Vangaurd life strategy 40

Elum29

Hi everyone,

I have had a LifeStrategy 40 fund since Nov 21 and you probably won’t be surprised to hear that it has steadily been dropping in value since day 1 

It is at this moment down by almost 12% and I’m now starting to wonder if and when I’ll ever start to see some growth on it. 

Does anyone else have experience with this sort of issue? Should I stick it out or look at getting out now?

I have done some Google rattling and have found quite a few different articles saying that if a fund is still not performing after 2 years then it’s best to cut and run. 

Still a few months yet before I hit the 2 year period but with things the way are I’m not very hopeful of a big recovery anytime soon. 

Any insight on this would be greatly appreciated. 

Liam. 

masonic

It's not really underperforming. Its performance is in line with what would be expected of a mixed asset fund with 60% in bonds, so the suggestion around switching is probably not relevant in your case. What would you switch to? Presumably you chose this fund as you wouldn't be able to tolerate a stockmarket crash while invested in higher risk assets, or have a short investment horizon? Performance has been largely flat over the last 6 months (about a 1% gain over the period), and it is up over 8% from its Oct 2022 low.

You are right that a big recovery probably won't happen, as that would require another event similar to the global financial crisis and another decade of near-zero interest rates. I don't think anyone credible sees that as a likely scenario.

Whether this is a suitable investment will depend on your objectives for this money, but there is no point holding in the hope this was a temporary dip. The fund has fallen in value so that its income remains in line with rising interest rates. The stream of income you purchased when you bought the fund is largely unchanged. It is just that this income stream can now be bought more cheaply. It's a sunk cost to have been invested while inflation ramped up and interest rates rose from historic lows to current levels.

Alexland

Without knowing your objectives it's hard to comment but I can't think of many scenarios where someone would want 60% in bonds (unless maybe they were preparing to buy an annuity). For several years they have a been a 'return free risk' and while they have become more attractive as prices have dropped they are still not overall attractive relative to the economic landscape. If you only want 40% global equities exposure that's fine but I would look to allocate the remainder across a more diverse range of assets otherwise yes it's a bet on returning to near zero interest rates to drive the kind of return from them that might keep up with inflation in the medium term. Long term they are dead weight.

Elum29 said:

I have done some Google rattling and have found quite a few different articles saying that if a fund is still not performing after 2 years then it’s best to cut and run.

Maybe active investors need to come up with such rules as they have the additional problem of picking a manager who over the long term is likely to underperform so they then have to add an additional layer of switching managers which again doesn't seem to work out well for most of them.

This suggestion doesn't really work when seeing a loss on mostly passive portfolios as for example a stock market crash may take more than 2 years to recover so you could take all the pain of owning an equity fund and miss out on all the long term gain. Better to look forward at the range of potential returns that asset classes can be expected to provide based on their current valuation and the time you might own them accepting there is uncertainty on how reasonable their valuation might be at the point you eventually sell them.

GeoffTF

Elum29 said:

Hi everyone,

I have done some Google rattling and have found quite a few different articles saying that if a fund is still not performing after 2 years then it’s best to cut and run.

That is usually the worst thing you could do. It is typical behaviour:

(1). Buy a fund because the price has been rising. When you do that you pay a high price.
(2). Sell it when it has been falling. When you do that you get a low price.

Buy high. Sell low. Repeat. The average fund investor under performs the market by about 2% before costs, according to some research. You decided that the risk profile of VLS 40 was appropriate for you. If that has not changed, you should do nothing.

dunstonh

I have had a LifeStrategy 40 fund since Nov 21 and you probably won’t be surprised to hear that it has steadily been dropping in value since day 1 

It shouldn't be.   It should have bottomed out in October and rose a little since then but pretty wavy line but not going anywhere this year.

It is at this moment down by almost 12% and I’m now starting to wonder if and when I’ll ever start to see some growth on it. 

An economic cycle is around 15 years. That is the ideal minimum hold period.   In that time you will see approx 12 positive years and 3 negative years.    You have had the fund less than 2 years and one has been negative.

So, why you thinking you won't see growth?

Does anyone else have experience with this sort of issue? Should I stick it out or look at getting out now?

Every investor on the planet has this issue.  And again, and again, and again.....
You know there would be negative years when you started investing? (one assumes you did a little bit of research)
So, when you get your first negative year, why are you surprised?

I have done some Google rattling and have found quite a few different articles saying that if a fund is still not performing after 2 years then it’s best to cut and run. 

What a load of crock.     Ignore them.  Clearly written by someone that either doesn't know what they are talking about or is being a troublemaker on purpose.

Albermarle

I have had a LifeStrategy 40 fund since Nov 21

As said above investments go up and down. Your timing has just been a bit unfortunate.

Albermarle

Without knowing your objectives it's hard to comment but I can't think of many scenarios where someone would want 60% in bonds (unless maybe they were preparing to buy an annuity). For several years they have a been a 'return free risk' and while they have become more attractive as prices have dropped they are still not overall attractive relative to the economic landscape. If you only want 40% global equities exposure that's fine but I would look to allocate the remainder across a more diverse range of assets otherwise yes it's a bet on returning to near zero interest rates to drive the kind of return from them that might keep up with inflation in the medium term. Long term they are dead weight.

@Alexland

I know you have been negative about bonds for some time now, and you were proved right big time in 2022.

However the forward outlook is maybe more positive than you think, according to Vanguard anyway, who are predicting a 5% year on year return for UK bonds for the next 10 years.

3 things to know about the global economy and global markets in 2023 (vanguardinvestor.co.uk)

Alexland

Albermarle said:

However the forward outlook is maybe more positive than you think, according to Vanguard anyway, who are predicting a 5% year on year return for UK bonds for the next 10 years.

I don't know the inner workings of their capital market model but can only assume they have baked in an expectation of lowering interest rates in generating that expected return as I can't see how it would naturally happen through the yield. If interest rates go down we should also see upside across other asset classes so I still don't see bonds as particularly attractive but yes as I said before they are more attractive than before but not sufficiently attractive that I would want 60% of my portfolio in them.

GeoffTF

Alexland said:

Albermarle said:

However the forward outlook is maybe more positive than you think, according to Vanguard anyway, who are predicting a 5% year on year return for UK bonds for the next 10 years.

I don't know the inner workings of their capital market model but can only assume they have baked in an expectation of lowering interest rates in generating that expected return as I can't see how it would naturally happen through the yield.

Here is the U.K. Investment Grade Bond Index Fund - GBP Acc:

https://www.vanguard.co.uk/professional/product/fund/bond/9125/uk-investment-grade-bond-index-fund-gbp-acc

Yield to maturity 5.3%. Average duration 6.0 years. A 5% p.a. return from UK bonds over the next ten years looks reasonable if interest rates do not change. Both the central banks and the market think that interest rates will fall, but they both have a bad record of predicting future interest rates. If interest rates do fall, the return from UK bonds will be more than 5%, and could outpace equity returns.

Alexland

GeoffTF said:5% annual return

Here is the U.K. Investment Grade Bond Index Fund - GBP Acc:

When considering UK bonds my mind tends to default to gilts which offer less yield but yes for a fund like that it may be possible assuming a low rate of defaults. I'm not negative on bonds as I was a few years ago and accept as a result of the price drops they have become more attractive but just wouldn't suggest going too heavy into them especially if this is a long term investment.

JohnWinder

‘However the forward outlook is maybe more positive than you think, according to Vanguard anyway, who are predicting a 5% year on year return for UK bonds for the next 10 years.’

If we read the same thing I sensed it was all UK bonds, not gilts. Secondly, the BoE publishes yield curves daily. If the yield on a ten year gilt is 4% today (rounding up) the market is saying it thinks that you’ll get a return of 4%/year for the next ten years buying this gilt. This seems incontrovertible, but correct me if the logic is wrong, because all the buyers and sellers have settled on today’s price for that bond’s coupon, resulting a 4% yield. So I suggest that the best guess for what gilts will return over the next decade is the current yield on ten year bonds. Any other guess is a speculation about future market movements - brave bordering on ……