Vanguard Target retirement funds for SIPP

jamesd

RSVMark said:

Thanks @jamesd
I read the ft article and sadly undestand maybe 10% of it as a newb into this area. Baby steps needed for me although the interesting thing is that it a) shows bonds aren’t that far behind equities over the time b) challenges the theory that bonds are risk free and c) walks us through the 60/40 rule of thumb and questions it. 

 Would like to read the second article but the link doesn’t work on my iPad?

Bonds definitely aren't risk free, just ask those who saw 40% losses when interest rates went up!

Part of that problem is that fund risk scores are based on the volatility over the last five years, not risk. It's the standard but misleading way. In the case of bonds recently, the long bull market showed low volatility even while the risk was constantly increasing as the measures introduced to fight the 2008 events were starting to be unwound. That unwinding of interest rates lower than they had been for centuries is likely to be a once in a lifetime one way - capital down - move. There will be some recovery, but very unlikely that rates will go as low as they were.

That 40 years was a long bull market so a bit lower performance is really expected but it hopefully shows that holding some bonds isn't punitively bad.

Just take your time learning, you've got plenty of time. Key for you is understanding of sequence of returns risk, how safe withdrawal rates have been determined and how that affects desirable drawdown investment mixtures.

jamesd

Don't let what I wrote about bonds discourage you. Usually they are risk reducing. I've been describing an exceptional situation, not how they normally do and not what you're likely to experience.

That paragraph is pretty much the opposite of what a wrote to someone here considering doing what you were doing two or three years ago, when I suggested cash or equities instead.

 What's best isn't unchanging, particularly when living through extraordinary events.

jamesd

Pat38493 said:

jamesd said:

Pat38493 said:

I would also be interested in the second link but it doesn’t work for me either, since most of the stuff that I’ve read concluded that an equity / bonds mix of more like 80/20 or 70/30 is better than 60/40 when looking at long term historical trends.

I don't think I've ever seen equities that high in a safe withdrawal rate maximising mixture. It's potentially reachable with longer than usual plans that FIRE followers might need since the general trend is higher bonds as the time gets shorter.

Good point as most of my research was looking at 40+ year timeframes for early retirement.  Maybe if you are looking at 30 years it’s a different matter.

Yes, and drawdown rules and investments matter. For 30 years Bengen started with just about any 50%+ equities but when he added small cap that took it to 60:40 narrow range. Meanwhile Guyton and Klinger ended up with 65:35 for the no small caps 40 year Guyton-Klinger rules. Even after adding small caps a bit more diversification is likely to help a little.

You might find Guyton's sequence of return risk reducing approach linked to in the SWR topic interesting. After possibly recoiling because it resembles market timing.

JohnWinder

A lot of useful information here, but one verse is out of tune:

..most need to read the FCA funded research which found that in most areas active outperformed passive for UK investors.

The problem is no one has reported finding this research, and that stated conclusion is at odds with the research in the SPIVA reports and the Morningstar active/passive barometer reports.

Two years ago someone wrote:

For UK investors in UK funds FCA research showed that active commonly beat passive and that outperformance was often persistent so the basis of your claim isn't accurate.

A challenge to that was put up:

Would you mind pointing me to that research please?  I know of FCA research on active vs passive fees but not the one you mention.

The reply:

 ‘I'll dig it up again later though you might find it sooner with a search’

https://forums.moneysavingexpert.com/discussion/6296028/passive-investing/p3
I’ve not seen the promised ‘I’ll dig it up’ research yet. I’m look’n at you, james.
In god we trust, others bring data.

Pat38493

If stating that active funds outperform passive funds, the other question is:
1) Over what period of time?
2) Is this out performance net of charges?  I can more likely believe that Active funds outperform passive if you don't take the charges into account?

I've often seen it quoted that most (80%+) active fund managers don't outperform the market after taking into account higher charges over the very long term.  Part of the logic for using passives is that we don't know how to identify the 20% or less that do, other than historically.

JohnWinder

‘2) Is this out performance net of charges?  I can more likely believe that Active funds outperform passive if you don't take the charges into account?’

I don’t quibble with that, but I’d question it. As a brave generalisation to simplify the discussion, and ignoring everyone’s management fees, the passive funds are getting market returns less a few basis points in not tracking the index perfectly. The passive funds are neither beating or losing to anyone in the market (except for the tracking error). That leaves only the market returns (plus that tracking error if they can get it) for the active funds as a whole. So if the active funds were to be outperforming the passives, which is more credible to you, who in the market is losing to them if the active funds are getting better than market returns (minus tracking error)? Or are you envisaging that the active funds as a whole are simply getting market returns, as that’s all that’s available, plus the passives’ tracking error?

Hoenir

The 40 year bond bull market was a result of falling interest rates. Correspondingly equities benefited as well over the same period. With the QE era turbocharging returns even further. New era has dawned. Government bonds again offer a decent guaranteed predictable return. Not to dissimiliar to periods pre the GFC.  Higher borrowing costs for corporate entities have a long way to permutate yet. 

jamesd

Pat38493 said:

If stating that active funds outperform passive funds, the other question is:
1) Over what period of time?
2) Is this out performance net of charges?  I can more likely believe that Active funds outperform passive if you don't take the charges into account?

I've often seen it quoted that most (80%+) active fund managers don't outperform the market after taking into account higher charges over the very long term.  Part of the logic for using passives is that we don't know how to identify the 20% or less that do, other than historically.

If it's not after charges it's not very useful.

There was an interesting US study which found that actives there beat passives but only before charges and tax. So not a benefit to the investor. 

That same FCA study found that outperformance persisted, so we do know how to pick the ones that are likely to do best: pick the current winners. That's exactly what worked when back in 2008 or so I looked at the global growth sector in some posts here: the funds in the top ten stayed in the top ten unless the human manager changed, which prompted a fall.

Pat38493

jamesd said:

Pat38493 said:

If stating that active funds outperform passive funds, the other question is:
1) Over what period of time?
2) Is this out performance net of charges?  I can more likely believe that Active funds outperform passive if you don't take the charges into account?

I've often seen it quoted that most (80%+) active fund managers don't outperform the market after taking into account higher charges over the very long term.  Part of the logic for using passives is that we don't know how to identify the 20% or less that do, other than historically.

If it's not after charges it's not very useful.

There was an interesting US study which found that actives there beat passives but only before charges and tax. So not a benefit to the investor. 

That same FCA study found that outperformance persisted, so we do know how to pick the ones that are likely to do best: pick the current winners. That's exactly what worked when back in 2008 or so I looked at the global growth sector in some posts here: the funds in the top ten stayed in the top ten unless the human manager changed, which prompted a fall.

Maybe I’m misunderstanding you but I’m confused now.  If the performance advantage persisted but there was no benefit to the investor, why would I invest in active funds, unless I want to make sure fund managers can feed their children? 

jamesd

Pat38493 said:

.  If the performance advantage persisted but there was no benefit to the investor, why would I invest in active funds, unless I want to make sure fund managers can feed their children? 

You wouldn't, as a US investor. Nor as a UK investor in US equities. That's why knowing the difference between US and UK outcomes matters.

It's also why I use trackers for US large cap and US dominated global large cap