Page 37 - DIY Investor Magazine - Issue 27

Stress testing the funds in the decade starting just before the Dot Com crash and including 2008’s GFC showed a 100% Equity portfolio losing almost 55% of value during both stress periods.
A 60% Equity portfolio dropped 25-30%. By comparison Covid-19 was a mere bagatelle.
However, returns expectations are where things get more challenging because the study period includes a ‘lost’ decade for equities and higher bond yields than are currently achievable.
Historical risk and return for Vanguard LifeStrategy benchmarks over the past two decades show a 100% Equity World ETF returned 5% annually, with a 100% bond portfolio delivering a not dissimilar 3.9%.
However in the last, exceptional decade, 100% Equity World ETF returned 10.4% annually and whilst adding bonds reduced risk, it added a drag with just 3% return
LifeStrategy core and 10% satellite portfolio could work as well; adding other asset classes could be a solution for a slightly more complex portfolio – like the Cyclist or the Banker.
Have a look at risk and return profiles of different asset classes over the past two decades.
Looking ahead, equities are unpredictable, but a reasonable long term average is a return of 7% annually – doubling
your investment after 10 years; given negative Bond yields in Europe, that portion should not be expected to make any meaningful contribution to returns in the next years
HOW TO INVEST IN A LIFESTRATEGY FUND
Vanguard is not exactly selling dreams when you take into account that bonds won’t contribute much to the returns in a 60/40 portfolio, so what are the options?
For your relatives, keep it simple; for yourself, think about the right mix of assets – holding it longer or treating as the core part of your portfolio.
Given negative bond yields, holding a higher proportion of equities could be a solution, if you can stomach losses; since 1988 the chances of losses were reduced below 5% if holding World Equities above 5 years.
However, if you have a short to medium term investment horizon, the 20 to 40% Equity portfolios are probably still the most sensible choices.
SHOW ME THE FUNDS
Fund
Vanguard LifeStrategy 20% Equity Fund A Gross Acc
Vanguard LifeStrategy 20% Equity Fund A Gross Inc
Vanguard LifeStrategy 40% Equity Fund A Acc
Vanguard LifeStrategy 40% Equity Fund A Inc
Vanguard LifeStrategy 60% Equity Fund A Acc
Vanguard LifeStrategy 60% Equity Fund A Inc
Vanguard LifeStrategy 80% Equity Fund A Acc
Vanguard LifeStrategy 80% Equity Fund A Inc
Vanguard LifeStrategy 100% Equity Fund A Acc
Vanguard LifeStrategy 100% Equity Fund A Inc
Income
Accumulating
Distributing
Accumulating
Distributing
Accumulating
Distributing
Accumulating
Distributing
Accumulating
Distributing
What’s the difference between accumulating and distributing?
Here is the answer.
Good Luck and keep’em* rolling !
(* Wheels & Dividends)
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Alternatively, adding satellites by having a, e.g. 90% Vanguard
37 DIY Investor Magazine | Mar 2021