the 2008/9 recession.
However, there is going to be a recession soon. The value the stock market is currently estimated at doesn't reflect the economic losses that have come about as a result of the global pandemic. Boom and bust. It just depends what side of it you enter the market on, right? It's impossible to time the market though (we know this). So this leaves the question: what would an average 20-30 year time span for a VLS 20 (or any VLS) look like, all things considered? 

4% ahead of inflation for the stock part of VLS (based on a couple of hundred years of stock market returns) and, given gilt yields are negative out for nearly a decade, around 0% in real terms for the gilt/bond component.

What I'd add is that although you acknowledge it's impossible to time the market you are quite certain about the timing of the next recession and that markets don't reflect correct values as you see them. If you are drawn to VLS20 because of this view then you are trying to do the impossible and time the market.

A more usual approach would be to choose an equity ratio which reflects your attitude to risk which will be informed somewhat by when you need the money. This can be ignored if you think the market is wrong and will come around to your way of thinking - obviously you'd position yourself to profit from your foresight.

Are you looking at low risk because you have a low risk appetite or because you think bad things are going to happen in the near future?

Thrugelmir

tcallaghan93 said:

Thrugelmir said:

Albermarle said:

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. 

40+ year bull market in bonds suggests little else as matters stand. Likewise will the 60/40 model stand up to scrutiny as time moves forward. 

/
Well Bogle always said that was before you take social security into account, that's the state pension for us, and we have the NHS (thank Christ) and a lot of people coming upto retirement nowish will have some defined benefit too.

Unfortunately DB schemes are in terminal decline in the private sector. 

sixpence.

This idea of splitting up the portfolio: into a strategy (which I've pasted below as a reference point) was not actually about trying to plan the market. But say you know you want to move house in the next 5-10 years then you would sell the VLS 20 rather than the 60. So its not about timing the market but when you need the money.

Re timing the market: I don't think you can time the market exactly but I think you can try a bit. For example, I topped up my VLS 60 in my ISA in April because I had some cash to one side. I didn't time the market exactly because that (as far as we can now see) would have meant investing at the end of march. However, it was an intelligent thing to do. I believe the next intelligent thing to do is to wait for a recession before investing. I live in London and loads of small to medium sized businesses have closed in the last month. It's really sad and indication of darker days to come.

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.