Vanguard - personalised service

jim8888

I've a lot of sympathy with the view that investing in stocks and shares is gambling. But so is keeping cash, if - IF - inflation outstrips it. What can you do? As I've been investing for years, I felt comfortable with the 80/20 split, but I also have a Defined Benefit pension on the subs bench which really helps me sleep at night. All you can do is endeavour to "know yourself" as an investor, what you're comfortable with, how much responsibility you want to take for financial decisions, how good you are at budgeting and so on. The fact that you're on these boards show you're taking an interest. Keep doing so. 

Malthusian

vulcanrtb said:

It's a good job you simplified it, I still don't have a clue what the terms in bold are. I'm a penetration tester by trade, I tend to speak to my audience when delivering reports to lay persons, it's not easy all the time!

Anyway, I'll do further research but the trend I'm reading here is that a higher ration of equities is probably a better 'bet'.

Fixed interest securities = investments that pay you a pre-agreed return (if the issuer can pay) rather than entitling you to a share of all the issuer's net returns.

Low volatility assets = assets that go up and down less. "Volatility" is often used a shorthand for risk. It is not the only financial risk, but it is the one that can be most easily quantified and scored, so regulators and by extension the finance industry are obsessed with it.

If interest rates are rising and inflation is rising a promise to pay you £X is less desirable because you are more likely to beat £X elsewhere and £X is not worth as much. This means less people will want to hand over money for one. Which means the price falls. Which means that anyone who already owns one will suffer a paper loss.

To reduce volatility you have to accept a reduction in growth potential. For most people this means holding less in equities and more in fixed interest. However, the more you try to reduce volatility, the more growth potential you have to sacrifice to get the same reduction in volatility.

At the extreme end (as you approach 100% bonds) you can increase risk because you have not just sacrificed volatility (which is a trade-off) but sacrificed diversification (which is unequivocally bad).

Once you get below 50% equities / above 50% bonds you are in the zone where you start losing more in growth potential than you gain in reduced volatility. Vanguard 20% Equities is not a "low risk" option.

Malthusian

DoublePolaroid said:

As Sharktail alludes to, I wonder how much over-performance it’s possible to expect even in a best case scenario with their managed service given they can only ever invest you in a handful of their relatively few in-house offerings many of which themselves overlap considerably in terms of holdings. 

Overperformance should never be expected. The point of paying for financial advice is to get financial advice. Not to generate free money from the adviser beating the market by more than their fee.

Albermarle

vulcanrtb said:

dunstonh said:

vulcanrtb said:

Albermarle said:

vulcanrtb said:

jim8888 said:

vulcanrtb said:

Thanks for the feedback all. I guess you could pidgeon-hole me as a nervous investor, the pot is >700K but I don't need to touch it (drawdown) for probably 2 years, I retired in July.

I have a webchat booked with Vanguard to learn more in general, not just their personalised service.

You're in a very similar situation to myself in a lot of ways. I wasn't a nervous investor at all until the day I stopped earning, stopped contributing to pensions and actually had to start drawing on the money I'd saved. Which is all sitting in a Vanguard 80/20 SIPP, at a similar level to yourself. I've just started dipping into the fund by taking some of my TFLS and it feels like a momentous step. I have other savings and investments (and pensions) and I constantly tell myself to stop worrying and try to enjoy and appreciate the position I'm in. After all, I've saved and invested over decades for exactly this moment to arrive. But I'd admit, I'm finding this very hard to do!

So you're in 80% equity, i.e. VLS80 ? I'm deciding between VLS20 or VLS40, such is my risk appetite. Yes, it's all very unnerving, but I expect in time it will just feel normal.

As you will know the non equity % of these funds is in bonds of various types.
There is a consensus that the outlook for bonds is not great, and most bond funds have gone down this year , some by as much as 8%.
So the normal assumption that VLS 20 is 'safer ' than VLS40, may well not hold true in the future .
Personally I am reasonably cautious/conservative  but in the last year I have increased my equity % a little ( despite some signs of frothiness in the stock markets , especially in the US) and reduced my bond % by more . Filling the gap with alternatives like infrastructure funds, more cash  etc.
Of course it may turn out to be a bad move but it does seem in line with general investment trends.

Some will wince at this and take me to task, maybe, but it's all just gambling isn't it? No matter what we do, we think we might have an inkling on the next shoe to drop. In reality, it's just a guessing game. I'll have to pass some trust to Vanguard that they will perform as well as can be hoped. I'm still undecided between VLS20 and VLS40 (or even 60), you've given me pause for thought, so thanks.

When interest rates fall and inflation is low or falling, fixed interest securities are pushed up in value and the yield reduces.    So, for the last 12-15 years, its been great holding low volatility risk assets like gilts and bonds.     
When interest rates are expected to rise and inflation is going up, the asset values of fixed interest securities falls and the yield increases.   We appear to be at the stage where the low risk stuff is more likely to lose value over the next decade.  The yield will increase and that will compensate somewhat but all indications are that the short term is likely to see short to medium term losses on 80% of your fund is you go with VLS20.

(simplified the explanation to avoid going to technical).

It's a good job you simplified it, I still don't have a clue what the terms in bold are. I'm a penetration tester by trade, I tend to speak to my audience when delivering reports to lay persons, it's not easy all the time!

Anyway, I'll do further research but the trend I'm reading here is that a higher ration of equities is probably a better 'bet'.

Looking back through the thread you have  £700K waiting to start drawdown in a while . That is a lot of money but it has to last a lifetime and you see naturally a bit nervous about it. This is probably a correct reaction, as how the investments/ drawdown strategy  is handled can make a big difference to the result 
Clearly your  investing knowledge is pretty limited and I would guess your understanding of safe withdrawal rates , sequence of returns risk , tax optimisation etc is probably a bit sketchy .
Maybe in this case you might be better with an IFA  rather than the Vanguard offering, which is mainly focusing on investments I think.
Unless you decide to learn more yourself . Or as a compromise employ an IFA for a couple of years whilst you get in the swing of it and then DIY. 

NannaH

One thing I can’t get my head around is the fact that Yields drop when a fund is doing well,  it makes no sense, you would assume that the yield increases if the fund performs well due to better fund growth. 

 Is there an idiot’s guide? 🙈

Albermarle

NannaH said:

One thing I can’t get my head around is the fact that Yields drop when a fund is doing well,  it makes no sense, you would assume that the yield increases if the fund performs well due to better fund growth. 

 Is there an idiot’s guide? 🙈

I think what might be confusing you is that the dividend yield from an equity or equity fund, and the yield from a bond or bond fund are quite different in nature . 

Thrugelmir

NannaH said:

One thing I can’t get my head around is the fact that Yields drop when a fund is doing well,  it makes no sense, you would assume that the yield increases if the fund performs well due to better fund growth. 

 Is there an idiot’s guide? 🙈

Where does the fund obtain it's income from to fund the dividend paid to you as an investor? 

AlanP_2

NannaH said:

One thing I can’t get my head around is the fact that Yields drop when a fund is doing well,  it makes no sense, you would assume that the yield increases if the fund performs well due to better fund growth. 

 Is there an idiot’s guide? 🙈

Yield can be applicable to a Fixed Interest security such as a Bond, to a single share e.g. one invested in Unilever, to a basket of shares (a fund), or even a BTL.

Fixed Interest / Bonds - Simplest example is a savings account paying 2% interest, that is the yield and won't change during the term.

Bonds on the other hand have a variable yield as the price fluctuates. Take a 2% rate bond. Invest £100 in a new issue from UK Gov or ANO company, and get £2 in interest per year with a 2% yield.

But when interest rates / inflation expectations change that £100 face value bond might be worth £90 (if rates rising) or £110 (if rates falling) to someone else. It will still pay £2 in interest but the yield will either be (2/90)*100 = 2.22% or (2/110)*100 = 1.82%.

So your bond fund is doing well and increases in value from the £100 you paid to £110 but the yield falls from 2% to 0.18% because the "coupon" or interest rate is a fixed percentage of the original issue price.

It's like selling your 2% savings account above to someone else for £90 or £110. If I thought interest rates would be at 5% next week I wouldn't pay you much for your 2% savings account I'll invest next week and get 5% instead. Conversely if I thought rates would go down to 1% next week I would want your 2% account and would pay a premium over the nominal £100 value to buy it off you.

Single Share - As per Unilever example - see https://www.dividendmax.com/united-kingdom/london-stock-exchange/household-goods/unilever-plc/dividends

The amount of the dividend changes each quarter and the yield is the dividend relative to the prevailing share price as it says, and as we know, the share price moves around so it isn't a fixed yield. Again, similar to Bonds, as the share price increases the yield goes down and vice-versa.

Funds - The yield is the sum of the dividends from the shares and bonds etc. they own relative to the unit price for the fund. Again this will vary as the value and yields of the individual components move around.

BTL - Buy a 2nd house for £200k without a mortgage and rent it out making a £10k profit after expenses then your yield is 5%.

Buy the same house with a 20% deposit (£40k) and £160k mortgage, rent it out and make £4k after expenses (including interest) and your yield is 10% on the £40k you have put in to it.


The potential issue with bonds in the next few years is that if interest rates / inflation increase (as appears quite likely) the market values will fall to maintain balance with new issues at higher coupon rates.

Your face value 2% bond has to be as good value as a newly issued 4% bond and the only way for yours to pay a competitive 4% yield is if the price falls to £50 for the £100 face value bond.

That is simplified as the real market price calculations factor in the duration of the bond - a £100 / 2% bond with 10 years to run before redemption at £100 will be valued differently than a £100 bond with the same 2% rate that will be redeemed next year for £100.

NannaH

I get it now - thanks.

vulcanrtb

Thanks for the insight folks, I am a little nervous as I personally don't believe the "second shoe" has dropped yet in this pandemic in terms of the smaller companies that might go bust, put people out of a job, which means less money in the economy to spend with the bigger companies etc etc.

Having said that, I have cash to live on for up to 4 years, no mortgage and a military pension payable in 4 years (8K a year).

I'm leaning very heavily now to VLS40 or VLS60. I'm speaking with them on Monday, but not expecting actual advice, just factual answers to my questions.

I'll report back here if there's anything surprising, well surprising to me, maybe not to you lot!