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Any thoughts about Vanguard funds ?

Investment discussion for beginners. Why you should invest your money, get help getting started
malakoffee
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Any thoughts about Vanguard funds ?

#120271

Postby malakoffee » February 25th, 2018, 10:24 am

My half-hearted ISA HYP, has been a bit of a roller-coaster. The modest income has helped me through the years of derisory interest rates on savings.

Picking appropriate stocks is a total gamble when one is not-particularly-interested . . . . .
Tesco & Centrica = bad luck . . . . . . AstraZenica, BAe, RioTinto = good luck

However, the HYP is a side issue which helps to set the scene for a possible funds transfer.

Many years ago I consolidated various PEPs & ISAs into an M&G AllShare tracker, due to the relatively low ongoing charges. ( Now 0.46% p.a.)

Many years later I look at the M&G annual charge and think that maybe it is a bit much compared to something like Vanguard Lifestyle funds.

Plus, now that I'm 60 Y.O., this might be an appropriate time to transfer into a fund with some proportion of bonds ?

Lootman
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Re: Any thoughts about Vanguard funds ?

#120310

Postby Lootman » February 25th, 2018, 1:36 pm

I have never had much use for bonds. And that is perhaps curious because my investing career started in around 1982 when the stellar bull market in bonds began. If 1982 was the best time to buy bonds because nobody wanted them, then where is the argument for them now that we have bottomed in rates?

A small position in US treasuries is always appropriate since they go up when everything goes down, and the USD is the safe haven currency. But otherwise I have no use for them except as a trade.

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Re: Any thoughts about Vanguard funds ?

#120318

Postby BreakoutBoy1 » February 25th, 2018, 2:06 pm

I think Vanguard has some competitive fees, for example their LifeStrategy equity/bond products are pretty reasonable with a headline OCF of 0.22%. If you hold direct with Vanguard they have a reasonable 0.15% account fee capped at £375 pa.

That may be competitive with what you have if there is a platform fee for the tracker you are currently using?

Hope that helps,

tjh290633
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Re: Any thoughts about Vanguard funds ?

#120328

Postby tjh290633 » February 25th, 2018, 3:10 pm

I'm with Lootman. This is not the time to be investing in bonds. There are several ITs which have a long history of increasing dividends, like 30 or 40 years. You will be better off putting money into FRCL or WTAN than anything bond-oriented. Yields just over 2% and an increasing dividend will serve you better.

TJH

GeoffF100
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Re: Any thoughts about Vanguard funds ?

#120453

Postby GeoffF100 » February 26th, 2018, 8:24 am

Picking stocks is a total gamble whether you are interested or not. The professionals cannot beat the market, except by chance. Whay should you have any better chances?

A common rule of thumb says that at age 60, you should have 60% of your assets in bonds In reality, it is not as simple as that. You can only decide the appropriate bond allocation after a careful analysis of your financial situation, your objectives and your risk tolerance.

Vanguard LifeStrategy has very good diversification and relatively low costs. Nonetheless, you could save money by investing directly in, for example, Vanguard Developed World ex UK, VFEM, Vanguard FTSE 100 and Vanguard Global Bond fund.

Vanguard LifeStrategy automatically rebalances. This is great if the market jiggles around or crashes and recovers before you need the money. The rebalancing buys more equities when the market falls and sells them when it rises. However, rebalancing works against you if the market falls and keeps falling, and does not recover. The rebalancing then keeps selling your relatively safe bonds and buying falling equities. Rebalancing also works against you if the market shoots up an does not retrace its steps. LTBH is safer, but potentially less profitable.

Nobody knows what will happen to interest rates. very few predicted that 1982 was the start of a big bond bull market. Very few predicted the long bull market in Japanese bonds, or the bond bear market in 1970s Britain. Long dated US Treasuries are negatively correlated with US stock, when they are both priced in dollars. For a sterling investor, they are subject to currency risk, unless they are hedged. A 3 year cash ISA paying over 2% has very little interest rate risk, and is guaranteed by the UK government, unless you are over the compensation limit.

Vanguard's 0.15% account fee capped at £375 pa is not competitive with iWeb, except for very small accounts.

Investment Trusts are less diversified than LifeStrategy and have much higher costs.

it is important to take account of transaction costs as well as the OCF. Mifid II gives some disclosure of transaction costs, but the real transaction costs are substantially higher than the Mifid II estimates suggest.

Market weighted trackers have very low turnover, and correspondingly low transaction costs.

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Re: Any thoughts about Vanguard funds ?

#120455

Postby dspp » February 26th, 2018, 8:33 am

malakoffee wrote:.....Many years later I look at the M&G annual charge and think that maybe it is a bit much compared to something like Vanguard Lifestyle funds.

Plus, now that I'm 60 Y.O., this might be an appropriate time to transfer into a fund with some proportion of bonds ?


1. I use Vanguard index trackers and like them for their low costs, they do what it says on the tin.

2. The adage about % of age in bonds is perhaps better stated as "bond-like". A pension is bond-like. Don't overdose on bonds if you have pensions or other reliable income streams.

regards, dspp

GeoffF100
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Re: Any thoughts about Vanguard funds ?

#120577

Postby GeoffF100 » February 26th, 2018, 4:21 pm

The adage about % of age in bonds is perhaps better stated as "bond-like". A pension is bond-like.

That is true to some extent, but the real NPV of an index linked pension is the number of years you have to live, which is an unknown for most of us. The nominal NPV also depends on future rates of inflation. If you do not have any real cash or bonds, and you drop dead tomorrow, and the stock market crashes too, you will not have much to leave in your Will. You also cannot get an advance on your pension to supplement your living costs at the bottom of a bear market.

If you are short of money to fund your personal expenditure, it makes sense to stick to pensions, cash and bonds. If you are swimming in money, you can afford to take a risk and hold a high percentage of equities.

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Re: Any thoughts about Vanguard funds ?

#120599

Postby jackdaww » February 26th, 2018, 5:59 pm

tjh290633 wrote:I'm with Lootman. This is not the time to be investing in bonds. There are several ITs which have a long history of increasing dividends, like 30 or 40 years. You will be better off putting money into FRCL or WTAN than anything bond-oriented. Yields just over 2% and an increasing dividend will serve you better.

TJH


agreed..

GeoffF100
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Re: Any thoughts about Vanguard funds ?

#120610

Postby GeoffF100 » February 26th, 2018, 7:22 pm

Sorry, I meant: That is true to some extent, but the real NPV of an index linked pension is the annual amount * the number of years you have to live, which is an unknown for most of us.
This is not the time to be investing in bonds.

The problem is that this is not the time to be investing in equities either. Equities are priced using bond yields as the discount rate. In the dividend discount model, for example, the equity price is the NPV of all the future dividends. More simply, the expected long term return of equities is the long term bond yield plus the equity risk premium. In theory, if you subtract 1% from bond yields, equity prices will rise until their long term return falls by 1% too.

If you do not fancy a bond yield of 2% you can gamble on equities, in the hope of getting more, but do not kid yourself that the likely return is as good as they were when bond yields were 4%. What you can be sure of is that the equity risk will be just as high, despite the lower expected return.

If you are convinced that interest rates will rise, you can invest in short dated bonds, but you will miss a big profit if bond yields continue to fall as they did in Japan. If you are scared of inflation, you can buy index linked gilts. The real yield is negative and horrible, but that is just a reflection of generally low expected investment returns. Alternatively, you can buy gold, but the price of gold is inflated by historical standards too.

I know nobody wants to hear any of this, but that does not make it any less true.

tjh290633
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Re: Any thoughts about Vanguard funds ?

#120634

Postby tjh290633 » February 26th, 2018, 11:13 pm

GeoffF100 wrote:If you do not fancy a bond yield of 2% you can gamble on equities, in the hope of getting more, but do not kid yourself that the likely return is as good as they were when bond yields were 4%. What you can be sure of is that the equity risk will be just as high, despite the lower expected return.

The point is that bond yields are not 4%. They are fixed and at a much lower rate.

Nobody says that there is no risk in equities. There is risk in everything, and the risk associated with rising interest rates affects the return on bonds. Bonds are a gamble, just as equities are.

TJH

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Re: Any thoughts about Vanguard funds ?

#120638

Postby Alaric » February 26th, 2018, 11:34 pm

GeoffF100 wrote:The problem is that this is not the time to be investing in equities either. Equities are priced using bond yields as the discount rate. In the dividend discount model, for example, the equity price is the NPV of all the future dividends. More simply, the expected long term return of equities is the long term bond yield plus the equity risk premium. In theory, if you subtract 1% from bond yields, equity prices will rise until their long term return falls by 1% too.


There's a lot more noise in equity prices than can be explained by simple pricing theories based on bond yields. Ownership and control have a value. Dividends are determined by directors who are appointed by shareholders, at least in theory.

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Re: Any thoughts about Vanguard funds ?

#120641

Postby hiriskpaul » February 27th, 2018, 12:23 am

tjh290633 wrote:
GeoffF100 wrote:If you do not fancy a bond yield of 2% you can gamble on equities, in the hope of getting more, but do not kid yourself that the likely return is as good as they were when bond yields were 4%. What you can be sure of is that the equity risk will be just as high, despite the lower expected return.

The point is that bond yields are not 4%. They are fixed and at a much lower rate.

Nobody says that there is no risk in equities. There is risk in everything, and the risk associated with rising interest rates affects the return on bonds. Bonds are a gamble, just as equities are.

TJH

There are essentially 3 sources of risk with bonds:
1) Credit risk, or risk of default meaning interest payments may not be paid in full and final payment may be less than the contractual amount. The level of perceived credit risk and what the appetite for credit risk is will influence the market price prior to expiry.
2) Currency risk, applicable to bonds denominated in foreign currencies. Payments of interest and principal when converted to pounds will vary with the exchange rates.
3) interest rate risk. The market price of a bond will be influenced by changes in the yield curve. The longer the bond duration, the bigger the impact due to movements in the curve. Note that I am talking about the yield curve here not the Bank of England base rate, which just sets the overnight end of the curve. Central bank quantitative easing effects points further along the curve.

Bonds being discussed here are I think ones with no (or hedged out) Currency risk and minimal credit risk, so to concentrate on those bonds, a parallel upward movement of 1% across the entire yield curve would cause a drop in price of a bond with 1 year duration of about 1%, 10 year duration about 10%. What would a 1% movement in the yield curve do to equity prices? You can get a clue by what happened a few weeks ago when it was hinted that US rates might rise a little more quickly than the market was anticipating. We had about a 10% market correction. Unexpected rises in interest rates can be unpleasant for bonds but are usually far more unpleasant for equities.

Bond yields are not fixed by the way, they change all the time. What I think you mean is that a bond's cash flows are fixed, which is true for many but certainly not all bonds. Even though a bond's cash flows may be fixed, the market price is not, so neither is a bond's yield.

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Re: Any thoughts about Vanguard funds ?

#120642

Postby hiriskpaul » February 27th, 2018, 12:37 am

Alaric wrote:
GeoffF100 wrote:The problem is that this is not the time to be investing in equities either. Equities are priced using bond yields as the discount rate. In the dividend discount model, for example, the equity price is the NPV of all the future dividends. More simply, the expected long term return of equities is the long term bond yield plus the equity risk premium. In theory, if you subtract 1% from bond yields, equity prices will rise until their long term return falls by 1% too.


There's a lot more noise in equity prices than can be explained by simple pricing theories based on bond yields. Ownership and control have a value. Dividends are determined by directors who are appointed by shareholders, at least in theory.

And directors take into account (or should do) anticipated future profitability. What happens to profitability as a company's borrowing costs rise and customers have less money to spend due to their increased borrowing costs?

Not only do increased borrowing costs reduce profits, but the NPV of future profits reduces as the yield curve rises.

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Re: Any thoughts about Vanguard funds ?

#120643

Postby hiriskpaul » February 27th, 2018, 12:47 am

To get back to the original question, I would say definitely move out of M&G, even if you just transfer to the equivalent Vanguard fund you will gain about 0.4% per year. It may not seem much, but better to have that 0.4% in your pocket rather than m&g's.

Personally I think you would be much better off more globally diversified. As to how much to hold in bonds/cash, that is really hard to answer as it depends on your own personal circumstances and what level of risk you are prepared to take.

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Re: Any thoughts about Vanguard funds ?

#120698

Postby malakoffee » February 27th, 2018, 10:21 am

Thanks to all for the contributions, both high-level and (devil-in-the-) details.

While the weather is hostile, I can sit still for protracted periods and educate myself with these generous tutorials.

GeoffF100 wrote:Vanguard's 0.15% account fee capped at £375 pa is not competitive with iWeb, except for very small accounts.

I did not understand that sentence.
I would expect to hold Vanguard funds with Vanguard, to prevent a.n.other ISA provider from taking an additional cut.
OR
Does iWeb offer equivalent funds to Vanguard ( with even lower charges ) ? I could not see any when I checked.
OR
something else . . . . .. ?

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Re: Any thoughts about Vanguard funds ?

#120709

Postby syrio » February 27th, 2018, 11:05 am

malakoffee wrote:I would expect to hold Vanguard funds with Vanguard, to prevent a.n.other ISA provider from taking an additional cut.
OR
Does iWeb offer equivalent funds to Vanguard ( with even lower charges ) ? I could not see any when I checked.

If you hold Vanguard funds directly with Vanguard they will charge you a 0.15% platform fee to hold the funds, it is capped at £375 p.a.

https://www.vanguardinvestor.co.uk/inve ... rnmore_cta

If you hold Vanguard funds with iWeb, iWeb will change you £25 to open the account initially, then nothing after that. They will also charge you a dealing fee whenever you buy or sell units.

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Re: Any thoughts about Vanguard funds ?

#137669

Postby eyeball08 » May 9th, 2018, 7:41 am

I read through this thread hoping to understand how etfs work as my son is considering them (vanguard) for a considerable lump of cash. The first replies talk about bonds.
I have personally invested in HY and ITs but never in etfs because I don’t understand how they work. For example, with a tracker etf does it put your money in the stock market or “follow” it in some mysterious way.
Is there a board or thread somewhere that explains how they operate?
I have tried to tell my son I would prefer an IT or three myself but haven’t been able to persuade him why ITs might not be so safe or rewarding. I might well be wrong...

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Re: Any thoughts about Vanguard funds ?

#137686

Postby tjh290633 » May 9th, 2018, 9:14 am

eyeball08 wrote:I read through this thread hoping to understand how etfs work as my son is considering them (vanguard) for a considerable lump of cash. The first replies talk about bonds.
I have personally invested in HY and ITs but never in etfs because I don’t understand how they work. For example, with a tracker etf does it put your money in the stock market or “follow” it in some mysterious way.
Is there a board or thread somewhere that explains how they operate?
I have tried to tell my son I would prefer an IT or three myself but haven’t been able to persuade him why ITs might not be so safe or rewarding. I might well be wrong...

Some ETFs are replicators and some are synthesized, using derivatives, etc. The fact sheets should make that clear.

Otherwise they trade like ordinary shares, but are open-ended. So if there are more sales than purchases they have to sell the underlying securities. Investment Trusts don't have to do this, of course. I'm with you in preferring ITs to ETFs.

TJH

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Re: Any thoughts about Vanguard funds ?

#137691

Postby swill453 » May 9th, 2018, 9:26 am

tjh290633 wrote:Some ETFs are replicators and some are synthesized, using derivatives, etc. The fact sheets should make that clear.

Otherwise they trade like ordinary shares, but are open-ended. So if there are more sales than purchases they have to sell the underlying securities. Investment Trusts don't have to do this, of course. I'm with you in preferring ITs to ETFs.

Don't Investment Trusts have more in common with managed funds than they do with ETFs? In that there is a bunch of humans making qualitative investment decisions, rather than being merely formulaic (eg trackers).

Scott.

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Re: Any thoughts about Vanguard funds ?

#137709

Postby DrBunsenHoneydew » May 9th, 2018, 11:10 am

ETFs are rather like like unit trusts/oeics in that they can be either trackers or actively managed. Either can use real shares/bonds or use derivatives.
ETFs trade like shares on stock markets with live continuously fluctuating pricing whereas UTs trade only once a day in a back room of the manager's office at a price you don't know what it is going to be until well after the trade.
Investment trusts are actively managed (all the old tracker ITs have closed or merged into active ITs) and have live pricing.


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