Vanguard funds and investment approach

whatstheplan

Hi All

So my investment journey has begun!  My first step was to put £20k into a Vanguard S&S ISA just as cash to beat the end of tax year deadline.  I've been looking at the 75 Vanguard funds investors can choose from within this ISA.  Although past performance is no guarantee of future performance, I decided to rank the funds in terms of growth from the period February 2016 (simply because that was the start date of a 5 year review on their platform) up to December 2019.  I avoided including 2020 growth figures as to me they show many funds in an artificially positive light due to recent global events.

In descending order, the top 10 funds are as follows:

Fund                                                                        Price (GBP)

US Equity Index - Accumulation                               647.43
FTSE Developed World ex-UK Equity Index            466.74
Emerging Markets Stock Index – Accumulation  276.07
ESG Developed World All Cap Equity Index        319.17
Lifestrategy 100% Equity                                          265.2
S&P 500 UCITS ETF                                                54.76
FTSE North America UCITS ETF                              71.8
Lifestrategy 80% Equity                                            240.39
FTSE Developed World UCITS ETF                         60.08
FTSE All World UCITS ETF                                      80.75

I am drawn to the funds I've highlighted in bold, they can be found in the links below:

Emerging Markets Stock Index Fund - Accumulation (vanguardinvestor.co.uk)
ESG Developed World All Cap Equity Index Fund - Accumulation (vanguardinvestor.co.uk)


Risk
These funds attract a risk level of 6 and 5 respectively.  I suppose the risk averse side of my nature would prefer funds ranked 3-4, however the potential returns in the shorter term (10ish years) are obviously greater with funds that attract a risk rating of 5+.  If I can use the phrase 'calculated gamble', on balance this is a risk I'm prepared to take given my compressed investment timescale compared to someone starting their investment journey in their 20s or 30s.

Rationale (fund selection)
My rationale in choosing these funds is I like the idea of have a diversified portfolio spread across emerging and (established?) markets.  The Emerging Markets Stock Index is 84.5% exposed to emerging markets, mainly China, concentrating on IT, Consumer Discretionary, Financial and Communication markets.  The ESG Developed World All Cap is 69.4% exposed to North America markets followed by Europe and the Pacific, concentrating on Technology, Consumer Discretionary, Financial and Health Care markets.  There is some Pacific region crossover.

Rationale (investment approach)
My intention is to spread the £20k across these two funds.  I am tempted to put £10k into each in one go, however almost everything I read advises against this, stating a dollar cost averaging approach helps to absorb some of the ups and downs.  So, starting this month, I intend to put £1,250 into each fund on a monthly basis, spreading the investment over 8 months.


I should have a further £20k to invest during 21/22 and I might simply elect to put that money to work in the above funds.  Equally, I might choose a different approach as I hope to further increase my knowledge around all of this over the coming months.

Do you feel my plan holds water, or do you see issues with it?  Should I be steering clear of emerging markets?  Please note I don't intend to do anything else with this initial £20k other than invest via Vanguard and into their S&S ISA.

Thoughts and advice welcome








 

Linton

Starting off with saying that you choice of fund manager is Vanguard and then askng abiout funds is a bit like saying you want to buy a car and it must be a Ford. However some specific points....

1) Choosing a global developed world index fund and an EM index fund is reasonable.  However putting equal amounts of money into each requires a very good justification as the whole developed world is very much larger than the emerging one. one.  EM is also much more volatile.  A 90/10 or 80/20 split in favour of the developed worldf would be much more sensible in my view.

2) Spreading your contribtions over time will on average provide lower returns than buying the investments immediately.  The reason is simple - investments tend to rise over time so the more time over which you invest the better.  However many people are nervous that there may be a crash soon after buying the investments.  There probably wont but the reduction in worry may justify accepting the slightly lower return given by phasing the purchases.

3) 10 years is a shortish time frame.  If it is a firm date and getting a ghood investment return is important to meet your objectives you would be well advised to derisk after perhaps 5 years as you dont want to lose a significant amount of money in a crash when you dont have time to wait for the recovery.

4) Investing 100% in equity (shares) means that at some time in the next 10 years there could well be a fall of say 40%-50%.  What would you do when this happens?

Thrugelmir

Rather than looking backwards. You need to be looking forwards. Global market history is what it is. Not least that exchange rates are highly influential in magnifying both gains and losses for UK investors. 4 years of data is simply to short a period to be meaningful. Makes no sense to ignore a year either.  As markets as always, respond to the events of the moment, and reprice stocks accordingly. 

Hopingforthesimplelife

Linton said:

3) 10 years is a shortish time frame.  If it is a firm date and getting a ghood investment return is important to meet your objectives you would be well advised to derisk after perhaps 5 years as you dont want to lose a significant amount of money in a crash when you dont have time to wait for the recovery.

I think I have seen it suggested on here that 10 years is about one economic cycle. If this is the case, could it be argued automatically de risking after 5 years could cause issues, especially if you have have had the poorer performing 5 years to begin with? 

In this scenario, could there be the argument to actually increase risk at the 5 year point to hopefully even out over a 10 year period?

dunstonh

Although past performance is no guarantee of future performance, I decided to rank the funds in terms of growth from the period February 2016 (simply because that was the start date of a 5 year review on their platform) up to December 2019.  I avoided including 2020 growth figures as to me they show many funds in an artificially positive light due to recent global events.

Although 2016 would include the recovery from the 2015 falls.  Picking just 5 years in a bull market is going to overstate reality  Sterling fell from 2016 and that boosted the returns of global funds in the UK.  Sterling is now reversing and will create a drag on global funds.

I am drawn to the funds I've highlighted in bold, they can be found in the links below:

Emerging Markets Stock Index Fund - Accumulation (vanguardinvestor.co.uk)
ESG Developed World All Cap Equity Index Fund - Accumulation (vanguardinvestor.co.uk)

That is pretty much the worst way to pick investment funds.     One is designed to be held as a part of a wider portfolio of single sector funds.  Yet this will be your sole single sector fund.     The other can be held in isolation but it has an ESG focus.  If you have an ESG preference then why are you selecting the emerging markets fund?    If you selecting on the basis of past performance it is worth noting that a good discrete period can distort cumulative returns.  As happened with ESG funds.  

Risk
These funds attract a risk level of 6 and 5 respectively.  I suppose the risk averse side of my nature would prefer funds ranked 3-4, however the potential returns in the shorter term (10ish years) are obviously greater with funds that attract a risk rating of 5+.  If I can use the phrase 'calculated gamble', on balance this is a risk I'm prepared to take given my compressed investment timescale compared to someone starting their investment journey in their 20s or 30s.

You should pretty much ignore the KIID risk scores as they are not benchmarked to cash and do not consider how they fit in with a wider portfolio.   You are looking at a potential 60% loss in 12 months with that spread and your risk is more like 7 out of 7.

Rationale (fund selection)
My rationale in choosing these funds is I like the idea of have a diversified portfolio spread across emerging and (established?) markets.  The Emerging Markets Stock Index is 84.5% exposed to emerging markets, mainly China, concentrating on IT, Consumer Discretionary, Financial and Communication markets.  The ESG Developed World All Cap is 69.4% exposed to North America markets followed by Europe and the Pacific, concentrating on Technology, Consumer Discretionary, Financial and Health Care markets.  There is some Pacific region crossover.

So, ESG is not an influence in your decision making?

Rationale (investment approach)
My intention is to spread the £20k across these two funds.  I am tempted to put £10k into each in one go, however almost everything I read advises against this, stating a dollar cost averaging approach helps to absorb some of the ups and downs.  So, starting this month, I intend to put £1,250 into each fund on a monthly basis, spreading the investment over 8 months.

Why have you chosen Vanguard?  You appear to want to be a fund manager and haven't bought into passive investing.  Adjusting the weightings to suit an objective is not unreasonable.  A lot of people have a core and satellite approach.  However, 50% into an emerging markets fund when most models dont get above 10% unless they are high risk is a bit question mark.  Picking figures out of thin air is not how you should invest.

Plus, what are you reading that tells you that pound cost averaging is better?  In the majority of investing periods, pound cost averaging results in lower returns.  

whatstheplan

Thanks all for the replies to date, much to digest!

I have no immediate interest in having to manage my investments on a regular basis, so yes, passive investing is what I'm looking to achieve at least initially.  I take on board the points raised about reconsidering such a significant investment into emerging markets.  Also the point about the risk of having 100% held in equity.  I was originally looking at some of the LifeStrategy products, either the 60/40 or 80/20 offerings.  Or I could look at the other standalone bond funds Vanguard offer.  However, whilst I understand the logic in having a % of an investment held in bonds, I can't quite see how it's helping me given my particular goals.  Surely to have the greatest potential of increasing the investment over a 10-15 year timeframe as oppose to 20-40 years, one needs to consider a much greater equity stake?  If I'm wrong on that please say why (I don't mean that sarcastically, I mean please say why!)  I can't get my head around e.g. having £8k in equity and £2k in bonds.  If the equity market crashes yes I have my £2k bonds plus whatever appreciation.  However what's that giving me in real terms?

Thrugelmir

What's your primary objective? Other than to grow your money into the largest sum possible. What's your attitude to risk, and the potential that your chosen investments might actually serially underperform. 

whatstheplan

Thrugelmir said:

What's your primary objective? Other than to grow your money into the largest sum possible. What's your attitude to risk, and the potential that your chosen investments might actually serially underperform. 

My primary objective is to retire from my 9-5 asap, aiming for anywhere between 58-62 (currently 49.)  Ideally somewhere between 58-60, failing that 61-62.  I have a work place pension, paid in 14 years to date.  I plan to start making additional payments into that.  Also 3 x BTLs (all mortgaged) the intention is to sell 2 of those when I'm in the 58-60 bracket and retain 1 mortgage free as a boost to my retirement pot.

I don't mean this flippantly, however I have quite a high risk tolerance when it comes to the £40-50k I'll invest over the next 2-3 years.  Whilst it's been hard earned, it's sitting doing nothing for me at present.  Worst case scenario, if my investment plans don't pay off, I keep on working until I'm 65.  So whilst I obviously don't want this to happen, if my investments were to underperform, it won't leave me dangerously exposed financially.  In short, I'd still get by with my 9-5 and a few more years of work.

whatstheplan

Meant to add, this is why I fell having 20-40% in bonds isn't the best direction for me as I'd look on that as 20-40% of my investment pot tie up in assets that don't perform.  Yes it's a fallback if the equity portion of my portfolio drops, however in real terms what will a few thousand in bonds do for me?

TheAble

I think just get your thoughts in order a bit, it all sounds a bit incoherent. Your primary objective is retire asap but worst case working till you're 65 is ok?
Personally I don't think you should build a retirement age around the short term vagaries of the stock market.

JohnWinder

I think you’re on the right track, although some have/could argue you used the wrong map so far.

Ignoring everything already written, one probably gets the best investing results by:

1  starting early to get the benefit of compounding (you’re not wasting another minute, so, good). 

2 choosing an asset allocation to match your risk appetite. I know bonds are promising poor returns, but just be sure you’re ok with a big equity price drop at a bad time for you.

3 diversifying the equities. You’ve done that very well with a developed world and an emerging markets holding(s).  ESG may turn out to be just a flavour of the month, but the returns are unlikely to be much different from a similarly diversified non-ESG fund (my uneducated guess only). I think the most efficient portfolio would be cap weighting the EM fund, so about 15% of your equities, not 50%, but it’s small print stuff.

4 keeping costs down. You’ve done that with Vanguard funds, most likely.

5 using index fund because you get market returns (less costs) which nothing else can ‘guarantee’.

6 matching your assets to your liabilities. You keep mentioning a 10-15 year time frame, but if you live to age 85 it’s 36 years of investing still to go. That’s more like an equity time frame.

Choosing funds on the basis of performance over the last few years is suboptimal. The best risk adjusted returns from equities is likely to be from a widely diverse global fund; be careful straying too far from that (which you haven't) as you tinker. And have a think about whether currency hedging and ‘home bias’ are issues you’re later going to regret you overlooked, if you have.