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Vanguard Target Retirement Funds – the Magimix of investing

Vanguard Target Retirement Funds carry on without you.

The Vanguard Target Retirement Funds are the state-of-the-art in investing convenience. They slice ‘n’ dice your money into a diversified portfolio, potentially juice your returns in the early years by holding a bigger dollop of riskier assets, and then stiffen the mix with more bonds towards the end so you’re less likely to have egg on your face when your pension pot comes out of the financial oven. [Tosses tortured metaphor to one side as it slips into unconsciousness.]

It’s hard to imagine an investment fund that can make life any easier than this.

  • It automatically rebalances that asset allocation for you.
  • It gradually dials down the equities and dials up the bonds as you age – lowering your risk exposure as retirement draws nearer.
  • It does almost everything for you bar filling out the direct debit.

All you have to do is decide when you’re going to retire.

Target date

Each Vanguard Target Retirement Fund comes with a target date that identifies the earliest year its investors are expected to retire.

For example, Vanguard Target Retirement Fund 2020 is aimed at investors who plan to flick the Vs to working life between 2020 and 2024, while the Vanguard Target Retirement Fund 2025 is just the ticket if you’re planning to hold your F.U. party between 2025 and 2029.

And on we go in five-year steps out to the impossibly futuristic Vanguard Target Retirement Fund 2055 – by which time The Investor will be tapping out posts with his cyber fingers and I’ll be an upload in The Cloud.

If you’re a forward-thinking 15-year old who’s already dreaming of a life on a Martian golf course from 2060, then no doubt Vanguard will soon be releasing a fund for you, too.

At this point, I should point out that the Target Retirement Funds are passive investor friendly:

  • They invest in an underlying selection of Vanguard index funds.
  • They are cheap. The Ongoing Charge Figure (OCF) is expected to be 0.24%.

Taken together the Target Retirement Funds are like cars on an asset allocation rollercoaster that careers downhill from peak equity to the bond flats below.

The asset allocation ride looks like this:

204. Target retirement glidepath_vanguard

Vanguard’s example supposes the journey starts at age 25 and ends with retirement at age 68.

  • Equity allocation is 80% for the first 18 years up until age 43. The other 20% is in bonds.
  • The portfolio gently derisks until you are 50:50 equities to bonds by age 68.
  • There’s a steep decline over the next seven years until you’re 30% equities, 70% bonds.
  • At that point, the asset allocation flatlines. It remains 30:70 in favour of bonds for as long as ye shall live (or your money lasts).

Of course, the fund trundles on regardless of what age you are when you hop aboard.

The Target Retirement Fund 2015 is split 50:50 (at the time of writing) so that would be your initial asset allocation if you piled into that fund right now, regardless of whether you happen to be 21 or 97. Over the next six years it will glide down to 30:70.

This means that even if you’re a glamorous showbiz personality who has spent a lifetime fibbing about your age, you should be honest with yourself when you’re deciding which fund is right for you.

Lifestyle choice

Frankly, the approach offered by Vanguard’s new funds is all very reasonable and based on a standard investment technique known as lifestyling.

The idea is you load up on equities when you’re young and time is on your side, to benefit from their historic knack of outperforming bonds over the longer term.

Then you gradually store more of your wealth in bonds – which are less apt to lose half their value in the blink of an eye – reducing the chance of your gravy train being wrecked just as you were about to put your feet up.

There is plenty of debate about whether this approach is right, wrong, defeatist, or optimal.

The reality is that it will depend on your individual circumstances and unknowable future investment returns.

But lifestyling is a perfectly sound theory and it makes a great deal of sense, particularly if you don’t have the time, knowledge or temperament to manage your own investments.

It’s also reassuring that Vanguard is happy to lay down its methodology cards on the table.

Global diversification

Vanguard manages the finer points of the asset allocation for you.

The following pic colours in the detail:

204. asset allocation glidepath

At the start of the journey (left-hand side of the graph) you’ll be in:

  • 20% UK equity (yellow)
  • 60% Global equity ex-UK (magenta)
  • 5% UK nominal bonds (blue)
  • 15% Global ex-UK bonds (green)

Five years before retirement, UK index-linked gilts (cyan) come into play to help protect the portfolio from inflation.

By the time the glidepath touches down at age 75 your final asset allocation is:

  • 10% UK equity (yellow)
  • 20% Global equity ex-UK (magenta)
  • 2.5% UK nominal bonds (blue)
  • 17.5% UK index-linked gilts (cyan)
  • 50% Global ex-UK bonds (green)

Again, it’s all perfectly sane.

The main debating points are:

  • There is home bias in the allocation to UK equities, which makes increasing sense as you come to retire and want to dampen currency risk.
  • The bond allocation includes global bonds and corporate bonds to diversify returns in this era of ZIRP (Zero Interest Rate Policy). But none of yer junk bonds or emerging market ones.
  • The global bond funds are rightly hedged to reduce currency risk. Meanwhile the non-government bond allocation of the 2015 fund is approximately 15% – so not worryingly excessive.
  • Emerging market equities are underweight, representing 8.5% of the equity allocation in the far-out funds and 5.6% of equity in the near-term 2015 fund.

Personally, I’d prefer a heftier index-linked gilt allocation (it maxes out at 30% of the bond allocation), no corporate or global bonds and more emerging market equities in my mix.

But if I couldn’t be bothered to going to the trouble of managing it myself then I could happily live with Vanguard’s broth.

Temptingly, the index-linked gilts are short-dated (0-5 year maturities) which makes them less exposed to interest rate hikes knocking lumps off your capital value.

Lower volatility options like that are ideal as you come to retire and there’s currently no short-dated index-linked alternative available as a separate tracker fund.

Pros and cons

Cons first.

The most obvious danger is that being young is no guarantee that you can hack an 80% equity allocation.

Theoretically, you’ve got years to recover if things go south. But that’s cold comfort if you freak out and sell during a bear market because you’re in way beyond your risk tolerance.

Of course, you could choose the Target Retirement Fund with the equity-bond mix that best suits your risk tolerance rather than your age. But take care to check its asset allocation serves your needs as you countdown to retirement.

If you go for a 50:50 split you may not want to be 30% in equities when the fund powers down seven years later but your retirement is still over a decade away, for example.

To get a feel for these issues, estimate your risk tolerance or try this respected test.

The other big danger comes from relying so heavily on Vanguard’s auto-pilot that you forget to check if you’re still on course before the fund touches down.

Ultimately your fund will need to hit your target number by its target date.

That will happen if:

If performance is falling short, human intervention is needed in order to up your contributions, extend your timeline, or reduce your needs.

A few smaller cons:

1. A Target Retirement Fund may not be tax efficient if it isn’t entirely sheltered by your ISAs, SIPPs and personal savings allowance. That’s because bond interest payments are taxed at income tax rates rather than dividend income rates.

2. You can buy cheaper. The underlying components of the 2055 fund can be bought in the same proportions for 0.14% per year rather than 0.24% in management fees. That’s a 32% discount for self-management, assuming you don’t pay dealing fees on fund transactions.

Naturally that has to be set against the hassle factor and the chimp factor – that is, the fair chance you’ll self-sabotage at some point because we’re all barely down from the trees in investing terms.

3.There’s no tilt to property, nor any of the factors that can further diversify a portfolio.

But the overwhelmingly massive pro is that the Vanguard Target Retirement Funds are like a self-inflating survival shelter for people who can’t:

  • Afford advice
  • Learn the ropes
  • Stay on top of their portfolio
  • Make rational investing decisions

I’ve got lots of friends and family in this camp. I would happily put every last one of them in a Target Retirement Fund.

The alternative is likely to be much worse.

Take it steady,

The Accumulator

P.S. Vanguard has occasionally made changes to the US version of the formula in response to market conditions. It previously increased the equities allocation and also broadened international exposure to equities and bonds. If you’re buying into the Target Retirement Funds for convenience – rather than because you have strong views – then you’ll probably be glad someone is keeping an eye on things, but beware.

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{ 89 comments… add one }
  • 1 magneto May 10, 2016, 10:15 am

    Thanks for an excellent review. Fascinating!

    There is much to ponder here about Asset Allocation, whether inside or outside of this fund, extremely educational.
    Of particular interest :-
    + the Global Bonds ex UK hedged
    + the UK Stock weightings.

    Had you noticed the quirk in UK nominal bonds; holding less at age 75 than at age 62ish? Suspect this is more related to their being the residue, rather than a deliberate policy decision?

    Definitely an article well worth coming back to from time to time, and an excellent reference point for thoughts about Asset Allocations.

    Thanks again.

  • 2 Dave May 10, 2016, 10:22 am

    Hello

    Very interesting. Just a quick question, regarding the below:

    “Temptingly, the index-linked gilts are short-dated (0-5 year maturities) which makes them less exposed to interest rate hikes knocking lumps off your capital value.”

    This is very tempting, but when I look at the underlying funds, the UK index linked portion seems to be made up of the ‘United Kingdom Gilt Inflation Linked’.

    And when I look at the maturity of the bonds in this fund it seems to be 23.3 years. Have I misunderstood or missed something here? I’d love to access a short-duration index linked UK bond fund!

  • 3 The Rhino May 10, 2016, 10:35 am

    a very useful product, on balance, probably a very sensible route to take.

    on a slight tangent, is there any known reason why vanguard couldn’t create a lifestrategy ETF?

    I desperately want one

    And I want more than just Vanguard providing them.

    While I’m not sure whether those ETFs will ever appear, I am reasonably confident other investment companies will eventually release lifestrategy equivalents (and when I say equivalent, that also means equivalent OCFs)

    Just want them to get on with it and make it happen.

  • 4 green_as grass May 10, 2016, 10:46 am

    I’m interested in the comment about tax efficiency:

    “A Target Retirement Fund may not be tax efficient if it isn’t entirely sheltered by your ISAs, SIPPs and personal savings allowance. That’s because bond interest payments are taxed at income tax rates rather than dividend income rates.”

    I’ve read somewhere that in a taxable account, mixed funds – funds with both equities and bonds – are taxed as either all dividend or all income depending on the weighting of the allocation. Is this correct? Or am I completely wrong?

  • 5 Mark May 10, 2016, 11:26 am

    I think the principle of ‘lifestyling’ and target retirement funds is a good one. It is particularly well suited to investors who intend relying on capital not protected in a tax shelter (SIPP, ISA), since it avoids the need to trigger a potential capital gains tax liability switching from ‘growth’ to ‘income’ assets on stopping work.

    However I think there are further risks than those you’ve identified, that merit highlighting:

    1. Bonds and gilts aren’t risk-free. On the contrary, in the current environment I’d argue they’re riskier than a globally diversified portfolio of solid dividend-payers;

    2. Given the rate at which longevity is rising – I believe British men in particular are gaining an additional year of expected lifespan every half-decade – many people currently in the accumulation phase of an investing life can expect to be retired a very long time. Given the extent to which inflation can erode the purchasing power of income derived from bonds, compared with that sourced from equities, I wonder whether the assumption that drawdown equates to being in fixed income still holds, at any level;

    3. In an increasingly insecure, transactional and youth-obsessed employment market, many investors who believe they can choose their retirement date are likely to be disappointed. Target date funds risk creating an unintended mismatch between planned and actual drawdown commencement dates. Holding growth equities within a tax shelter while working and switching them to income-generating assets – which could still be equity-heavy – may be more prudent.

  • 6 magneto May 10, 2016, 11:53 am

    @Dave
    “the index-linked gilts are short-dated (0-5 year maturities) which makes them less exposed to interest rate hikes”
    but seems to be up of the ‘United Kingdom Gilt Inflation Linked’
    And when I look at the maturity of the bonds in this fund it seems to be 23.3 years. Have I misunderstood or missed something here? ”

    As others will be able to explain far better, maturities and duration are very different terms.
    google ‘bond duration’ for more info

    Bonds with short maturities but low coupons can have long durations!

  • 7 diy investor (uk) May 10, 2016, 12:11 pm

    These new funds do not yet seem to be available for retail clients with my brokers AJ Bell & Halifax Share Dealing. I was wondering if they may only be offered via the adviser platforms.

    The brochure on their UK website suggests this is the case –

    “This document is directed at professional investors and should not be distributed to, or relied upon by retail investors”.

  • 8 magneto May 10, 2016, 12:14 pm

    Outside of this fund, how can the average investor get exposure to the largest fund allocation for retirees of Global Funds ex UK Hedged?

    Nearest ETF found so far is GHYS, Global High Yield GBP hedged (4 year duration). Not an ideal allocation!

  • 9 atlanticspan May 10, 2016, 12:21 pm

    50:50 at age 68 seems a bit rich for me. If the market goes down 50% you’ve potentially lost a quarter of your portfolio’s value without the time to make it up.
    I’m sticking to owning my age in bonds.

  • 10 AlanP May 10, 2016, 12:24 pm

    Good article, food for thought.

    I can see the benefits of lifestyling as a way of managing the glide path to retirement but only see it as appropriate if you want a “lump sum” on a (reasonably) fixed date – to buy an annuity with for example.

    If you plan on taking income via drawdown then a higher equity proportion would be sensible as you will want to generate above inflation returns for anything up to 40/50 years.

  • 11 magneto May 10, 2016, 12:27 pm

    Correction to comment 8 :-

    Outside of this fund, how can the average investor get exposure to the largest fund allocation for retirees of Global Bonds Funds ex UK Hedged?

    Nearest ETF found so far is GHYS, Global High Yield Bonds GBP hedged (4 year duration). Not an ideal allocation!

    previously omitted the word ‘Bonds’!

    All suggestions welcome.

  • 12 dearieme May 10, 2016, 12:27 pm

    “Bonds and gilts aren’t risk-free. On the contrary …”: I agree. But what to do about it? At the moment cash in high interest accounts might do some people pretty well, but then it’s back to managing your money yourself.

    “Given the rate at which longevity is rising …”: I gather that there’s some recent data to suggest that the effect may be tailing off. “I believe British men in particular are gaining an additional year of expected lifespan every half-decade …”: if that’s because of the ending of the epidemic of middle-aged heart attack deaths, then it would make sense that longevity increases would tail off; an epidemic can’t end twice.

    “I wonder whether the assumption that drawdown equates to being in fixed income still holds”: hear, hear. It’s a sod: DB pensions are wonderful until they go phut; DC pensions leave you wondering how on earth to invest the money.

  • 13 bandh May 10, 2016, 12:41 pm

    Just pick a retirement fund 5/ 10 years earlier

  • 14 Dave May 10, 2016, 12:50 pm

    @magneto – thanks, I’ll do some googling!

  • 15 Harry May 10, 2016, 1:09 pm

    When you’re starting off, this is a great product for the novice investor. If you start at age 20 and target a retirement age of 70 you’d have 50 years to grow your ‘pot’ for a (hopefully) comfortable retirement. But, I would like to ask what people think about having ‘all your eggs in one basket’. Do any readers have any views on the maximum amount you should hold on one platform?

  • 16 IanH May 10, 2016, 1:19 pm

    A very good and comprehensive review of these funds – thanks for the effort Mr A. The ‘massive pro’ mentioned at the end of your article is probably their main selling point, and I can see the appeal of feeling one may never have to worry about your personal finances ever again, but I suspect this may turn out to be be an illusion of security, especially with the most distant horizons. On the other hand, for many people unmotivated to manage their finances themselves closely, this approach may provide a large part of what closer attention might provide with little effort and reduced worry.

    On the basic strategy of these funds the main discussion point I’d advance is whether deceasing equity in a retirement portfolio is actually correct. Recent results by Pfau and Kitces suggest rising equity ‘glide paths’ may actually be a better strategy for managing retirement portfolios.

    PS @DIY Investor(UK) – I just checked ii and Vanguard Target funds don’t show up in the main fund search screen, but do show up when the name is searched globally as being offered in the UKOF market – I’ve no idea what that means though… I presume UK Offshore, but no details were provided e.g. if these can be included in ISAs or SIPPS.

  • 17 Mark May 10, 2016, 2:06 pm

    @ Dearime:

    The principal income-generating assets classes for those deterred by the low interest rates payable on bonds and cash are property and equities.

    I’d argue that London/inner South East residential property is overvalued but there may be opportunities in the rest of the UK – particularly cities that will benefit from investment in the Northern Powerhouse – and in some overseas markets, particularly Germany, when the Pound recovers following the expected Remain vote next month.

    While US big-caps are looking toppy, I’d argue that the equities that most British income-hunters invest in are otherwise fairly or undervalued. Yes, income can fall in any given year, but a combination of diversification and holding some cash in reserve should mitigate any risk of being left temporarily berefit of sufficient income.

    For the risk-averse, holding a mix of investment trusts represents diversification squared, and since the funds themselves possess cash reserves, provides a further margin for safety on the cashflow front.

    While I think you may be right that the rate at which longevity is rising in the UK may have slowed lately, I’m more optimistic (or, from a financial planning viewpoint, pessimistic) than you about the future. Tackling heart disease among middle-aged men is an incremental, rather than binary, win; every day, this horseman claims victims; they’re just slightly fewer and older than previously, a trend which is likely to continue. Similarly, while cancer and strokes are more survivable than before and tend to strike later in life, they still claim lives, and the battle against them is ongoing. And that’s before I get going on the plague that is dementia – a condition that clouds then claims more lives as we get better at surviving other conditions.

    Robert Colville’s recent book, The Great Acceleration, argues that the pace of pretty much everything in life is increasing, thanks to a number of factors. In the case of medical discoveries, the more people there are on this planet, the higher the proportion of them that are well educated and the better able they are to pool information and thinking, the more likely we are to score breakthroughs.

    I agree that the era of the DC pension is almost entirely behind us, at least in the private sector. The number of government workers has fallen substantially in recent years, a trend that may continue, and in some cases their retirement plans have been paired back, at least for new joiners.

    In principle, growth equity investing in the accumulation phase followed by the purchase of an annuity in later life should work well for most of the rest of us. As we know, increasing longevity, abnormally low interest rates and cautious regulation (requiring providers to load up on bonds) have kiboshed the latter. In two decades’ time – I’m 47 – the situation may have changed. If not, financial services firms and their regulators may by then have developed an alternative, probably based around pooled funds.

  • 18 dearieme May 10, 2016, 2:54 pm

    “they’re just slightly fewer and older than previously”: oh no, they’re massively fewer. As you say, they are older. There is no sign at all that the fall is anything to do with medics or their purported discoveries: the epidemic peaked around 1970 and fell away long before statins and so forth could have mattered. Probably the fall started too early to have much to do with the cessation of smoking either. It gives every impression of having been an epidemic that’s ending under its own steam. (I have an explanation of sorts but it’s pure conjecture so I won’t bother you with it here.)

    While there’s still lots of money to be made from a continuing heart attack scare it’s unlikely the facts will be publicised enough to make much impression on everyman.

  • 19 green_as grass May 10, 2016, 3:02 pm

    I’m still interested in the tax efficiency point. As I understand it, and no one has yet told me different, in a taxable account the yield from a mixed fund is taxed either wholly as dividend or wholly as income depending on the weight of asset allocation in the fund. Thus a 60% equities 40% bonds would be taxed wholly as dividends, effectively allowing your 40% bond allocation to be taxed as if they were equities. For a basic rate taxpayer that is one big tax difference. In fact the Vanguard lifestrategy funds information sheet says that the 40% equities 60% bonds fund is paid as dividends as well, but the 80% bonds 20% equities lifestrategy is treated as income. Is this correct or not? If it is correct, then the implications for the target retirement funds in a taxable account which change their asset allocation over time are obvious.

  • 20 Mark May 10, 2016, 3:15 pm

    @ Dearieme:

    Thanks, I wasn’t aware that deaths from heart attacks peaked as early as they did. I’d have guessed it was in the mid-1980s or later, rather than 1970. Perhaps diet-related? While people back then might not have eaten s much as we do today, I suspect the mix was rather worse: lots of saturated fats, for a start.

  • 21 Naeclue May 10, 2016, 3:31 pm

    Good article and in my opinion an excellent product that would suit most savers. Precise allocations could be tailored to a degree by adding just one other fund. For example a global bond fund for those wanting less equity risk or the 100% equity Life Strategy fund for those wanting more. I will not be buying, but I am considering how to reflect some of the ideas into our own portfolio, which costs much less that 0.24%. I dislike the idea of home bias for equities, but I do now see the logic to it from the currency risk perspective.

    I just had a look at the iWeb platorm and the target dated funds are not available there yet, although I would be surprised if they were not added soon as all the Life Strategy funds are listed. They are available through Hargreaves Lansdown, not a great place to hold them because of the 0.45% platform charge.

    For anyone wanting to invest in global bonds, hedged to GBP, Vanguard have a fund that does this called the Global Bond Index Fund (GBP hedged), with a TER of 0.15%. For some reason it is domiciled in Ireland, but is certainly available through iWeb, which is based on the Halifax platform. It’s a shame there is no ETF version as I would quite like it in my SIPP (I am not prepared to pay HL an additional 0.45%).

    On this statement, there is a lot I disagree with:

    “Bonds and gilts aren’t risk-free. On the contrary, in the current environment I’d argue they’re riskier than a globally diversified portfolio of solid dividend-payers;”

    This could have come straight from the mouth of an equity fund manager, or from the financial pages of a popular newspaper.

    To start with it does not make a lot of sense to talk this way about “bonds and gilts”. Gilts are bonds, but not all bonds are gilts. Some bonds carry enormous risk, such as those of distressed mining and oil companies at present. Gilts carry no (ok negligible) credit risk, but do have interest rate risk which rises with duration. To say that a 2 year gilt is more risky than a portfolio of equities is simply untrue, but compared with some of the highly distressed debt out there, then yes a globally diversified portfolio of blue-chip equities probably is less risky.

    On the “solid dividend-payer” bit, then if you know in advance what companies are going to be solid dividend payers, then you can form a very low risk portfolio out of them, but you do not know in advance which companies will be solid dividend payers. You might as well say that a portfolio of successful companies is a safe investment. Companies cut dividends and some fail completely, many failures would previously have been “solid dividend payers”.

  • 22 Mark May 10, 2016, 3:38 pm

    @ Naeclue:

    First, apologies for the imprecise term ‘bonds and gilts’; I believe I was quoting from an earlier post. I might more accurately have written ‘corporate and government bonds’.

    Second, only the passage of time will tell which is safer, out of the above and the counterfactual equity portfolio, in terms of both capital and income accounts. But for now I’m sticking with my view that equities are more likely to preserve capital and deliver stable or growing income than a comparably diversified fixed income portfolio.

  • 23 weenie May 10, 2016, 4:33 pm

    Vanguard Target Retirement (2015) up to (2055) are available with HL, TER 0.24% and can be purchased like any other fund.

  • 24 Naeclue May 10, 2016, 4:35 pm

    “But for now I’m sticking with my view that equities are more likely to preserve capital and deliver stable or growing income than a comparably diversified fixed income portfolio.”

    That is a different matter. Over a prolonged, multi-decade period I would agree with you, but you have to be prepared to accept substantial fluctuations in equity values along the way which can be a real pain for anyone living off their investments, or intending to within a few years.

    Over the next year it is anyone’s guess whether equities, gilts or investment grade bonds will perform better. I am fairly certain my gilts will not be down 40%, but would not be totally surprised to see my equities 40% down as I have seen that happen a few times already.

    Over the last 12 months, my gilts portfolio has outperformed my global equities portfolio (mostly ETFs/tracker funds), although not by much, but the unhedged US Treasuries ETF I hold in my SIPP is up about 15% in sterling terms over the last year, not including the income. I have not the faintest idea what will be delivered by next May, but as I am living off my investments I am not prepared to bet the farm on equities.

  • 25 Mark May 10, 2016, 4:41 pm

    @ Naeclue:

    I agree that the values (and, more so, the distributions) of bonds tends to fluctuate less than those of equities over the short run.

    In the long run, the value of bonds is an inverse, rough proxy for interest rates. And while the income generated by new bonds (once old ones have been redeemed, at face value rather than the price at which they were purchased) partly reflects prevailing interest rate expectations, it is also affected by the capital performance of the previous bonds. So in the long run, buying bonds at a time when interest rates are low is not a plan likely to result in a secure, ideally growing, income stream.

  • 26 Nick May 10, 2016, 4:56 pm

    My question is when will Fidelity/Funds network start marketing this, I have asked and got a glib response. I a loathed to go with HL unless anyone else can suggest a platform where I can buy into this cheaply

  • 27 green_as grass May 10, 2016, 5:21 pm

    @ Nick

    From The Telegraph 1 April 2016:

    Investors can buy the funds through Alliance Trust Savings, Fidelity Personal Investing, Hargreaves Lansdown and Aviva Investment Account, each of which will make a charge for their service.

    http://www.telegraph.co.uk/investing/funds/new-funds-offer-cheap-route-for-buy-and-forget-investors/

  • 28 diy investor (uk) May 10, 2016, 5:43 pm

    Update – AJ Bell Youinvest have got back to confirm they can arrange a purchase and just need confirmation of the appropriate SEDOL code.

  • 29 Naeclue May 10, 2016, 5:45 pm

    @Mark, I don’t buy bonds because I want them to give me a “Secure, ideally growing, income stream”. If I wanted that, I would buy an inflation linked annuity, or ladder of indexed linked gilts. In fact I don’t pay the slightest attention to the income stream when I buy a gilt. Whether the coupon is 8%, 4% or even if it was 0% is of no consequence as I invest for total return. I buy gilts (and US Treasuries) as part of overall portfolio construction. I take income from cash deposits, bond interest, equity dividends and once per year when I re-balance, capital withdrawal.

    These target dated funds are constructed with this same strategy in mind. They invest globally, focusing on total return. Not only do they ignore distribution income in making investments, they pay no income! At present, Vanguard are only offering accumulation units, no income units.

  • 30 Mark May 10, 2016, 5:57 pm

    @ Naeclue:

    Apologies, I assumed, based on the context, that you saw bonds as a source of income.

    How do you find the total return from bonds compares with equities?

  • 31 Naeclue May 10, 2016, 6:02 pm

    I have asked iWeb Share Dealing whether the funds will be offered and will post a comment when I hear back. From previous experience, that may take a few days!

    For larger accounts iWeb would be a good platform for the funds as iWeb do not charge a platform fee, just charging £5 for each buy/sell deal. Off putting £200 account setup fee though if you are not already a customer.

  • 32 Naeclue May 10, 2016, 6:46 pm

    @Mark, comparing the total returns of bonds and equities really depends on what bonds and when you pick the start and end dates. For gilts I have been running a 5-13 year ladder for over 20 years and have been very lucky both with returns and their negative correlation with equities when equity markets have crashed. For that period they have delivered excellent returns, but I find it hard to judge exactly the returns and how the returns have compared to equities as until recently I was still accumulating and have been re-balancing each year in/out of equities. From memory, it has mostly been selling equities to buy gilts (or more accurately, topping up gilts more than equities), but on the few occasions when I have sold gilts to buy equities, such as Jan 2008, these were large movements.

    It is hard to see how gilts could deliver the same real returns over the next 20 years as they have over the last, but as I said, that was not why I invested in them anyway. This January when I re-balanced, I decided to reduce my gilt holdings and hold more cash instead. So far that has been a mistake, so what do I know?

    US Treasuries I have only held for around 10 years, but they are more volatile than gilts because of the long duration (about 18 years) and currency fluctuations. Again though returns have been good and were brilliant when the financial crisis hit. I tend to think of US Treasuries in a different way to gilts. Treasuries and the US dollar are frequently the safe haven during periods of worldwide market carnage. The same is true of gold, probably more so, but I really cannot bring myself to invest in that.

  • 33 Naeclue May 10, 2016, 7:31 pm

    It strikes me that the one thing missing from this ultra-easy retirement investment is decent broker/platform support during retirement. What is needed is low cost (ideally free) automatic selling of units each month or quarter to provide an income and no obscene percentage platform fee just for holding units.

    Do any brokers offer that? Both Hargreaves Lansdown and Youinvest levy a charge for selling investments if you do not have sufficient cash in your account to cover monthly fees.

    What is the justification for such high platform fees anyway? They are clearly not required for ETFs, ITs, directly held shares or bonds, so why are platform fees needed for funds? The entire platform must surely be STP automated these days. Some brokers, such as iWeb and Halifax do not charge a platform fee either, so is this just an unjustified rip-off by certain brokers? It should not cost a broker more to offer a fund than an ETF.

  • 34 Sharpespur May 10, 2016, 7:32 pm

    A very timely post to read. At the risk of sounding morbid, I have attempted over the last few months in trying to get my wife more involved in our finances and our investment portfolio. Aside from the fact it belongs to her as well, and so she needs to be happy with how I invest our hard-earned, but I also want to make sure she would know what to do to carry on the (hopefully) good work I’ve started in the last couple of years if I’m not around to reap the rewards one day.

    However she just does not have a head for investment, or interest for that matter. I was thinking today on my drive home that I would just leave a piece of paper attached to my will saying 1. Dont pay for financial advice or expensive fund managers, 2. Slowly move it all into Vanguard Life strategy fund where you wont need to do much, 3. read Monevator.

    This sounds like an investment that might be suitable for her if her current financial advisor pops his clogs.

  • 35 dawn May 10, 2016, 8:59 pm

    enjoyed reading the post and all the comments.
    food for thought as always.

  • 36 @algernond May 10, 2016, 9:32 pm

    I still don’t understand this bit:
    ‘the index-linked gilts are short-dated’

    Vanguards ‘U.K. Inflation-Linked Gilt Index Fund’ has average maturity of 23.3 years and average duration of 21.7 years; not 0-5 years…

  • 37 dearieme May 11, 2016, 12:28 am

    @green_as grass, I share your interest in avoiding tax. We’ve always held gilts in PEPs/ISAs: no tax to pay on the coupons. I resent the idea of buying bonds within a collective investment such that I pay tax on the income from them.

    We shall be parting from our last gilt soon, transferring the cash to a “Flexible” Cash ISA, and then withdrawing it to put into high interest accounts until March, when it can be squirrelled away in the Cash ISA again. This way we’ll exploit our savings allowances. I can’t say that I enjoy this sort of tedious money-shuffling but it does mean that we can get a far higher return on cash than an investment manager could. So we’ll be viewing cash as equivalent to gilts of very short maturity but paying a markedly superior interest rate.

  • 38 The Rhino May 11, 2016, 10:37 am

    @green_as_grass – interesting comment about the income/dividend stuff, I noticed that IWEB has now put together my tax certificate for year end 2016. Thats for an unwrapped holding of just VLS60% and the only thing it reports is ‘net dividend payable’ – I’m glad I don’t have to try and calculate it myself as I remember going round the houses with TA on how to do that and never being able to generate the right no. (by right no. I mean a no. that agreed with that on the broker produced tax cert)

  • 39 helfordpirate May 11, 2016, 4:14 pm

    @algernond. If you look at the factsheets for the near-dated target funds that have inflation -linked bonds, instead of listing the “Vanguard UK Inflation-Linked Gilt Index Fund” as part of the constituents it simply lists “United Kingdom Inflation-linked Gilts” . So one is to assume they will hold these gilts directly – however I can’t find any direct confirmation that they are short-dated.

    Dimensional do a short-dated inflation-linked fund – but you have to pay someone 1% in order to access it.

  • 40 The Accumulator May 11, 2016, 8:07 pm

    @ Dave / Magneto / Algernond – Helford is spot on. See factsheet for 2015 or 2020 target date funds and read page 11 of this doc for Vanguard’s discussion of their use of short-dated linkers:

    https://www.vanguard.co.uk/documents/adv/literature/trf-research-paper.pdf

    I think you’re looking at the Vanguard UK inflation-linked gilt index fund which is not the same thing.

    @ Green – yes, any vehicle with over 60% fixed income is taxed as interest income not dividend income. This piece may help too: http://monevator.com/tax-efficient-investing-uk-order-isa-sipp/

    @ IanH – Pfau and Kitces have been challenged on the notion of increasing equity glidepaths vs declining paths. The debate is ongoing, the difference may well be marginal and it seems to rely heavily on assumptions made. A big question is whether you want to be exposed to additional volatility of rising glide path in your dotage. Also Pfau and Kitces advocate U shaped path i.e. it declines to retirement before rising again. So you could always shift a couple of % a year into a 100% equity LifeStrategy fund after you retire, if you’re won over by the rising equity argument.

  • 41 L May 12, 2016, 10:25 am

    For anyone who is interested, I have contacted Charles Stanley Direct to see whether they intend to offer these. I am currently lifestyling with the Life Strategy funds as part of my FI/retirement portfolio, but this appeals as it would reduce my need to tinker.

    @The Accumulator

    Point taken re. fees and discount for self management, but it will be relatively tricky to rebalance/create a clone of most of these funds as they have quite a few holdings (unless you have a very large pot). CSD only allow £100+ purchases, so it may be difficult to invest the correct amount to keep things in sync?

  • 42 diy investor (uk) May 13, 2016, 11:57 am

    Update 2 – My broker AJ Bell now confirm they cannot offer these funds for my sipp so looks like I stick with my LifeStrategy fund.

  • 43 L May 13, 2016, 1:50 pm

    For any interested parties, Charles Stanley Direct expect to be offering these by mid June (although that’s an estimated date).

  • 44 Naeclue May 13, 2016, 3:50 pm

    I received a typically poor answer from iWeb along the lines of these not currently available on their list. Clearly something I already knew and not the question I asked. I have responded, but don’t hold much hope of progress.

  • 45 The Accumulator May 14, 2016, 11:35 am

    @ L – Managing your own set of funds and mimicking Vanguard’s approach would only mean handling 5 funds which is very doable. In fact, Vanguard’s approach is really mimicking what DIY investors or IFAs would have (could have) done before target date funds existed.

    Apart from the linkers, all the component funds used also exist in Vanguard’s range as separates. Equivalents exist in the ranges of other providers too.

    The real genius of a Target Date fund and where they earn their keep is that they do the right thing for you. You don’t have to rely on your own willpower and discipline (systems subject to failure) to keep you on track when your tempted to do something dumb.

    Secondly, managing your own half dozen fund portfolio is something best done by someone who enjoys the process of investing as I do, along with many other Monevator readers.

    If you couldn’t give a toss about investing and just want it sorted already then a Target Date fund is the way to go in my opinion. At least for retirement investing.

    Re: Charles Stanley – to the best of my knowledge you can use their monthly investing scheme to invest £50 a time. Then just cancel the next regular trade.

  • 46 The Accumulator May 14, 2016, 11:44 am

    @ Sharpespur – Missed your comment first time around. I wholeheartedly agree. I have written that piece of paper for Mrs Accumulator and it says (I’m paraphrasing here):

    1. Move everything into LifeStrategy 60
    2. Ring The Investor

    The Investor doesn’t know this, so I hope he doesn’t mind, but he’s an old friend of Mrs Accumulator and mine and the best person I can think of to advise if the time comes. He’s also a touch younger so hopefully his brain cells will still be in full working order if called upon.

  • 47 The Accumulator May 14, 2016, 12:02 pm

    @ Mark / Naeclue and Dearime – thoroughly enjoyed your debate of the advantages of income investing. I’d add that the main advantage of a Target Date fund is its simplicity. Mark, you’re obviously a highly engaged investor who enjoys having your hand on the tiller so it’s not the right product for you.

    Income investing may or may not be superior over the next X years, but without knowing the future, it does:

    1. Require more capital to live off than you would otherwise need for retirement i.e. unnecessarily draws out your accumulation years.

    2. Leaves a lot of money on the table when you die i.e. you will have underspent.

    3. Is likely to be less diversified and more costly than a total return strategy.

    4. A 100% equity portfolio needs a strong stomach even if you only intend to live off the income.

    5. A growth strategy in the accumulation phase is also less diversified than total return and – in my view – an unnecessary bet on one portion of the market.

    6. As Naeclue says: hi-grade bonds are a source of stability rather than growth. Bonds are not ‘risk-free’ but the risks of a rising interest environment are oft over-stated. If interest rates don’t rise too quickly then you’ll make up capital losses through higher income yields within half a dozen years. If you hold a lot of equities the best diversifier you can have is a slug of bonds.

    I get why income investing is so appealing and it works for lots of people. My research leads me to conclude that it’s a luxury vehicle that doesn’t quite get you as many miles to the gallon as the total return model.

  • 48 jed May 14, 2016, 2:46 pm

    Hi all, regarding the index linked part of the target retirement fund it got me thinking of the holy grail of the bond part of a portfolio. A fund that was short duration to cover interest rate risk, index linked to cover inflation risk and govt bond to cover credit risk. There is a fund that might just do that if you could access it, Pimco global investors series plc,global low duration real return fund GB hedged. The duration is 2.5 yrs and is index linked global govt bonds.

  • 49 Emma G May 16, 2016, 2:36 pm

    I found these funds via the search function on Interactive Investor, but they are not currently tradable. I wonder if they have plans to introduce in the near future?
    In some places there appears to be a minimum investment level of £100,000 which would be a bit of a barrier to entry!

  • 50 The Accumulator May 16, 2016, 8:32 pm

    Hi Emma – it certainly would. However the £100K minimum only applies to direct investment through Vanguard itself. Your usual broker’s minimums will apply once the fund is part of their range i.e. around £50. I expect within a few months to a year most of the brokers will stock these funds. It’s quite normal for them to gauge the level of demand before taking the plunge.

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