40-60% Funds Worried

P933alilli

Thanks Masonic. So, just to get it completely right, anything i buy now will be at the new YTM of 3% or am i stuck with what the YTM value was when i originally bought the fund in january? The latter would be terrible! Yes, i understand the higher risk now with VLS100 especially considering the overweight of the fund to the UK and that we are predicted to be the worse hit of all the G7 nations with a higher likelihood of recession. Is the alternative to VLS60 the HSBC fund which designates weightings according to size of each economy?

JohnWinder

I’m going to fumble my way through this as I’m not sure I understand your questions, and less sure what the right answers are. 

46% capital loss seems excessive, can it be recouped...if so, how?’‘   

It has already been recouped, to the extent possible that a bond is fixed in its return, by the 6% coupon it was paying (since its an old bond) while newer bonds were paying smaller coupons.

On maturity, does any money invested go towards the new bond issues set at £100’

At the risk of complicating everything, as background, all/?most bonds are issued with a face value of £100 or $1000 or whatever the bond issuer chooses in round numbers. And the same bond has a fixed interest rate for its life. So, the treasury decides to issue a new 5 year bond, the yield on those bonds being 2%, so the treasury says these bonds will pay 2%. Tomorrow, the first day the bonds can be traded, interest rates for 5 year bonds have changed to 2.3% or 1.96% or whatever. So, when the first person to buy those new bonds buys them, they will be asked to pay a bit more or a bit less than £100 so that the 2% coupon now reflects the current 5 year interest rate of 2.3% or 1.98% or whatever. Back to your question:

Only a tiny bit, because you’re buying into the fund and so get all the bonds already in the fund, surely, or did I mistake your question?

‘So when i buy my fund  what my return will be is dependent on the YTM and that is factored in at the beginning? ’

Your return must be partially dependent on that I suppose, but it must also be dependent on when you sell and how much interest rates have changed in the meantime. If you buy into the fund today when YTM is 3%/year, then interest rates sky rocket and the fund value falls 10%, and you then sell 6 months after buying, you surely won’t be getting 3% yield/year on that.

‘. I started drip feeding initially, £500 per month, and then i put a lump sum in just before the new tax year cut off in April to use last years allowance. I'm back to drip feeding each month now. I'm wondering if i'll get c.3% YTM or would it probably have been lower in january?’

Vide supra.

‘So, just to get it completely right, anything i buy now will be at the new YTM of 3% or am i stuck with what the YTM value was when i originally bought the fund in january?’

I’m getting more confident with my answers. Anything you buy today will have the YTM of today; but that same parcel of fund will likely have a different YTM in a day or a week or a year as interest rates change. 

P933alilli

Thanks John, i also dont understand some of my questions but youve cleared up my quearies in your last two paragraphs...i think!
   Will i see any interest from bonds or does it appear when they mature? I noticed 1p appeared in my account last week! Not much consolation as my return is -6.43% since i opened it!

bostonerimus

Collyflower1 said:

Thanks John, i also dont understand some of my questions but youve cleared up my quearies in your last two paragraphs...i think!
   Will i see any interest from bonds or does it appear when they mature? I noticed 1p appeared in my account last week! Not much consolation as my return is -6.43% since i opened it!

Don't dwell on short term fluctuations in bond and stock markets. This forum generally recommends a long term outlook when it comes to investing and you should not be buying something like VLS60 with less than a roughly 10 year perspective. You will continually (well, probably quarterly) get dividends and interest payments from the assets in a fund and if you have an accumulation fund they will be automatically reinvested in the fund.

aroominyork

If you polled the forum I think you'd find ten years at the top of minimum investment period for VLS60. It's dependent of the individual's circumstances, risk tolerance etc. but I would put it closer to five years, de-risking as time passes.

masonic

aroominyork said:

If you polled the forum I think you'd find ten years at the top of minimum investment period for VLS60. It's dependent of the individual's circumstances, risk tolerance etc. but I would put it closer to five years, de-risking as time passes.

It depends where you want to set your minimum probability of achieving a real return. If ~80% is ok, then a 5 year time horizon would suffice. A 10 year horizon would give you the benefit of >90%. That would be for a fixed allocation. If you derisk as time passes, then you have greater exposure of sequence of returns risk: a loss in the early years won't have chance to recover if you are selling equities and buying bonds. A proportion of your equities would be held for just 1, 2, 3 years etc. Returns from bonds will not do any heavy lifting now as they have done in the past.

P933alilli

I'm wondering whether or not to put this years isa allocation into my VLS60 or just carry on drip feeding which would take me to 26k at the end of the tax year. Looking at the above probabilities in Masonic's post about real returns over ten years i'm wondering where those probabilities come from?  Would i have to be in the really unlucky 10% not to bring back a real return in ten years?

masonic

Collyflower1 said:

I'm wondering whether or not to put this years isa allocation into my VLS60 or just carry on drip feeding which would take me to 26k at the end of the tax year. Looking at the above probabilities in Masonic's post about real returns over ten years i'm wondering where those probabilities come from?  Would i have to be in the really unlucky 10% not to bring back a real return in ten years?

It's based on ~100 years past performance data on a global 60:40 portfolio. The VLS asset allocation will not be exactly the same, but should be similar enough not to make an appreciable difference. Another caveat is that there won't be precedent for interest rates rising from 0.1% to 3%+ in the back-test data. A key element of the fall in VLS60 was that both equities and bonds dropped by a comparable amount.

Investing after a >10% drop is going to improve your odds of making a real return over all time periods. That is not necessarily an argument to go in with a lump sum now if you normally drip feed.

P933alilli

Thanks Masonic! I'm 7.2% down since starting in january but my personal rate of return is -12%. Does a personal rate of return matter in real terms as i know how much i'm down compared to the total ive invested. Is it more to show how badly ive 'timed' individual sums into the investment, more than anything....does it matter? 
   I suppose putting more in after a 10% fall from the price i got when i bought the investment would stand me in good stead! The problem with my monthly direct debits is that some of them plough in when the price has been higher. And the lump sum i made just before the end of last tax year put my average cost up quite a bit. Having said that my average cost is now only 0.69 up from when i first went in and is c.5% lower than the funds highest price last december. Maybe a good strategy would be to stop the direct debits for now and put 3 months worth at a time when the price has dropped 10% or lower? Not that i'd intentionally try to time the market or anything:)

masonic

Collyflower1 said:

Thanks Masonic! I'm 7.2% down since starting in january but my personal rate of return is -12%. Does a personal rate of return matter in real terms as i know how much i'm down compared to the total ive invested. Is it more to show how badly ive 'timed' individual sums into the investment, more than anything....does it matter? 
   I suppose putting more in after a 10% fall from the price i got when i bought the investment would stand me in good stead! The problem with my monthly direct debits is that some of them plough in when the price has been higher. And the lump sum i made just before the end of last tax year put my average cost up quite a bit. Having said that my average cost is now only 0.69 up from when i first went in and is c.5% lower than the funds highest price last december. Maybe a good strategy would be to stop the direct debits for now and put 3 months worth at a time when the price has dropped 10% or lower? Not that i'd intentionally try to time the market or anything:)

I don't know how Vanguard calculates the personal rate of return. I calculate my return myself using XIRR based on cash flows into my account and the current valuation.

It's always the way that regular investing day happens when markets are rising and they tend to fall back in the following days. That's life! It's very difficult to know when a good time to invest is when you have cash ready and are looking for an opportunity. It is even harder when a fund is forward priced, and there are at least several hours between the time you place the order and when it executes.