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Minimal risk asset?

Index tracking funds and ETFs
Lynx
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Minimal risk asset?

#280287

Postby Lynx » January 27th, 2020, 12:33 pm

I am aged 34 and have set up a SIPP through Interactive Investor, into which I intend to place the annual allowance each year adopting an 80/20 split in terms of equities / minimal risk asset.

I am convinced by the passive approach recommended by Lars Kroijer and others and for the equities component have invested in:

Vanguard FTSE Global All Cap Index Fund - Income.

But I am uncertain about the minimal risk asset component.

Is VGOV a good candidate? It apparently has a very long time horizon, but then being aged 34 and intending to retire 30 years down the line, do I not also?

Lars recommends diversifying bonds a little, and I have read Vanguard's article here:

https://www.vanguard.co.uk/documents/adv/literature/going-global-with-bonds-tlor.pdf

So might VAGP be a better choice?

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Re: Minimal risk asset?

#280292

Postby James » January 27th, 2020, 12:43 pm

Why not just use the Vanguard Lifestyle 80, which puts 80% in global equities, 20% in global bonds. Sorted.

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Re: Minimal risk asset?

#280294

Postby James » January 27th, 2020, 12:44 pm

To correct myself, that's Vanguard Lifestrategy 80, not lifestyle. :oops:

Lynx
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Re: Minimal risk asset?

#280311

Postby Lynx » January 27th, 2020, 2:00 pm

I can see the thinking regarding the Vanguard LifeStrategy 80-20 concept, but I want to stick with the FTSE Global All Cap because I understand that it is a true market weighted global tracker fund, whereas I understand that the LifeStrategy funds are not, and include some UK bias. I had a look to see whether a LifeStrategy 0 exists, but the lowest appears to be LifeStrategy 20 and that has a charge of 0.22%.

For my 'minimal risk asset', I still think either VGOV or VAGP might be better, but I find it difficult to think through the issues. I would very much like just one extra investment, so tending to lean towards VAGP, but I am not sure how well this fits in with the overall investment strategy in terms of constituting the 'minimal risk asset' as described by Lars Kroijer.

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Re: Minimal risk asset?

#280315

Postby GeoffF100 » January 27th, 2020, 2:14 pm

LifeStrategy 0 would be 100% bonds. There would not be much point in that. It would just be an expensive bond fund.

Currently, the cheapest all cap global tracker is roughly 0.8 x VEVE + 0.1 x VFEM + 0.1 x Vanguard Small Cap Index Fund. Vanguard does eat its own cooking here though. They do not include small cap in LifeStrategy. Most people here go for 0.9 x VEVE + 0.1 * VFEM for the equity component, but you can add a FTSE 100 or FTSE All Share tracker to give a UK bias, according to taste. LifeStrategy has 25% UK in its equity component.

Within a tax free fund, I would be inclined to go for VAGP, but it is debatable whether it is the "minimum risk asset".

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Re: Minimal risk asset?

#280353

Postby xxd09 » January 27th, 2020, 5:37 pm

Lynx-well done
I am 73-17 years ret
My 2 fund portfolio has the one you chose for equities portion
I use Vanguard Global Bond Index Tracker hedged to the Pound (VIGBBD) for my bond investment
There may be an ETF equivalent
Cos I have made my pile and am in drawdown/deaccumulation my portfolio is 30% Equity 65% Bond 5%Cash
20% Bonds seems right for your age
Age in Bonds is a rough rule
Once set up leave well alone-in the ŵords of John Bogle-“Stay the Course”rebalance once a year only if required and concentrate on making money with your day job(+ live frugally?)
xxd09
PS remember nothing is without risk . No safe cheap alternative to equities except Bonds
If you find one let me know
Retirees keep 2 years or more living expenses in cash in case of downturns
No need for so much foryounger workers unless your your job is precarious

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Re: Minimal risk asset?

#280451

Postby AJC5001 » January 27th, 2020, 10:44 pm

Lynx wrote:I am aged 34 and have set up a SIPP through Interactive Investor, into which I intend to place the annual allowance each year adopting an 80/20 split in terms of equities / minimal risk asset.

I am convinced by the passive approach recommended by Lars Kroijer and others and for the equities component have invested in:

Vanguard FTSE Global All Cap Index Fund - Income.



Why have you selected the Income instead of the Accumulation version? What do you intend to do with the income received? At age 34 it will have to remain in the SIPP until you are 55 (currently - likely to increase before you get there), so will need reinvesting.

Adrian

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Re: Minimal risk asset?

#280463

Postby xxd09 » January 28th, 2020, 12:20 am

Absolutely agree
Accumulation mode is the way to go
Having to constantly reinvest dividends is an unnecessary and expensive complication that you could do without while you build your Savings
xxd09

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Re: Minimal risk asset?

#280466

Postby Lynx » January 28th, 2020, 3:41 am

Interactive Investor gives me trading credits so there is no additional cost for me to reinvest.

I favour Income because I like to have the greater control over reinvesting dividends. As I understand it, Accumulation reinvests dividends at a specific annual time point regardless of the present unit value of the fund. But I would prefer option to defer reinvestment slightly to a point in which fund unit value dips slightly lower. This fund goes up and down quite a bit in the short term so Accumulation may five suboptimal reinjection. That gives me a slight gain. Also as the funds increase over time I think this will make rebalancing easier. Finally I just like the idea of seeing dividends come in as cash ready for me to reinvest!

Any more thoughts on minimal risk asset and suitability of VAGP vs VGOV or others?

What is the difference between:

Vanguard Global Bond Index Fund - Hedged Income

and VAGP?

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Re: Minimal risk asset?

#280483

Postby GeoffF100 » January 28th, 2020, 7:51 am

Lynx wrote:Vanguard Global Bond Index Fund - Hedged Income

and VAGP?

They appear to have the same holdings, but VAGP is cheaper currently.

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Re: Minimal risk asset?

#282194

Postby Hariseldon58 » February 4th, 2020, 1:57 pm

Lynx wrote:Interactive Investor gives me trading credits so there is no additional cost for me to reinvest.

I favour Income because I like to have the greater control over reinvesting dividends. As I understand it, Accumulation reinvests dividends at a specific annual time point regardless of the present unit value of the fund. But I would prefer option to defer reinvestment slightly to a point in which fund unit value dips slightly lower. This fund goes up and down quite a bit in the short term so Accumulation may five suboptimal reinjection. That gives me a slight gain. Also as the funds increase over time I think this will make rebalancing easier. Finally I just like the idea of seeing dividends come in as cash ready for me to reinvest!

Any more thoughts on minimal risk asset and suitability of VAGP vs VGOV or others?

What is the difference between:

Vanguard Global Bond Index Fund - Hedged Income

and VAGP?


I think you will find that Accumulation units accrue ( effectively reinvest/incorporate) the dividends as they come in on a daily basis. When you purchase an accumulation unit you are buying the capital and accumulated income sections in a process called equalisation. The annual pricing process at the end of an accounting period simply draws a line under this process.
I believe you may be mistaking this accounting end period as to when the dividend income is reinvested, it is not.

By choosing to reinvest dividend income yourself you are losing compounding on the retained dividend income and indulging in market timing.... it’s an unnecessary complication but won’t do much harm if you choose to do so, doing something can feel good !

A global aggregate bond fund is not really the safe asset as it incorporates the bond universe of less credit worthy bonds, it would probably work well enough over time though. Vanguard life strategy funds do hold a substantial chunk of their bonds in a Global Aggregate Bond.

At age 34 and if retirement investing is your objective then perhaps a higher proportion in equities might be considered if you have a long period to run.

None of the detail matters too much , your really heading in the right direction with a low cost approach and there is a very good chance it will all work splendidly.

Being comfortable with your chosen strategy is really important and that you feel happy to stay the course when bad times occur as they will do over time.

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Re: Minimal risk asset?

#283256

Postby Lynx » February 9th, 2020, 12:23 pm

Hariseldon58 wrote:
I think you will find that Accumulation units accrue ( effectively reinvest/incorporate) the dividends as they come in on a daily basis. When you purchase an accumulation unit you are buying the capital and accumulated income sections in a process called equalisation. The annual pricing process at the end of an accounting period simply draws a line under this process.
I believe you may be mistaking this accounting end period as to when the dividend income is reinvested, it is not.

By choosing to reinvest dividend income yourself you are losing compounding on the retained dividend income and indulging in market timing.... it’s an unnecessary complication but won’t do much harm if you choose to do so, doing something can feel good !

A global aggregate bond fund is not really the safe asset as it incorporates the bond universe of less credit worthy bonds, it would probably work well enough over time though. Vanguard life strategy funds do hold a substantial chunk of their bonds in a Global Aggregate Bond.

At age 34 and if retirement investing is your objective then perhaps a higher proportion in equities might be considered if you have a long period to run.

None of the detail matters too much , your really heading in the right direction with a low cost approach and there is a very good chance it will all work splendidly.

Being comfortable with your chosen strategy is really important and that you feel happy to stay the course when bad times occur as they will do over time.


This is very helpful - thank you.

Take the Vanguard FTSE All Cap:

https://www.vanguardinvestor.co.uk/investments/vanguard-ftse-global-all-cap-index-fund-gbp-income-shares/overview

This comes in income and accumulation flavours. Are those separate funds with separate pots of money?

The income flavour pays dividends annually. For this reason I thought the accumulation flavour reinvests annually. And that this reinvestment may occur at suboptimal points given the short term volatility. It seems this is wrong.

Vanguard state here:

https://www.vanguardinvestor.co.uk/articles/latest-thoughts/how-it-works/income-or-accumulation

Here Vanguard indicate the income share class assets are sold to generate income. Are such assets sold daily then, with a dividend pot growing and then this pot is emptied annually?

So then in the accumulation share class the daily sales do not occur so that it grows instead? So there is no actual reinvestment of income - it is just never generated in the first place?

So it seems I should try to convert my Vanguard FTSE All Cap Income investment into the equivalent accumulation fund. I use Interactive Investor. In practice how would I do this? Presumably I would want both the sale and purchase to occur at the same time if that is possible? Perhaps I would need to ring up and ask one of their traders to put a special order in for me?

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Re: Minimal risk asset?

#283268

Postby mc2fool » February 9th, 2020, 1:30 pm

Lynx wrote:Take the Vanguard FTSE All Cap:

https://www.vanguardinvestor.co.uk/investments/vanguard-ftse-global-all-cap-index-fund-gbp-income-shares/overview

This comes in income and accumulation flavours. Are those separate funds with separate pots of money?

I'd suspect yes and no. If you look at the "Share class assets" figures for each at the link you provided you'll see that the income class is some £27.6m and the accumulation class £283.5m, but I wouldn't mind betting that they're separated only by accounting and the holdings are actually all held together in one big pot -- indeed, possibly even in a mega pot with those from other Vanguard funds -- being divided only by entries in a spreadsheet.

Lynx wrote:The income flavour pays dividends annually. For this reason I thought the accumulation flavour reinvests annually. And that this reinvestment may occur at suboptimal points given the short term volatility. It seems this is wrong.

Vanguard state here:

https://www.vanguardinvestor.co.uk/articles/latest-thoughts/how-it-works/income-or-accumulation

Here Vanguard indicate the income share class assets are sold to generate income. Are such assets sold daily then, with a dividend pot growing and then this pot is emptied annually?

So then in the accumulation share class the daily sales do not occur so that it grows instead? So there is no actual reinvestment of income - it is just never generated in the first place?

No, what they are saying is that when they receive the dividends they reinvest them immediately for both classes, but then later make some sales to pay them out to income class holders.

But methinks you are being unnecessarily discombobulated by internal mechanisms which are actually irrelevant to you. Why do you care?

You've bought the Vanguard FTSE Global All Cap Index Fund presumably because you want to invest in and track the FTSE Global All Cap Index. So, is it doing that closely enough to your satisfaction?

Vanguard receives dividends from the holdings in the fund, and Vanguard is required, by law, to distribute an amount equal to those dividends to holders of the income units. Why is the internal mechanism it uses to do that relevant to you -- as long as the fund is still achieving its primary goal that you bought it for?

Lynx wrote:So it seems I should try to convert my Vanguard FTSE All Cap Income investment into the equivalent accumulation fund.

There may well be a good reason for you holding the accumulation rather than the income units, but the above isn't it. What was your reason for buying the income and not the accumulation units in the first place?

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Re: Minimal risk asset?

#283273

Postby mc2fool » February 9th, 2020, 1:57 pm

mc2fool wrote:
Lynx wrote:So it seems I should try to convert my Vanguard FTSE All Cap Income investment into the equivalent accumulation fund.

There may well be a good reason for you holding the accumulation rather than the income units, but the above isn't it. What was your reason for buying the income and not the accumulation units in the first place?

Just noted your earlier comments on the matter. As I and others have said, dividends get reinvested within an accumulation fund immediately.

Of course, it's possible that you may be able to reinvest them yourself at better times, but given that, overall, you hope that the fund will go up over time, you being able to do so is actually, overall, less than likely based on that expectation ... and if you didn't have that expectation you wouldn't be here. :D

To "just like the idea of seeing dividends come in as cash" I understand but is something only you can ascribe a value to. ;)

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Re: Minimal risk asset?

#283294

Postby Lynx » February 9th, 2020, 4:42 pm

I see. I am interested not necessarily from the perspective of determining what is best for me; I am also just interested for interests sake.

I reread the Vanguard article about income vs accumulation and what you say seems consistent. My understanding is now that both income and accumulation classes involve reinvestment to meet the objective, but in the case of income some assets are sold to pay out a dividend.

I wonder how the choice is made regarding assets sold to fund dividend payments. Presumably in both cases assets need to be sold continually as part of rebalancing to meet the objective. I wonder how this relates to, and what dictates, the size of the annual dividend payment.

Is there any books or resources anyone could recommend to get a better understanding of this? From reading various internet articles there would appear to be a lot of confusion about how income and accumulation works.

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Re: Minimal risk asset?

#283300

Postby Lynx » February 9th, 2020, 5:12 pm

I just read pages 19 to 21 of this Warren Buffet letter on the benefits of reinvesting and selling off. It includes the statement on page 21:

http://www.berkshirehathaway.com/letters/2012ltr.pdf

The sell-off alternative, on the other hand, lets each shareholder make his own choice between cash receipts
and capital build-up. One shareholder can elect to cash out, say, 60% of annual earnings while other shareholders
elect 20% or nothing at all. Of course, a shareholder in our dividend-paying scenario could turn around and use his
dividends to purchase more shares. But he would take a beating in doing so: He would both incur taxes and also pay
a 25% premium to get his dividend reinvested. (Keep remembering, open-market purchases of the stock take place at 125% of book value.)


Does that apply to reinvesting dividends in income generating funds like this Vanguard fund?

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Re: Minimal risk asset?

#283316

Postby GeoffF100 » February 9th, 2020, 7:00 pm

Lynx wrote:I just read pages 19 to 21 of this Warren Buffet letter on the benefits of reinvesting and selling off. It includes the statement on page 21:

http://www.berkshirehathaway.com/letters/2012ltr.pdf

The sell-off alternative, on the other hand, lets each shareholder make his own choice between cash receipts
and capital build-up. One shareholder can elect to cash out, say, 60% of annual earnings while other shareholders
elect 20% or nothing at all. Of course, a shareholder in our dividend-paying scenario could turn around and use his
dividends to purchase more shares. But he would take a beating in doing so: He would both incur taxes and also pay
a 25% premium to get his dividend reinvested. (Keep remembering, open-market purchases of the stock take place at 125% of book value.)


Does that apply to reinvesting dividends in income generating funds like this Vanguard fund?

The situation with the US company Berkshire Hathaway is different from a Vanguard fund. Berkshire Hathaway does not pay dividends. If it did, US investors would have to pay tax on them. With a Vanguard fund, UK investors have to pay tax on the dividends from the underlying investments, irrespective of whether they are paid out or accumulated.

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Re: Minimal risk asset?

#283964

Postby Lynx » February 13th, 2020, 11:18 am

Happily Interactive Investor say that they can simply switch my Vanguard FTSE Global Index investment from income to accumulation.

I would welcome thoughts on the following. I am at somewhat of a loss how to pick between any one of the following for the bond aspect of my two-fund portfolio.

I like the short term duration of the following funds:

Vanguard U.K. Short-Term Investment Grade Bond Index Fund - Accumulation (fee 0.12%; ytm 1.3%; 3 avg year duration)

https://www.vanguardinvestor.co.uk/investments/vanguard-uk-short-term-investment-grade-bond-index-fund-accumulation-shares?intcmpgn=fixedincomeuk_ukshortterminvestmentgradebondindexfund_fund_link

Vanguard Global Short Term Bond Index Fund GBP Hedged (fee 0.15%; ytm: 1.1%; 3 year avg duration):

https://www.vanguardinvestor.co.uk/investments/vanguard-global-short-term-bond-index-fund-pound-sterling-hedged-accumulation-shares?intcmpgn=fixedincomeglobal_globalshorttermbondindexfund_fund_link

To what extent would an ETF be preferable? It would allow me to more rapidly convert from the bond investment to more of the equities investment.

If I want to go for a Vanguard ETF, the accumulation version of:

Vanguard Global Aggregate Bond UCITS ETF (fee 0.10%; tm: 1.5%; 7 year avg duration)

https://www.vanguardinvestor.co.uk/investments/vanguard-global-aggregate-bond-ucits-etf-gbp-hedged-distributing

That is 'VAGS' would seem appropriate.

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Re: Minimal risk asset?

#283993

Postby GeoffF100 » February 13th, 2020, 12:58 pm

We do not know which way interest rates are going. The ETF looks like the best choice to me.

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Re: Minimal risk asset?

#284745

Postby Hariseldon58 » February 16th, 2020, 3:01 pm

Lynx wrote:Happily Interactive Investor say that they can simply switch my Vanguard FTSE Global Index investment from income to accumulation.

I would welcome thoughts on the following. I am at somewhat of a loss how to pick between any one of the following for the bond aspect of my two-fund portfolio.

I like the short term duration of the following funds:

Vanguard U.K. Short-Term Investment Grade Bond Index Fund - Accumulation (fee 0.12%; ytm 1.3%; 3 avg year duration)

https://www.vanguardinvestor.co.uk/investments/vanguard-uk-short-term-investment-grade-bond-index-fund-accumulation-shares?intcmpgn=fixedincomeuk_ukshortterminvestmentgradebondindexfund_fund_link

Vanguard Global Short Term Bond Index Fund GBP Hedged (fee 0.15%; ytm: 1.1%; 3 year avg duration):

https://www.vanguardinvestor.co.uk/investments/vanguard-global-short-term-bond-index-fund-pound-sterling-hedged-accumulation-shares?intcmpgn=fixedincomeglobal_globalshorttermbondindexfund_fund_link

To what extent would an ETF be preferable? It would allow me to more rapidly convert from the bond investment to more of the equities investment.

If I want to go for a Vanguard ETF, the accumulation version of:

Vanguard Global Aggregate Bond UCITS ETF (fee 0.10%; tm: 1.5%; 7 year avg duration)

https://www.vanguardinvestor.co.uk/investments/vanguard-global-aggregate-bond-ucits-etf-gbp-hedged-distributing

That is 'VAGS' would seem appropriate.



@lynx

The idea of a simple two fund portfolio has merit, not sure either of the two funds selected is a minimal risk asset.

Short duration U.K. investment grade bonds have little interest rate risk but do have significant credit risk in bad times, in good times the credit risk is minimal but when bad time’s strike then you have significant credit risk.

The global aggregate bond, has more interest rate risk and less credit risk but given it contains a mix of negative yield bonds and junk bonds plus all those in between ...

How about NS&I income bonds, duration is pretty much zero, full faith of U.K. government and interest rate just over 1%


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