Vanguard Global Bond Index Fund GBP Hedged Acc...thoughts?

Hoenir

Albermarle said:

masonic said:

I think you need to be clear on your reason for holding it. If it is to serve as a low risk pot to draw from if equities tank, then it is a good choice now that money market funds will be offering lower forward returns. You can't, however, expect it to do much to counter falls in equities when they crash. About half the time such a fund is likely to have a negative period while equities are falling. I doubt you have a better option available to you in your pension.

Although I read in this very recent 'mini crash', that US investors were piling into safe haven bonds and pushing yields down. I did not follow all the detailed numbers, but this switching between equities and bonds in a market stress situation still seems to happen in the traditional way, now this massive correction in bond prices seems to be out of the way.

Central Bank balance sheets are stuffed full of Government and Corporate Bonds, Retail Mortgage Backed Securities (RMBS) etc. There's no shortage of supply in the pipeline. Shrinking the balance sheets will in time increase the level of medium and long term interest rates. 

GeoffTF

masonic said:

OldScientist said:
From the point of view of reducing volatility, the duration of the bond fund is critical. One of the problems with the 'All stocks' index of UK gilts is that the modified duration is currently about 8 (it was nearly 13 in 2020, was as low as 5 in 1990 and 16 in 1950) which still leaves it fairly sensitive to changes in interest rates. With a modified duration of 6.5, the global bond fund under discussion here is currently slightly less sensitive, while the short version of the same fund is less sensitive still. Of course, in the long term, the returns will tend to be higher for longer duration, but, in retirement, it is not just returns that are important but their sequence.

This is a good point and the duration can be either good or bad depending on what you want from the exposure. As has been discussed at length elsewhere, you can opt for a ladder of individual gilts to get the benefit of duration on returns without the uncertainty. This could be done in addition to holding a fund. Having different buckets fulfilling different purposes can assist with portfolio management during adverse sequence of returns scenarios. Especially considering that beyond the early years the argument for holding significant defensive assets weakens.

Vanguard disagrees. See Figure 1 in their adviser guide for Target Retirement funds:

https://www.vanguard.co.uk/content/dam/intl/europe/documents/en/trf-adviser-guide.pdf

That shows 50% equities at retirement, falling to 30% at age 75 and beyond.

masonic

GeoffTF said:

masonic said:

OldScientist said:
From the point of view of reducing volatility, the duration of the bond fund is critical. One of the problems with the 'All stocks' index of UK gilts is that the modified duration is currently about 8 (it was nearly 13 in 2020, was as low as 5 in 1990 and 16 in 1950) which still leaves it fairly sensitive to changes in interest rates. With a modified duration of 6.5, the global bond fund under discussion here is currently slightly less sensitive, while the short version of the same fund is less sensitive still. Of course, in the long term, the returns will tend to be higher for longer duration, but, in retirement, it is not just returns that are important but their sequence.

This is a good point and the duration can be either good or bad depending on what you want from the exposure. As has been discussed at length elsewhere, you can opt for a ladder of individual gilts to get the benefit of duration on returns without the uncertainty. This could be done in addition to holding a fund. Having different buckets fulfilling different purposes can assist with portfolio management during adverse sequence of returns scenarios. Especially considering that beyond the early years the argument for holding significant defensive assets weakens.

Vanguard disagrees. See Figure 1 in their adviser guide for Target Retirement funds:

https://www.vanguard.co.uk/content/dam/intl/europe/documents/en/trf-adviser-guide.pdf

That shows 50% equities at retirement, falling to 30% at age 75 and beyond.

Vanguard seems to disagree with me on many things related to asset allocation. Though I do approve of the use of linkers in these funds. It is a shame they don't explain their rationale for extending the derisking phase 7 years beyond retirement. If this portfolio comes into contact with an adverse sequence of returns, then the reduction in risk after the damage is done would compound the problem. cFIREsim seems to bear this out, with such a glide-path giving rise to a higher failure rate compared with one that derisks around retirement, but later ramps back up.

GeoffTF

masonic said:

GeoffTF said:

masonic said:

OldScientist said:
From the point of view of reducing volatility, the duration of the bond fund is critical. One of the problems with the 'All stocks' index of UK gilts is that the modified duration is currently about 8 (it was nearly 13 in 2020, was as low as 5 in 1990 and 16 in 1950) which still leaves it fairly sensitive to changes in interest rates. With a modified duration of 6.5, the global bond fund under discussion here is currently slightly less sensitive, while the short version of the same fund is less sensitive still. Of course, in the long term, the returns will tend to be higher for longer duration, but, in retirement, it is not just returns that are important but their sequence.

This is a good point and the duration can be either good or bad depending on what you want from the exposure. As has been discussed at length elsewhere, you can opt for a ladder of individual gilts to get the benefit of duration on returns without the uncertainty. This could be done in addition to holding a fund. Having different buckets fulfilling different purposes can assist with portfolio management during adverse sequence of returns scenarios. Especially considering that beyond the early years the argument for holding significant defensive assets weakens.

Vanguard disagrees. See Figure 1 in their adviser guide for Target Retirement funds:

https://www.vanguard.co.uk/content/dam/intl/europe/documents/en/trf-adviser-guide.pdf

That shows 50% equities at retirement, falling to 30% at age 75 and beyond.

Vanguard seems to disagree with me on many things related to asset allocation. Though I do approve of the use of linkers in these funds. It is a shame they don't explain their rationale for extending the derisking phase 7 years beyond retirement. If this portfolio comes into contact with an adverse sequence of returns, then the reduction in risk after the damage is done would compound the problem.

...or prevent it getting worse. Vanguard suggests reducing the size of withdrawals (or not fully indexing them) if your capital gets depleted. If you are unlucky, you cannot take out as much. Taking on more risk when you are losing is not good. Fortunately most people do not rely on a drawdown pension as their sole source of income.

masonic

GeoffTF said:

masonic said:

GeoffTF said:

masonic said:

OldScientist said:
From the point of view of reducing volatility, the duration of the bond fund is critical. One of the problems with the 'All stocks' index of UK gilts is that the modified duration is currently about 8 (it was nearly 13 in 2020, was as low as 5 in 1990 and 16 in 1950) which still leaves it fairly sensitive to changes in interest rates. With a modified duration of 6.5, the global bond fund under discussion here is currently slightly less sensitive, while the short version of the same fund is less sensitive still. Of course, in the long term, the returns will tend to be higher for longer duration, but, in retirement, it is not just returns that are important but their sequence.

This is a good point and the duration can be either good or bad depending on what you want from the exposure. As has been discussed at length elsewhere, you can opt for a ladder of individual gilts to get the benefit of duration on returns without the uncertainty. This could be done in addition to holding a fund. Having different buckets fulfilling different purposes can assist with portfolio management during adverse sequence of returns scenarios. Especially considering that beyond the early years the argument for holding significant defensive assets weakens.

Vanguard disagrees. See Figure 1 in their adviser guide for Target Retirement funds:

https://www.vanguard.co.uk/content/dam/intl/europe/documents/en/trf-adviser-guide.pdf

That shows 50% equities at retirement, falling to 30% at age 75 and beyond.

Vanguard seems to disagree with me on many things related to asset allocation. Though I do approve of the use of linkers in these funds. It is a shame they don't explain their rationale for extending the derisking phase 7 years beyond retirement. If this portfolio comes into contact with an adverse sequence of returns, then the reduction in risk after the damage is done would compound the problem.

...or prevent it getting worse. Vanguard suggests reducing the size of withdrawals (or not fully indexing them) if your capital gets depleted. If you are unlucky, you cannot take out as much. Taking on more risk when you are losing is not good. Fortunately most people do not rely on a drawdown pension as their sole source of income.

Well at 30% equities, withdrawals are going to need to be conservative. The aim of de-risking in the early years is to protect yourself from getting into that position of "losing" in the first place. If you get hit early on and then subsequently reduce risk then you will end up worse off. I know the assumption baked into this product is retirement at state pension age, but many aspire to retire up to 10 years before that and they'll be investing in retirement for 30+ years if they have a good innings. 

Backtesting the Vanguard glide path results in a 14% failure rate over a 30 year retirement at a inflation adjusted drawdown starting at 4% of the portfolio value. If you reverse it to start at 30% and increase to 50% equities over the first 7 years, the failure rate reduces to 8%. The median ending portfolio value is double for the latter. So it seems overly conservative without a reduction in the risk of a shortfall. 

Of course one may be able to take out less if unlucky in either scenario. If you were to do so, for example following the Guyton-Klinger rules, then the worst case scenario for both approaches is equivalent, but with a greater chance of having to cut withdrawals when following the Vanguard glide path.

I realise we are straying far from the 80% equities retirement portfolio mentioned by the OP.

GeoffTF

masonic said:

GeoffTF said:

masonic said:

GeoffTF said:

masonic said:

OldScientist said:
From the point of view of reducing volatility, the duration of the bond fund is critical. One of the problems with the 'All stocks' index of UK gilts is that the modified duration is currently about 8 (it was nearly 13 in 2020, was as low as 5 in 1990 and 16 in 1950) which still leaves it fairly sensitive to changes in interest rates. With a modified duration of 6.5, the global bond fund under discussion here is currently slightly less sensitive, while the short version of the same fund is less sensitive still. Of course, in the long term, the returns will tend to be higher for longer duration, but, in retirement, it is not just returns that are important but their sequence.

This is a good point and the duration can be either good or bad depending on what you want from the exposure. As has been discussed at length elsewhere, you can opt for a ladder of individual gilts to get the benefit of duration on returns without the uncertainty. This could be done in addition to holding a fund. Having different buckets fulfilling different purposes can assist with portfolio management during adverse sequence of returns scenarios. Especially considering that beyond the early years the argument for holding significant defensive assets weakens.

Vanguard disagrees. See Figure 1 in their adviser guide for Target Retirement funds:

https://www.vanguard.co.uk/content/dam/intl/europe/documents/en/trf-adviser-guide.pdf

That shows 50% equities at retirement, falling to 30% at age 75 and beyond.

Vanguard seems to disagree with me on many things related to asset allocation. Though I do approve of the use of linkers in these funds. It is a shame they don't explain their rationale for extending the derisking phase 7 years beyond retirement. If this portfolio comes into contact with an adverse sequence of returns, then the reduction in risk after the damage is done would compound the problem.

...or prevent it getting worse. Vanguard suggests reducing the size of withdrawals (or not fully indexing them) if your capital gets depleted. If you are unlucky, you cannot take out as much. Taking on more risk when you are losing is not good. Fortunately most people do not rely on a drawdown pension as their sole source of income.

Well at 30% equities, withdrawals are going to need to be conservative. The aim of de-risking in the early years is to protect yourself from getting into that position of "losing" in the first place. If you get hit early on and then subsequently reduce risk then you will end up worse off. I know the assumption baked into this product is retirement at state pension age, but many aspire to retire up to 10 years before that and they'll be investing in retirement for 30+ years if they have a good innings. 

Backtesting the Vanguard glide path results in a 14% failure rate over a 30 year retirement at a inflation adjusted drawdown starting at 4% of the portfolio value. If you reverse it to start at 30% and increase to 50% equities over the first 7 years, the failure rate reduces to 8%. The median ending portfolio value is double for the latter. So it seems overly conservative without a reduction in the risk of a shortfall. 

Of course one may be able to take out less if unlucky in either scenario. If you were to do so, for example following the Guyton-Klinger rules, then the worst case scenario for both approaches is equivalent, but with a greater chance of having to cut withdrawals when following the Vanguard glide path.

I realise we are straying far from the 80% equities retirement portfolio mentioned by the OP.

Target Retirement is a mass market product aimed at people with modest means who retire at the state retirement age, as most people do. It needs to be at the lower end of the risk spectrum to satisfy most people and the regulator.

Back testing is dangerous, particularly if it is selective, which it always is. The world changes. The future is not always like the past.

4% index linked withdrawal is too optimistic. As I have said, the withdrawal rate can be adjusted to suit the funds that remain.

masonic

GeoffTF said:

masonic said:

GeoffTF said:

masonic said:

GeoffTF said:

masonic said:

OldScientist said:
From the point of view of reducing volatility, the duration of the bond fund is critical. One of the problems with the 'All stocks' index of UK gilts is that the modified duration is currently about 8 (it was nearly 13 in 2020, was as low as 5 in 1990 and 16 in 1950) which still leaves it fairly sensitive to changes in interest rates. With a modified duration of 6.5, the global bond fund under discussion here is currently slightly less sensitive, while the short version of the same fund is less sensitive still. Of course, in the long term, the returns will tend to be higher for longer duration, but, in retirement, it is not just returns that are important but their sequence.

This is a good point and the duration can be either good or bad depending on what you want from the exposure. As has been discussed at length elsewhere, you can opt for a ladder of individual gilts to get the benefit of duration on returns without the uncertainty. This could be done in addition to holding a fund. Having different buckets fulfilling different purposes can assist with portfolio management during adverse sequence of returns scenarios. Especially considering that beyond the early years the argument for holding significant defensive assets weakens.

Vanguard disagrees. See Figure 1 in their adviser guide for Target Retirement funds:

https://www.vanguard.co.uk/content/dam/intl/europe/documents/en/trf-adviser-guide.pdf

That shows 50% equities at retirement, falling to 30% at age 75 and beyond.

Vanguard seems to disagree with me on many things related to asset allocation. Though I do approve of the use of linkers in these funds. It is a shame they don't explain their rationale for extending the derisking phase 7 years beyond retirement. If this portfolio comes into contact with an adverse sequence of returns, then the reduction in risk after the damage is done would compound the problem.

...or prevent it getting worse. Vanguard suggests reducing the size of withdrawals (or not fully indexing them) if your capital gets depleted. If you are unlucky, you cannot take out as much. Taking on more risk when you are losing is not good. Fortunately most people do not rely on a drawdown pension as their sole source of income.

Well at 30% equities, withdrawals are going to need to be conservative. The aim of de-risking in the early years is to protect yourself from getting into that position of "losing" in the first place. If you get hit early on and then subsequently reduce risk then you will end up worse off. I know the assumption baked into this product is retirement at state pension age, but many aspire to retire up to 10 years before that and they'll be investing in retirement for 30+ years if they have a good innings. 

Backtesting the Vanguard glide path results in a 14% failure rate over a 30 year retirement at a inflation adjusted drawdown starting at 4% of the portfolio value. If you reverse it to start at 30% and increase to 50% equities over the first 7 years, the failure rate reduces to 8%. The median ending portfolio value is double for the latter. So it seems overly conservative without a reduction in the risk of a shortfall. 

Of course one may be able to take out less if unlucky in either scenario. If you were to do so, for example following the Guyton-Klinger rules, then the worst case scenario for both approaches is equivalent, but with a greater chance of having to cut withdrawals when following the Vanguard glide path.

I realise we are straying far from the 80% equities retirement portfolio mentioned by the OP.

Target Retirement is a mass market product aimed at people with modest means who retire at the state retirement age, as most people do. It needs to be at the lower end of the risk spectrum to satisfy most people and the regulator.

Back testing is dangerous, particularly if it is selective, which it always is. The world changes. The future is not always like the past.

4% index linked withdrawal is too optimistic. As I have said, the withdrawal rate can be adjusted to suit the funds that remain.

Back testing may have its flaws, but it provides useful information and can be used as a guide to whether a different approach broadly gives improved survivability in a portfolio. I set the initial withdrawal rate to a level that would produce a low but non-zero failure rate, again just as a guide to establish whether the approach was broadly positive or negative for success rate.

Given your commentary about the need for constraints on risk and retirement age, it is not really a suitable product to examine for disagreement in approach in a thread where the OP intends to retire early with a much greater risk appetite. If this is the level of risk the mass market is expected to take in retirement then so be it, but it is an overly cautious approach in my view and if those of already modest means follow this path AND potentially have to reduce withdrawal rate anyway, then they are getting the worst of both worlds. Probably better for them to buy an annuity with a portion of the money and then take more risk with the remainder.