Best way to offset a Vanguard UK Bias and increase equity holding

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Topic Author
CqpedVulture
Posts: 12
Joined: Thu Apr 16, 2015 12:26 pm

Best way to offset a Vanguard UK Bias and increase equity holding

Post by CqpedVulture »

I hold a Vanguard UK Lifestrategy 60% equity fund.
I've been looking at ways to increase my equity holding to 70% and reduce the 20% UK bias in the fund.

I could of course, put 50% of my holding into an 80% UK Lifestrategy, but that doesn't reduce the 20% UK bias.

I was thinking to put 25% into a Vanguard VWRL ETF.
So, 25% in the VWRL and 75% in the LifeStrategy. 60% of 75% is 45%.
45 + 25 = 70% in Equities.

This would give me 70% equity total and offset my UK bias, by approximately 25%, so I'd end up with about 15% UK bias, at a guess, with some equity overlap?

Any thoughts on whether this is a sensible approach or whether there is a better way to do this? What fund would you use?

The other option is to use a simple 2 ETF portfolio like a VWRL and SAGG, but does this approach give as much diversification as a Lifestrategy with 17 index holdings?

Thoughts appreciated.
Valuethinker
Posts: 42745
Joined: Fri May 11, 2007 11:07 am

Re: Best way to offset a Vanguard UK Bias and increase equity holding

Post by Valuethinker »

CqpedVulture wrote: Fri Jun 11, 2021 2:46 am I hold a Vanguard UK Lifestrategy 60% equity fund.
I've been looking at ways to increase my equity holding to 70% and reduce the 20% UK bias in the fund.

I could of course, put 50% of my holding into an 80% UK Lifestrategy, but that doesn't reduce the 20% UK bias.

I was thinking to put 25% into a Vanguard VWRL ETF.
So, 25% in the VWRL and 75% in the LifeStrategy. 60% of 75% is 45%.
45 + 25 = 70% in Equities.

This would give me 70% equity total and offset my UK bias, by approximately 25%, so I'd end up with about 15% UK bias, at a guess, with some equity overlap?

Any thoughts on whether this is a sensible approach or whether there is a better way to do this? What fund would you use?

The other option is to use a simple 2 ETF portfolio like a VWRL and SAGG, but does this approach give as much diversification as a Lifestrategy with 17 index holdings?

Thoughts appreciated.
Main advantage of the Lifestrategy funds is continuous rebalancing rather than manual rebalancing. Vanguard can do it better than you can.

For my spouse, who is not sophisticated in investment strategy (and does not have the time for it), we use a mix of the LS 60% and the LS 40% fund.

I must admit I view the fund weightings within those funds as a bit of a "black box". Cross your fingers and pray VG doesn't do anything really stupid - they are much less likely to than I am, in a market meltdown for example.

The overweighting of UK equities has definitely hurt performance in recent years (no tech stocks, lots of natural resources). It's about 2.5x world index weighting for UK (about 8%) from memory? But another way of looking at it is is it is 12% (more than market weighting) so -20% performance by UK market v world is -2.4% of total fund performance. Ouch but presumably the UK doesn't do that every year.

In other words, the UK is a big enough part of the world (developed market) index that the overweighting is not grievous (but it has hurt).

For my own portfolio I use VWRL because I don't want to find myself deciding on the "right" level for Emerging Markets etc. Vanguard closed their value ETF which seriously annoyed me - predictably just when Value was beginning to take off against the broader market index.

SAGG I don't know. Bond fund?

Bonds I hold in my pensions because of the Lifetime Allowance limit - there's no point growing money I will probably pay 55% tax rate on (if I have any reasonable alternatives). I must admit last March, as my equity portfolio melted, it was comforting to think that I would not starve because of the bonds I hold.

Re 17 funds question:

Yes, you will lose diversification.

No, because of the diversifications that are available to you, the factors you want are global equity diversification, low credit risk on your bonds (corporate bonds carry equity risk) and inflation protection risk. The actual amount of inflation-protected securities in those funds is miniscule, I believe.

So the diversification you are losing is not a major factor in the decision, I don't think.

What *is* a major factor is whether you trust yourself to hold to 60: 40 if stocks say drop -40%? If you are like me, you freeze in the headlights and do not rebalance (based on my behaviour in 2008/9). And of course the dawn has always come (as long as you weren't only an investor in Japan, at least) but there are false rallies on the way. And when it does come, it's before there's any real good news.

If you hold a 60:40 fund, Vanguard takes that freedom away from you. It's a strategy of precommitment, of the type psychologists tell us works with dieting, fitness plans and just about everything else.
Topic Author
CqpedVulture
Posts: 12
Joined: Thu Apr 16, 2015 12:26 pm

Re: Best way to offset a Vanguard UK Bias and increase equity holding

Post by CqpedVulture »

Thanks for your thoughts.

My advisor suggests not to bother with an additional fund such as VWRL.
More effort than its worth. I am a bit of a lazy investor and I wonder how much of a difference small changes like this really make in the long run.

Would you make the change or leave it as is? I take it your spouse leaves it as it is?
Valuethinker
Posts: 42745
Joined: Fri May 11, 2007 11:07 am

Re: Best way to offset a Vanguard UK Bias and increase equity holding

Post by Valuethinker »

CqpedVulture wrote: Fri Jun 11, 2021 4:50 pm Thanks for your thoughts.

My advisor suggests not to bother with an additional fund such as VWRL.
More effort than its worth. I am a bit of a lazy investor and I wonder how much of a difference small changes like this really make in the long run.

Would you make the change or leave it as is? I take it your spouse leaves it as it is?
Yes leaves as is.

60/40 fund does rebalancing automatically.

If you are a lazy investor that is your best strategy.
steveyg50
Posts: 76
Joined: Tue Jul 09, 2019 6:35 pm

Re: Best way to offset a Vanguard UK Bias and increase equity holding

Post by steveyg50 »

I'm in a similar boat as you, except about a year ago I set up direct debits into Vanguard Target Date 2035 fund in a SIPP. Its basically the same as the LifeStrategy funds, having the same large overweight to UK, just that it reduces the equity automatically as I age. This was to augment my works pension, I wanted something safe and simple I wouldn't meddle with. Another 1/3 of my savings I do meddle with!

I didn't particularly like the 25% UK weighting, indeed it goes against Vanguards own principles of not over weighting your home country. It seems the average UK investor is about 30% in UK so seems they are pandering to that preference.

However -

Historically the UK has basically pretty much matched the world index. I couldn't go back further than 1994 on Trustnet but if you look at FTSE 100 v FTSE world they are very similar. Until 2015 when the UK has performed very badly. So it's really just the last 5/6 years the UK had underperformed.

And various 'experts' now consider the UK to be good value and will do well in future.
Blackrock projections for 5,10 and 15 year have UK equity expected to outperform global equities.

https://www.blackrock.com/institutions/ ... ssumptions

Various other 'experts' have similar opinions.

Also there is this projected 'rotation into value' which may be occurring, and the UK is heavily 'value' oriented.

I personally wouldn't place all that much stock in these predictions, I wouldn't for instance deliberately have gone out of my way to overweight UK. But I am at least more confident of leaving my Target Date fund be and not meddling.

Its only my opinion but it seems if one starts adding all-world index to the LifeStrategy and Target date funds you are just adding to the complexity and the whole point of them is to be simple and hands-off.

I will be watching my Target Date fund over next 2 years or so and if UK part is significantly underperforming I will give up on it and replace it with all-world index/global bond fund and balance it myself.
Topic Author
CqpedVulture
Posts: 12
Joined: Thu Apr 16, 2015 12:26 pm

Re: Best way to offset a Vanguard UK Bias and increase equity holding

Post by CqpedVulture »

steveyg50 wrote: Sun Jun 13, 2021 10:58 am I'm in a similar boat as you, except about a year ago I set up direct debits into Vanguard Target Date 2035 fund in a SIPP. Its basically the same as the LifeStrategy funds, having the same large overweight to UK, just that it reduces the equity automatically as I age. This was to augment my works pension, I wanted something safe and simple I wouldn't meddle with. Another 1/3 of my savings I do meddle with!

I didn't particularly like the 25% UK weighting, indeed it goes against Vanguards own principles of not over weighting your home country. It seems the average UK investor is about 30% in UK so seems they are pandering to that preference.

However -

Historically the UK has basically pretty much matched the world index. I couldn't go back further than 1994 on Trustnet but if you look at FTSE 100 v FTSE world they are very similar. Until 2015 when the UK has performed very badly. So it's really just the last 5/6 years the UK had underperformed.

And various 'experts' now consider the UK to be good value and will do well in future.
Blackrock projections for 5,10 and 15 year have UK equity expected to outperform global equities.

https://www.blackrock.com/institutions/ ... ssumptions

Various other 'experts' have similar opinions.

Also there is this projected 'rotation into value' which may be occurring, and the UK is heavily 'value' oriented.

I personally wouldn't place all that much stock in these predictions, I wouldn't for instance deliberately have gone out of my way to overweight UK. But I am at least more confident of leaving my Target Date fund be and not meddling.

Its only my opinion but it seems if one starts adding all-world index to the LifeStrategy and Target date funds you are just adding to the complexity and the whole point of them is to be simple and hands-off.

I will be watching my Target Date fund over next 2 years or so and if UK part is significantly underperforming I will give up on it and replace it with all-world index/global bond fund and balance it myself.
Ok thats interesting. Of course no one can really predict the future, as you say, but maybe something positive for the UK economy going forward. UK and European stocks not as over valued as US stocks at this point. Tech stocks etc.

Would you go to a simple 2 index or ETF portfolio, like VWRL and SAGG or similar in 2 years time?
I am tempted with this as its so simple and easy to rebalance, but it can't give the diversification of the Lifestrategy or target dated funds either and of course the moment you move to this option, your target dated fund will outperform lol!
steveyg50
Posts: 76
Joined: Tue Jul 09, 2019 6:35 pm

Re: Best way to offset a Vanguard UK Bias and increase equity holding

Post by steveyg50 »

https://www.vanguardinvestor.co.uk/arti ... ement-fund

https://occaminvesting.co.uk/the-best-v ... investors/

https://monevator.com/best-bond-funds/

I'm not an expert by any means, the above is some of the things I've been reading lately, plus most stuff in the Bogleheads wiki.

Yes if UK underperformed I will switch to 2 fund portfolio. Since it will be in my Vanguard SIPP that will be either the VG FTSE global all-cap or the FTSE all-world ETF, and the global Aggregate bond index or ETF version.

I believe to replace the equity part of a LifeStrategy fund, you lose nothing whatsoever in 'diversifying' by using an all-world index fund.

The bond funds, I'm not so sure... But I don't think you can go far wrong to just have the Global Aggregate bond index fund (Hedged to GBP).
As you get older you may be advised to add index- linked gilt.

https://www.bogleheads.org/wiki/Investing_from_the_UK

the Global Aggregate bond funds are something like 60% government and 40% corporate/various. There seems a consensus of opinion that government bonds are better crash protectors, so you could argue a global government Bond fund is better for that purpose. Ie ishares global government Bond ETF.

I've also seen it argued that you don't need a global government Bond fund, simply a gilt fund will suffice.

The corporate bonds have less crash protection but have higher rate of return. Some people think you shouldn't have any corporate bonds at all since they tend to behave in line with your equity..... But I notice Vanguard seem to disagree, if you calculate the % in LifeStrategy and Target Date funds, there's quite a lot of corporate.

Seems to me that you should have some as you get older and you have a larger % of bonds... then the purpose of bonds is not simply for rebalancing. When you are up to 50% or 60% bond allocation, you are hoping for some return on them... . In this case maybe the Aggregate bond fund is better than global government Bond Index, since it has some corporate. I don't know how much corporate is to be advised, so myself I'll just stick to the Global Aggregate fund..

in the Bogleheads guide to investing, index-linked bonds are advised, especially when at retirement age. If you look at the top link, in the glide path graph, you'll see the Target Retirement fund is adding index linked gilt as you near retirement and as you age its moving up to approx 25% of the bonds being index linked. (I don't think LifeStrategy have hardly any index linked bonds)

Like I say I'm no expert. Still thinking about this.

Am seeking over time to simplify a mess of bond funds I hold.

I think for simplicity, as I simplify my mess, I will use VG global Aggregate bond index and ishares equivalent.. I may or may not use ishares global government Bond Index and gilts also.
I don't think in practice there's much difference between the Global Aggregate and Global Government bonds.

As I get older I think I will add some index linked gilt - the bogleheads books and UK wiki advises the same.

For the Target Date fund of course I need do nothing......
Topic Author
CqpedVulture
Posts: 12
Joined: Thu Apr 16, 2015 12:26 pm

Re: Best way to offset a Vanguard UK Bias and increase equity holding

Post by CqpedVulture »

steveyg50 wrote: Sun Jun 13, 2021 1:47 pm https://www.vanguardinvestor.co.uk/arti ... ement-fund

https://occaminvesting.co.uk/the-best-v ... investors/

https://monevator.com/best-bond-funds/

I'm not an expert by any means, the above is some of the things I've been reading lately, plus most stuff in the Bogleheads wiki.

Yes if UK underperformed I will switch to 2 fund portfolio. Since it will be in my Vanguard SIPP that will be either the VG FTSE global all-cap or the FTSE all-world ETF, and the global Aggregate bond index or ETF version.

I believe to replace the equity part of a LifeStrategy fund, you lose nothing whatsoever in 'diversifying' by using an all-world index fund.

The bond funds, I'm not so sure... But I don't think you can go far wrong to just have the Global Aggregate bond index fund (Hedged to GBP).
As you get older you may be advised to add index- linked gilt.

https://www.bogleheads.org/wiki/Investing_from_the_UK

the Global Aggregate bond funds are something like 60% government and 40% corporate/various. There seems a consensus of opinion that government bonds are better crash protectors, so you could argue a global government Bond fund is better for that purpose. Ie ishares global government Bond ETF.

I've also seen it argued that you don't need a global government Bond fund, simply a gilt fund will suffice.

The corporate bonds have less crash protection but have higher rate of return. Some people think you shouldn't have any corporate bonds at all since they tend to behave in line with your equity..... But I notice Vanguard seem to disagree, if you calculate the % in LifeStrategy and Target Date funds, there's quite a lot of corporate.

Seems to me that you should have some as you get older and you have a larger % of bonds... then the purpose of bonds is not simply for rebalancing. When you are up to 50% or 60% bond allocation, you are hoping for some return on them... . In this case maybe the Aggregate bond fund is better than global government Bond Index, since it has some corporate. I don't know how much corporate is to be advised, so myself I'll just stick to the Global Aggregate fund..

in the Bogleheads guide to investing, index-linked bonds are advised, especially when at retirement age. If you look at the top link, in the glide path graph, you'll see the Target Retirement fund is adding index linked gilt as you near retirement and as you age its moving up to approx 25% of the bonds being index linked. (I don't think LifeStrategy have hardly any index linked bonds)

Like I say I'm no expert. Still thinking about this.

Am seeking over time to simplify a mess of bond funds I hold.

I think for simplicity, as I simplify my mess, I will use VG global Aggregate bond index and ishares equivalent.. I may or may not use ishares global government Bond Index and gilts also.
I don't think in practice there's much difference in practice between the Global Aggregate and Global Government bonds.

As I get older I think I will add some index linked gilt - the bogleheads books and UK wiki advises the same.

For the Target Date fund of course I need do nothing......
I'll need time to look at all of this. I think if you have the time and inclination then it might be worth the effort. It fast becomes a guessing game for me, where self doubt quickly creeps in and I then start "fiddling" with the fund instead of leaving it alone.
My thoughts revert back to letting Vanguard do it for me, as for sure they know better than I.

Luckily I have a good advisor who just keeps me on track.

If you are confident that you know what you are doing, can make the changes and stick the whole course, no matter how the funds do, then I guess its a good thing.
But I also think this desire to try and tweak funds to find a perfect solution, is more a cathartic (feel good) process which might make no difference to long term returns.

Having said that, I still like the idea of a 2 fund portfolio separating your stock and bond options.
steveyg50
Posts: 76
Joined: Tue Jul 09, 2019 6:35 pm

Re: Best way to offset a Vanguard UK Bias and increase equity holding

Post by steveyg50 »

Totally agree.
2 fund portfolio seems to be ideal for simplicity.
Its highly recommended on here and many other places.

Vanguard FTSE Global All Cap Fund & Vanguard Global Bond Index Fund (or equivalents)

Though seems advisable to add some index linked gilt as you get older which makes it a 3 fund portfolio. Maybe only after retirement?

I was really just running through some of the arguments re bond funds I was reading about tbh, someone may have some educated comments!
Valuethinker
Posts: 42745
Joined: Fri May 11, 2007 11:07 am

Re: Best way to offset a Vanguard UK Bias and increase equity holding

Post by Valuethinker »

CqpedVulture wrote: Sun Jun 13, 2021 4:28 pm

I'll need time to look at all of this. I think if you have the time and inclination then it might be worth the effort. It fast becomes a guessing game for me, where self doubt quickly creeps in and I then start "fiddling" with the fund instead of leaving it alone.
My thoughts revert back to letting Vanguard do it for me, as for sure they know better than I.
If you know you will have difficulty sticking rigidly to a 60:40 allocation, fund selection etc, then you should really consider sticking with the Vanguard fund.

There are disadvantages - the UK has underperformed by quite a bit against world indices (but may do better in the future, no one knows).

But otherwise you really risk making gross behavioural errors. All the evidence suggests that individual investors in general chase performance - they buy when things are going up and sell when they are going down.
Luckily I have a good advisor who just keeps me on track.

If you are confident that you know what you are doing, can make the changes and stick the whole course, no matter how the funds do, then I guess its a good thing.
But I also think this desire to try and tweak funds to find a perfect solution, is more a cathartic (feel good) process which might make no difference to long term returns.

Having said that, I still like the idea of a 2 fund portfolio separating your stock and bond options.
Yes. Yes. And yes.

The main principles are:

- stay in the market, no matter what
- hold enough bonds that you can ride the downturns without jeopardising your retirement plans
- minimize costs
- diversify widely (meaning: don't just hold equities in your home country market)
- stick rigidly to your bond/ equity split - sell equities in a bull market, and buy them in a bear market
- do as little as possible subject to the above

These lessons have held through the bear market of 2000-03, the crash of 2008-09, the Covid emergency of March 2020. In fact, they have held well for a lot longer than that.

Right now the big error people will be making is not having enough fixed income (bonds and other fixed rate exposures, including bank CDs/ notice deposits).

A 2 fund solution works, well, but only if you can adhere to the above.
Topic Author
CqpedVulture
Posts: 12
Joined: Thu Apr 16, 2015 12:26 pm

Re: Best way to offset a Vanguard UK Bias and increase equity holding

Post by CqpedVulture »

steveyg50 wrote: Sun Jun 13, 2021 4:55 pm Totally agree.
2 fund portfolio seems to be ideal for simplicity.
Its highly recommended on here and many other places.

Vanguard FTSE Global All Cap Fund & Vanguard Global Bond Index Fund (or equivalents)

Though seems advisable to add some index linked gilt as you get older which makes it a 3 fund portfolio. Maybe only after retirement?

I was really just running through some of the arguments re bond funds I was reading about tbh, someone may have some educated comments!
Thats really good to know. Have you got the 4 letter exchange tickers like VWRL for all the stock and bond funds you mention?
VWRP and SAGG were mentioned by my advisor as good £ options, but SAGG I'm told has a lot of corporate bonds (don't do that well when equities do poorly) too?
Haven't looked but would like to consider all the alternatives, like yourself.
Topic Author
CqpedVulture
Posts: 12
Joined: Thu Apr 16, 2015 12:26 pm

Re: Best way to offset a Vanguard UK Bias and increase equity holding

Post by CqpedVulture »

Valuethinker wrote: Mon Jun 14, 2021 1:52 am
CqpedVulture wrote: Sun Jun 13, 2021 4:28 pm

I'll need time to look at all of this. I think if you have the time and inclination then it might be worth the effort. It fast becomes a guessing game for me, where self doubt quickly creeps in and I then start "fiddling" with the fund instead of leaving it alone.
My thoughts revert back to letting Vanguard do it for me, as for sure they know better than I.
If you know you will have difficulty sticking rigidly to a 60:40 allocation, fund selection etc, then you should really consider sticking with the Vanguard fund.

There are disadvantages - the UK has underperformed by quite a bit against world indices (but may do better in the future, no one knows).

But otherwise you really risk making gross behavioural errors. All the evidence suggests that individual investors in general chase performance - they buy when things are going up and sell when they are going down.
Luckily I have a good advisor who just keeps me on track.

If you are confident that you know what you are doing, can make the changes and stick the whole course, no matter how the funds do, then I guess its a good thing.
But I also think this desire to try and tweak funds to find a perfect solution, is more a cathartic (feel good) process which might make no difference to long term returns.

Having said that, I still like the idea of a 2 fund portfolio separating your stock and bond options.
Yes. Yes. And yes.

The main principles are:

- stay in the market, no matter what
- hold enough bonds that you can ride the downturns without jeopardising your retirement plans
- minimize costs
- diversify widely (meaning: don't just hold equities in your home country market)
- stick rigidly to your bond/ equity split - sell equities in a bull market, and buy them in a bear market
- do as little as possible subject to the above

These lessons have held through the bear market of 2000-03, the crash of 2008-09, the Covid emergency of March 2020. In fact, they have held well for a lot longer than that.

Right now the big error people will be making is not having enough fixed income (bonds and other fixed rate exposures, including bank CDs/ notice deposits).

A 2 fund solution works, well, but only if you can adhere to the above.
Yes totally agree.
Particularly on this statement "Right now the big error people will be making is not having enough fixed income (bonds and other fixed rate exposures, including bank CDs/ notice deposits)."
Vanguards idea of holding government and very high quality corporate to protect in a stock market downturn and not to increase return, rings true here.
You don't know how many years it will take you to recover from a large downturn.
xxd091
Posts: 273
Joined: Sun Aug 21, 2011 4:41 am
Location: UK

Re: Best way to offset a Vanguard UK Bias and increase equity holding

Post by xxd091 »

My tuppence worth
Now 75 -long retired
If I was starting now with no particular wish to shoot the lights out or pay an expensive adviser I would would simply have 2 funds only
A Global Equities Index Tracker and a Global Bond Index Fund hedged to the Pound
Allocated as to your preference for risk-ie your age minus 10 in bonds is a rough guide
A single LifeStrategy Fund would be even better but the U.K. bias is a no no for me
That’s it -rebalance as you add your yearly contributions
xxd09
PS this is position I managed to arrive at 20 years ago-earlier would have been better
Topic Author
CqpedVulture
Posts: 12
Joined: Thu Apr 16, 2015 12:26 pm

Re: Best way to offset a Vanguard UK Bias and increase equity holding

Post by CqpedVulture »

xxd091 wrote: Mon Jun 14, 2021 10:47 am My tuppence worth
Now 75 -long retired
If I was starting now with no particular wish to shoot the lights out or pay an expensive adviser I would would simply have 2 funds only
A Global Equities Index Tracker and a Global Bond Index Fund hedged to the Pound
Allocated as to your preference for risk-ie your age minus 10 in bonds is a rough guide
A single LifeStrategy Fund would be even better but the U.K. bias is a no no for me
That’s it -rebalance as you add your yearly contributions
xxd09
PS this is position I managed to arrive at 20 years ago-earlier would have been better
Appreciate your input. Probably good advice. The UK bias bugs me, however I think Lifestrategy UK still very good, hence I'm still in it.
If I ever moved to something else it would be exactly as you say. A global equity and bond ETF. 2 funds end of story.
My advisor suggests VWRL and SAGG. I'm not sure though which would be best.
xxd091
Posts: 273
Joined: Sun Aug 21, 2011 4:41 am
Location: UK

Re: Best way to offset a Vanguard UK Bias and increase equity holding

Post by xxd091 »

No particular advice on these funds but…….
The sooner you start the better
Simplifying to an understandable plan ie 1 or 2 funds only allows you to manage investments yourself and reduce costs-even possibly of the advisor
This should boost your bottom line considerably in the long term
xxd09
DJN
Posts: 843
Joined: Mon Nov 20, 2017 12:30 am

Re: Best way to offset a Vanguard UK Bias and increase equity holding

Post by DJN »

hi,
are you able to buy VNGA through your platform? That should avoid the bias that worries you, I don't know about tax implications if any?
See top holdings for VNGA60 (IE domicile and UCITS) below according to Bloomberg, I didn't check on Vanguard.

Expense Ratio 0.25%
Fund Top Holdings
Vanguard FTSE Developed World VHVE:LN 19.45%
Vanguard FTSE All-World VWRA:LN 19.40%
Vanguard Global Aggregate Bond VAGF:GR 9.06%
Vanguard FTSE North America VNRA:LN 11.37%
Vanguard USD Treasury Bond VDTE:GR 6.05%
Vanguard EUR Eurozone Government VETA:LN 5.96%
Vanguard USD Corporate Bond VDCE:GR 5.34%
Vanguard FTSE Emerging Markets VFEA:LN 4.74%
Vanguard FTSE Developed Europe VWCG:LN 3.32%
Vanguard EUR Corporate Bond VECA:LN 1.99%
Or you could buy all that and rebalance yourself, ugh.
DJN
Yah shure. | Have a look at the Bogleheads Wiki in the first instance.
Valuethinker
Posts: 42745
Joined: Fri May 11, 2007 11:07 am

Re: Best way to offset a Vanguard UK Bias and increase equity holding

Post by Valuethinker »

DJN wrote: Wed Jun 16, 2021 4:19 am hi,
are you able to buy VNGA through your platform? That should avoid the bias that worries you, I don't know about tax implications if any?
See top holdings for VNGA60 (IE domicile and UCITS) below according to Bloomberg, I didn't check on Vanguard.

Expense Ratio 0.25%
Fund Top Holdings
Vanguard FTSE Developed World VHVE:LN 19.45%
Vanguard FTSE All-World VWRA:LN 19.40%
Vanguard Global Aggregate Bond VAGF:GR 9.06%
Vanguard FTSE North America VNRA:LN 11.37%
Vanguard USD Treasury Bond VDTE:GR 6.05%
Vanguard EUR Eurozone Government VETA:LN 5.96%
Vanguard USD Corporate Bond VDCE:GR 5.34%
Vanguard FTSE Emerging Markets VFEA:LN 4.74%
Vanguard FTSE Developed Europe VWCG:LN 3.32%
Vanguard EUR Corporate Bond VECA:LN 1.99%
Or you could buy all that and rebalance yourself, ugh.
DJN
What currency is it in?

Because if GBP is home currency, then a USD or EUR denominated fund is not usually a good idea (in fact in an ISA, I think you can only hold GBP cash, so conceptually every dividend or transaction requires a currency conversion).
Valuethinker
Posts: 42745
Joined: Fri May 11, 2007 11:07 am

Re: Best way to offset a Vanguard UK Bias and increase equity holding

Post by Valuethinker »

CqpedVulture wrote: Mon Jun 14, 2021 2:03 am

Yes totally agree.
Particularly on this statement "Right now the big error people will be making is not having enough fixed income (bonds and other fixed rate exposures, including bank CDs/ notice deposits)."
Vanguards idea of holding government and very high quality corporate to protect in a stock market downturn and not to increase return, rings true here.
You don't know how many years it will take you to recover from a large downturn.
Just to be clear.

Empirically the correlation between high quality government bonds and equities is very low and may practically be zero.

That increases the "diversification benefit" to the portfolio of adding that asset to an all-equity portfolio.

There are reductions in returns, but, again historically, the tradeoff curve is quite flat - you can go over 30% in bonds without reducing portfolio returns by anything like 30%. But you do cut volatility of the portfolio by almost 30% doing that.

This is where the rebalancing benefit comes from, aka "the efficient frontier" - that curve in the portfolio line when graphed on expected return (Y) axis and volatility (X) axis.

Corporate bonds of course have equity risk. So the diversification benefit is smaller to the portfolio. The question (debated) is whether credit risk is another factor, that if you take on, you are rewarded for it (a factor orthogonal to other portfolio risks like equity risk). Again, the empirical evidence seems to suggest no (corporate bond funds don't outperform high quality government bond funds).

One issue is we have had 40 years of mostly falling interest rates. That makes bond returns look good.

A rule of thumb (known as "Adrian's rule" from a poster who used to post here) is that your bonds can go down 10%, your stocks can go down 50%. That's by no means the worst outcomes out there (depending on time period and market you choose) but, say, for the S&P500 and the US Treasury bond index, that's pretty much historically been true*.

And please let's not mention Japan, or the -100% drops associated with war & Revolution.

* because prices actually fell, the nominal drop 1929-33 of the US stock market was actually greater than the real drop. But that nominal drop was, from memory, something over 70 per cent? And in any case the UK 192-74 (during a period of 20%+ inflation) had a minus 80% real return (bonds would have been something like -15-20%) on stocks. So 50% is by no means the worst case. But it's a sufficiently nasty case as so to focus the mind.

Had the authorities not intervened post the failure of Lehman Brothers, I have no doubt that market drops would have tested the percentages achieved in the early 1930s.
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