compound interest and the avg % year on year

GotPrincess

Hi guys so much to learn and I have been reading lots I am just wondering if anyone can help me out 
40 year old lad late to the saving/investing party ( sadly) took my first plunge with a £300 a month into a Vangard product the 80/20 split Acc option.
I looked up compound interest and understand the concept what I wanna try get my head round is what £300 a month over the next 20/30 years will look like in terms of the avg % performance of the fund I have chosen and the effect of compound interest + the reinvestment of the dividends (or whatever it is i get in a ACC fund) 
I was trying to figure out a tier system so below avg performance, Middle and above average.

I know past doesn't reflect the future and investments will fluctuate in some cases tank but its good to see the end game and spur myself on

A_T

this link should help you
https://www.investor.gov/financial-tools-calculators/calculators/compound-interest-calculator

eskbanker

GotPrincess said:

I was trying to figure out a tier system so below avg performance, Middle and above average.

The last thing anyone needs just now is another tier system....

The performance of VLS80 is a matter of record so you can see it for yourself at a whole range of sites, Vanguard's own plus Trustnet/Morningstar and many platforms, so you can see 7-8% in the last year and much the same in each of the last three years on average, with better performance further back, but, as you recognise, averages are of limited value when looking forward - if you're looking for genuinely long-term averages then Vanguard LifeStrategy isn't a suitable model, as it only came into existence in the early years of a sustained bull run so hasn't gone through significant downturns yet....

A_T

VLS80's American equivalent Lifestrategy Growth has been going since 1994 - it averages 8.31% per year.

Another_Saver

You're asking for a few things.

1. Working out a long term return expectation.

We all know the market goes up and down in the short run, but in the long run it smoothes out towards some kind of average return. For bonds it's easy, look at the yield to maturity of vanguard's global bond index fund, currently 0.7%. Takeaway the fees of ~0.4% leaves 0.3%. but that's only over the maturity of the bonds already there, when they mature they will be replaced, probably by higher yielding bonds (academic prediction). So whereas over the next 9.2 years I know the return on that fund will be at most 0.3% annualised, over the next 30 years I would guess that the real return will be about 0%.
Stocks are much harder to work out, but skipping the academics, the historic average has been 4-6% in real terms, I would say at most 4% over the next 30 years (valuations, interest rates bottoming out, population growth, demographics).
So the real return for VLS 80 should be about 0.2*0+0.8*4=3.2% before fees, 2.8% after fees (if you're on the vanguard platform).

2. Time Vs money weighted rate of return.

You arent just interested in the returns the fund you picked will generate, but the returns the money you put it in it will generate from the date you put it in. This is different. Think regular saver, if you pay in £250 a month for a year at 5%, you don't get £150 interested but about £80.
You can work this out manually in Excel, or use the rough formula (you can work it out precisely using months but I cba):
End amount = annual investment X (((1 + rate of return) ^ years ) -1)/rate of return

E.g.
£300 a month @ 2.8% (real terms) over 30 years is

£3600 X ((1.028^30) -1) / 0.28 = £166k in today's money, a profit of £58k on an investment of £108k. If inflation is 2%, in nominal terms you'll end up with about £300k (if you keep increasing your contributions accordingly).
This information is useless when comparing different funds.

But anything can happen, fees will probably fall, earnings and the % of them you can save and invest tend to rise and peak just before retirement. And if you're thinking about the next at least 17-27 years to retirement you can afford the risk of going 100% equity.

I have assumed you are using an ISA.

GotPrincess

eskbanker said:

GotPrincess said:

I was trying to figure out a tier system so below avg performance, Middle and above average.

The last thing anyone needs just now is another tier system....

The performance of VLS80 is a matter of record so you can see it for yourself at a whole range of sites, Vanguard's own plus Trustnet/Morningstar and many platforms, so you can see 7-8% in the last year and much the same in each of the last three years on average, with better performance further back, but, as you recognise, averages are of limited value when looking forward - if you're looking for genuinely long-term averages then Vanguard LifeStrategy isn't a suitable model, as it only came into existence in the early years of a sustained bull run so hasn't gone through significant downturns yet....

Interesting are you of the opinion that as a investor its a solid product with risk attached to it 

GotPrincess

A_T said:

VLS80's American equivalent Lifestrategy Growth has been going since 1994 - it averages 8.31% per year.

A_T said:

VLS80's American equivalent Lifestrategy Growth has been going since 1994 - it averages 8.31% per year.

I'd be happy with 8% a year though based on news and opinion only I think that could be halved 

eskbanker

GotPrincess said:

eskbanker said:

GotPrincess said:

I was trying to figure out a tier system so below avg performance, Middle and above average.

The last thing anyone needs just now is another tier system....

The performance of VLS80 is a matter of record so you can see it for yourself at a whole range of sites, Vanguard's own plus Trustnet/Morningstar and many platforms, so you can see 7-8% in the last year and much the same in each of the last three years on average, with better performance further back, but, as you recognise, averages are of limited value when looking forward - if you're looking for genuinely long-term averages then Vanguard LifeStrategy isn't a suitable model, as it only came into existence in the early years of a sustained bull run so hasn't gone through significant downturns yet....

Interesting are you of the opinion that as a investor its a solid product with risk attached to it 

Well, yes, but so are many others, so whether it's right for you or not depends on your financial circumstances, objectives, timescales, risk tolerance, etc, which to me are more important than trying to construct some sort of performance model....

Alexland

Based on current asset valuations I would agree with Another_Saver's estimate of around 3% pa nominal return (maybe 1% above inflation) on VLS80 as a reasonable return assumption. Some years it will do much better and other years much worse. It's not very motivating but where else are you likely to get a more favourable level of return? Our investments are more adventurous with lower costs so aiming for around 2% pa above inflation.

GotPrincess

Another_Saver said:

You're asking for a few things.

1. Working out a long term return expectation.

We all know the market goes up and down in the short run, but in the long run it smoothes out towards some kind of average return. For bonds it's easy, look at the yield to maturity of vanguard's global bond index fund, currently 0.7%. Takeaway the fees of ~0.4% leaves 0.3%. but that's only over the maturity of the bonds already there, when they mature they will be replaced, probably by higher yielding bonds (academic prediction). So whereas over the next 9.2 years I know the return on that fund will be at most 0.3% annualised, over the next 30 years I would guess that the real return will be about 0%.
Stocks are much harder to work out, but skipping the academics, the historic average has been 4-6% in real terms, I would say at most 4% over the next 30 years (valuations, interest rates bottoming out, population growth, demographics).
So the real return for VLS 80 should be about 0.2*0+0.8*4=3.2% before fees, 2.8% after fees (if you're on the vanguard platform).

2. Time Vs money weighted rate of return.

You arent just interested in the returns the fund you picked will generate, but the returns the money you put it in it will generate from the date you put it in. This is different. Think regular saver, if you pay in £250 a month for a year at 5%, you don't get £150 interested but about £80.
You can work this out manually in Excel, or use the rough formula (you can work it out precisely using months but I cba):
End amount = annual investment X (((1 + rate of return) ^ years ) -1)/rate of return

E.g.
£300 a month @ 2.8% (real terms) over 30 years is

£3600 X ((1.028^30) -1) / 0.28 = £166k in today's money, a profit of £58k on an investment of £108k. If inflation is 2%, in nominal terms you'll end up with about £300k (if you keep increasing your contributions accordingly).
This information is useless when comparing different funds.

But anything can happen, fees will probably fall, earnings and the % of them you can save and invest tend to rise and peak just before retirement. And if you're thinking about the next at least 17-27 years to retirement you can afford the risk of going 100% equity.

I have assumed you are using an ISA.

Ty for the in depth break down the math is to complicated for me but yes I plan t hold one product that being the LifeStrategy 80% Equity Fund - Accumulation and just continue to pump money into this until im Dead, Retired or Rich haha 

I would like to take on something much more risky that makes up maybe 5-15% of my portfolio however I'm not sure what to punt on in any case it would only be a small % but with the capacity for bigger returns I think the only way to get this sort of return is possibly though buying individual shares but I'm happy to be educated

GotPrincess

eskbanker said:

GotPrincess said:

eskbanker said:

GotPrincess said:

I was trying to figure out a tier system so below avg performance, Middle and above average.

The last thing anyone needs just now is another tier system....

The performance of VLS80 is a matter of record so you can see it for yourself at a whole range of sites, Vanguard's own plus Trustnet/Morningstar and many platforms, so you can see 7-8% in the last year and much the same in each of the last three years on average, with better performance further back, but, as you recognise, averages are of limited value when looking forward - if you're looking for genuinely long-term averages then Vanguard LifeStrategy isn't a suitable model, as it only came into existence in the early years of a sustained bull run so hasn't gone through significant downturns yet....

Interesting are you of the opinion that as a investor its a solid product with risk attached to it 

Well, yes, but so are many others, so whether it's right for you or not depends on your financial circumstances, objectives, timescales, risk tolerance, etc, which to me are more important than trying to construct some sort of performance model....

Well I'm new to saving I have lived a life of spending whats in my pocket etc, I thought I best invest in something now before I hot the stage where saving the money is pointless.
As for my attitude to risk I'm of the mindset that life is just one big gamble and I want to maximize my enjoyment whilst I'm on earth.
I have no worries investing X into a high risk fund that could give me X above the market preformance BUT my newness hampers me as I have no idea where to look, what to throw money at per month along side my more sensible  VLS80