Weighing up different Vanguard options - % equity and risk in medium term

Wobble101

I've got about £50k invested through ISAs in three different Vanguard funds: 

25% in LifeStrategy 40
70% in Target retirement age 2030
5% in ESG developed world all cap. 

I am thinking through how best to use my partner's ISA allowance, and also want to invest up to £50k in my name through a GIA (I have used up my ISA allowance for this year but will use some of these funds to purchase future ISAs). I have a good rainy day fund, a minimal mortgage and am already overpaying my pension. I want to retire at c 62 at the latest, which is in 7 years (so 2028 or thereabouts). I'm going to be using these investments to bridge the gap between early retirement and starting to get pension payments at 65, so I have a gap of about 3 years to fill there and some additional shortfalls to make up until my full pension entitlements kick in at 67. I'd say my risk appetite is moderate but I am very aware that 7 years, which is when I will need to start drawing on these investments, is not that far away. 

I'm rather tying myself into knots about it and would welcome people's thoughts. I think the main issue I am fretting about is the overall % of my portfolio in equities, and whether the balance is right given the 7 year timeline mentioned above. On the one hand, I've seen it said that at my age I should be thinking roughly 50/50 in equities and bonds; on the other, I've got the Vanguard TRA for 2030 (ie for people of my sort of age) suggesting that a 65/35 mix is currently suitable. If the former is the case, then I assume I should be looking to balance my existing investments with new ones that are weighted more heavily towards bonds (ie more Vanguard LS40 for eg). If the latter is a better position, then I could either put more into the TRA 2030 or move to the LS60. Finally, I am favourable towards ESG funds, hence the rather small allocation in my portfolio, so would be happy to increase the amount I have invested there as well. 

I'm quite new to this and am slowly finding my way. I like the philosophy behind the Vanguard funds, so am happy to stay with them for now. 

Views welcome!

[Deleted User]

Hello, in your position I would select 1 VLS fund, suitable to my risk, and stick with it. For simple investing they are an ideal one stop multi asset global fund, pick 1 and leave alone. My opinion. Regards

Thrugelmir

Decide what your objectives are then choose the investments. Seven years isn't very long. Not least when there maybe an era of lower investment returns. Unless one is prepared to take a higher level of risk which by the very nature of equity markets will result in unpredictable outcomes. 

Albermarle

There are more than just Vanguard multi asset funds .
Fund-of-funds: the rivals - Monevator

safe_hands2

I've got 9 years until I hope to mostly retire. Am using vanguard sipp and ISA to help me find 60 to 67, but will also keep at least ISA in long term. I've gone LS60 for the retirement funding will gradually start reducing equities from 55. LS80 for longer term saving...20 years ish.

MX5huggy

Why are you not using SIPP this money? 

Are you maxed out on contributions? 

Eco_Miser

Consider how much you will need to bridge the gap, then split your portfolio (theoretically, not physically) into a safe investment for what you will need to withdraw and put any excess into higher risk funds.

Ultimately, you need to invest at a risk level you can live with.

[Deleted User]

Albermarle said:

There are more than just Vanguard multi asset funds .
Fund-of-funds: the rivals - Monevator

Hello, the open post does state they are happy to stay with Vanguard. Regards

Wobble101

Thank you everyone. I can’t pay any more into pensions so that isn’t an option. I think where I’m stuck is between a 40% and 60% equities option. To the poster who asked about my objectives here, the key one is to be able to use this money to fund earlier retirement. So I suppose safety is more important than growth in that respect. 

dunstonh

I can’t pay any more into pensions so that isn’t an option.

Which either means you are paying 100% of your salary in or you are a non-earner.  Yet your posts suggest you are not a non-earner.   So, are you really paying 100% of your salary into a pension?

JohnWinder

I think you’re right to post your question here, hoping to get it untangled, but I think you already know the issues and that there’s no answer that we can know that is optimal in advance.

I don’t understand the exact quanta of your ‘bridging to full pension’ needs, but here are some thoughts.

Firstly, if it really is in your view down to choosing between 60 or 40% equities, have a look at long term graphs of those choices. I’d expect you to find there’s not much difference in terms of total returns or maximum value drop in crisis times. And if there isn’t much difference you might be trying to fine tune beyond what’s realistic. You can use portfolio visualiser website, and choose the asset classes not the funds.

Secondly, a lot hinges on how important having that bridging money is. If it’s crucial to have an actual amount it needs to be in a cash account, or 1-2 year interest bearing deposit, or in inflation linked government bonds that mature each year or so during the period from 7-10 years from now. The problem with the first two options is no inflation protection, and while you might take that risk for a 0-4 year period, 8-9 years is risky. The problem with the third is the complexity in building a non-rolling bond ladder; you just might not want the bother. And the problem with all three is that real returns are probably slightly negative (probably worse for the bonds as they protect against unexpected inflation), but when you take no/little risk you get lower returns than when you take more risk, on average.

Thirdly, a short term bond fund might be a suitable alternative to these three. One of the ’secrets’ with bond funds in addition to them being stabilisers is if you use them for storing money then their ‘duration’ should match the duration of your liabilities (3 year bridge spending, 7 years away). You can find their durations on an information sheet. Intermediate bond funds have durations of ~7 years, long ~20 years, but you need ~2 years. The reason is that although it is 7-10 years until you need the money, in 5 years it will be between 2-5 years, but the bond fund with still have its original duration. Shorter duration funds return less, on average, but have less volatility with interest rate changes and crises.

Fourthly, you’ve seen it said that your age group should have 50% equities, but let’s recognise that all those ‘rules’ are rough guides to start off an investor’s thinking. By the time you’re at your stage of planning with specific requirements none of those ‘rules’ are worth much. 

Fifthly, I don’t understand how or in which type of accounts all of this money is partitioned, the restrictions on access, or their adequacy for a bare bones or luxurious retirement. But don’t overlook that if you had everything in just one fund that happened to suffer a bad sequence of returns when you needed your bridge money, that there is potentially another 20 years of investing that money when it can recover from some of those losses. Does it come down to you needing to read up a bit on dealing with sequence of returns risk?

Finally, my quick look at some of those broadly diversified ESG funds suggests their returns and volatility have been extremely close to that for the base fund (or index) that went through the ESG filter to get rid of the undesirables.