Is VLS20 worth holding?

artyboy

Audaxer said:

artyboy said:

daveyjp said:

If that fund meets her risk appetite it is perfect for her.

But that wasn't the question - it may be positioned as a 'lower' risk investment, and yes that was what she wanted, but if the current market conditions plus short/mid term outlook is for poor returns for anything predominantly bond focused, then taking the risk level in isolation could lead to a false sense of security that it's the right investment.

This is more about trying to determine if the risk/reward balance makes it a good investment versus, say, putting it back into cash at 3.5%

What is the anticipated time frame of her investing? If she is investing for retirement then I would say VLS20 was overly cautious and she would be better changing it for maybe VLS60 or higher. If she hopes to use it within say the next 10 years for a house deposit, then a bit more difficult in my view, but I would probably keep holding the VLS20 hoping bonds recover in the next few years, rather than sell it and crystallising a loss to put it into cash savings. Just my opinion.

It's the second one - house likely in a 7-10 year timeframe (which was part of the reason that risk tolerance was lower). She's already got a significant amount of cash savings, likely enough for a 10% deposit if there was a good opportunity to buy sooner, so this would become something to help pay down a mortgage over time...

aroominyork

dunstonh said:

It is likely bonds will come back into play soon.  Yields are now higher and about 2/3rds of the credit crunch gains have now unwound.   Another 5-10% loss and it will be back to early 2000s levels (assuming income withdrawn).  Soon could be next month.  It could be next year or the year after.   You cannot predict the time.  You just know the bottom will hit soon.

So if we are hovering near the bottom does that mean bond funds will start returning something close to their current distribution yields without significant capital gain or loss?

Albermarle

artyboy said:

Audaxer said:

artyboy said:

daveyjp said:

If that fund meets her risk appetite it is perfect for her.

But that wasn't the question - it may be positioned as a 'lower' risk investment, and yes that was what she wanted, but if the current market conditions plus short/mid term outlook is for poor returns for anything predominantly bond focused, then taking the risk level in isolation could lead to a false sense of security that it's the right investment.

This is more about trying to determine if the risk/reward balance makes it a good investment versus, say, putting it back into cash at 3.5%

What is the anticipated time frame of her investing? If she is investing for retirement then I would say VLS20 was overly cautious and she would be better changing it for maybe VLS60 or higher. If she hopes to use it within say the next 10 years for a house deposit, then a bit more difficult in my view, but I would probably keep holding the VLS20 hoping bonds recover in the next few years, rather than sell it and crystallising a loss to put it into cash savings. Just my opinion.

It's the second one - house likely in a 7-10 year timeframe (which was part of the reason that risk tolerance was lower). She's already got a significant amount of cash savings, likely enough for a 10% deposit if there was a good opportunity to buy sooner, so this would become something to help pay down a mortgage over time...

Has she got a LISA, as she is planning to buy her first home at some point?

artyboy

Albermarle said:

artyboy said:

Audaxer said:

artyboy said:

daveyjp said:

If that fund meets her risk appetite it is perfect for her.

But that wasn't the question - it may be positioned as a 'lower' risk investment, and yes that was what she wanted, but if the current market conditions plus short/mid term outlook is for poor returns for anything predominantly bond focused, then taking the risk level in isolation could lead to a false sense of security that it's the right investment.

This is more about trying to determine if the risk/reward balance makes it a good investment versus, say, putting it back into cash at 3.5%

What is the anticipated time frame of her investing? If she is investing for retirement then I would say VLS20 was overly cautious and she would be better changing it for maybe VLS60 or higher. If she hopes to use it within say the next 10 years for a house deposit, then a bit more difficult in my view, but I would probably keep holding the VLS20 hoping bonds recover in the next few years, rather than sell it and crystallising a loss to put it into cash savings. Just my opinion.

It's the second one - house likely in a 7-10 year timeframe (which was part of the reason that risk tolerance was lower). She's already got a significant amount of cash savings, likely enough for a 10% deposit if there was a good opportunity to buy sooner, so this would become something to help pay down a mortgage over time...

Has she got a LISA, as she is planning to buy her first home at some point?

I'd deliberately avoided reference to LISAs as it's another point of 'discussion' - she is hesitant as thinks she might want to go and work abroad and buy elsewhere. And doesn't want to tie up money without penalty until she's 60

Personally I think she's mad and it's a pipe dream, and she's throwing free money away, but as I said, that's a discussion for another day. Ideally before the end of this tax year.

masonic

artyboy said:

Audaxer said:

artyboy said:

daveyjp said:

If that fund meets her risk appetite it is perfect for her.

But that wasn't the question - it may be positioned as a 'lower' risk investment, and yes that was what she wanted, but if the current market conditions plus short/mid term outlook is for poor returns for anything predominantly bond focused, then taking the risk level in isolation could lead to a false sense of security that it's the right investment.

This is more about trying to determine if the risk/reward balance makes it a good investment versus, say, putting it back into cash at 3.5%

What is the anticipated time frame of her investing? If she is investing for retirement then I would say VLS20 was overly cautious and she would be better changing it for maybe VLS60 or higher. If she hopes to use it within say the next 10 years for a house deposit, then a bit more difficult in my view, but I would probably keep holding the VLS20 hoping bonds recover in the next few years, rather than sell it and crystallising a loss to put it into cash savings. Just my opinion.

It's the second one - house likely in a 7-10 year timeframe (which was part of the reason that risk tolerance was lower). She's already got a significant amount of cash savings, likely enough for a 10% deposit if there was a good opportunity to buy sooner, so this would become something to help pay down a mortgage over time...

When investing in a bond fund, which essentially this is, things like this can happen in the short term (though not usually as bad as this), but it just represents shifting cash flows. When interest rates fell from 5%+ to 0.25%, funds like this went up in price, because people were willing to pay more than the face value for an investment that delivered 5% interest per year. Over several years, the higher price drove down the rate of interest to be more in line with the new ultra-low interest rate regime (hopefully she benefited from this). What we are witnessing now is interest rates going back to historical norms and the price of bonds falling. This is pushing up the rate of interest they pay. The 13% she's lost will mean the income being paid is a higher percentage of the value of her investment, and there will be some positive impact from bonds within the fund maturing and being replaced. You can't expect it to 'recover' what it's lost unless central banks get into a panic and slash interest rates again. This seems highly unlikely based on the current view. Nor can you expect the past high returns to be repeated in the future.

masonic

aroominyork said:

dunstonh said:

It is likely bonds will come back into play soon.  Yields are now higher and about 2/3rds of the credit crunch gains have now unwound.   Another 5-10% loss and it will be back to early 2000s levels (assuming income withdrawn).  Soon could be next month.  It could be next year or the year after.   You cannot predict the time.  You just know the bottom will hit soon.

So if we are hovering near the bottom does that mean bond funds will start returning something close to their current distribution yields without significant capital gain or loss?

"Current" distribution yield of VLS20 is 1.25%. This still looks low to me, even treating the 20% equities as being 0% yield. In the context of 10 year Treasuries and gilts both being >3% and 1 year being similarly high as well. I wonder what it is holding that is dragging down the average (given there's corporates in there that should be propping up the yield).

aroominyork

masonic said:

aroominyork said:

dunstonh said:

It is likely bonds will come back into play soon.  Yields are now higher and about 2/3rds of the credit crunch gains have now unwound.   Another 5-10% loss and it will be back to early 2000s levels (assuming income withdrawn).  Soon could be next month.  It could be next year or the year after.   You cannot predict the time.  You just know the bottom will hit soon.

So if we are hovering near the bottom does that mean bond funds will start returning something close to their current distribution yields without significant capital gain or loss?

"Current" distribution yield of VLS20 is 1.25%. This still looks low to me, even treating the 20% equities as being 0% yield. In the context of 10 year Treasuries and gilts both being >3% and 1 year being similarly high as well. I wonder what it is holding that is dragging down the average (given there's corporates in there that should be propping up the yield).

The low yield is curious. Vanguard Global Bond Index has a distribution yield of 1.66% (according to HL) having distributed c.4% over the last three years. If we are not betting on lower interest rates (although at CGT's AGM during the summer Peter Spiller predicted a Fed pivot later in the year) leading to capital gain, what purpose is there in holding this kind of index fund over cash or a nominal gilt that returns c.3%?

aroominyork

dunstonh said:

It is likely bonds will come back into play soon.  Yields are now higher and about 2/3rds of the credit crunch gains have now unwound.   Another 5-10% loss and it will be back to early 2000s levels (assuming income withdrawn).  Soon could be next month.  It could be next year or the year after.   You cannot predict the time.  You just know the bottom will hit soon.

Even though yields on new issues are higher, won't it take some years until the bonds within an intermediate duration index bond fund start reflecting the new issues more than the old issues that make up most of the holdings? So won't those funds keep distributing less than 2-3% for a few years more?

artyboy

aroominyork said:

dunstonh said:

It is likely bonds will come back into play soon.  Yields are now higher and about 2/3rds of the credit crunch gains have now unwound.   Another 5-10% loss and it will be back to early 2000s levels (assuming income withdrawn).  Soon could be next month.  It could be next year or the year after.   You cannot predict the time.  You just know the bottom will hit soon.

Even though yields on new issues are higher, won't it take some years until the bonds within an intermediate duration index bond fund start reflecting the new issues more than the old issues that make up most of the holdings? So won't those funds keep distributing less than 2-3% for a few years more?

And this is (I think) the crux of my question - the conventional wisdom with investments is not to bail when the market turns against you, and instead take the long view. But if there is a more than realistic prospect that bonds (and more specifically those held within VLS20) are going to underperform in the mid term - even relative to cash - does bailing for an alternative fund actually make sense... on the balance of probabilities...?

aroominyork

Take a look at https://occaminvesting.co.uk/how-to-predict-bond-returns/#bull. It seems to me that if you accept Occam's reasoning, reverse it to the current situation and expect interest rates to keep climbing, then you should sell VLS and replace the bond element with individual bonds/gilts that match your duration preference and return say 3.5% pa.