[UK] Bond choice - Vanguard Money Market Fund

[rohitiiml]

Dear bogleheads,

I (40M) have been following the bogleheads philosophy for about 5 years now. Till now i have been 100% global equities (market weighted). My salary, my wife's salary and home equity (nearly half of NW) is all in GBP. My expenses in retirement are likely to be in GBP (50%+) and rest mix of global currencies.

I have been mulling for quite a while that I would like to reduce the riskiness of my portfolio as I feel I am getting close to my target number and don't feel like with this size portfolio i could stomach a 50% or so drawdown. I have hence decided to move to 30% fixed income at this stage of my life. I expect to remain in accumulation stage for at least another 10 years.

I have not been able to convince myself that VAGP is the right choice for me. Duration risk and inverted yield curve are stopping me. But i still feel staying 100% equities is even worse for me.

I've narrowed down after much contemplation to this - https://www.vanguardinvestor.co.uk/inve ... s/overview

This seems to have no duration risk and in my view, for a year or two, would be a a quite safe place to leave the money with 4-5% yield. That will give me time to get my head around what i eventually want to do with my fixed income exposure. If Uk rates go up, happy days and if they go down, then i will go back to VAGP - presumably inverted yield curve already bakes that in...in any case i cant get my head around what can happen here with rates. I liked VGOV (https://www.vanguardinvestor.co.uk/inve ... stributing ) conceptually but that seems to have gone through a harrowing (continued) ride with the UK rates situation.

Can someone advise what is wrong with my approach of 70% global equities and 30% Vanguard Sterling MMF? My basic thesis is that since I cannot decide what is the right fund, this seems to have no currency risk, no duration risk and no/minimal credit risk. So will do the job.

Grateful for any advice

[Valuethinker]

Dear bogleheads,

I (40M) have been following the bogleheads philosophy for about 5 years now. Till now i have been 100% global equities (market weighted). My salary, my wife's salary and home equity (nearly half of NW) is all in GBP. My expenses in retirement are likely to be in GBP (50%+) and rest mix of global currencies.

I have been mulling for quite a while that I would like to reduce the riskiness of my portfolio as I feel I am getting close to my target number and don't feel like with this size portfolio i could stomach a 50% or so drawdown. I have hence decided to move to 30% fixed income at this stage of my life. I expect to remain in accumulation stage for at least another 10 years.

I have not been able to convince myself that VAGP is the right choice for me. Duration risk and inverted yield curve are stopping me. But i still feel staying 100% equities is even worse for me.

I've narrowed down after much contemplation to this - https://www.vanguardinvestor.co.uk/inve ... s/overview

This seems to have no duration risk and in my view, for a year or two, would be a a quite safe place to leave the money with 4-5% yield. That will give me time to get my head around what i eventually want to do with my fixed income exposure. If Uk rates go up, happy days and if they go down, then i will go back to VAGP - presumably inverted yield curve already bakes that in...in any case i cant get my head around what can happen here with rates. I liked VGOV (https://www.vanguardinvestor.co.uk/inve ... stributing ) conceptually but that seems to have gone through a harrowing (continued) ride with the UK rates situation.

Can someone advise what is wrong with my approach of 70% global equities and 30% Vanguard Sterling MMF? My basic thesis is that since I cannot decide what is the right fund, this seems to have no currency risk, no duration risk and no/minimal credit risk. So will do the job.

Grateful for any advice

On the face of it, this seems fine.

Nothing wrong with a "Barbell" of very short term & safe securities + equities. Beta (sensitivity to market movements where 1.0 = tracks market perfectly) will be about 0.7 for the global portfolio (+/- 10% on equities = +/-7% on portfolio).

Interest rates confuse all of us. However the gilt index was always very long duration (now c 15 years?) much longer than other govt bond markets - the pension funds and insurance companies buy & hold these long gilts (actuarial rules + regulation). Thus it is unusually sensitive to interest rate movements. And we had the Liz Truss administration and the Liability Driven Investment fund fiasco.

[rohitiiml]

Thanks, good to hear.

From this link https://www.vanguard.co.uk/professional ... stributing VGOV duration is 10.4 years.

[xxd091]

Your worries about a big equity drop are sensible once your saving goals are in sight or even if you have achieved a large equity position on your way to your eventual final goal
Classically investors have used equities balanced by bonds with some cash
Some investors further diversify into gold,commodities etc
The common Boglehead approach is the use of equities and bonds only in the Asset Allocation
In this current scenario the stockmarket had had drops in equities and bonds together-an unusual situation but not without precedent
The problem for the amateur investor who goes mostly to cash instead of bonds is knowing when to reenter the market again
Market timing of any sort seems to end in tears for the amateur investor
So enjoy your cash position but bonds really should be your destination for the non equity part of your portfolio in the long term
Of course I could be wrong and things are different this time but history says otherwise
xxd091

[Valuethinker]

Your worries about a big equity drop are sensible once your saving goals are in sight or even if you have achieved a large equity position on your way to your eventual final goal
Classically investors have used equities balanced by bonds with some cash
Some investors further diversify into gold,commodities etc
The common Boglehead approach is the use of equities and bonds only in the Asset Allocation
In this current scenario the stockmarket had had drops in equities and bonds together-an unusual situation but not without precedent
The problem for the amateur investor who goes mostly to cash instead of bonds is knowing when to reenter the market again
Market timing of any sort seems to end in tears for the amateur investor
So enjoy your cash position but bonds really should be your destination for the non equity part of your portfolio in the long term
Of course I could be wrong and things are different this time but history says otherwise
xxd091

There's a weird thing with gilts.

Yields always seem to be low enough that it doesn't work out to "go long" and track the gilt index.

I think what is going on is:

- pension fund & insurance company regulation requires them to buy long gilts. The gilt index (long duration) is shaped around that. As we found with the Liability Driven Investing fiasco (around the Truss budget) long gilts are very volatile, and the pension funds are heavily exposed. Prices of gilts are thus "bid up" and yields lowered by more than fundamentals would suggest.

- bonds were an absolutely terrible investment for UK investors from 1945-1980s. We have a bias towards high inflation and the current economy (where our inflation is higher than US or Europe) just shows this.

Thus the benefits to a UK investor of "going up the yield curve" seem to be smaller than for other currencies. That says the "Barbell portfolio" of cash + equities is not such a bad idea. Cash held in term deposits (Notice Accounts), National Savings, possibly MMF.

I am pondering this without having come to a definite conclusion. I generally hold global bond funds, hedged into sterling, which should give very similar returns to a sterling bond fund. Certainly the terrible returns of the last 18 months were mirrored .

I agree with the problems of market timing. For someone 20+ years to retirement, I say "80% equities, 20% cash + bonds, fire and forget; rebalance periodically". Arguably one could go to 90% equities, however that ride can be a very bumpy one (I was more than 100% in equities in 2000, and it was not a fun ride until 2010).

[StillGoing]

Dear bogleheads,

I (40M) have been following the bogleheads philosophy for about 5 years now. Till now i have been 100% global equities (market weighted). My salary, my wife's salary and home equity (nearly half of NW) is all in GBP. My expenses in retirement are likely to be in GBP (50%+) and rest mix of global currencies.

I have been mulling for quite a while that I would like to reduce the riskiness of my portfolio as I feel I am getting close to my target number and don't feel like with this size portfolio i could stomach a 50% or so drawdown. I have hence decided to move to 30% fixed income at this stage of my life. I expect to remain in accumulation stage for at least another 10 years.

I have not been able to convince myself that VAGP is the right choice for me. Duration risk and inverted yield curve are stopping me. But i still feel staying 100% equities is even worse for me.

I've narrowed down after much contemplation to this - https://www.vanguardinvestor.co.uk/inve ... s/overview

This seems to have no duration risk and in my view, for a year or two, would be a a quite safe place to leave the money with 4-5% yield. That will give me time to get my head around what i eventually want to do with my fixed income exposure. If Uk rates go up, happy days and if they go down, then i will go back to VAGP - presumably inverted yield curve already bakes that in...in any case i cant get my head around what can happen here with rates. I liked VGOV (https://www.vanguardinvestor.co.uk/inve ... stributing ) conceptually but that seems to have gone through a harrowing (continued) ride with the UK rates situation.

Can someone advise what is wrong with my approach of 70% global equities and 30% Vanguard Sterling MMF? My basic thesis is that since I cannot decide what is the right fund, this seems to have no currency risk, no duration risk and no/minimal credit risk. So will do the job.

Grateful for any advice

In the worst times, cash in the UK has done better than long bonds (various US studies have use different duration bonds - IIRC the SBBI dataset has 20 year, 5 year, and 3 month fixed income, with an allocation to 5 year bonds giving the best outcome in SWR studies). For example, using the UK calculator at https://www.2020financial.co.uk/pension ... alculator/ gives a lower failure rate with a withdrawal rate of 3.5% with 60/0/40 than 60/40/0 (stocks/bonds/cash). The bonds used in that calculator are 15-20 year duration.

Choosing a bond fund with a shorter duration than VGOV (duration ~ 11 years) might be an alternative - two options at Vanguard are global bond (~7 years) or global short term bond (~3 years). What is annoying for anyone wanting UK gilts, is that in addition to VGOV, Vanguard offer a long term gilt fund but not a short term version. If you are not locked into Vanguard then ishares do a short term gilt ETF (https://www.ishares.com/uk/individual/e ... -ucits-etf) with a duration of 2 years.

Given you have 10 years or so until retirement (and hopefully many years of spending after that), then perhaps rather than jumping in all at once, a drip feed into bonds might be an approach to avoid market timing (e.g. all future contributions) as well as placing a portion of your current portfolio in the MMF in case of a sudden drop in stocks (note that the MMF is distributing, so you have to manually reinvest the distributions each month - actually, a month in arrears).

cheers
StillGoing

[xxd091]

Bonds values dropping in parallel with equities (if not so far) has upset everyone
But that situation is not without precedent but it it is unusual
The stockmarket (and life) however are constantly unusual !
Your chosen Asset Allocation has to be such that you can live with it through the constant recurring vagaries of the market
It may be of interest to you as an practical example that I retired 20 years ago at 57 with a 30/70 equities/bond portfolio which I have never changed through 2002,2008 and now 2022
A conservative investor!
It is currently 33/62/5 equities.bonds.cash
Cash =2 years living expenses
Worked so far……..will probably see me to the end OK
xxd09

[Valuethinker]

Bonds values dropping in parallel with equities (if not so far) has upset everyone
But that situation is not without precedent but it it is unusual
The stockmarket (and life) however are constantly unusual !
Your chosen Asset Allocation has to be such that you can live with it through the constant recurring vagaries of the market
It may be of interest to you as an practical example that I retired 20 years ago at 57 with a 30/70 equities/bond portfolio which I have never changed through 2002,2008 and now 2022
A conservative investor!
It is currently 33/62/5 equities.bonds.cash
Cash =2 years living expenses
Worked so far……..will probably see me to the end OK
xxd09

As always, good and straighforward advice.