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A strategy for life: Using Vanguard LifeStrategy funds to simplify investment

The cover of DIY Simple Investing

This article on making Vanguard’s LifeStrategy funds the core of your lifelong investment strategy is by John Edwards, whose book DIY Simple Investing aims to get novices up to speed.

I was recently discussing financial matters with a good friend. She is articulate, exceedingly well-educated and accomplished – Oxbridge degree, large circle of friends, owns her own home in the country, a mother and now grandmother.

However, the one area of life where she struggles is personal finance.

Talking to her started me thinking. If someone as well balanced and educated as my friend gets stuck, then how many others have difficulty with everyday financial challenges – be it pensions, investments, or savings?

Many people are confused about money

When I started to do some research into ‘financial dyslexia’, I found it was a major problem for a lot of people.

Most Monevator readers are self-directed investors, I imagine, and it is easy to make the assumption that other people could easily do the same if only they chose to do so.

However this may not be the case.

Many people, for whatever reason, have a complex emotional relationship with money. This could be due to repeatedly telling themselves “I don’t/can’t do this” or it may stem from failing to grasp maths right back at primary school level, perhaps due to a single poor teacher.

It may even be down to the wrong sort of genes!

It’s all too easy for those of us who (more or less) take investing for granted to overlook how confusing, daunting and difficult it can seem to those would-be investors looking in for the first time.

More evidence: In 2014, the Open University Business School asked a cross section of the population to answer questions currently on the financial education syllabus. It was shocked by the results – over two-thirds of UK adults got basic personal finance school exam questions wrong.

Consumers also admitted that their lack of financial knowledge was stopping them from making informed decisions about mortgages (44%), pensions (43%), and even the simplest products such as ISAs (32%).

The research also suggested ignorance isn’t bliss – 60% of the 25-34 age group admitted that their personal finances caused them stress, anxiety and sleepless nights.

Another recent report suggested that one in ten people cannot identify the total balance on a bank statement, whilst 25% said they would rather live for today than plan for tomorrow.

The cost of financial advice

Those who can afford the fees can get around these stumbling blocks by employing the services of a qualified financial adviser. However after the various regulatory changes of recent years, the costs associated with advice are no longer hidden in the fund charges.

Making these costs more transparent is probably a good thing, but it does mean the fees of employing an adviser must be agreed and paid upfront.

The cost for such advice varies according to the nature of the advice, complexity and time involved.

As an example, a would-be investor starting up an investment ISA or SIPP or investing a one-off lump sum could pay between £750-£1,500, plus 20% VAT.

Understandably, many ordinary people investing modest sums may be put off by the idea of such high upfront charges.

For these individuals, it may well be a case of DIY investing or nothing.

When simple isn’t simple enough

I have written and self-published three previous books about money and investing. At the time I thought they were fairly straightforward.

My first I described as ‘A simple and easy to understand guide to savings, pensions and investments’ and my second as ‘A simple and, I hope, easy to understand guide to UK pensions’.

But when I took the opportunity to re-read these books in the light of my later findings about the depth of financial difficulty out there, it was obvious that – whilst from my own perspective those statements were true – for possibly the majority of ordinary individuals, my efforts to open up and explain the mysterious world of personal finance had failed.

My challenge was to try to step into the shoes of the novice would-be investor – to become what I had been 25 years previously when I started my own investing journey.

I wanted to try to see things from this different angle and perspective. I needed to unlearn everything I had picked up over the past two decades and then to try to write a book that would be easy for anyone to understand.

DIY Simple Investing

It seems to me that all that the vast majority of would-be investors need is a very simple, no-frills DIY strategy that provides a good chance of a decent outcome.

It was when I was researching Vanguard’s LifeStrategy funds for my own possible use that I realised these products could be the centrepiece of just such a simple all-in-one investing strategy that almost anyone could follow.

I even wrote an article on my own website about this: Vanguard LifeStrategy – A One-Stop Solution.

Now, the average Monevator reader would probably not have too much difficulty in constructing a portfolio of passive index funds and ETFs – or even shares or investment trusts.

But for those who would find such an undertaking daunting, the LifeStrategy funds provide a one-shot solution that I believe is a significant advance in making investing accessible to everyone.

A strategy for life

Vanguard’s LifeStrategy funds hit the UK market in June 2011. They are a range of low cost all-in-one funds holding an assortment of Vanguard’s globally diverse, standalone index funds.

There are five options to choose from, with the number in the name representing the equity level for each fund:

  • LifeStrategy 20% Equity Fund
  • LifeStrategy 40% Equity Fund
  • LifeStrategy 60% Equity Fund
  • LifeStrategy 80% Equity Fund
  • LifeStrategy 100% Equity Fund

(From here I’ll abbreviate the funds to LS20 and so on, for convenience).

For instance, the LS40 fund holds an assortment of Vanguard’s underlying equity funds that together make up 40% total equity exposure. The remaining 60% is made up from a mixture of standalone bond funds.

The current geographic breakdown of the LS40 fund is:

 Equities Allocation
 FTSE Developed World (ex UK) 19.4%
 FTSE UK All Share 10.0%
 US Equity 5.0%
 Emerging markets 2.9%
 Europe (ex UK) 1.5%
 Japan 0.8%
 Pacific (ex Japan) 0.4%
 Total 40%

 Bonds Allocation
 Global bonds 19.2%
 UK Gilts 9.6%
 UK corporate bonds 5.7%
 US corporate bonds 5.1%
 European government bonds 5.1%
 US government bonds 4.9%
 UK inflation-linked gilts 4.8%
 Japanese government bonds 3.3%
 European corporate bonds 2.3%
 Total 60%

Total (equities + bonds) = 100%

Each of the five LifeStrategy funds holds over 1,000 assorted securities.

Which LifeStrategy fund to choose?

Investors who have a longer time horizon and are willing to embrace more risk or volatility in their portfolio in exchange for the possibility of a higher return would select a fund with a higher equity holding – say LS80 or even LS100.

Investors with a lower tolerance to risk or a shorter time span ahead of them should opt for a LifeStrategy fund with more bonds in the mix, such as the LS20 or LS40 funds.

You could also hold more than one LifeStrategy fund in your portfolio to fine tune your exposure.

For example, if you wanted to achieve a 50-50 mix of equities and bonds, you could purchase the LS40 and LS60 funds in equal measure.

The following graph gives an indication of how the various difference equity/bond blends have done over the long-term:

Historical-portfolio-returns

(Click to enlarge)

Source: Vanguard

Remember, it’s not just about the average total annual return, otherwise we’d all obviously choose the LS100 fund!

Volatility increases as you increase the equity mix, which in turn increases the range of returns – including into the negative zone represented by the grey areas.

Vanguard rebalancing for you

I believe the regular rebalancing of a portfolio is important and too often overlooked by investors.

To my mind it’s a great benefit of the LifeStrategy approach that the funds are automatically rebalanced by Vanguard on a regular basis.

The more that can be automated, the better.

Rebalancing ensures you are not exposed to more risk than you chose at the outset when you first purchased your LifeStrategy fund – and without you having to lift a finger.

In contrast, with most other multi-index or multi-asset funds an investor is merely offered a range of potential exposure to equities. This means you may have no idea what your actual level of exposure is at any given time.

For example in an investment offering 20-60% equity exposure, the fund manager has complete freedom to increase or reduce holdings according to how he or she reads prevailing market conditions.

As an investor, you will not know from one month to the next whether your chosen fund holds 60% equities or 20% – or anything in between.

Such a fund’s returns will also depend to a large extent on the manager making consistently good market calls.

Personally I would not feel comfortable with that strategy.

How to implement your DIY LifeStrategy portfolio

Remember, what we are after is a simple, low cost and diversified strategy that a novice investor can understand and implement with a minimum of fuss.

And with the LifeStrategy all-in-one solution, investing can be as simple as ABC:

A) Decide on your attitude to risk/volatility

B) Select the corresponding LifeStrategy fund

C) Choose an appropriate low-cost broker, and set up your automated monthly direct debit

Job done, and you can now get on with your life.

It seems to me that putting together a DIY portfolio does not come much simpler.

As we saw earlier, the LifeStrategy funds are globally diversified which helps to reduce risk. They also have reasonable costs of 0.24% (plus a one-off 0.10% dilution levy).

True, it would be slightly cheaper to hold all the underlying funds separately but it’s not very practical. For the convenience of an all-in-one fund and automatic rebalancing, the marginal additional cost is well worth it.

A strategy for life

Most LifeStrategy investors at the moment are probably planning to use the funds during the early years – the building phase – of growing their wealth within ISAs and SIPPs.

Part of this process should include some thought about your changing risk tolerance at various stages of your life.

For example:

When starting out in your 20s and 30s you could use the LS100 or LS80.

During your late 40s and 50s you could switch to LS60.

As retirement approaches in your 60s you could swap to LS40.

The beauty of the LifeStrategy option is its simplicity.

Choose your level, set up your automatic monthly payments with a selected broker and then leave it on autopilot until your fortieth, fiftieth and sixtieth birthdays, when you switch into progressively less risky funds.

What could be simpler?

The drawdown phase

Although most people will probably use LifeStrategy funds for the wealth-building phase of their investing journey, I believe the funds could be used in later years for the ‘deaccumulation’ phase, too.

Of course, at that point you might plan to move your accumulated money into more income-orientated options.

For instance, other passive funds with an income focus include Vanguard’s UK FTSE Equity Income fund or its All World High Yield ETF – both of which I hold in my portfolio.

There are also income focused investment trusts you might consider.

However, if you have been happily building your retirement pot using the simple LifeStrategy route, then why not continue with it?

In this case, instead of investing in funds that pay out a regular income, you’d plan to ‘create’ and withdraw your 3.5% or 4.0% annual income by selling units.

The average total return on the LS60 since launch in June 2011 has been just over 9% per year, on average.

This return will probably come down a little as the years pass, but using a cash buffer if necessary to cover negative return years, it should be perfectly feasible to obtain a reasonable income.

It’s also worth noting that each of the five LifeStrategy funds comes in both accumulation and income flavours, with the latter paying out – of course – an income.

For those who do not require too much income during the deaccumulation phase, it could therefore be worth considering the income version of their chosen fund.

However at the present time the average distribution yield for the LifeStrategy funds is around 1.4%, which will be too low for most investors.

That is why selling units can provide a good alternative.

Simply is best

My advice to any would-be investor is to keep things simple, low cost, diversified and to understand your tolerance to market risk/volatility and invest accordingly.

And it seems to me the Vanguard LifeStrategy funds offer all this and a bit more in a single all-in-one fund.

Naturally, I go into much more detail in my latest DIY Simple Investing book and cover other aspects that underpin this central theme.

But, in a nutshell, the essence of my book is covered above – short and sweet, jargon-free, and, I hope, a practical guide for those people who are looking for a low cost and easy to understand investment strategy.

Incidentally, the book was in part inspired by a development in my personal investment strategy over the past year or so, which has made me re-evaluate some of my earlier thinking.

Monevator has a lot to answer for!

You can read more from John at his blog – or check out his book at Amazon.

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{ 135 comments… add one }
  • 1 ermine June 30, 2015, 9:38 am

    You’ve done a great job with sorting the how – looks pretty good and reasonably simple.

    But the why is the motivating factor that supplies the how with resources in the form of deferred consumption – forgoing all the lovely consumption, holidays and big houses in order to invest for the long term.. Somehow the hyperbolic time discounting of humans has to be fought too.

  • 2 Neverland June 30, 2015, 10:10 am

    This is pretty much what I’m planning to do although I think the TER of 0.25% is a bit expensive

    The interesting point is that the current yield on these funds is below 1.5% so if you are going down this route you are going to selling a little over 2% of your units each year, which will takes balls of steel

  • 3 Fremantle June 30, 2015, 10:56 am

    I like these fund of funds, but they are a little UK heavy. In my ISA I choose to mix an VLS60 with a Vanguard FTSE Developed World ex-U.K. Equity Index to balance things out and will add Vanguard Emerging Markets Stock Index Fund to keep the EM segment balanced.

  • 4 Marine June 30, 2015, 11:42 am

    Great article! I think that you made a lot of things more understandable for a lot of people.

  • 5 Naeclue June 30, 2015, 1:10 pm

    When you say this:

    As retirement approaches in your 60s you could swap to LS40.

    Is that really what you mean? Is there no cost involved in swapping from one LS fund to another? In addition, at what point exactly should such swaps be done?

    I would have thought that a better strategy would be to start investing in LS80 then at some point also start investing in LS20, gradually paying more into LS20 until retirement, then gradually selling more of LS80 each year than LS20 so that the total bond content more gradually rises with age. I admit though that what I have described is still complicated to implement. Probably more so than buying a global equity tracker and a global bond tracker and gradually selling down more of the equity tracker in retirement.

    Building up a portfolio over time is I think far easier than taking retirement income from it. If you want to write another book about something, one that focuses a lot more on the retirement aspect would be pertinent. From what I have read most people do not have a clue how to do that efficiently, opting for high charging managed funds, ITs or IFAs to do it for them. Even those who seem perfectly capable of investing for retirement seem to make a pigs ear of drawdown.

    I think that a lot of the difficulties that people face in retirement comes from a fear of selling investments, or in spending money for fear of running out.

  • 6 Topman June 30, 2015, 1:41 pm

    Checking on Amazon, it looks as if the book is “slim” and is available for Kindle only, which latter point would rule me out were I to be interested, which I’m not.

    Also, by all means call me a cynic if you wish but I’m always wary of any tome which is tied to one product or one product provider. You don’t get to my age without getting smart, as my old granny used to say!

  • 7 TheSlowHare June 30, 2015, 1:48 pm

    Great article, thank you.

    @Neverland

    Just out of interest – what vehicle(s) are you considering instead and what is the TER? Thanks.

  • 8 Passive Investor June 30, 2015, 3:46 pm

    I am a huge fan of these funds. You certainly could buy the individual ETFs with TERs less than 0.25% but the automatic rebalancing is well worth the small extra expense in my book at least. I use Lifestrategy as my core portfolio and take slight extra tilts to small cap, emerging markets, property and the UK. However these complicating non-Lifestrategy investments are more for ‘fun’ or exist as legacy holdings rather than because I believe they are an important part of my investment plan.

  • 9 Mr and Mrs Geek June 30, 2015, 4:25 pm

    Yep, same here.
    We are using LS80 for almost 1year now and we can say that it is relaxing! 🙂
    We don’t have to worry..LS is just a layer, a abstraction facade, an investment tool to achieve diversity, auto-balance and exposure to the word financial markets! We love it!
    Great post!

    Cheers,
    Mr and Mrs Geek

  • 10 An Admirer June 30, 2015, 6:41 pm

    We have >300k in LifeStrategy; in fact, the vast majority of our pot. Possibly unwise to have so much with one provider but that’s the only real worry I have. Like “Passive Investor”, I get my kicks with tilts but sensible investing is LS all the way.

    Completely fire-and-forget. Perfect for normal people. It is to investments what Apple is to the masses (without the gold plated price tag). It just works.

    HSBC and L&G do similar products, but not as cheap as Vanguard.

  • 11 diy investor (uk) June 30, 2015, 7:48 pm

    Ermine, thanks and just to agree with your comment on consumption and to say Chapter 2 of my book is headed ‘Living Within your Means’ and looks at debt issues and consumer credit. The questions posed – do I really need this? Do I really want this? Can I manage without this?

    Naeclue, I suppose the point to be reinforced is that sticking with the Vanguard LS funds can be an option during the drawdown phase – why make life complicated? For those who may choose to do this, they will probably be looking to preserve capital, reduce risk/volatility and take a step or two down from the LS80 for example which may have been used during the build phase.

    Selling the LS80 and recycling the proceeds into, say LS40 seems to me to be a sensible move in your later years and should not incur too much expense.

    Thanks to all for comments so far – sounds like there are quite a few satisfied VLS investors out there!

  • 12 Dawn June 30, 2015, 9:01 pm

    Very good article with intresting comments.

  • 13 polpo June 30, 2015, 9:58 pm

    I looked at the Life Strategy range pretty carefully but in the end was put off by the home bias and the structure of the bond piece which seems unduly complicated to me (and contrary to the wisdom of luminaries such as Bernstein, for example). Having recently read Lars K’s book I found his approach more logical if one is ‘just’ trying to secure a market return and therefore went for a portfolio which simply comprising one equity fund combined with a minimal risk asset (or assets in my case). That ended up as VWRL and VGOV in my chosen percentages and, as retained relics, some NSI index linked certificates. Buy and leave well alone. The only drawback of the ETF I can see is that reinvesting dividends is not automatic which is one of the good features of the LS range. I would suggest that though that the LS products are a good deal better than trying to put together a portfolio of funds or ETF’s where the temptation to deviate from one’s plan must be high when rebalancing in tough market conditions.

  • 14 Captain_111 June 30, 2015, 10:30 pm

    Going from LS 80 to LS 60 to LS 40 seems risky. What if you made the switch at the wrong time?

    Passive investment has the key tenet of: do not time the markets. But this switching surely involves market timing. Otherwise, what if you switch at the wrong time and destroy a chunk of your wealth.

    Better option is to get an LS 100 and LS 20. Then shift a percentage towards your LS20 each year. Or LS 80 and LS 20, etc.

  • 15 John Boogle June 30, 2015, 10:42 pm

    Basically is common sense but if someone can learn, £3.00 is not that much to get the same information that one can get from the monevator.com, for free.

    Vanguard LS is probably the best thing available for the ones that really don’t want to lose time looking at the random walk.

    LS did rather well these days with Greece disturbing markets. Nothing special happening to the LS I have.

    Cheers
    John (not really) Boogle

  • 16 Damazia Ajayi June 30, 2015, 11:43 pm

    This is brilliant, thank you.

  • 17 Lostpupp July 1, 2015, 1:56 am

    I would really like some more comment/development on Naeclue’s comment. Maybe another blog post?

    In particular, I too am interested in the idea of buying LS20 and not selling LS80 during accumulation, vs selling LS80 to LS60 or LS40. My concerns are: is this too close to active trading or alpha seeking? Does this open itself to tinkering too much (i.e. i think markets are going down, thus I will buy LS20 going forward, or half LS20)? Would this actually defeat the whole purpose of simplification? What differential advantages would the auto rebalancing give me, if any, between the two options?

    Is it possible to get any figures as to the costs involved? Is it as simple as cost = .10% dilution levy + dealing fee, intuitively I would expect the not selling to be cheaper?

    In the non-selling option, would the fact you could only ‘move’ the asset allocation by how much disposable income you have to invest be a benefit to people prone to tinkering, forcing one to only make relatively minimal changes year-on-year?

    So many questions! Most of which seem suspiciously close to active trading… and potentially defeating the main benefit of simplification which this article tries to expose.

  • 18 PublishingGuru July 1, 2015, 8:12 am

    “I got money, now what?” is what you could name an alternative version of this book, with picture of someone looking puzzled at a funeral on the front cover. Let me know which version does best!

  • 19 Neverland July 1, 2015, 8:46 am

    @ Slowhare

    Basically half of the world market is the US and you can get trackers for the large cap US market around TER ~0.1%

    UK and European trackers are available similarly cheaply, Japan, developed Asia and emerging markets are available 0.2-0.25% TER

    My etf equity portolio has a TER c. 0.15% TER which I reckon saves me a worthwhile sum in fees and I rebalance myself once a year

    UK government bonds can be acquired direct eliminating any management fee

    Say you have £500k in lifestyle funds 50:50 (which doesn’t exist). You can get a TER of £1,250 you might be paying to Vanguard down to maybe c. £450 a year at best, so thats an extra £65 a month for you

  • 20 Mike July 1, 2015, 8:58 am

    Having been informed of this through Trustnet ‘Vanguard LifeStrategy 60% Equity fund no longer a second quartile performer’ as an investor should I be concerned about this?

  • 21 Aidan July 1, 2015, 9:55 am

    @Topman Why do Kindle e-books rule you out? Download the app on your PC/Smartphone/Tablet and you’re good to go; no Kindle required.

  • 22 magneto July 1, 2015, 10:09 am

    At the risk of seeming predictable, based on previous comments about LS daily rebalancing :-

    To maximise a rebalancing bonus (ignore risk for a moment), the investor needs to buy an asset class at the bottom and sell at the top!!! A half wave length!!!
    Daily rebalancing as used in LS funds works splendidly in rippling sideways markets (short half wave lengths) but can be a problem in trending markets.
    Longer rebalancing periods work better in trending markets (longer half wavelengths).
    With any rebalancing, unless picked at the top/bottom, the investor is moving funds from a winning asset class into a losing asset class.

    The other issue for the would be investor, is whether it may be prudent to hold some cash and/or real estate. It could be argued that present market conditions are not favourable to be fully invested in only stocks and bonds. For now it is assumed we are talking purely about risk financial assets?

    Faint praise then for LS funds for the novice investor. Could do worse!

  • 23 Topman July 1, 2015, 11:36 am

    @aidan post 21

    “….. were I to be interested, which I’m not.” ~:-)

  • 24 dearieme July 1, 2015, 12:34 pm

    “I think that a lot of the difficulties that people face in retirement comes from a fear of selling investments, or in spending money for fear of running out.” I’ve found this blog, and a few others, very useful fora on which to debate with myself what to do, informed by their reflective writings. Here for instance is the excellent Mr Pfau’s summary:

    http://retirementresearcher.com/7-risks-of-retirement-income-planning/

  • 25 The Rhino July 1, 2015, 12:46 pm

    @neverland

    how many etfs are in your portfolio?

    do you time your rebalances to coincide with when the etfs spit out their income?

    are they all vanguard?

    i agree that 0.1% prob is worth going for, 1k a year on a million £ pot

    i am tempted

  • 26 Neverland July 1, 2015, 3:23 pm

    @Rhino

    Lols for over-estimating the science of my approach. The bulk of the rebalancing gets done on 6 April each year as new ISAs can be subscribed and I just do the lot then

    I use accumulation etfs right now for max laziness, this will switch to income etfs when its fun time

    I have five for equity:

    – US large cap
    – Europe large cap
    – Japan large cap
    – Emerging large cap
    – Developed Asia Pacific large cap (you could probably drop the last one or do small cap instead)

    (i do small cap with a legacy active holding)

    So I am completely naked to the huge potential of the Canadian stock market….hey ho

  • 27 The Investor July 1, 2015, 5:08 pm

    @magneto — Please stop raising this issue of daily rebalancing on every LifeStrategy article we post unless you have something new to bring to the table — definitive, linkable evidence that it is a meaningfully and probabilistically losing strategy (not DIY spreadsheet sums using extreme movements to prove the point) — as I am a bit fed up with having to write the other side of the argument every time.

    To be clear, it’s not that I think you’re not entitled to your views, or that I didn’t welcome initial views on this subject. It’s just you state your objection as if it’s a firm, known and provable fact, rather than a personal conjecture, and it means that I have to write a load of commentary every time to make clear to other readers that it’s not.

    Also, as I’ve said many times, even leaving aside performance issue, the LifeStrategy fund is a specified amount of equity/bond exposure, not, say, the LifeStrategy 63% this Tuesday but maybe 59% next Wednesday fund. Even if your criticism of daily rebalancing was meaningful in the context of most people’s investing – which I don’t believe it is – then to preserve the fixed equity/bond allocations (a big benefit of LS) would still require daily rebalancing.

    This post isn’t meant angrily etc, it’s a drawback of the blog system really as a discussion forum. People who want to read more on rebalancing might want to consider starting with our previous discussion here: http://monevator.com/how-to-chooose-total-world-equity-trackers/#comments

    Cheers! 🙂

  • 28 Ivan July 1, 2015, 6:05 pm

    ‘Having been informed of this through Trustnet ‘Vanguard LifeStrategy 60% Equity fund no longer a second quartile performer’ as an investor should I be concerned about this?’ I saw that Trustnet had downgraded them . Can someone explain this please ?

  • 29 magneto July 1, 2015, 7:03 pm

    @ The Investor

    Thanks for the blast!
    It is hot today.

    Thought the concept, rather than tedious repetition of spreadsheeet data might assist to create that lightbulb moment.

    Nothing is perfect, we have to choose and accept compromises. So LS funds are a useful addition to the investment armoury and can have a role.

    Your goodself will hear no more on this subject from this investor unless invited.

  • 30 The Rhino July 1, 2015, 7:26 pm

    @neverland

    i didn’t think there were many acc type etfs, almost all seem to be inc.

    which ones have you found of the acc variety to cover those 5 bases?

  • 31 Gaz July 1, 2015, 9:49 pm

    Is there a calculator for seeing which Fund Platform is best for you? Even with Monevator’s comparison table, I’m having trouble deciding which one is best for me to invest in Vanguard LS funds.

    I’m either going to invest 20k lump sum and leave it, or invest a smaller amount (maybe 5 or 10k) and then drip feed £500 (or so) per month. With the Broker’s table, do I just need to look at the Dealing:Funds column for regular drip feeding, or will they count under the ETFs/Regular Investing column? I’m having a hard time trying to understand if investing in LS counts as either a fund (which is what I think it is), or is each trade counted as an ETF?

    Right now, I’m weighing up the costs between Cavendish or Charles Stanley to see which would be better for me, but please correct me if I’m looking at the wrong brokers for what I want to do. Cheers

  • 32 The Investor July 1, 2015, 10:25 pm

    @magento Hah! Fair cop. Cheers. 🙂

  • 33 Yabusame July 1, 2015, 10:54 pm

    I,m invested, via an ISA, in LS100 Acc. One thing that still confuses me is this statement from the prospectus:
    “Holders of Income Shares are entitled to be paid the distributable income attributed to such Shares on any relevant annual allocation dates.
    Holders of Accumulation Shares are not entitled to be paid the income attributed to such Accumulation Shares, but that income is automatically transferred to (and retained as part of) the capital assets of the relevant Fund on the relevant annual accounting dates. This is reflected in the price of an Accumulation Share.”
    http://doc.morningstar.com/document/15897418d4f5a14eb93c214896a54499.msdoc/?clientid=alliancetr&key=28d3238a1a3b7047

    As an Acc holder my ‘divis’ don’t come to me but are transferred to the capital assets of the fund. What does that mean exactly? I thought the dividends would be distributed to my holdings as additional shares in the funds. Comments?

  • 34 Passive Investor July 2, 2015, 4:36 am

    @yabusame. It just means that the accumulation units are each worth a bit more after income distribution.

    Value of each unit = capital value of fund / total number of units

    Imagine income and accumulation version of a fund with 100 units worth £1 each and a yield of 2%. After the dividend has been paid the income unit investor will have £2 cash plus 100 units worth £1 each (ie £102 total) the accumulation investor will have 100 unit worth £1.02 each (ie £102 total). It’s a matter of convenience and whether the investor is accumulating or deaccumulating. The tax position is identical for the funds as the accumulation unit investor has to pay income tax on the notional £2 of income

  • 35 Passive Investor July 2, 2015, 4:44 am

    PS A possible advantage of accumulation unit for accumulating life strategy investors is that there is no dilution levy paid on the £2 dividend. An income unit investor who buys more income units with the £2 dividend would pay the dilution levy and possibly dealing fees too depending on the platform.

    PPS @magneto / the investor. The rebalancing algorithm is proprietary. Ie Vanguard don’t publish the frequency or rules they use. My hunch is that under most reasonable scenarios of volatility the rebalancing will add a few basis points to the LS fund’s growth (due to the buy low sell high effect).

  • 36 Yabusame July 2, 2015, 6:48 am

    @Passive Investor, thanks for the explanation. I assumed it worked that way but when the distribution date came and went recently I didn’t see any change in the value of my holdings so I was wondering why since I am in the wealth building stage and every bit of growth I can get… Etc.

  • 37 Passive Investor July 2, 2015, 7:17 am

    @yabusame

    I don’t have any professional knowledge of the internal workings of the LS funds but I assume that some income from the 1000s of securities is received nearly every day and that this is used to buy more securities ?daily ?weekly.

  • 38 The Investor July 2, 2015, 10:05 am

    The following two articles may help regarding Accumulation versus Income units:

    http://monevator.com/income-units-versus-accumulation-units-difference/

    http://monevator.com/accumulation-funds-dividends/

  • 39 Neverland July 2, 2015, 12:35 pm

    @ rhino

    I mimic acc units by using automatic dividend reinvestment where its cost efficient, which works or not depending on the platform you use

    I have calculated it costs me about ~0.02% per annum in additional fees

  • 40 Topman July 2, 2015, 1:30 pm

    @TI post 32 – “@magento” [sic]

    Hope he doesn’t see red! ~:-)

  • 41 Mikkamakkamoo July 2, 2015, 1:52 pm

    A good article (and comments) about a strategy I’ve suggested to a number of friends and family as a good starting point when we inevitably get to talking about money/pensions/investments, namely:

    – Invest in LS via an ISA/SIPP with an online broker* (LS funds have got to be better than them doing naff all no matter what minor flaws they may have); and
    – Read Monevator blog regularly to help them become ‘engaged’ with the whole investing/personal finance thing

    The key for me is getting them engaged. If they don’t then they revert to the ‘live for today’ mentality that is so prevalent in the UK, but the ones who ‘get it’, well…

    And for those that can’t even be bothered to expend less than 1 hours effort, I tell them they’ll either have to accept they’re lazy and cough and pay for a financial adviser or promise they won’t whinge when they have to keep working till they’re 73!!

    * I usually suggest HL simply because of how easy it is to use and I don’t want them to fall at the first hurdle. Once they understand a bit more about investments they can shop around themselves for a cheaper platform.

  • 42 Dragon July 2, 2015, 8:58 pm

    On the whole acc v inc units, I’ve often wondered if the acc units are worthwhile. Thinking being:-

    acc – your “income” is “retained” in the units. To my mind, that’s a bit like saying “it will pump up the unit price short term, but unit prices go up and down, so you may or may not get to keep the benefit of that increase in price due to the “retained” income. Oh, and you don’t actually have any more units and if capital values go down, you’ve lost twice – once through capital loss and again through no income”.

    inc – “you get paid the cash, so you still have your original holding, value of which could go up or down, but now, in addition, you have some ready cash which you can spend or buy more units with. If you buy more units, you get more income. That way, even if capital values go down, you still get the income stream”

    Am I wrong here?

    If not, then (bearing in mind dealing costs for acquiring more units), it seems to me inc units would be more flexible, as you can decide either to reinvest or take the income. That way, come retirement, you don’t need to sell down capital if you don’t want to as you already have an income stream, but if you have acc units, you either have to sell or are forced to face issues like possible conversion costs and/or market timing issues?

  • 43 Dave July 3, 2015, 12:43 am

    What’s the capital gains tax position on Vanguard Life Strategy?

    As an example say you bought 200,000 worth an it went up 8pc in a year that’s now worth 216,000, should you sell 10,000 worth and use that to buy a different similar product eg Standard Life MyFolio? Or is it that these are not capital gains tax liable as tax is already paid by the company? (This is something I have heard from someone else, but not sure I believe it!)

    Over a few years a large sum could easily generate a massive CGT bill!

  • 44 magneto July 3, 2015, 8:17 am

    @ Dragon

    Think that is an intriguing, probably correct, but maybe slightly biased summing up.
    Add in the nightmare of calculating tax due on any unwrapped holdings and life can be tricky for acc. I had thought, perhaps like others, rather naively until recently, that acc could defer income tax, converting income into capital gains, but Monevator put me right on that one.
    But there are other issues as the above links highlight.

  • 45 Neverland July 3, 2015, 10:23 am

    @Dragon

    Acc units are a neat solution in the accumulation phase where:

    – there is income tax to be paid otherwise

    – small fund with platform costs for reinvestment of divs

    Income units are better in retirements obvs, but the cost of switching between the two won’t be much if done once

  • 46 Passive Investor July 3, 2015, 11:02 am

    @neverland @dragon You do still have to pay income tax on the ‘internal’ income that is rolled up in the value of the accumulation units. See article on monevator or HMRC web site
    @dave you do need to pay CGT You should be looking to sell around £140,000 as 8% gain on this figure is around the annual CGT allowance. It is complicated as you can include any dividend income as part of the purchase price. Very clear explanation on HMRC website. The one thing i can’t get from my account is how different the fund you buy has to be to avoid the 30 day rule. Eg if you sold Vangusrd ftse all share could you buy i shares FTSE 100 or iShares developed world? – no one seems to know the answer

  • 47 ivanopinion July 3, 2015, 11:54 am

    @Passive Investor
    “The one thing i can’t get from my account is how different the fund you buy has to be to avoid the 30 day rule. Eg if you sold Vangusrd ftse all share could you buy i shares FTSE 100 or iShares developed world? – no one seems to know the answer”
    I do! The 30 day rule relates to sale and repurchase of the same share (and for this purpose, units in a fund are a share). So, the 30 day rule does not apply if you sell Vanguard FTSE All Share tracker fund and immediately purchase, say, Vanguard FTSE 100 tracker fund. Nor if you purchase Vanguard FTSE All Share ETF (as the ETF is not the same “share” as the OEIC). The legislation has no wording requiring you to go beyond the exact same share.

    Indeed, I’m satisfied that it does not apply if you sell acc units of a fund and use the cash proceeds to buy inc units of the same fund, because different classes of share are treated as different shares. (However, if you ask the fund manager to convert the acc shares to inc shares, this is not treated as a disposal, as it is considered to be a reorganisation.)

    There are loads of ways not to be caught by the bed and breakfast rules. eg, sell fund and spouse immediately buys the same fund.

  • 48 Passive Investor July 3, 2015, 12:51 pm

    @ivanopinion. Thanks very much for that – are you able to give me a view on how confident you are about or whether you have professional tax expertise?
    It would be great news if you are right. I am concerned partly as in the US there is a rule that the security must not be “substantially identical”. Also it seems like such an obvious loop hole for HMRC to close.

  • 49 helforpirate July 3, 2015, 4:57 pm

    @passiveinvestor Ivanopinion is definitely correct. You can find the details in the CGT manual here http://www.hmrc.gov.uk/manuals/cgmanual/CG51560.htm

    The mechanism itself is accomplished by matching the sale of shares with the exact same shares acquired in the future – so it only works if the shares are identical i.e same company and same class.

    The US rule are as usual much more severe!

  • 50 magneto July 3, 2015, 5:00 pm

    To look at another aspect, that of geographical allocations, which for us is a continuing question :-

    Think it was The Accumulator that I took particular note of possibly in regard to the ‘Slow & Steady :-

    “Instead, we invest in the most diversified equity line up available – the World Stock Market, which currently looks something like this:
    Region Allocation (%)
    North America (US & Canada) 52
    UK 8
    Europe 17
    Pacific inc Japan 13
    Emerging Markets 10
    Source: iShares MSCI All-Country World Index (ACWI) ETF”

    This is not a criticism but with the fund in this article we have :-

    Equities Allocation
    FTSE Developed World (ex UK) 19.4%
    FTSE UK All Share 10.0%
    US Equity 5.0%
    Emerging markets 2.9%
    Europe (ex UK) 1.5%
    Japan 0.8%
    Pacific (ex Japan) 0.4%

    Total 40%

    If we adjust for % of stocks my best guess is we are looking at :_
    Equities Allocation
    FTSE Developed World (ex UK) 50%
    FTSE UK All Share 25%
    US Equity 12.5%
    Emerging markets 7.5%
    Europe (ex UK) 3.75%
    Japan 2.0%
    Pacific (ex Japan) 1%

    Now there is some overlap here which may explain some of the differences but not all. The Asia/Pacific is particularly interesting.

    This aspect of investing can confuse when I read in the IC only today that the WMA (formerly APCIMS) balanced index is :-

    UK 35%
    International 30%
    Bonds 17.5%
    Cash 5%
    Commerc Property 5%
    Hedge Funds etc 7.5%

    So UK here is about 54% of stocks.
    Looking at the above we get for UK 8%, 25%, 54%.
    The advantage of overweighting UK may be the maximising of currency swings to the investor’s advantage, but beyond that am baffled.

    Maybe there is no right or wrong with this geographical allocations business, but as The Accumulator has pointed out don’t keep changing allocations.

    Would be very interested indeed to see how others tackle this issue.

  • 51 The Investor July 3, 2015, 5:41 pm

    @magneto — Well, one comment is I wouldn’t think of overweighting domestic equities as a route to maximizing the benefits of currency swings. On the contrary it’s more about lowering currency risk, which can have a big impact particularly late in your life when you’re drawing down your portfolio and spending it on stuff you buy with your own currency. (If anything I’d expect it to reduce total returns, but these things aren’t totally knowable in advance, just best guesses).

    If you want a lot of overseas exposure but are wary of currency risk you could use a hedged ETF for a portion of your overseas exposure.

  • 52 Passive Investor July 3, 2015, 6:19 pm

    @ivanopinion @helforpirate. Thank you both very much, this may make life a little easier in due course

  • 53 The Accumulator July 4, 2015, 11:49 am

    @ Dragon – mathematically acc units are at no disadvantage. It’s wrong to think of accumulating dividends as just pumping up the price. Yes, inc units are more flexible if you want to live on the income. More painful if you want to reinvest. Remember dividends can be cut too!

  • 54 david July 4, 2015, 11:50 am

    @ Mike – best to ignore the roller-coaster performance analysis from Trustnet, see this:

    November 03, 2014: Vanguard LifeStrategy 60% Equity fund becomes a top quartile performer
    http://www.trustnet.com/Fundswire/News/vanguard-lifestrategy-60-equity-fund-becomes-a-top-quartile-performer/559763

    December 01, 2014: Vanguard LifeStrategy 60% Equity fund no longer a top quartile performer
    http://www.trustnet.com/Fundswire/News/vanguard-lifestrategy-60-equity-fund-no-longer-a-top-quartile-performer/566647

    there’s always one fund that has recently done better than your current one, then that top performer gets replaced by a different top performer, it’s noise basically.

  • 55 ivanopinion July 4, 2015, 3:40 pm

    @Passive Investor
    I’m confident there is no “substantially similar” rule, or anything similar. It is a black and white test: same share or not?

    I agree, it is a huge loophole and they could easily close it or at least make it a much smaller loophole. But it would be hard to eliminate all loopholes, eg, sell units, then buy an option to purchase the same units at the same price, in 31 days time.

  • 56 Rowan Tree July 6, 2015, 2:25 pm

    Just back from holiday and wanted to say thanks for this article. Regular reminders about simple investing are good for people like me.
    As a regular saver, I was persuaded to invest in a stock market PEP in the late 1990s. Trying to get good information and not fall for marketing was difficult in the early years. I fell for everything. Only since discovering Monevator via SLIS have I really been able to get our investments into sensible order, and I restrict my reading to bloggers/forums who will not lead me up the garden path.

    No one I know in everyday life is investing (other than blindly letting money go into the company pension scheme!) and I can understand why – even after choosing your Vanguard LS, you have to handle your platform – some more tricky than others, and then be calm while the markets do their thing. I’ve lasted through investing in the dot.com bubble, windfall shares becoming worthless, two major stock market crashes, ridiculously high charges. On the whole, I would say that the cash part of our savings has been an easier ride (at least we got our ISA cash back after the Icelandic banking crisis!).

    It’s been an education I guess (always worth paying for) and the money is still there, perhaps even has grown a bit!
    Now for deaccumulation….. time to have some fun (low cost, outdoor, freedom!)

  • 57 Tom Thumb July 6, 2015, 10:03 pm

    I have over £1,000,000 in Lifestrategy 60. I read widely before making this decision and it’s been a rocky ride since I invested (April 2015). However, I’m no expert and not sure whether there would be a better option for this sum, if anybody could suggest other options?

  • 58 oldie July 7, 2015, 11:22 am

    Hi
    Some would say a nice problem to have.

    I believe….. that when you are young you can’t afford to take risks. When you are old you do not need to take risks.

    I am sure someone will offer, for a price, to help solve your problem.

    enjoy.

  • 59 Tom Thumb July 7, 2015, 2:51 pm

    @oldie Yes, I can’t argue with that! Certainly, I’m very fortunate. I’ve paid for advice before, but I’m never sure what to trust and I thought I would ask for opinions from those who stand nothing to gain by giving their advice. I can understand why people would think that I shouldn’t be getting anything for free though.

  • 60 oldie July 7, 2015, 5:17 pm

    Hi
    My thoughts on your question are
    1. do you have a reasonable chance of meeting your objectives using the strategy you are using?
    2. are you prepared to be passive and patient over the timeframe you are investing in?

    My view is don’t change anything unless you have a clear reason.

    Other approaches could include different a asset allocation, and more hands-on, etc. More equites, less bonds, smaller companies, REITs, plenty of options.
    cheers

  • 61 Tom Thumb July 7, 2015, 5:27 pm

    Thanks for your reply. Yes, I’m looking at a long term investment but would like to generate some income. I don’t have the knowledge or expertise to take a more active approach and as I’m new to investing, it’s not easy to watch the dips (it’s lost about 6% since I started!). However, I know that this is all part of the process and will have to remain patient.

    Monevator is a great site for gathering information about practical investing for those who want to take more control over the process. I could pass it all over to UBS for example!

    Thanks again.

  • 62 Passive Investment July 7, 2015, 9:40 pm

    @tom thumb.

    A detailed answer to your question particularly from an advisor (who would probably want to charge you 1% or £10 K for the advice) would be “it depends on your age / tolerance of risk / other assets / any dependants / desire for bequests / other income from side work or annuities or pensions”.

    In brief summary though you are on exactly the right track and in fact have played a blinder in my opinion. You have diversified across markets, have kept costs down to less than 0.25%, taken a balanced approach to risk (60:40 equities to bonds) and have chosen the most customer friendly company in the world to trust your savings with. You have automatic rebalancing included in the above.

    You don’t have to worry about generating income in my view. Just take 3.5% a year and forget. The real challenge you (we all) have is managing your psychology in a down-turn. Best to tune out the noise and only look at your investments rarely. Write down an investment plan and stick to it religiously.

    There is loads of wise advice here on Monevator, on the Vanguard web sites, on RickFerri.com, Mr moneymustache, retirement investing today, and bogleheads.com. If you aren’t aware of it already look out for the Saturday morning blog roll on Monevator.

    Having invested through all the major down turns in the last 20 years I know that the most important thing is managing your own psychology “stay the course” as US index investors like to say.

  • 63 Tom Thumb July 8, 2015, 12:02 pm

    @Passive Investment

    Thank you for your comment. I’m 40 so have gone for a basic age t0 bonds calculation in choosing which fund to purchase.

    I will show my wife that you think I have ‘played a blinder’ later as she would rather have given this to an investment banker to manage. I do need to take some income from this pot at present so your suggestion is interesting.

    I will also check some of the other websites you’ve listed. I haven’t read much negative about using the Vanguard route as yet but, as you say, it’s managing your own psychology that is important.

  • 64 oldie July 8, 2015, 2:57 pm

    Hi
    Further thoughts,
    You are right to focus on the investing side. What you are doing is straight forward and easy to understand. If you can also sleep at night…. then great

    Don’t forget that with the sum of money you are dealing with that tax efficiency is also important. Capital gains, inheritance tax, income,..But don’t let it interfere with investing issues. Lots of help and info out there.

  • 65 Passive Investor July 9, 2015, 12:06 am

    @tom thumb Thanks for that. You could also read / suggest your wife reads

    Smarter investing by time hale
    the little book of commonsense on mutual funds by jack bogle
    Or one of the books by rick ferri

    On the sums you mention you really have saved a lot of money in charges.

  • 66 Ivan August 21, 2015, 9:30 am

    This is a straightforward question frm an unsophisticated invester with no bias or agenda . Why is lifestategy 40 so
    Poorly rated by the so called expert advice sites

  • 67 IanH November 2, 2015, 8:12 pm

    [Not sure if comments will be relevant on older post but anyway…]

    I am taking up the self investment challenge, and moving my SIPP to manage it myself. So I have spent a lot of time now reading and preparing my portfolio plan. Still not there yet, but I can’t find much reason not to go down the LifeStrategy route. I even went to the length of calculating what a DIY version of the LS funds would cost, and taking into account platform fees the LS80 fund worked out 0.70p more expensive to do myself for the sum I have to invest! And that’s without estimating rebalancing costs…

    I’m doing similar spreadsheet antics on several of the monevator lazy portfolios, and wanted to check out the Tim Hale one specifically. On balance I feel it is a bit complicated, and so have looked at Lars Kroijer’s rational portfolio as well. The latter has only 3 or 4 funds and for a mid-risk portfolio and works out with a OCF around 0.28%, so near the LS fee level, but practical to implement with only a few ETFs.

    However, the LK portfolio I put together relies on the Whole world Vanguard fund [Vanguard FTSE All-World UCITS ETF] & when I consulted the Vanguard prospectus it states in the appendix about this fund that “An investment in the Fund should not constitute a substantial proportion of an investment portfolio and may not be appropriate for all investors.” which gave me pause for thought. The only other Vanguard (IE) product with this warning is the Vanguard FTSE Emerging Markets UCITS ETF so I presume this is something to do with the general risk indicators associated with these two products. A mid-risk LK portfolio would have 50-75% in this fund – which seems to clearly go against the ‘health warning’ from Vanguard.

    So for peace of mind I’m again draw to the LifeStrategy products (which work out cheaper anyway) unless I can come up with a clear reason not to. The only significant negative factor I can think of at present is the UK home bias in the LS fund, but I’m prepared to give Vanguard the benefit of the doubt on this, especially as I think anything more complicated than the LK approach will expose me to endless tinkering and uncertainty.

    Does anyone have a view on the Vanguard ‘health warning’ in respect of using this fund as a major part of a portfolio like the LK one?

  • 68 The Investor November 2, 2015, 9:57 pm

    @IanH — I haven’t seen such warnings before, but I don’t really do funds myself. My co-blogger is your man, so perhaps he or one of the passive investing gurus will still be subscribed to get comments on this older post and can come along to give us some insight. It does sound somewhat boilerplate though.

    Lars himself has advocated a one-fund approach: http://monevator.com/why-a-total-world-equity-index-tracker-is-the-only-index-fund-you-need/

    Personally, I wouldn’t, and I’d be happy to pay higher costs to avoid doing so: http://monevator.com/assume-every-investment-can-fail-you/

    All just FWIW, not personal financial advice.

  • 69 IanH November 2, 2015, 10:59 pm

    @TI yes, I think the ‘health warning’ does look like a bit of boilerplate too, but it would be interesting to hear some of the passive investors views on this.

    Thanks for the heads up on the other two posts – I read both a while back, and I feel the same about the risk of having everything in only one place. Lots of people seem to do it though, especially with the LifeStrategy funds.

    I’ll have another trip round the spreadsheet block with more relaxed perspective on cost – I’ve reduced these by at least 2% by deciding to self-manage my funds anyway so scratching around for a couple of 1/10ths of a % off 0.3% is hardly something to get worked up about in comparison… though weren’t you (or TA) just talking about ‘analysis paralysis’ just the other day?

  • 70 ivanopinion November 3, 2015, 8:59 am

    I suspect the warning is a reflection of the “orthodox” view that most investors should spread their investments in bonds as well as equity and that for the portion in equity, overseas equities are riskier than domestic. And emerging markets are riskiest of all.

    A better warning would be that the fund should only constitute a significant proportion of an investor’s portfolio if the investor fully understands the constituents of the fund and its risk profile. If you want exposure to the markets that the fund invests in, the only reason not to get this exposure by investing in this fund is the tiny risk the fund might go bust.

  • 71 The Investor November 3, 2015, 9:21 am

    If you want exposure to the markets that the fund invests in, the only reason not to get this exposure by investing in this fund is the tiny risk the fund might go bust.

    @ivanopinion — Agreed, and well put. To be clear for those who don’t follow my link, I’ve got nothing at all against this or other global trackers as a strategy for passive investors. 🙂 It’s just the very very small risk of disruption to access to your cash or even loss from being all-in one fund that I’d caution against.

    I think that once you’re into six-figures let alone at or aspiring to get to seven (or whatever sum is significant relative to your annual income/savings) then it is safer to spread your money between multiple funds/platforms. Just in case.

    Many of us went through a tough financial crisis in 2008/2009. I say let’s not to forget the lessons. 🙂

  • 72 Passive Investor November 3, 2015, 10:06 am

    @ Ian H. I don’t have any answer to the warning you spotted but it was striking I agree. Wouldn’t but me off the fund subject to the comments above. Two related comments.
    – the automated rebalancing in LS funds is extremely valuable in my view and probably worth quite a few basis points of charges. There are good data showing that rebalancing increases returns significantly (though the particular pattern of volatility will determine the exact excess return figure).
    Aside from the expense and time is is very very difficult psychologically to rebalance strictly (I find at least)
    – one issue for ETFs is that there minute by minute tradability is potentially problematic. There is a psychological risk that an investor might be attempted to cut losses during a sharp down turn. You won’t necessarily know whether you can resist this until it happens. Also practically in sharp downturns liquidity becomes an issue and there are lots of instances of ETFs trading way below asset value when the market falls.
    I am a great fan of LS funds and although I do have some ETFs generally I prefer funds for the reasons above.

  • 73 IanH November 3, 2015, 2:25 pm

    @TI @IvanOpinion. I will take heed of the cautionary note about being too heavily investing in one fund. As IvanOpinion says though, and I agree, total calamity is a tiny risk. Also I’ve read jlcollingsnh view on the perceived risk of being invested in one LifeStrategy fund, which is that any near-apocalyptic level risk is mitigated by the comprehensive recovery plans a group like Vanguard has in place, and that as an investor via a fund you are not in fact exposed to risk at the level of the fund platform or investment group as the share ownership is in the actual companies themselves, so globally diversified. Maybe this view is incorrect though. I guess if there was a complete cyber attack wipeout across the world, which is my guess as the most likely near-apocalyptic disaster scenario, it would take some almighty efforts to work out who had what, but even then I believe a gradual recovery would emerge. Actual apocalypses can’t be survived, by definition…

    I guess I am also a bit sanguine as only 15% of my total assets would be exposed to this risk – if I take into account my house and existing pension that I am drawing. In a few years though I am considering selling the house and using the investment from that to rent in a more expensive part of the country. Now that will be something that will take nerve and I’m not sure I will be able to stomach it.

    @PassiveInvestor. Thanks for the point about the importance of automatic rebalancing. I did know about this but I did not appreciate just how important it is. I will follow that up. Also for your point about the psychology of ETF investing. I’m not sure I really follow you here – I can’t see why there is greater psychological risk of pulling out of an ETF compared to an index fund investment, unless it is simply the immediacy of the transactions that can be made. Fortunately, I think I am the type that is happy to invest and let lie through good or ill.

    Interesting that Lars Kroijer has just posted today on the very topic of risk premuim – hope he stops by.

  • 74 Passive Investor November 3, 2015, 3:07 pm

    @IanH. By ‘psychology’ of ETFs I was trying make the point that a security that is instantly tradeable almost encourages bad investor behaviour. In the kind of scenario where the market drops 5-10% by lunchtime (before recovering a bit the next day say) there is much more chance of losing your nerve and selling than there is with a mutual fund that is priced every 24 hours. Of course those with iron discipline needn’t sell an ETF in these circumstances but it is very very difficult to keep your nerve when things are going badly wrong in my experience….

  • 75 The Investor November 4, 2015, 2:24 am

    @IanH — There’s a point on the spectrum between “ready access as usual to your capital” and “Mad Max Apocalypse”. 🙂

    It’s hard to imagine a situation where society goes on somewhat like today and yet you don’t get your money back from a Vanguard fund, I agree. (It’s a non-zero risk, though).

    But it’s not so hard for me to imagine situations where for one reason or another in a period of turmoil / in the aftermath you don’t get access to your money for days, months, or even perhaps a year or two.

    That might not matter to you, especially if the fund is only 15% of your assets (which is sort of my point, after all!) but I will never ever put all my eggs in one basket (fund company, platform, vehicle etc) on this earth. Ever.

    I’ve seen/read far too much to do that.

  • 76 IanH November 4, 2015, 1:59 pm

    @TI OK – I think I agree with your perspective. It can only make sense to take steps to further minimize risk when there is little or zero cost and effort involved, such as diversifying over funds and platforms – why would you not choose to do this? On the other hand if a sub-Mad Max situation arose limiting access to your money in one provider’s funds for a period running into years, I imagine the issue would affect all similar investment vehicles – all the providers are likely to be in the same boat. The only way round this I imagine might be to invest through providers in other countries and juristictions (e.g. ex-EU) – I suppose this is exactly what very wealthy individuals have to do for security. Seems overkill for ordinary Joe public like me though – but your point is well made.

  • 77 The Accumulator November 7, 2015, 8:20 am

    The research I’ve read on rebalancing is very mixed in terms of a rebalancing premium. It’s highly dependent on the pattern of returns and timeframe examined by the study. Rebalancing is still a good thing, however, just best to be thought of as risk management tool – preventing asset allocation drift to something more risky than you are comfortable with. Anything above that is a very welcome bonus. Agree very much with PI’s comment’s on the psychology of portfolio management.

    Personally VWRL is exactly the kind of ETF I’d be happy to have in bulk – globally diversified and composed of many constituents. I find that every prospectus I’ve ever read contains enough legal latitude to scare the pants off me if I let it.

  • 78 Passive Investor November 7, 2015, 10:41 am

    @accumulator. I agree absolutely with what you say about the empirical data and the rebalancing premium. An additional complicating factor is the fact that Vanguard’s rebalancing algorithms are not in the public domain. However….
    Rebalancing will produce gains as far as it involves buying high and selling low. It will produce losses (relative to market beta) as far as it involves costs and loss of momentum gains. My quite strong prediction is that on the average (provided costs are minimised) the former will outweigh the latter. Still this is not a very scientific line of reasoning and as you say rebalancing is mostly about riskmanagement.

  • 79 Passive Investor November 7, 2015, 10:48 am

    Buying low and selling high! Line 8

  • 80 Retired Investor February 16, 2016, 10:30 am

    I’ve been transferring 50% my retirement fund to LS100 over the last year as it seems to be a simple cheap and stress free approach to investment. However I am beginning to question the cost of using this fund.
    What concerns me is the difference between the yields of LS 100 and its underlying funds. LS 100 currently yields 1.4%, whereas the weighted average yield of its component funds is 2.54%. A difference of over 1% seems a lot to keep the fund balanced, and is likely to considerably reduce the longevity of my fund during draw down.
    I would appreciate others views on this.

  • 81 PR March 4, 2016, 2:39 pm

    I appreciate that LS100 gives you a lot more diversification (not just the UK) however the yield is only 1.52%. Legal & General’s UK Equity Trust yields 4.06% and the TER is 0.01% compared to LS100’s 0.24%.

    Please could you explain why the LS100 would win over L&G’s UK Equity Trust?

  • 82 Passive Investor March 4, 2016, 3:25 pm

    They are two completely different investment funds.

    If the fund you are referring to is what I think it is it is a 100% UK high yield tracker with a strong weighting in large FTSE 100 stocks. ie it is ideal if you want a very high income but is very undiversified even within the FTSE 100. No international diversification at all. Much cheaper to run presumably.

    The Vanguard 100 fund is invested in 1000s of stocks across the world including emerging markets. The yield is low. The higher TER seems good value to me considering the complexity of the fund and the re-balancing benefits

    Remember low yield does not equal low return and may actually be advantageous from the tax point of view.

  • 83 PR March 4, 2016, 3:44 pm

    Thanks for your reply.

    I have some funds to invest monthly in an ISA, so tax is not an issue and as I am a novice, I’m a little unsure between choosing a vehicle such as the LS100 or something more straight forward like a FTSE All Share tracker (L&G). I have a way to go to retirement (late 40s) and I like the diversification of the LS100. Would you mind explaining your comment that a low yield does not equal low return?

  • 84 Passive Investor March 4, 2016, 4:03 pm

    Shares aka equities aka stocks basically represent ownership of a share of company’s future profits. These future profits can either be directly returned to the share holders as dividends (ie yield) or the company can use the money to grow (for example by setting up a new factory). In this latter case the profits increase the value of the company and therefore the value of a single share. So shares are often divided into growth stocks and income stocks. Income stocks tend to be companies in mature markets with little opportunity for growth – utility companies / tobacco companies etc. Growth stocks tend to be in new industries with the archetypal example being internet start-ups 20 years ago. Leaving aside the issue of the value premium, over the long-term the return on an investor’s capital should be pretty much the same whether they are invested for yield or growth. (Markets would have to be very inefficient indeed for this not to be the case). This is what I meant by “low yield does not equal low return” – it just means that profits are returned to investors as company growth rather than dividends.
    I like the LS 100 fund too! You need to be a bit careful about the fact that it exposes you to some exchange rate risk and make sure you are happy that the home bias is sufficient for you. (I take a bit more of a home bias but this approach isn’t necessarily the right thing)

  • 85 PR March 4, 2016, 10:06 pm

    After looking at the figures on the LS100 fact sheet, I too would prefer to be a bit more UK bias, so maybe a 50/50 split might be on the cards.

    Thank you so much for taking the time to explain – much appreciated!

    All the best.

  • 86 Ivan March 5, 2016, 3:12 pm

    Forgive me for asking ( the question may have been posed already) does anyone connected with this site have a vested interest in Vanguard. I ask as I was an ex-pat for many years and a very savvy accountant set up a site and literally pounced everyone someone posted about transferring pension out of UK. Vanguard are huge in UK and still trying to establish a base here. This email isn’t meant to be offensive rather a request for clarification.

  • 87 The Investor March 5, 2016, 3:21 pm

    @Ivan — No. In fact, they haven’t even advertised. (My ad rep at the time claimed for a year they were close to doing so, but certainly nothing ever came of it). So we’ve had zero support for our regular highlighting of Vanguard’s excellent products.

    From a purely financial perspective, this site would be far better off writing about all the active funds that actually do advertise. 🙁

  • 88 Ivan March 5, 2016, 3:25 pm

    Good to know. Thank you

  • 89 Passive Investor March 5, 2016, 4:20 pm

    @Ivan. I am not connected with this site or with Vanguard. I am a big fan of both though having learnt a lot about investing from Monevator and entrusting Vanguard with my life savings. The link in the post today (5/3/2016) suggesting that Vanguard have lost their way a bit (bureaucratic etc) was interesting but I would still put them in a different league from their for-profit competition

  • 90 CisforV April 10, 2016, 12:33 am

    .

  • 91 Tomcat May 24, 2016, 1:50 pm

    First of all, I just wanted to say this is a terrific email – full of informative information and friendly posting.

    I have long been sold on the idea of index investing and have a reasonable size portfolio of funds. To be honest its all a bit of a mixed bag of trackers and active funds. Fortunately I have done ok over the piece (i.e. only slightly underperformed the market!). However, the time has come to simplify matters and I am looking at moving everything into a diversified world tracker (most likely MCSI world AWCS). I will split this over various providers to reduce risk because my portfolio exceeds compensation limits.

    On matter which interested me was the impact of the Japan bubble between 1985 – 1989 on the MCSI World Index. The index has been calculated since 1973 so it has a useful history. I am told that at the peak, Japan accounted for around 45% of the value of index on a weighted cap basis. This of course is less than the value of the US market now included in the same index.

    I fully expected to see returns for the 1989 index on the floor as a result of the Japanese weighting. To my amusement, the index still returned c. 13% (or 17% depending on the data source). Given equity returns in other markets, what was lost on the roundabouts was gained on the swings. Of course, if in a 2008 type scenario, the entire index will fall. However, it seems to me that one can take comfort that a deflating bubble in one market will not destroy your entire portfolio. That strikes me as being reassuring! As someone with an investment horizon of over 25 years (and who cannot see any value in the bond market), I think the world index is the only way to go. I can only see risk in the Vanguard Lifestrategy home bias weightings. That said, given the international component to FTSE All Share earnings (and that of the S&P), perhaps my fears are overstated.

    In the end, I have decided on 80% MSCI World; 15% international property and 5% gold (purely as a hedge and the possibility that it might generate an exponential return in some markets). Fingers crossed!

  • 92 Tomcat May 24, 2016, 1:52 pm

    Above post should read “website” not “email”. I was not congratulating myself!

  • 93 JVT August 31, 2016, 7:54 am

    Hi, I am already invested in the LS80 and plan to continue over the long term.
    I am currently an expat who is planning to return to the UK within the next 5-6 years. I have a lump sum of approx GBP 350k that i want to invest for this period but then sell and use as a deposit for a UK property. Is putting it all in a LS60 or LS80 too risky given that my time period is not sufficient to ride out any drop in global markets?
    Appreciate your thoughts.

  • 94 ivanopinion August 31, 2016, 10:34 am

    @JVT

    6 years is reasonably long term. But there have certainly been 6 year periods when the global equity markets have had a negative total return. Same applies to global bonds. Having a mix of bonds and equities reduces the risk, but there is still a risk. Have a look at http://monevator.com/portfolio-charts/

    But if you don’t want the risk, then what else to invest it in? Savings rates a close to zero.

  • 95 IanH August 31, 2016, 12:27 pm

    “Is putting it all in a LS60 or LS80 too risky given that my time period is not sufficient to ride out any drop in global markets?”

    I think your question may contain your answer – you may face a large downturn just as you plan to cash in. If you have a clear idea of where you want to settle could you not buy somewhere now and rent it out? Then even if the house market fluctuates you will have a place where you want to live whatever the price in 6 years. If you are planning on turning 350k into 450k in 6 years though equity investment to get a better house than you can afford now then you have to accept the risk of maybe returning in 6 years and being faced with renting for a long period until your investments recover after a crash.

    If there were a winnie the pooh spectrum of investment confidence from hyper-tiggerish to sub-eeyorial I’d be close to the eeyore end of it, so don’t let me dampen your enthusiasm. Plus I’m as investment savvy as a hedge sparrow. I tend to regard money invested as probably gone forever, though I cling to the hope that in my dotage I may then occasionally get a few scraps thrown my way from the high tables of corporate finance.

  • 96 JVT September 1, 2016, 7:08 am

    Thanks for your comments, I’m happy with some risk, but will probably go with the LS40 to limit exposure to equities.

    I don’t to put it in property now as my requirements could well be different in 6 years time, plus I don’t want the hassle factor of investing in property from abroad.

  • 97 Tanya R October 29, 2016, 11:52 pm

    I am almost 40 and want to start to invest, and want to do index and bonds…ideally the LifeStategy60…my challenge is, I have access to £100 to open up the accounts! Everything I’m seeing requires a min.investment of £100,000….how can someone with barely any savings get started???? Know what I want to do, but am stuck at the first hurdle of opening something up….

  • 98 IanH October 31, 2016, 10:55 am

    @Tanya
    The £100,000 quoted in the product factsheets is for trading directly with Vanguard, I imagine for example if you are a pension fund. You will be investing through your broker platform, for example AJBell, into your ISA or SIPP accounts, and the minumum trade will be about £10. There is a lot more for you to read around on the Monevator website to get up to speed on all this…

  • 99 Peter Piper December 16, 2016, 11:19 am

    I’m using a Lifestrategy fund for a reasonably large investment and am thinking of investing a similar amount again. I don’t really want to have all my eggs in one basket but, looking at the alternatives (BR Consensus, L&G etc.) nothing seems to come close to Vanguard in terms of the fees. For example, the BR Consensus is showing an initial charge of 5%. I have read the Monevator article on LS alternatives and it would appear that the LS is still hard to beat.

    Should I be wary of having all my assets in one Vanguard fund of funds, and are there alternatives that can compete with Lifestrategy funds that I have missed? Thanks in advance for any advice.

  • 100 Passive Investor December 17, 2016, 4:34 am

    @peter piper. I have 80% of my investments with Vanguard these days and most of it in the LS 60% / 80% funds. The risk of having all your money with one company is minimal in my view. It would need some kind of fraudulent activity that was missed by the regulator and auditors. As a non-profit organisation with one of the best brand-names in the industry it is the remotest of tail risks. (The Equitable Life debacle was over a complicated and very different type of financial instrument from a tracker fund).
    Pros for Vanguard LS – amazing tracking errors, rebalancing premium probably worth a lot more than .24%.
    Possible negatives: my only concern would be about a large lump sum investment NOW given low value of pound vs dollar and state of bond market. I continue to put regular money into these funds but this new money is now less than 5% of my portfolio value every year. If I hadn’t been in LS since the beginning I am not sure I would rebalance into their portfolio distribution in one go right now.

  • 101 Peter Piper December 19, 2016, 12:21 am

    @Passive Investor Thank you for your reply. You are up early/late!

    Could I ask where you would invest such a lump sum in 2016?

  • 102 Passive Investor December 19, 2016, 5:01 am

    Thanks Peter Piper. The short answer to your question is ‘I don’t know’. Also I should say I am not a financial advisor.

    Obviously a lot depends on your age. But one approach would be:

    (1) choose the correct ratio between stocks / bonds for your investment horizon and risk tolerance. Say 60-65 % if you are in your mid 50s

    (2) invest perhaps 30% in the appropriate Vanguard LS fund

    (3) invest 60-65% of rest in the broad UK stock market.

    (4) invest the 35-40% bond element in a vanguard short duration bond fund and cash.

    (5). Move the non- LS money (3&4 above) into LS over a period of 3-4 years

    This may turn out to be completely the wrong approach and you might do worse than if you just put it all into Vanguard LS now. But I am keen to avoid tail risks of now being a low water mark for sterling and of the bond market unraveling a bit over next few years.

    I would avoid index linked gilts (see articles here on Monevator).

    All the best

    PI

  • 103 Peter Piper December 23, 2016, 2:45 pm

    @Passive Investor thank you for your follow up suggestions and apologies for the late reply. Your ideas are interesting and I will explore the possibilities over the Christmas break. It is precisely because you are not a financial advisor that I appreciate your advice!

    Have a great Christmas and thanks for all the great articles during 2016.

  • 104 Passive Investor December 23, 2016, 3:07 pm

    Thanks & Peter Piper. Just a caution as I think you may be a case of mistaken identity. I am just PI an occasional poster in the comments here. I am not connected with The Investor who owns the Monevator Blog. (I did buy my first passive fund more than 20 years ago though!)

  • 105 Peter Piper December 23, 2016, 3:12 pm

    @Passive Investor Yes, sorry. But thanks for the advice anyway; still better than a FI imho.

    Happy Christmas!

  • 106 brexit shy investor January 3, 2017, 10:32 pm

    Is there a way to currency hedge vanguard life-strategy in a suitably resource un-intensive way?

  • 107 New to Saving... January 8, 2017, 1:39 am

    Hi. Forgive my ignorance as I’m just starting to invest and learning the ropes/terminology.
    I’m interested in the Vanguard LS funds as they will keep it simple for me to invest, but all my investing will be within either an ISA or SIPP wrapper. I’m a higher rate tax-payer (occasionally) so want to make the best of the tax breaks available and I just want to understand if this single ‘fund of funds’ would be eligible for the full UK tax relief I would be entitled to.
    Basically, I’m confusing myself thinking about whether it is (or needs to be) listed on the UK stock exchange, or whether the constituent funds are/need to be…

    I hope that makes sense!

  • 108 Passive Investor January 8, 2017, 8:25 am

    @ new to saving. The LS Vanguard funds are fine for UK tax relief and are ideal for ISAs & SIPPS. I have most of my investments with them. Lots of information on their website and their help line has been helpful in two occasions I have rung. It’s partly to do with having “reporting status” but there may be more to it than that too (I am not an accountant / tax expert). In short they are fine and a great choice in my view.

  • 109 New to Saving... January 8, 2017, 1:39 pm

    @Passive Investor. Thanks, you’ve put my mind at ease. They certainly look like an ideal way for me to start investing without getting into too much detail of the separate funds/shares for now.

  • 110 Passive Investor January 8, 2017, 2:46 pm

    @ New to saving. I think they’re a great way to FINISH investing too! My aim is move everything else I have across to them slowly (they weren’t around when I started investing) with the aim of living off the yield at the beginning and then drawing down perhaps 3.5% later on. Will be nice and simple with no worries for anyone if I shuffle-off first! They are amazing value and although you could shave off 0.1-0.15% by investing in individual funds the automatic balancing and lack of dealing costs is worth much more than that, I am sure.

  • 111 simonides January 23, 2017, 4:01 pm

    What concerns me about a significant investment in a global index tracker eg. the highly respected Vanguard index funds is that the holder would be significantly exposed to exchange risk ie. the strength of the home currency (eg. GBP) Have I missed something here?
    thanks!

  • 112 ivanopinion January 24, 2017, 10:30 am

    It is very hard to avoid FX risk, whilst maintaining diversification. Even if you went for a FTSE100 tracker, quite a few of the companies are foreign and are only in the index because they choose to list on the London stock exchange. So, their value in GBP fluctuates depending on the strength of the pound. And most of the UK companies in the FTSE100 earn a lot of their income overseas, in foreign currency, and/or purchase raw materials in foreign currency, so again FX movements affect the profits (stated in pounds). That’s why the FTSE100 has gone up so much, recently.

    If you want to avoid FX risk, you would have to stick with GBP bonds and selected UK companies that are mainly domestic.

    As long as you are investing long term, FX movements should average out.

  • 113 simonides January 24, 2017, 10:57 am

    @ ivanopinion: Yes good points: most UK investors do not worry overmuch about FX risk when buying FTSE100 stock, which as you say, is very sensitive to exchange movement. Lars Kroijer proposes on this site and elsewhere holding an amount of bonds and gilts in one’s domestic currency that is dependent on appetite for risk as bonds and gilts reduce the risk.

    I’m reassured by your last statement “As long as you are investing long term, FX movements should average out” which sounds good but I wonder if there’s any evidence for that?

  • 114 ivanopinion January 24, 2017, 12:43 pm

    If you look at historic movements, rates swing up and down. eg, http://fxtop.com/en/historical-exchange-rates.php?YA=1&C1=GBP&C2=USD&A=1&YYYY1=1990&MM1=01&DD1=01&YYYY2=2017&MM2=01&DD2=24&LANG=en

    Over the very long run, the pound has lost strength, given that there was a time when it was worth more than US$2.5. So, this will, on average, have led to FX gains for UK investors in US$ assets.

    Perhaps another way to look at it is that no-one can tell whether the pound will strengthen or weaken, so best to spread your money across a range of currencies.

  • 115 mike February 26, 2017, 1:09 pm

    Can you explain why Vanguard invest into Vanguard FTSE Developed World (ex UK) and then into the Index funds for each of the regions e.g. US Equity . I can understand why the UK is chosen as this is not part of Vanguard FTSE Developed World (ex UK) but the rest are? You would think they would just increase the percentage for each of the region funds and not bother with the World Fund or am I missing something?

  • 116 two shillings and sixpence September 12, 2017, 9:45 am

    If a lot of people invest in vanguard life strategy is there not a danger that the underlying share/funds will be over valued. Or as the fund is split between many funds/index that this reduces the risk.

    For the sake of discussions what would happen if all uk pension investment changed to just using vanguard life strategies.

  • 117 Paul September 25, 2017, 2:08 pm

    Looks like financial advisers are following into Vanguard LS:
    https://www.ftadviser.com/investments/2017/09/25/pressure-on-multi-asset-funds-as-vanguard-eats-into-sales/
    Hope they’re not charging their clients over the odds….

  • 118 Neil November 21, 2017, 10:54 pm

    Question for others that use the LifeStrategy funds. If say you decide you are happy with the VGLS80, but also want to add some tilts to the side, say Small Cap & Value 10% of each, how do you then counter the fact the 20% bond allowance you had with VGLS80 is now only worth around 15% total portfolio?

    Thanks!

  • 119 ivanopinion November 22, 2017, 9:59 am

    @Neil
    First, have a think about how sure you are that 20% is exactly the right portion of bonds. You might decide that this is just an arbitrary, round figure, that is only roughly right for you, and in fact there is just as good an argument for 15% or 25%. (Or even 10% or 30%.) If so, then no problem.

    I’m not telling you what your figure should be. Even if I knew all your circumstances, I wouldn’t presume to do so. Just querying whether you are starting with an unnecessary presumption, that bonds have to be exactly 20%.

    If you do want to adjust, then why not switch some of your LS80 into LS60, in the right proportions to increase your bond exposure to what you judge to be appropriate.

  • 120 Bluejeansman November 28, 2017, 1:54 am

    Lifestrategy sounds like a great idea for tax sheltered accounts (ISA, SIPPs), but if you have significant taxable amount to invest, then is it a good idea ? What I mean is that in a taxable account, dividends from pure equity funds are taxed at a more favourable rate than income from pure bond funds, the latter being treated like bank interest. This is why the typical advice is to park bond funds in tax-sheltered part of the portfolio as much as possible.

    Any of you high rate (40%) tax payers out there using LifeStrategy in the taxable part of your portfolio ? Do you then just bite the bullet and pay 40% tax on the dividend income reported by the Lifestrategy fund like you would do for a bank interest ?

    Thanks

  • 121 ivanopinion November 28, 2017, 1:58 pm

    @Bluejeansman
    I take it you are talking about LS20 and (maybe) LS40, because only funds with more than 60% fixed interest (or cash) assets have their dividends taxed as interest. On a quick look, LS 40 has only 39.7% equities, so is presumably caught.

    And I assume you are also talking about situations where the personal savings allowance has been used up?

    So you are saying that LS20 is bad to hold outside a tax wrapper, because the entire dividend is taxed at normal income tax rates (20/40/45), whereas buying a 4:1 mix of a pure bond fund and pure equity fund should save some tax, because the div from the equity fund is taxed at dividend tax rates (7.5/32.5/37.5) and it benefits from a £5k allowance (reducing to £2k, next year)? (And the same with LS40, assuming it is taxed as a bond fund.)

    That seems to make sense. It would be good tax planning to prioritise bond funds (including those with up to 40% equities) for tax shelters, and for any such funds that cannot be sheltered and that have any equity assets, convert them into equivalent mixes of pure bond funds and pure equity funds.

  • 122 Mikkamakkamoo November 28, 2017, 9:47 pm

    LS20 pays interest distributions. LS40 (and 60, 80 and 100) pay dividend distributions.

  • 123 Bluejeansman November 29, 2017, 1:16 am

    Thanks @ivanopinion / @ Mikkamakkamoo

    I was not aware that only funds with more than 60% fixed interest (or cash) assets have their dividends taxed as interest. That is useful news. Thanks.

    @ Mikkamakkamoo : So even LS40 dividends are treated for tax purpose similar to dividends from pure equity funds ? Vow, I am truly surprised that HMRC would let us get away with that.

    makes it simple, I suppose.

    My initial thought was that the tax may be pro-rated, meaning in LS60, one would pay “dividend tax” on 60% of the dividends received and “bank interest” tax on 40% of the dividends received.

    But thinking about his further … I asked myself why should the proportion of assets matter. Shouldnt it instead be based on the actual dividends received from the equity component vs bond component ? A £100 dividend from LS60 may well be composed of £70 from the bond part and only £30 from equity part.

    Yes, I was considering the scenario of receiving more dividends than the personal allowances. In tax year 2016-2017, I believe savings allowance (bank interest etc) is £1000 and dividend allowance is £5000.

    To provide an example that further exaggerates my statemeent in the 3rd paragraph above, say a high rate tax payer (say on salary of £50,000) holding LS60 fund in taxable account receives a dividend of £4,999. Let us assume the individual has no other funds or stocks or bank interest. So there would be no tax to pay, which sounds ** too good to be true **, considering that quite a bit of that £4,999 might indeed be “interest income”, possibly exceeding the £1000 significantly.

    Thanks for the clarification.

  • 124 Bluejeansman November 29, 2017, 1:36 am

    Still cant get over the shock that LS40/60/80’s distributions are entirely taxed at favourable dividend rates rather than bank-interest rates.

    If one is in the unfortunate situation of not having much of an ISA/Pension built up (say they worked abroad for several years and relocated back to the UK) and let us say they are on high income (40% tax band) and are in the accumulation phase. They may not be willing to go gung-ho on equities, so may prefer a 60/40 stock/bond mix. But they dont have much tax-sheltered “room” to pack the bonds. Such an individual could structure their taxable portfolio with a single LS60 instead of a separtate equity fund(s) and bond fund(s). Going the LS60 route would give them a tax advantage, not to mention the costs of trading / rebalancing 🙂

    Sounds too good to be true. Still in shock 🙂

  • 125 Mikkamakkamoo November 29, 2017, 8:42 am

    “So even LS40 dividends are treated for tax purpose similar to dividends from pure equity funds ? Vow, I am truly surprised that HMRC would let us get away with that.”

    Yes. Although in theory they could flip flop over time and change to interest distributions. You would need to check your tax voucher provided by your platform.

    Yes, if someone had £4,999 of dividends in the current tax year (17/18) there would be no tax to pay on those dividends. Remember though that the dividend allowance is due to reduce to £2,000 for 2018/19 tax year.

    Obviously all of this irrelevant if holding LS in ISA or pension wrapper.

    Assuming you’re not, also remember that those distributions also help to reduce your CGT bill as they can be used to increase your base cost for CGT purposes. That’s a whole other conversation though!

  • 126 ivanopinion November 29, 2017, 11:07 am

    @Bluejeansman
    “If one is in the unfortunate situation of not having much of an ISA/Pension built up (say they worked abroad for several years and relocated back to the UK)…”
    I assume you are putting as much as you can into a pension. You can make pension contributions equal to 100% of your income from employment. Sell some of your existing investments to generate cash to cover your living expenses. The net effect is that you have moved unsheltered investments into a pension. Of course, there’s a £40k pa cap on this, but you can carry forward unused caps – see other articles for details.

    So, depending on your circumstances, you could be transferring £80k or more into tax shelters. That’s 2x£20k, assuming you have a partner, and £4ok into a pension (or more, if your partner has income from employment too, or if your pension contributions were less than £40k pa in the last few years).

  • 127 ivanopinion November 29, 2017, 11:28 am

    Perhaps the preceding comments actually highlight an unrecognised benefit of the LS funds (at least unrecognised by me). Anyone who currently has unsheltered investments in pure bond funds and pure equity funds (both passive) might be better converting them (in a 60:40 ratio) into LS40. Such a person is currently paying tax on the bond fund dividends at the rates that apply to interest, but by blending with dividends sourced from equities the whole lot becomes taxed at the more favourable dividend rates (or even tax free, up to the dividend allowance).

    The same would be true of any fund that mixes up to 60% bonds with equities, but LS40 is optimal in this sense, assuming it always manages to get close to, but just under, 60% bonds.

    However, I think LS40 has fees that are a few bp higher than if you buy the underlying funds instead, so you would need to offset this against the tax saved.

  • 128 Haphazard June 29, 2018, 3:03 pm

    I’m not sure if anyone is following this thread. But if you are: there may be a caveat with holding Vanguard funds outside tax wrappers. The funds don’t seem to appear on brokers’ tax certificates. My experience is that some brokers tell you their tax certificate only has information fund managers happen to pass on (perhaps not on ACC funds, for example). Vanguard seems to be frequently missing. Not sure whether this has to do with Ireland domicile. The advice from one broker was that I’d have to approach them directly to ask…. no idea how anyone would do this, and it suggests that the “consolidated” tax certificates, which look so helpful, can be rather misleading.

    So it hasn’t simplified my life – quite the opposite! Blackrock funds do seem to get reported more.

  • 129 Fremantle October 19, 2018, 2:24 pm

    I emailed Vanguard UK directly regrading the LS40 interest or dividends and got the following response

    Vanguard Message Number NCRE-B5PHFP

    Dear xxx,

    Thank you for getting in touch with the crew here at Vanguard.

    That is a great question!

    I can confirm that for tax purposes the income received from the LifeStrategy 40% Equity Fund – Income is classed as dividends.

    I hope this helps.

    Kind regards,

    Nathan
    Personal Investor Services

  • 130 Daniel November 8, 2018, 12:12 pm

    Quick one, in case anyone is monitoring this.

    Say I use a VLS 100. In a Vanguard ISA. And I use this for some years. But then my risk profile changes and I’d prefer to be in to the VLS 60 or 40. Can I just swap funds? I’d assume that I’d be incurring significant fees for the sale of one and purchase of another? Or would an internal swap not incur this?

    Would it be better to just divert payments into a VLS20 to create some balance – however this assumes I’d be paying this in for a long time and it’d take a long time to create said balance.

    (lets ignore just buying some separate Bond funds to offset the VLS 100)

    Does this question even make sense!?

  • 131 Ivanopinion November 8, 2018, 1:14 pm

    @Daniel
    The costs of switching will depend on what platform you use. In most cases, fund purchases and sales have no dealing charge. There used to be a dilution levy on purchases, but no longer. If you hold them direct with Vanguard then I would guess that you might be able to convert directly and I’d be surprised if it cost anything.

    So, probably best just to convert to the LS fund that has the mix you prefer, rather than trying to balance 100 and 20.

  • 132 Leon March 3, 2019, 6:38 am

    Good morning all, ive just been reading through the articles and comments on here as im fairly new to dealing with my own investments and currently putting my revised long term strategy in place. As a matter of opinion would you stick to only one fund i.e one of the Vanguard LS funds since they are pre-diversified, or would you hold an LS fund and also another side fund such as lets say the Vanguard S&P 500 tracker or perhaps even one of the new Vanguard target retirement funds aswell? Im currently 33 and have lets say 30 years until retirement but would ideally like to get this on the right path now with my core holdings.

  • 133 Indexer March 3, 2019, 1:15 pm

    @Leon: as you say, the Vanguard LifeStrategy funds are already diversified and there’s a good range from which to select the one you need (though please take account of the running costs) so it’s difficult to see any benefit in having more than one fund unless the two funds are at a lower running cost. If you were to select more than one fund then you would need to consider regular rebalancing to meet your needs. In view of the time to retirement I assume that you’d be aiming for a mostly equity balance. More importantly, ensure you take advantage of pound cost averaging by saving a regular eg. monthly amount and save as much as you safely can while still keeping sufficient aside to cope with major purchases and periods out of work etc.

    I’m not a professional investor so the above are purely my own personal views. I’ve no doubt those better qualified to give an opinion will jump in shortly.

  • 134 The Shidoshi October 31, 2019, 11:04 am

    Hi all

    If you are still monitoring this thread and able to help. I am a 41-year-old beginner-intermediate investor and spent all of 2018/2019 learning to invest in different ways. I have an ISA portfolio in the region of £20k split between several index ETFs (SP500, Emerging Market, MSCI World Index, FTSE100, UK REITs, Physical Gold) and 7-10 UK stocks. I have come to realise that fully investing in individual stocks is time-consuming and can open you up for errors and rebalancing efforts. My new strategy thanks to this article is as follows. Please share your thoughts and suggestions.

    1) Building and accumulation phase. Automated. Monthly. Minimum tweaking: Buy a portion during the bull market runs, double the slice during dips or bear market.

    – 50% VLS80 Accumulating until my 50th,
    then switch to VLS60 Acc until my 60th,
    then switch to VSL40 distributing.

    2) I am reasonably comfortable buying additional ETFs and would still like to build a dividend portfolio (a mix between value, growth stocks etc) with additional niche diversification such as Gold and REIT. No more than 7 stocks as I would free up more time investing half of my money in one-stop-shop fund (VLS80).

    – 25% UK Dividend stocks
    – 10% Investment Trust
    – 5% REIT
    – 5% Gold
    5% Cash

  • 135 Anth February 10, 2020, 1:20 am

    @The Shidoshi

    My private pension is currently invested in VLS80 Accumulating until my 50th, then will switch to VLS60 Acc until my 60th like yourself. My question is what happens if you switch to a distribution fund? Thanks

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