Weekend reading: Vanguard’s bond investors losing their religion

What caught my eye this week.

Seems that even Vanguard investors can be turned into – ahem – ‘tactical asset allocators’ if they are hit by one of the worst bond slumps for several generations.

Trustnet reports that in 2023:

[…] investors withdrew £426.2m out of Vanguard LifeStrategy 60% Equity, the largest fund in the [LifeStrategy] range.

Yet, Vanguard LifeStrategy 40% Equity was the most affected fund, as it shed £1.2bn, making it the most sold portfolio in the IA Mixed Investment 20-60% Shares sector.

Investors also shunned Vanguard LifeStrategy 20% Equity, taking out £404.6m from the smallest fund in the LifeStrategy range. As a result of those outflows, it was the most sold fund in the  IA Mixed Investment 0-35% Shares sector.

These are not inconsequential liquidations.

In the case of the LifeStrategy 20% Equity fund, it represents about a 25% outflow versus that fund’s size the year before.

Everybody hurts

While I believe that many of those taking money out of these funds are probably making a mistake, I do sympathise.

As I wrote when recapping the calamitous bond crash of 2022, the whole reason we own bonds is to (hopefully) make our portfolios less volatile.

Equities are where you go for thrills and spills. But bonds are meant to numb you into ignoring most of that action.

Great in theory, but at the time I posted that piece (late November 2022), the supposedly most-boring LifeStrategy 20% Equity fund had actually delivered the biggest one-year loss of all the LifeStrategy line-up.

That was not the game investors thought they were playing. So it’s not too shocking some have said “thanks but no thanks” and taken their marbles elsewhere.

Yet as both myself, The Accumulator, and many others have belaboured since the bond crash, that was then and this is now.

The sell-off in bonds made their yields reasonable again. That is key. It doesn’t rule out another bad year for bonds, but overall their expected returns over the medium-term are now much higher.

You may remember Vanguard itself gave us a forecast just before Christmas?

The fund titan said:

We expect UK bonds to deliver annualised returns of around 4.4%-5.4% over the next decade […]

That’s a huge difference compared to when quantitative tightening started in early 2022.

Indeed Vanguard was looking for just 0.8%-1.8% 10-year annualised returns as recently as the end of 2021, just before the rate-hiking cycle began

Sweetness follows

The ultra-low yields that prevailed for over a decade presented huge challenges for everyday investors – and for those who write about such things, too.

With hindsight, everyone would have liked to have sold bonds before they… repriced.

If only life were so simple.

Nevertheless, even before the sell-off somebody who was in the LifeStrategy 20% Equity fund probably didn’t have much capacity or tolerance for losses.

That was presumably why they were in that fund in the first place. And it wasn’t necessarily the wrong place for them to be.

Dreadful though a 10%-plus loss from a bond-heavy fund in a year might feel, that’s much less bad than the worst you’ll see from equities.

In fact a 15% down market is routine from shares every few years. (Try on a 30-50% crash for size.)

Shiny happy people

Presumably much of the money withdrawn from bond funds has gone into cash. That’s not the end of the world while interest rates are healthy.

A chunky holding of cash might not even be a bad long-term decision for some investors – though that money will likely underperform bonds if it stays in cash for long enough.

But if what was meant to be low-risk bond money held by low-risk investors has actually shifted into equities? That’s an accident waiting to happen.

We’ll have to wait and see. (And thus discover once again what only looks obvious with the benefit of hindsight.)

Want more? Learn why a diversified portfolio needs more than bonds.

Have a great weekend all. Hope your side does okay in the Six Nations, which has just kicked off. But better yet that my side wins!

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Bank of England holds interest rate at 5.25% for fourth month in a row – Sky

House prices rose 0.7% in January, says Nationwide – Yahoo Finance

Average mortgage rates fall for first time since 2021 [Search result]FT

Small investors pull money out of UK stock market at record pace – E.S.

Bank of Scotland agrees payout over shared appreciation mortgages – Guardian

Record 6,000 ‘ghost houses’ across London as property market takes a downturn – E.S.

One in five out of cash by end of month as cost-of-living bites – This Is Money

Products and services

Should you runaway from ‘marathon’ mortgages? – Which

Beware locking in a fixed-rate energy deal too soon, says expert – This Is Money

Pension planning: annuities back on the table [Search result]FT

Get between £100 and £5,000 cashback when you open a SIPP with Interactive Investor before 29 Feb. New SIPP customers only. Minimum £10,000 account value. Terms apply. Capital at risk – Interactive Investor

How does Asda’s 10% cashback credit card compare? – Which

NS&I slashes Green Savings Bond to 2.95% – This Is Money

‘Save to buy’: developer launches a 1% deposit scheme for first-time buyers in London – E.S.

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The best ways to collect and spend Nectar points – Be Clever With Your Cash

Mid-century homes for sale, in pictures – Guardian

Comment and opinion

A few thoughts about spending money – Morgan Housel

Should we prefer bonds over stocks? – Klement on Investing

‘Loud budgeter’ or ‘doom spender’? Finance according to Gen Z – Guardian

When your financial mindset is on a seven-year lag – Money with Katie

FIRE in the hold: “I blew up my passive income”Financial Samurai

17 thoughts about money – A Wealth of Common Sense

Investing in stocks at all-time highs – Of Dollars and Data

Managing money is easy. Managing wealth isn’t – A Teachable Moment

Comparison culture – Humble Dollar

The investing business mini-special

Why arts graduates should get into the investing industry – Flyover Stocks

Are financial advisors becoming life coaches? – Echo Beach

The unspoken conflict of interest at the heart of investment consulting – CFAI

Naughty corner: Active antics

Michael J. Mauboussin: increasing returns [PDF]Morgan Stanley

TIPSplaining a lousy inflation hedge [Nerdy, search result]FT

Kindle book bargains

How Not To Be An Antiques Dealer by Drew Pritchard – £0.99 on Kindle

I Will Teach You To Be Rich by Ramit Sethi – £0.99 on Kindle

The Tipping Point by Malcolm Gladwell – £0.99 on Kindle

Money Box by Paul Lewis – £1.99 on Kindle

Environmental factors

West of England coal mines: renewable energy potential? – Guardian

The hidden cost of your supermarket salmon [Visuals, search result]FT

Polluting firms earn higher returns, but are riskier – Morningstar

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Could Bitcoin ETFs make Bitcoin less environmentally unfriendly? – Blockworks

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Population rise and fall mini-special

UK population projected to grow to 74m by 2036 – BBC

Global fertility isn’t just declining, it’s collapsing – Faster, please

Are Nordic-style family-friendly policies no longer enough? [Search result]FT

Shrinking family sizes may change our experience with aging – Scientific American

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Why Tim Cook is going all-in on the Apple Vision Pro – Vanity Fair

The end of money – Prospect

Who owns the megaphone? – Uncharted Territories

The secret to finding the best idea? Think of the worst first [Search result]FT

Fentanyl: portrait of a mass murderer – El Pais

What is your contribution? – We’re Gonna Get Those Bastards

You’re probably eating way too much protein – Vox

A single small map is enough for a lifetime – Noema

Pigeon suspected of being a Chinese spy released by Indian police – Sky

And finally…

“Today’s economy is good at generating three things: wealth, the ability to show off wealth, and great envy for other people’s wealth.”
– Morgan Housel, Same as Ever

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The post Weekend reading: Vanguard’s bond investors losing their religion appeared first on Monevator.

What caught my eye this week. Seems that even Vanguard investors can be turned into – ahem – ‘tactical asset allocators’ if they are hit by one of the worst bond slumps for several generations. Trustnet reports that in 2023: investors withdrew £426.2m out of Vanguard LifeStrategy 60% Equity, the largest fund in the
The post Weekend reading: Vanguard’s bond investors losing their religion appeared first on Monevator.