VLS 60 buying more now ok?

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  • ColdIron
    ColdIron Posts: 9,052 Forumite
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    jdw2000 wrote: »
    So if your investment has gone up by 50%, and then it's hit by a 30% reduction in a crash, then you're still 20% up.
    That's right except you're not 20% up

    If you started with £100 and it increased by 50% you would have an extra £50 and a total of £150

    If this £150 suffered a 30% reduction you would be £45 worse off and have a total of £105

    I make that a 5% gain
  • dunstonh
    dunstonh Posts: 116,376 Forumite
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    If you suffer a 50% loss straight away you will need 100% to get back to the same position you started at.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • JohnRo
    JohnRo Posts: 2,887 Forumite
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    I cobbled this a while ago to help visualise how easily, in percentage terms, gains can be lost and how difficult large losses can be to recover.

    nMA9Ibt.png
    'We don't need to be smarter than the rest; we need to be more disciplined than the rest.' - WB
  • TheShape
    TheShape Posts: 1,779 Forumite
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    dunstonh wrote: »
    If you suffer a 50% loss straight away you will need 100% to get back to the same position you started at.

    But if, after the 50% loss, you add an amount equivalent to half of what you started with, that 100% increase becomes a total gain of 100%.
  • bowlhead99
    bowlhead99 Posts: 12,295 Forumite
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    edited 9 March 2017 at 7:50PM
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    TheTracker wrote: »
    Do you have a source for this assertion? Remember that a correlation of 1 is totally correlated, 0 is uncorrelated, and -1 is totally negatively correlated. As of November 2016, U.S. bonds had a 12-month correlation with large-cap U.S. stocks of -0.07. Just because two classes are both going up in annual terms doesn't mean they are correlated.

    I agree of course that two things going up together doesn't imply correlation, nor causation. However, the fact that since 2009 equities have been on a strong bull run while many bond total return indices have been going up at well over their coupon rates, mean you have an environment where the movement of bond prices over multi year periods were positively correlated with, rather than negatively correlated with, the values of equities. Largely due to QE, with some currency effects on unhedged overseas bonds and so on.

    You mention a close-to-zero correlation score of two indices over a 1 year period ended three months ago at US election time. But 1 year is not much of a timeframe. 3 years would seem to be bare minimum.

    If you go onto Trustnet or similar data tool and bring up Vanguard's Global Bond Index fund (the backbone of the VLS bond component), added to your "basket" alongside the Vanguard FTSE Developed World ex UK index fund (the backbone of the VLS global equity component) you get a 3 year correlation score of 0.42.

    That is relatively weak correlation (example, Dev World ex UK compared to UK Allshare is stronger at 0.76)... But it is far from being a negative correlation and it is significantly above a zero correlation. Obviously it's not going to be +1.0, which isn't what I'm suggesting of course.

    So I'm comfortable saying generically that bonds in recent years have been correlated with - if not in lockstep with - equities. They have both shot up in the last seven years. Likewise they could both fall at the same time so if/when your overseas equities are falling 50% in sterling your bonds are not necessarily gong to be going the other way to offset them. They are of course very unlikely to fall as fast so will still act as a "brake" but you wouldn't bank on correlation being 0 or -0.5 or similar.
    I do not see how that stands to reason. Such passive products will generally float in that noisy sea around the 2nd quartile. If a 'bad year' means stock crashes, I don't see your logic that says that changes where in a table such products will land.
    People put mixed asset funds in pigeon holes. If we take VLS80 for example it sits in the "mixed asset, 40-85% equity" table.

    However that pile of investment funds occupying the "league table" has a vast range of risk profiles.

    - The VLS fund for example is in a pigeon hole where its apparent "competitors" may have a fixed or variable equity component going up to 85% at very top end. VLS80 is permanently no less than 80%. It has pretty much the highest equity component in its "mini-league". In an equity bull run it will do awesome. In an equity crash it will be terrible and other end of the league

    -VLS fund has 75% of its equities overseas and its UK equities are majority FTSE100 with high dollar revenues. That is a higher overseas equity and foreign currency component than most UK investors accept, so it is higher risk from that perspective and in sterling weakness it will do awesome but in sterling strengthening it would be poor and other end of the league

    - VLS non equity component is 100% bonds while other things in the mini league will use a mixture of bonds, real estate maybe a bit of gold or other commodities or multi-strategy solutions like currency plays or whatever. Some rivals are pure equity/bond, but many aren't. As we mentioned, bonds have been on a 30 year bull run until last year. So when you pull up a chart for five years, the VLS non-equity component did nicely thanks to the bull run, and maybe better than the other competitors in the mini league whose non equities bit on average had a broader mix of some bonds, some "other non-equities". As such, VLS did well but if bonds fall next to other non-equities it will push them towards other ends of the table.

    Basically, VLS as a product range was well positioned for the specific set of circumstances we experienced since VLS launch in July 2011. It tops the table in the widely-drawn mixed asset categories and people recommend it.

    There is a risk that some investors think that because it topped the table in the good years it will be better at surviving the bad years because the reason it topped the table was due to vanguard being competent, reliable and cheap. Ok cheap is a part of it. But instead the performance was really due to how the static asset mix was positioned. It pushed them right to one end of the table. Opposite economic circumstances could push them right to the other.

    I do understand your comment that a tracker might be mid table (2nd quartile you think, let's not rehash the argument:)) in good times and also mid table (2nd quartile you think) in bad times. That's how general index trackers behave. But a fund of tracker funds is not a single tracker.

    The point that you were pulling me up on was from an observation which stemmed from the fact that the VLS products are not really showing as mid table / lower second quartile at the moment, as you infer they will be and will stay. At the moment, they are top of the pops. And that premium position well above mid table comes from their pretty rigid asset allocation which was lucky. If instead it was UNlucky, they would not simply be sitting around in the second quartile. They would have larger losses than many.

    The solution of course is to get better "league tables" somehow, which try to risk grade these funds by volatility or something other than just an equity percentage. But unfortunately, casual retail investors will not be doing that as the popular common search tools don't really let you do that and their DIY platforms (which are keen to lump funds together for simple "usability") do not help.
  • bowlhead99
    bowlhead99 Posts: 12,295 Forumite
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    edited 9 March 2017 at 5:42PM
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    TheShape wrote: »
    But if, after the 50% loss, you add an amount equivalent to half of what you started with, that 100% increase becomes a total gain of 100%.

    So the solution could be, assuming you are at the top of a boom ready to invest, only ever invest 2/3 of what you want to invest, then when it crashes 50%, invest the other 1/3 (being half what you originally invested) at the bargain price of 50p in the pound. Then after waiting anything from two to ten years until price is back where it all started at a pound, tranche two will have doubled (100% gain) and tranche one will have recovered back to the beginning for 0% gain.

    So at that point, end of the economic cycle you would have your tranche one £2 which is back up to its starting £2, and tranche two £1 which turned into £2, so overall you have turned £3 into £4 for a 33% gain.

    Alternatively if you had just invested mid way through the cycle when things were not at peaks, you could have invested everything at a price of 75p (instead of 2/3 at 100 and 1/3 at 50p) and seen it go up to 100p, t growing your overall total by 33%.

    Of course, we don't really know where we are in the cycle so it isn't clear if we should go all in (hoping today is the "75p" point), or assume today is the "100p" point and leave a third uninvested for the "expected" 50% crash. It is just an unwinnable game of trying to time the market with cash on the sidelines.

    One thing is clear, if you gamble strongly on one approach being right, you will be disappointed of the other was better. This is where the oft used cliche "it's 'time in the market', not timing it" mantra comes from.

    Generally if you invest as spare investible money becomes available from salary or other income etc, you will probably be fine over the long long long term, but the large inevitable downturns will happen whether you are mentally prepared or not, so if you find it difficult to mentally prepare for them, consider products which are unlikely to have peak-to-trough downturns as high as 50%.

    This may rule you out of some products which your friends or fellow forum members have. Which is fine. World would be boring if there was only one personality type or investment method and we all had to accept it.
  • davieg11
    davieg11 Posts: 278 Forumite
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    Generally if you invest as spare investible money becomes available from salary or other income etc, you will probably be fine over the long long long term, but the large inevitable downturns will happen whether you are mentally prepared or not, so if you find it difficult to mentally prepare for them, consider products which are unlikely to have peak-to-trough downturns as high as 50%.

    My Aviva pension has over 2000 different funds. How do you know which ones are unlikely to have 50% downturns?
  • Audaxer
    Audaxer Posts: 3,508 Forumite
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    jdw2000 wrote: »
    But I sure as hell wouldn't be 80% equities if I was 59 years old and that was my nest egg.
    I'm in my late 50s, retired, and was thinking of transferring part of my savings to a VLS60, to hopefully get more growth from my savings and take income from that growth. However reading this thread, it looks like I will need to the growth years just to balance the losses.

    It was also suggested I should consider Investment Trusts which I now think may be a better way of getting a steady income. While I assume the equity element of Investment Trusts will also be volatile and suffer losses, am I right in thinking dividends are based on the number of shares you have rather than the value, so the dividends may not be badly affected in an equity crash?
  • dunstonh
    dunstonh Posts: 116,376 Forumite
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    My Aviva pension has over 2000 different funds. How do you know which ones are unlikely to have 50% downturns?

    Some could have 80% losses.

    All funds carry different risk levels. This includes funds in the same sector. A common mistake by new investors is to assume that all the funds in a particular sector are the same risk. There is no way for you to know unless you understand risk and reward and are able to make your own judgement call based on that research or use software.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • jdw2000
    jdw2000 Posts: 418 Forumite
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    bowlhead99 wrote: »
    I agree of course that two things going up together doesn't imply correlation, nor causation. However, the fact that since 2009 equities have been on a strong bull run while many bond total return indices have been going up at well over their coupon rates, mean you have an environment where the movement of bond prices over multi year periods were positively correlated with, rather than negatively correlated with, the values of equities. Largely due to QE, with some currency effects on unhedged overseas bonds and so on.

    You mention a close-to-zero correlation score of two indices over a 1 year period ended three months ago at US election time. But 1 year is not much of a timeframe. 3 years would seem to be bare minimum.

    If you go onto Trustnet or similar data tool and bring up Vanguard's Global Bond Index fund (the backbone of the VLS bond component), added to your "basket" alongside the Vanguard FTSE Developed World ex UK index fund (the backbone of the VLS global equity component) you get a 3 year correlation score of 0.42.

    That is relatively weak correlation (example, Dev World ex UK compared to UK Allshare is stronger at 0.76)... But it is far from being a negative correlation and it is significantly above a zero correlation. Obviously it's not going to be +1.0, which isn't what I'm suggesting of course.

    So I'm comfortable saying generically that bonds in recent years have been correlated with - if not in lockstep with - equities. They have both shot up in the last seven years. Likewise they could both fall at the same time so if/when your overseas equities are falling 50% in sterling your bonds are not necessarily gong to be going the other way to offset them. They are of course very unlikely to fall as fast so will still act as a "brake" but you wouldn't bank on correlation being 0 or -0.5 or similar.

    People put mixed asset funds in pigeon holes. If we take VLS80 for example it sits in the "mixed asset, 40-85% equity" table.

    However that pile of investment funds occupying the "league table" has a vast range of risk profiles.

    - The VLS fund for example is in a pigeon hole where its apparent "competitors" may have a fixed or variable equity component going up to 85% at very top end. VLS80 is permanently no less than 80%. It has pretty much the highest equity component in its "mini-league". In an equity bull run it will do awesome. In an equity crash it will be terrible and other end of the league

    -VLS fund has 75% of its equities overseas and its UK equities are majority FTSE100 with high dollar revenues. That is a higher overseas equity and foreign currency component than most UK investors accept, so it is higher risk from that perspective and in sterling weakness it will do awesome but in sterling strengthening it would be poor and other end of the league

    - VLS non equity component is 100% bonds while other things in the mini league will use a mixture of bonds, real estate maybe a bit of gold or other commodities or multi-strategy solutions like currency plays or whatever. Some rivals are pure equity/bond, but many aren't. As we mentioned, bonds have been on a 30 year bull run until last year. So when you pull up a chart for five years, the VLS non-equity component did nicely thanks to the bull run, and maybe better than the other competitors in the mini league whose non equities bit on average had a broader mix of some bonds, some "other non-equities". As such, VLS did well but if bonds fall next to other non-equities it will push them towards other ends of the table.

    Basically, VLS as a product range was well positioned for the specific set of circumstances we experienced since VLS launch in July 2011. It tops the table in the widely-drawn mixed asset categories and people recommend it.

    There is a risk that some investors think that because it topped the table in the good years it will be better at surviving the bad years because the reason it topped the table was due to vanguard being competent, reliable and cheap. Ok cheap is a part of it. But instead the performance was really due to how the static asset mix was positioned. It pushed them right to one end of the table. Opposite economic circumstances could push them right to the other.

    I do understand your comment that a tracker might be mid table (2nd quartile you think, let's not rehash the argument:)) in good times and also mid table (2nd quartile you think) in bad times. That's how general index trackers behave. But a fund of tracker funds is not a single tracker.

    The point that you were pulling me up on was from an observation which stemmed from the fact that the VLS products are not really showing as mid table / lower second quartile at the moment, as you infer they will be and will stay. At the moment, they are top of the pops. And that premium position well above mid table comes from their pretty rigid asset allocation which was lucky. If instead it was UNlucky, they would not simply be sitting around in the second quartile. They would have larger losses than many.

    The solution of course is to get better "league tables" somehow, which try to risk grade these funds by volatility or something other than just an equity percentage. But unfortunately, casual retail investors will not be doing that as the popular common search tools don't really let you do that and their DIY platforms (which are keen to lump funds together for simple "usability") do not help.

    Thanks for that. Much food for thought.

    Do you have any suggestions for other types of funds I can research which you feel are more stable (ie, are not prone to be toping or bottoming tables depending on what the market is doing)? You've mentioned L&G Multi Index 7 in the past, but that fund is not available with Halifax.

    I will be bringing money into my ISA in April. I have VLS60 in there already, which I am fine with. I was going to simply buy more VLS60. But I am thinking it wouldn't do any hard to get a similar fund, but perhaps one with property/emerging markets/comodities etc... things to diversify the equity and non-equity components away from VLS.
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