Author Topic: LifeStrategy or Target Retirement?  (Read 1394 times)

icbatbh

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LifeStrategy or Target Retirement?
« on: September 28, 2017, 02:25:30 AM »
Hi all,

Just looking for some opinions on whether I should rethink my strategy.

I currently have investments in Vanguard LifeStrategy 80 in a S&S ISA which I opened in April 2016. Up until now this has seen gains of 13.95%.

I also have investments in Vanguard Target Retirement 2045 in a SIPP which I opened in April this year. Gains have been 1.97% so far.

I'm 30 years old and my plan is to put as much as possible into my SIPP now, so that it will compound to my FIRE number by the time I am 58 in 2045. Once I've done that, I will save as much as possible into my ISA and taxable accounts until I have enough to bridge the gap until I can draw on my SIPP.

I am tempted to sell my Target Retirement 2045 fund units and buy into LifeStrategy 80, but is this a bad idea? With at least 28 years to go until I can access my SIPP do you think it could even be worth investing in Life Strategy 100? Or should I just leave things as they are? I'm just worried the money in my SIPP isn't working as hard as it could.

Any advice and opinions appreciated


cerat0n1a

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Re: LifeStrategy or Target Retirement?
« Reply #1 on: September 28, 2017, 02:35:38 AM »
The UK version of target retirement 2045 holds 80% equity and 20% bonds, spread across various world markets and both corporate and government bonds, with an overweighting to both UK equity & bonds. That doesn't seem hugely different to what you have in your ISA? What's you reason for wanting to switch?

Playing with Fire UK

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Re: LifeStrategy or Target Retirement?
« Reply #2 on: September 28, 2017, 03:13:46 AM »
Do you want the tapering towards bonds that the Target Retirement does as you get near to 2045?

While this was great when you needed to buy an annuity, and is still right for some people, the pension freedoms make this less suitable than it was before.

If you are considering LS100, you should first consider buying a Global index fund (and a chunk of FTSE all share if you want to be overweight in the UK). The performance is likely to be similar and the fees are lower.

It isn't unreasonable to have something akin to LS80 in an ISA and LS100 in a SIPP - the planned timeline for accessing the ISA is shorter, and you may need to access it sooner due to circumstances (I emptied all my ISAs out around 4 years ago - if that had co-coincided with a stock market crash it would have been more painful in 100% equities).

What rate of tax do you pay? Are you happy that you are optimising the tax breaks over your career? [Some people should fill ISAs first and then SIPPs]

icbatbh

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Re: LifeStrategy or Target Retirement?
« Reply #3 on: September 29, 2017, 03:17:42 AM »
The UK version of target retirement 2045 holds 80% equity and 20% bonds, spread across various world markets and both corporate and government bonds, with an overweighting to both UK equity & bonds. That doesn't seem hugely different to what you have in your ISA? What's you reason for wanting to switch?
I understand that performance varies over time, but as I'm currently putting everything into my SIPP, it's disappointing to see gains of 1.97% compared to the 13.95% in my ISA. Am I just being impatient?

Do you want the tapering towards bonds that the Target Retirement does as you get near to 2045?

While this was great when you needed to buy an annuity, and is still right for some people, the pension freedoms make this less suitable than it was before.

If you are considering LS100, you should first consider buying a Global index fund (and a chunk of FTSE all share if you want to be overweight in the UK). The performance is likely to be similar and the fees are lower.

It isn't unreasonable to have something akin to LS80 in an ISA and LS100 in a SIPP - the planned timeline for accessing the ISA is shorter, and you may need to access it sooner due to circumstances (I emptied all my ISAs out around 4 years ago - if that had co-coincided with a stock market crash it would have been more painful in 100% equities).

What rate of tax do you pay? Are you happy that you are optimising the tax breaks over your career? [Some people should fill ISAs first and then SIPPs]

I thought the tapering towards bonds would add a little more security, but as 2045 is quite a way off I thought that perhaps I could afford to take a little bit more risk. Perhaps something like LS100 for the foreseeable future and then switch to something LS40 or LS20 in 2035 or even 2040.

I am a higher rate tax payer (but only just). Currently stashing 37.5% of net pay into my SIPP. I am expecting this to drop to 25% next year though as I have a child who will be going to nursery for 2 days per week. Not sure if that information is of any use.

Playing with Fire UK

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Re: LifeStrategy or Target Retirement?
« Reply #4 on: September 29, 2017, 04:47:29 AM »
The UK version of target retirement 2045 holds 80% equity and 20% bonds, spread across various world markets and both corporate and government bonds, with an overweighting to both UK equity & bonds. That doesn't seem hugely different to what you have in your ISA? What's you reason for wanting to switch?
I understand that performance varies over time, but as I'm currently putting everything into my SIPP, it's disappointing to see gains of 1.97% compared to the 13.95% in my ISA. Am I just being impatient?

Yes. You are comparing gains over different time periods, and a big chunk of the difference is explained by what happened to the markets over that time period, not what you invested in. 6 or 18 months' returns is nowhere near long enough to evaluate the performance of a fund.

I thought the tapering towards bonds would add a little more security, but as 2045 is quite a way off I thought that perhaps I could afford to take a little bit more risk. Perhaps something like LS100 for the foreseeable future and then switch to something LS40 or LS20 in 2035 or even 2040.

I am a higher rate tax payer (but only just). Currently stashing 37.5% of net pay into my SIPP. I am expecting this to drop to 25% next year though as I have a child who will be going to nursery for 2 days per week. Not sure if that information is of any use.

There are two types of security. There is avoidance of year-to-year volatility (which bonds tend to reduce), then there is the risk of running out of money while you need it (which a very high % of bonds will increase, because the growth will be lower). For a SIPP, you know that you won't be spending any of it until age 55/58, and the majority of it won't be spend until years later, so volatility doesn't matter as much. Keeping a high level of growth is important to make sure that you don't run out of money. It can be useful to have some bonds, so that if the market drops dramatically you can sell the bonds and not the stocks (this won't work if you have a LS fund - but that is an issue for a much later date). I like around 20% bonds for drawdown, others say 40%, but 80% is atypically high.

It makes a huge difference to what I would do if I were you. Whether it makes a difference to what you want to do is up to you.

Money that would have been taxed at 40% is more valuable wrapped in a SIPP than money that would have been taxed at 20%. If you expect your salary to rise into the 40% bracket, I would seriously consider filling the ISAs and taxable accounts for now, and stash all your pay above the 40% tax band into the SIPP, as your pay increases this will get higher and higher.

Well done for doing what you've done so far. Living below your means so that you have money to save is around 90% of the work to prepare for FIRE; tweaking investments and tax wrappers is much less work, but does require some time to get your head around.

icbatbh

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Re: LifeStrategy or Target Retirement?
« Reply #5 on: October 05, 2017, 01:08:15 AM »
The UK version of target retirement 2045 holds 80% equity and 20% bonds, spread across various world markets and both corporate and government bonds, with an overweighting to both UK equity & bonds. That doesn't seem hugely different to what you have in your ISA? What's you reason for wanting to switch?
I understand that performance varies over time, but as I'm currently putting everything into my SIPP, it's disappointing to see gains of 1.97% compared to the 13.95% in my ISA. Am I just being impatient?

Yes. You are comparing gains over different time periods, and a big chunk of the difference is explained by what happened to the markets over that time period, not what you invested in. 6 or 18 months' returns is nowhere near long enough to evaluate the performance of a fund.

I thought the tapering towards bonds would add a little more security, but as 2045 is quite a way off I thought that perhaps I could afford to take a little bit more risk. Perhaps something like LS100 for the foreseeable future and then switch to something LS40 or LS20 in 2035 or even 2040.

I am a higher rate tax payer (but only just). Currently stashing 37.5% of net pay into my SIPP. I am expecting this to drop to 25% next year though as I have a child who will be going to nursery for 2 days per week. Not sure if that information is of any use.

There are two types of security. There is avoidance of year-to-year volatility (which bonds tend to reduce), then there is the risk of running out of money while you need it (which a very high % of bonds will increase, because the growth will be lower). For a SIPP, you know that you won't be spending any of it until age 55/58, and the majority of it won't be spend until years later, so volatility doesn't matter as much. Keeping a high level of growth is important to make sure that you don't run out of money. It can be useful to have some bonds, so that if the market drops dramatically you can sell the bonds and not the stocks (this won't work if you have a LS fund - but that is an issue for a much later date). I like around 20% bonds for drawdown, others say 40%, but 80% is atypically high.

It makes a huge difference to what I would do if I were you. Whether it makes a difference to what you want to do is up to you.

Money that would have been taxed at 40% is more valuable wrapped in a SIPP than money that would have been taxed at 20%. If you expect your salary to rise into the 40% bracket, I would seriously consider filling the ISAs and taxable accounts for now, and stash all your pay above the 40% tax band into the SIPP, as your pay increases this will get higher and higher.

Well done for doing what you've done so far. Living below your means so that you have money to save is around 90% of the work to prepare for FIRE; tweaking investments and tax wrappers is much less work, but does require some time to get your head around.
Thanks for taking the time to write this post, it's been very helpful.

Playing with Fire UK

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Re: LifeStrategy or Target Retirement?
« Reply #6 on: October 05, 2017, 01:14:24 AM »
You are welcome icbatbh.

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Re: LifeStrategy or Target Retirement?
« Reply #7 on: October 23, 2017, 10:09:36 AM »
Apologies I know this thread had seemed to reach its conclusion, but for those people invested with Vanguard are the LifeStrategy funds worth investing in over selecting some of the individual funds contained within?

The way I see it investing in a LifeStrategy fund has the benefit that it is extremely diversified and will rebalance automatically. Where selecting say 4 or 5 individual funds from within the LifeStrategy and investing in them directly has the benefit of slightly lower fees and the ability to tweak asset allocation to whatever an individual prefers.

My logic would seem to suggest the latter is better but I like the fact that a LifeStrategy is so simple and there is less incentive to keep tweaking and messing around. They really do reflect the buy and hold approach so perfectly.

Playing with Fire UK

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Re: LifeStrategy or Target Retirement?
« Reply #8 on: October 23, 2017, 10:34:06 AM »
The fact that LS stays rebalanced and you don't need to log in a run the risk of seeing a slight drop and panicking and wanting to sell is a benefit for some people (including me when I was getting started).

If you think that you really need LS 54.651384384385743184 rather than LS60 you're probably over thinking it.

One of the UK bloggers (I forget who) had spent decades tweaking investments and spending a couple of hours every morning reviewing various stocks before buying; they then bought some LS80 and ran that alongside the more complex portfolio. The LS80 outperformed the more complex and they were talking about switching everything over.

I think that the auto-rebalancing makes up for the slightly higher fee (including the anti-meddling feature when you buy on an automatic monthly contribution/regular purchase scheme).

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Re: LifeStrategy or Target Retirement?
« Reply #9 on: October 23, 2017, 12:59:57 PM »
That's a really powerful experiment. Someone may enjoy reviewing investments but for those of us that don't that approach would add up to a considerable amount of time spent and not necessarily provide any reward as your example shows.

I agree I think the auto-rebalancing and simplicity is worth the higher fee.

londonstache

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Re: LifeStrategy or Target Retirement?
« Reply #10 on: October 26, 2017, 08:39:34 AM »
Apologies I know this thread had seemed to reach its conclusion, but for those people invested with Vanguard are the LifeStrategy funds worth investing in over selecting some of the individual funds contained within?

The way I see it investing in a LifeStrategy fund has the benefit that it is extremely diversified and will rebalance automatically. Where selecting say 4 or 5 individual funds from within the LifeStrategy and investing in them directly has the benefit of slightly lower fees and the ability to tweak asset allocation to whatever an individual prefers.

My logic would seem to suggest the latter is better but I like the fact that a LifeStrategy is so simple and there is less incentive to keep tweaking and messing around. They really do reflect the buy and hold approach so perfectly.

Auto-rebalancing and simplicity trump it I think. There is a very slight premium for having the bundled rather than underlying assets, but it frees me from wanting to mess around. I'm fully in LS80 in my ISA and LISA, and if I could be in my pension I would be too (I'm in BLK Concensus instead, which is a slightly more expensive version of the same idea).
This makes the only input how much I invest, which I like.

Further reading here: http://monevator.com/vanguard-lifestrategy/

I'd share the thoughts on target retirement funds - they are fine, but at retirement age I still want a high stocks allocation. my general plan could be something along the line of taking a small annuity to cover the most basic living costs and then living on the natural yield of the stocks component.

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Re: LifeStrategy or Target Retirement?
« Reply #11 on: October 26, 2017, 10:09:55 AM »
Thanks for the link londonstache, that was a good read. I guess the only exception may be LifeStrategy 100 where the rebalancing advantage disappears. In this case it seems to be a direct call between slightly lower charges versus simplicity. I may be more likely to go for the separate funds in this situation, although 100% stocks isn't for me at my stage of things so isn't a decision I need to make.

icbatbh

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Re: LifeStrategy or Target Retirement?
« Reply #12 on: October 27, 2017, 02:34:24 AM »
I have only been investing since April last year and know very little about it all to be honest. All of the money in my ISA is in LS80, with the exception of money that I have been putting aside for my baby daughter which is in LS100. The "set and forget" nature of the LS funds takes a lot of the difficulty out of everything, and is probably the main reason that I am investing money and not letting it sit idle in the bank. I'm sure my money could work harder elsewhere or I could save on fees but I like the fact that my biggest decision is how much I'm going to put in each month.

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Re: LifeStrategy or Target Retirement?
« Reply #13 on: October 27, 2017, 07:51:10 AM »
Quote
I have only been investing since April last year and know very little about it all to be honest. All of the money in my ISA is in LS80, with the exception of money that I have been putting aside for my baby daughter which is in LS100. The "set and forget" nature of the LS funds takes a lot of the difficulty out of everything, and is probably the main reason that I am investing money and not letting it sit idle in the bank. I'm sure my money could work harder elsewhere or I could save on fees but I like the fact that my biggest decision is how much I'm going to put in each month.

No wrong or right here its just what suits I think. The fees aren't that much lower. If you like the simplicity then that's perfect. The LS are all considerably cheaper than actively managed funds.

Playing with Fire UK

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Re: LifeStrategy or Target Retirement?
« Reply #14 on: October 27, 2017, 08:28:14 AM »
I have only been investing since April last year and know very little about it all to be honest. All of the money in my ISA is in LS80, with the exception of money that I have been putting aside for my baby daughter which is in LS100. The "set and forget" nature of the LS funds takes a lot of the difficulty out of everything, and is probably the main reason that I am investing money and not letting it sit idle in the bank. I'm sure my money could work harder elsewhere or I could save on fees but I like the fact that my biggest decision is how much I'm going to put in each month.

This is the most on-point review for VLS ever!

RobFIRE

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Re: LifeStrategy or Target Retirement?
« Reply #15 on: October 28, 2017, 12:30:22 PM »
As others have said, comparing the performance of two funds over a year or so isn't meaningful if you're a long term investor. Who knows whether in 10 years from now you'd have been better of with LS 80 or TR 2045. Probably they won't be much different as TR will probably be around 80% equity for the next 10 years anyway, and you can be sure that you will have saved years of fees compared to having an actively managed fund with > 0.5% fees.

I avoid looking at the performance of my investments, I think short term changes are just noise. I have money in LS 80, I looked at the Target Retirement funds but decided since I've no idea in detail what my work & retirement plans are for 10+ years ahead there seemed no point in having a fund target a particular date. I can always change that later, but following pension freedom rules I am not sure that a target retirement date is a relevant concept anyway (if I'll have pension money invested for 20+ years after starting to draw down on it, I'm pretty sure I don't want all low risk low return investments from the start).

Focus on what you can control: spending, saving using the tax allowances/relief, using low cost funds. Sounds like you are doing well on those.

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Re: LifeStrategy or Target Retirement?
« Reply #16 on: October 28, 2017, 01:27:58 PM »
I agree the target funds seem to be designed for someone purchasing an annuity at retirement. Of all their funds LS80 appeals to me the most too.

Helium

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Re: LifeStrategy or Target Retirement?
« Reply #17 on: October 28, 2017, 06:17:43 PM »
What factors would influence the decision of LS80 vs LS100? Is this purely a risk/reward thing i.e. 100% equities more risky but higher expected return over the long term (20 years), while 80% equities 20% bonds less volatile but also lower expected return over long term? Are there any other factors to think about?

Someone above said you can get the performance of LS100 with lower fees by buying a global index fund instead. Which fund(s) specifically would do this?

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Re: LifeStrategy or Target Retirement?
« Reply #18 on: October 28, 2017, 06:51:06 PM »
For me itís age and expected time frame until needing to use the funds as well as attitude to risk. Iím 40. Iíve seen that an investing rule sometimes mentioned is to take your age from 100 or 110 and that gives you your stocks percentage. Iím fairly new to investing and no expert by the way. I do wonder if that rule existed when we only had the option of purchasing an annuity as it seems a bit defensive around the 60-65 age mark.

If you click on LS100 on the VG website you can look at the portfolio data page which gives the composition of the fund. The fund charge is 0.22.

I donít know a single fund that would do but choosing VGís FTSE Developed world ex UK, FTSE UK all share and FTSE Emerging Markets in a proportion similar to LS100 would perform relatively similarly I presume. These funds  charge 0.15, 0.08 and 0.25. Assuming emerging markets would only be a small proportion of the portfolio this would work out slightly cheaper than LS100.

As has been mentioned on here though LS100 is a lot simpler and more diversified than this approach and no rebalancing between geographical areas would be necessary. I would choose LS100 over what I have described above. 0.22 is still a low cost fund. Itís the fund charges over 1% that do so much damage to a portfolios returns.

Playing with Fire UK

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Re: LifeStrategy or Target Retirement?
« Reply #19 on: October 29, 2017, 12:32:10 AM »
Someone above said you can get the performance of LS100 with lower fees by buying a global index fund instead. Which fund(s) specifically would do this?

Noooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooo!

[Pedantic but important point]

You can get a similar performance buying a global index fund. It is similar as you're 100% equities (so the volatility will be about the same, and the risk is about the same). But the actual growth will be different. If the UK does well, the LS100 will do better, if the UK does badly, the Global fund will do better.

For people who don't need a bias to the UK, (or people who are passive-but-not-that-passive and have reason to believe that the UK will do badly), the Global fund may be a better choice, because there is no benefit to gain from the rebalancing between bonds and equities in LS100, and the Global fund will stay balanced between regions. Global funds can be slightly cheaper.

[/Pedant]

Monevator

Cheapest

    Fidelity Index World Fund P (GB00BJS8SJ34) OCF 0.13%

Next best

    L&G Global 100 Index Trust I (GB00B0CNH056) OCF 0.14%

    HSBC MSCI World ETF (HMWO) OCF 0.15%

    HSBC FTSE All-World Index Fund C (GB00BMJJJG09) OCF 0.21%
« Last Edit: November 01, 2017, 06:54:54 AM by Playing with Fire UK »

Playing with Fire UK

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Re: LifeStrategy or Target Retirement?
« Reply #20 on: October 29, 2017, 12:37:35 AM »
For me itís age and expected time frame until needing to use the funds as well as attitude to risk. Iím 40. Iíve seen that an investing rule sometimes mentioned is to take your age from 100 or 110 and that gives you your stocks percentage. Iím fairly new to investing and no expert by the way. I do wonder if that rule existed when we only had the option of purchasing an annuity as it seems a bit defensive around the 60-65 age mark.

Yes, this.

It is also designed to protect financial advisors from bad publicity/reviews when there is a crash just before someone needs to buy an annuity and they end up living off cat food.

You're right that it is about when you plan to spend the money. If the money has to be paid in 5 years time, it doesn't matter whether you are 18 or 80.

londonstache

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Re: LifeStrategy or Target Retirement?
« Reply #21 on: November 01, 2017, 06:31:11 AM »
I have only been investing since April last year and know very little about it all to be honest. All of the money in my ISA is in LS80, with the exception of money that I have been putting aside for my baby daughter which is in LS100. The "set and forget" nature of the LS funds takes a lot of the difficulty out of everything, and is probably the main reason that I am investing money and not letting it sit idle in the bank. I'm sure my money could work harder elsewhere or I could save on fees but I like the fact that my biggest decision is how much I'm going to put in each month.

This is the most on-point review for VLS ever!

Exactly what I like about it too! Amount of thinking about asset allocation = zero, which means I can spend more time thinking about the bigger question - how much can I save?

Helium

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Re: LifeStrategy or Target Retirement?
« Reply #22 on: November 05, 2017, 12:24:33 PM »
Someone above said you can get the performance of LS100 with lower fees by buying a global index fund instead. Which fund(s) specifically would do this?

Noooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooo!

[Pedantic but important point]

You can get a similar performance buying a global index fund. It is similar as you're 100% equities (so the volatility will be about the same, and the risk is about the same). But the actual growth will be different. If the UK does well, the LS100 will do better, if the UK does badly, the Global fund will do better.

For people who don't need a bias to the UK, (or people who are passive-but-not-that-passive and have reason to believe that the UK will do badly), the Global fund may be a better choice, because there is no benefit to gain from the rebalancing between bonds and equities in LS100, and the Global fund will stay balanced between regions. Global funds can be slightly cheaper.

[/Pedant]

Monevator

Cheapest

    Fidelity Index World Fund P (GB00BJS8SJ34) OCF 0.13%

Next best

    L&G Global 100 Index Trust I (GB00B0CNH056) OCF 0.14%

    HSBC MSCI World ETF (HMWO) OCF 0.15%

    HSBC FTSE All-World Index Fund C (GB00BMJJJG09) OCF 0.21%

Thanks - pedantry much appreciated!