Uk portfolio

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Topic Author
nacv2016
Posts: 6
Joined: Mon Aug 06, 2018 4:05 pm
Location: UK

Uk portfolio

Post by nacv2016 » Tue Jul 23, 2019 2:02 pm

I’m UK resident and have ISA with Vanguard. At present invested in 50% Lifestrategy 80 and 50% Lifestrategy 100. I’m thinking of a simple portfolio 90% FTSE Global and 10% bonds. I’m not sure how to go with the bonds allocation and after reading various posts I’m even more confused. Should I keep it simple and go with Vanguard global bonds or should I add some UK inflation linked bonds. Would like to know what other UK investor think about bonds allocation and what they have done with their portfolio.

PS: the plan is to rebalance annually and to increase bonds allocation later on in life but stabilising at 80/20 until retirement age.

longinvest
Posts: 4085
Joined: Sat Aug 11, 2012 8:44 am

Re: Uk portfolio

Post by longinvest » Tue Jul 23, 2019 2:17 pm

Your current portfolio seems good enough to me, yet somehow low on bonds to my taste.

Selling out of the home bias of LifeStategy funds exactly when everyone is bearish on UK seems ill-advised to me.

I say: stay the course for now, and consider moving slowly towards something closer to the global weights of the two major asset classes with a 60/40 stocks/bonds portfolio, retaining a moderate home bias due to inefficiencies of international investing (withholding taxes, currency fluctuations and hedging costs, higher costs). Maybe send new money into the LifeStategy 60 fund.
Bogleheads investment philosophy | One-ETF global balanced index portfolio | VPW

steveyg50
Posts: 35
Joined: Tue Jul 09, 2019 6:35 pm

Re: Uk portfolio

Post by steveyg50 » Tue Jul 23, 2019 2:44 pm

I don't understand bonds either. If I may high jack your post, but it is relevant - I currently have these Vanguard bond funds in these proportions -

20% global bond index
30% UK government Bond index
30% UK inflation linked index
10% long duration Gilt index
10% UK investment grade bond

I picked long duration simply because performance has been good over last 10 years.
I picked inflation linked for same reason, plus BH book suggests having 50% index linked bonds.

Maybe some knowledgeable folks can critique this choice, which in all honesty was chosen with little knowledge. I can then maybe switch around a bit.

Can someone explain why I should not have higher proportion of index-linked and long term, when their performance seems far better?

Also what is the risk of having only UK gilts? Do we really need euro and global bonds etc?

Schlabba
Posts: 252
Joined: Sat May 11, 2019 9:14 am

Re: Uk portfolio

Post by Schlabba » Tue Jul 23, 2019 3:00 pm

steveyg50 wrote:
Tue Jul 23, 2019 2:44 pm
Can someone explain why I should not have higher proportion of index-linked and long term, when their performance seems far better?
Long term bonds have a higher interest rate risk. Therefore their yield is better.
steveyg50 wrote:
Tue Jul 23, 2019 2:44 pm
Also what is the risk of having only UK gilts? Do we really need euro and global bonds etc?
You don't need anything, but more diversification gives you lower volatility for the same returns. Having the entire global aggregate bond market hedged to your currency gives you much more diversification.

https://www.vanguardfrance.fr/documents ... -tlisg.pdf

Edit: To add to the first question where you say "when their performance seems far better?".
The point of having bonds is not performance. If you want better performance put your money in stocks instead. Stocks outperformed bonds in the long run.
Bonds (especially government bonds) are often negatively correlated with the stock market. So when the entire market crashes you still have a part of your portfolio going up in value. This provides emotional comfort and if you happen to need your money at the same time as the market crash, you can simply sell your bonds. You wouldn't want to sell your stocks when they are at a 50% discount!
I see bonds more as a market-crash-insurance.
IWDA: MSCI World | EMIM: MSCI Emerging Markets | AGGH: Global Aggregate Bond Hedged to €

LongTermInvestor88
Posts: 63
Joined: Mon Dec 25, 2017 9:18 am

Re: Uk portfolio

Post by LongTermInvestor88 » Tue Jul 23, 2019 4:17 pm

nacv2016 wrote:
Tue Jul 23, 2019 2:02 pm
I’m UK resident and have ISA with Vanguard. At present invested in 50% Lifestrategy 80 and 50% Lifestrategy 100. I’m thinking of a simple portfolio 90% FTSE Global and 10% bonds. I’m not sure how to go with the bonds allocation and after reading various posts I’m even more confused. Should I keep it simple and go with Vanguard global bonds or should I add some UK inflation linked bonds. Would like to know what other UK investor think about bonds allocation and what they have done with their portfolio.

PS: the plan is to rebalance annually and to increase bonds allocation later on in life but stabilising at 80/20 until retirement age.
I think simplifying to global all caps is a better move. If you trully believe 'The global market' is the most efficient fund and has the best risk/reward profile this is the fund for you. I changed to it myself and currently hold 90% equities. For such a heavily dominated equity portfolio Long Term AA/AAA rated government bonds have been shown to more often than not be the best diversifier...goes up when equities go down. This enables buying deep during big crashes exactly what your seeking. On top of this you 'Should' over the long term be rewarded for the duration length risk your buying and long term government bonds have also been a good hedge against bouts of deflation. For me that is why I chose long term gilts as my bond choice

longinvest
Posts: 4085
Joined: Sat Aug 11, 2012 8:44 am

Re: Uk portfolio

Post by longinvest » Tue Jul 23, 2019 4:56 pm

There are maybe a few ten (or hundred?) long-term UK government bonds whereas the LifeStrategy 80 fund (indirectly) invests into more than ten thousand bonds across the world. It's quite possible for those few ten or hundred bonds to outperform the more diversified bond allocation, but at the cost of significantly increasing concentration and risk. “Don't look for the needle in the haystack. Just buy the haystack!” -- Jack Bogle.

The average long-term growth of a portfolio is mostly determined by its average allocation to stocks over the entire time period. A constant 60/40 stocks/bonds portfolio will, on average, perform similarly to a portfolio gliding from 90/10 to 30/70 stocks/bonds. But, the constant 60/40 stocks/bonds portfolio will be more consistent. The gliding portfolio owner might get unlucky with low stocks returns during earlier years and higher stocks returns during later years, leading to a significant underperformance relative to a constant allocation. Or he might get lucky, too, with the reverse.

A 60/40 stocks/bonds allocation is pretty close to the overall ratio of global stocks and bonds, making it an efficient allocation that can be used all life long. As I wrote earlier, I think that a moderate home bias is justifiable for investors across the world in both asset classes.
Bogleheads investment philosophy | One-ETF global balanced index portfolio | VPW

steveyg50
Posts: 35
Joined: Tue Jul 09, 2019 6:35 pm

Re: Uk portfolio

Post by steveyg50 » Tue Jul 23, 2019 7:31 pm

Schlabba wrote:
Tue Jul 23, 2019 3:00 pm
steveyg50 wrote:
Tue Jul 23, 2019 2:44 pm
Can someone explain why I should not have higher proportion of index-linked and long term, when their performance seems far better?
Long term bonds have a higher interest rate risk. Therefore their yield is better.
steveyg50 wrote:
Tue Jul 23, 2019 2:44 pm
Also what is the risk of having only UK gilts? Do we really need euro and global bonds etc?
You don't need anything, but more diversification gives you lower volatility for the same returns. Having the entire global aggregate bond market hedged to your currency gives you much more diversification.

https://www.vanguardfrance.fr/documents ... -tlisg.pdf

Edit: To add to the first question where you say "when their performance seems far better?".
The point of having bonds is not performance. If you want better performance put your money in stocks instead. Stocks outperformed bonds in the long run.
Bonds (especially government bonds) are often negatively correlated with the stock market. So when the entire market crashes you still have a part of your portfolio going up in value. This provides emotional comfort and if you happen to need your money at the same time as the market crash, you can simply sell your bonds. You wouldn't want to sell your stocks when they are at a 50% discount!
I see bonds more as a market-crash-insurance.

I understand what you are saying, and also see bonds as market crash insurance. However if you chart the performance of the index linked and long term bonds compared to the UK gilt and global aggregate funds I hold - we are not taking about slight performance differences, it is substantial (past 10 years or as long a time as I can graph on morningstar).
So if I am aiming for a 60/40 equity/bond allocation, and keeping this for the long term, the difference in the performance of the bonds will have a significant effect I think? It is after all 40% of my portfolio.

It just seems to me - why not have the higher performing bonds rather than not? Unless there is some risk or other reason not to, which I don't understand at all at the moment.

So corporate bonds will suffer more in a 'crash' it seems, and yet dont seem to outperform gilt as far as I can see, so why have them? There must be a reason? Gilt hardly seems affected in a crash (2008 at least). Index-linked bonds suffered far more in 2008, but more than made up for this long term, so a significant proportion of index-linked seems a good idea. TBH I am finding bonds more confusing than equity, I'm not sure if I'm overthinking it, or am simply dumb ! :oops:

glorat
Posts: 342
Joined: Thu Apr 18, 2019 2:17 am

Re: Uk portfolio

Post by glorat » Tue Jul 23, 2019 7:37 pm

My 2c is that OP and some posters are overthinking on minutiae and are at risk of losing money by switching strategies, changing minds, looking for more "perfection" through complexity. Basically at risk of messing things up by accident.

The backtesters may note the difference between all these strategies is minimal.

For ISA, I'd put all into the closest lifestrategy fund, close your eyes and never touch it.

I guess it is hard to avoid the temptation to be active with fund choosing and rebalancing. Resist.

DJN
Posts: 529
Joined: Mon Nov 20, 2017 12:30 am

Re: Uk portfolio

Post by DJN » Tue Jul 23, 2019 8:02 pm

Hi.
I am trying to build a picture for a simple EU investor portfolio and for the fixed income its either a global aggregate and / or world government if you take that approach. Taking apart the UK life strategy and retirement funds by Vanguard the breakdown on the fixed income side is pretty much as follows in % to suit age and risk:

- Global aggregate bond sterling hedged accumulating
- UK government bond accumulating
- UK Gilt inflation linked
- UK investment grade bonds accumulating
- Developed world government bonds sterling hedged (individual bond funds for: US; Euro govts; Japan

BTW the Blackrock life strategy funds are simpler.
Happy hunting!
DJN
Yah shure

Topic Author
nacv2016
Posts: 6
Joined: Mon Aug 06, 2018 4:05 pm
Location: UK

Re: Uk portfolio

Post by nacv2016 » Wed Jul 24, 2019 3:23 am

Have you read this

https://monevator.com/passive-fund-of-funds-the-rivals/

The Vanguard Lifestrategy are pure passive (with automatic rebalance to original allocation) the others tend to have an active input (trying to time the market).

Valuethinker
Posts: 39210
Joined: Fri May 11, 2007 11:07 am

Re: Uk portfolio

Post by Valuethinker » Wed Jul 24, 2019 3:54 am

steveyg50 wrote:
Tue Jul 23, 2019 7:31 pm


So corporate bonds will suffer more in a 'crash' it seems, and yet dont seem to outperform gilt as far as I can see, so why have them? There must be a reason? Gilt hardly seems affected in a crash (2008 at least). Index-linked bonds suffered far more in 2008, but more than made up for this long term, so a significant proportion of index-linked seems a good idea. TBH I am finding bonds more confusing than equity, I'm not sure if I'm overthinking it, or am simply dumb ! :oops:
You are overthinking:

- corporate bonds have credit risk thus they do worse in bear markets. In the long run they should offer higher returns than government bonds, but empirically that has not worked out particularly well

- historic bond performance is tricky because we have been in an environment (UK) of falling interest rates since 1981 (21-22%; 30 year gilt yielded something like 13% at that time). The ultimate bull market in sterling bonds. It's unlikely interest rates will fall below their current all time historic low levels.

- hedging into the UK currency will give you similar returns to gilts (plus some additional yield due to higher credit risk of some governments v UK)

- gilt index has unusually long duration (13 years v. 7-8 yrs for US, Germany) therefore a global government bond fund would have less interest risk (modestly more credit risk in particular Italy which is the world's (4th?) largest government bond market; Japan is capped at 20% in most indices).

An alternative would be to hold some percentage in a short term gilt fund, which would have almost no yield (currently) but would reduce interest rate risk (say 50-50 split with gilt index)

- Indexed Linked Gilts are a totally different beast. Long term inflation protection but high volatility. Also if inflation is as expected, you are locking in a return of 1.5% negative or worse

danielbird193
Posts: 35
Joined: Thu Mar 21, 2019 2:15 pm

Re: Uk portfolio

Post by danielbird193 » Wed Jul 24, 2019 5:09 am

nacv2016 wrote:
Wed Jul 24, 2019 3:23 am
Have you read this

https://monevator.com/passive-fund-of-funds-the-rivals/

The Vanguard Lifestrategy are pure passive (with automatic rebalance to original allocation) the others tend to have an active input (trying to time the market).
Thanks for the link, I found that really helpful.

xxd091
Posts: 101
Joined: Sun Aug 21, 2011 4:41 am
Location: UK

Re: Uk portfolio

Post by xxd091 » Wed Jul 24, 2019 6:10 am

Vanguard Global Bond Index Fund hedged to day Pound returned over 5%pa during the last 10 years(Vanguard figures-website)
Does the business for me re a Bonds
I use Vanguard Global Index fund ex UK plus Vanguard FTSE Index Fund for my Equities portion of Portfolio
Vanguard has a Global Equities Fund now so could exchange it for above 2 Funds
For your interest-I am aged 72-made enough money
Bonds 65% ,Fund ex UK 26%,FTSE Fund 4%,Cash 5%
xxd091.

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