Vanguard Lifestrategy Funds Explained | The only fund you will ever need? (Investing for beginners)

today i'm going to be explaining everything that you need to know about vanguard life strategy funds and how one of these funds could well be the only investment you ever need to make [Music] hello and welcome back to the channel it's great to see a lot of new faces here and if it's your first time then hi i am james and i have been working in and around financial advice for the best part of 10 years but i've decided to start creating content to help you guys cut through a lot of the noise that you'll hear on youtube and to give you guys more confidence in the decisions that you're making and the things you're investing in and today i've got a big one for you today we're going to be talking about a very special set of funds known as one decision funds they're called this because all you need to do is pick one of these funds just one and that could be you set up for life there may not be any need to invest in anything else and ultimately these funds are very similar to the types of things that i would be investing my clients in now this is going to be a big video but by the end of it not only are you going to fully understand how these funds work and how they can help you but you're also going to learn a lot about the fundamental principles that go into building investment portfolios so the first thing we're going to do is together we're going to build a portfolio of index funds and i'm going to show you some of the problems that we're going to come up against then i'm going to show you how vanguard have actually solved a lot of these problems with their life strategy funds and finally i'm going to help you guys work out which one of these funds might be suitable for you just a quick point before we start vanguard are not the only provider to offer these funds there are plenty of other good providers out there however i've only got time to cover one in this video and vanguard is definitely one of the best now i'm going to try and give you all the information that you need to work out which one of these funds might be right for you but ultimately that decision lies with you so before you invest just really make sure that you understand what you're doing right disclaimer's over let's get into it building a portfolio and the problem with index funds so in my last video i talked about what index funds are and why you should be using them to invest if you haven't watched that video and you're still not entirely sure what index funds are then please do check it out before watching the rest of this but in that video i talked about how index funds can help you invest in the stock market without having to do any research on the underlying companies so you could invest in a fund that tracks the s p 500 and immediately get access to the 500 largest companies in america or you could invest in a global equities fund like the one that you're seeing here that would invest you into thousands of companies from all across the globe and you could if you wanted invest all of your money into a fund like this and not buy anything else that would actually be totally fine in fact we have a lot of clients that are invested in very similar portfolios however they are all high risk investors which means that these people are comfortable seeing their investments fluctuate substantially and they may at some time or another expect to see their investments fall by up to 40 as an example if we look back to how this fund performed in march of last year when the pandemic was just unfolding we can see that it dropped by over 25 but as you can see it has gone back up so on the upside if these types of investors were able to hold on for five to ten years they might expect to see annualized returns of seven to eight percent now you've got to remember that that is just an average some years are going to be up some years are going to be down so you need to put yourself in their shoes imagine if you had just invested all of your life savings in a fund like this and suddenly it drops by over 25 how would that make you feel do you think you would be able to hold on and prevent yourself selling out for most people the answer will be no in fact only 30 percent of people are comfortable investing in a 100 stocks and shares portfolio like this and for the other 70 well we're just gonna have to try and find a way to turn down the heat a bit and the best way to do that is to diversify even further now you're probably thinking how can i diversify even further i already own 3 000 stocks from around the world well that's where bonds come in a bond is very much like a loan but instead of you being the one that's borrowing the money you're actually lending it to other people like governments companies and even institutions like universities and of course you're gonna get paid for doing that i will do a deep dive into the intricacies of bonds in another video but for now you only need to know these three things as a whole bonds are less risky than stocks but they're also likely to produce a lower return and that return is typically not correlated with the stock market which means that when the price of stocks is moving in one direction bonds are likely to be moving in the opposite direction or maybe doing nothing at all now this is actually really really important and we're going to come on to exactly why that is later in the video so the best way to invest in bonds is to invest in a bond fund which just like a stocks and shares fund is going to give you access to a lot of different bonds it's immediately going to give you a lot of diversity and you're going to own a little bit of everything so let's take a look at the vanguard global bond index fund which invests in pretty much every type of bond that you could imagine now you can see that when we compare the performance of the global equity fund with this global bond fund the global bond fund is producing a lower return however the global bond fund is less risky and you can see that by its risk score of three so that's three out of seven and when we compare that with the global equities fund we can see that that is a five out of seven now before we continue building our portfolio i just want to take some time to help you really understand what these risk numbers mean because we're going to be using them later on to help you work out which life strategy fund might be right for you before i recommend a investment to a client i first need to understand how much risk they can handle and to help me work this out i asked them to take a risk tolerance questionnaire which is a psychometric test that will output a score of zero to 100. with zero being absolutely no tolerance for risk and the only thing that you can ever do is really keep money in a current account and a score of 100 would mean that this person was comfortable investing in things that are even riskier than stocks and they could stay the course even if their portfolio was jumping up and down by 50 on a yearly basis what you're seeing here is how those risk scores translate into the seven risk groups that you'll see not only on the vanguard website but attached to any fund that you come across and what the graph is showing us is what percentage of the population would likely fall into each of these categories so only one percent of people would fall into the top and bottom categories and if you remember i said that with our global equities fund it would only be suitable for about 30 of people now that had a risk score of five which means that anybody that scored a five or above would probably be comfortable with an investment like this now pretty much every single fund that you come across when you're investing will have one of these risk scores attached to it so if we just look at free trade so free trade is an investing app that you could use um here we're looking at an emerging market latin america fund so this should be a pretty high risk fund and if we scroll down to the bottom here and press key information documents we can see here that this is actually a seven out of seven a high very high risk fund but if we try and look at something else let's try and look at something maybe japanese um bailey gifford here and scroll down to the bottom key investor information this is a five out of seven so whatever investment apple platform you're using they will have this documentation supporting any fund that you might invest in here it's called key information document in others it may be called a key facts document so just look out for those so i hope you can see that having a good grasp of what your level of risk is is very very important because if you ended up getting it wrong and you ended up taking too much risk when the market tanks you could panic and ultimately you could sell out and potentially never come back to the markets on the other hand if your level of risk was too low then you could end up with lackluster returns and potentially not being able to achieve the things that you want in life so to help you work out what your level of risk is i've actually included a link down in the comments to a basic version of the risk tolerance questionnaire that i would give to clients so after the video please check it out and let me know how you get on so now let's get back to building our portfolio and what we're going to do is we're going to try and build a 50 50 portfolio so that's 50 invested in that global equities fund that we were looking at and the other 50 invested in global bonds now the risk of these individual funds on their own was five for global equity and three for global bonds now if you invested in each of these funds you may expect to achieve an average annual return of eight percent for the global equities and three percent for global bonds now what we want to look at is what is going to be the overall risk and expected return of this portfolio now if we look at the average return first we would expect that we're going to get 50 of that 8 and we're going to get 50 of that 3 which would leave us with an overall portfolio return of 5.5 so now for the risk of the overall portfolio well global equity has got a risk of five and global bonds has got a risk of three so 50 50 uh it's probably going to be four right well no and this is where it gets really interesting well at least i find it interesting because i'm a finance nerd but seriously what i'm about to show you is the bedrock of portfolio construction theory remember that i told you earlier that bonds are not correlated with stocks well this is an illustration of what that actually means here you've got two assets that on their own look quite volatile up down up down and they would individually be considered to be quite risky but you'll notice that they never seem to be moving in the same direction at the same time when one is up the other is down and this is where it gets interesting look what happens if we combine these into a 50 50 portfolio the portfolio's returns are midway between the two individual assets exactly as you would expect but look at the line it's a lot less volatile this combined portfolio is a lot less risky than either of the two investments on their own so we're actually getting a fairly similar return but for a lot less risk now this is actually a very extreme example but this same process is occurring when we mix stocks with bonds of course over the long term a 100 stocks portfolio is likely to outperform any combination of stocks and bonds but the risk adjusted return so the amount of return that we are expecting to receive for each unit of risk that we are taking is actually much better in a portfolio that diversifies not only within stocks but also into other asset classes okay so you're probably thinking hang on where's the problem because so far this sounds bloody fantastic well allow me let's say we had invested in our 50 50 portfolio and over the following months equities have had a pretty good run but bonds however have taken a bit of a hit well this is now no longer a 50 50 portfolio it's more like a 60 40 portfolio which is too risky for us so what are we going to do about it well we're going to have to rebalance we're going to have to sell some of those stocks and buy back some of the bonds now this rebalancing is actually extremely important because not only does it help to maintain our portfolio's level of risk but it automatically forces us to sell stocks when they've gone up in value and buy more when they've gone down so you're probably thinking well this seems pretty simple i could uh probably keep up with that well firstly you won't because life and secondly this is actually a super simple to fund portfolio and if you were managing this yourself in reality you're gonna have quite a few more funds than this and it can quickly get very complicated but don't worry don't stress because as per usual vanguard's got your back life strategy funds vanguard's life strategy funds already made portfolios that give you access to both stocks and bonds and as you can see within these funds there are already a lot of other vanguard funds which is why we would call this a fund of funds this fund will also rebalance its allocation to each of these funds on a daily basis and not only that but these funds are super cheap as you can see they've each got an ongoing charge of 0.22 but you'll also have to pay the vanguard platform fee of 0.15 you can only buy these funds directly from vanguard's website and you'll see that you're given the option of investing either through a pension an icer even a junior icer or just a general investment account you should know that there is a minimum initial investment of 500 pounds or a monthly ongoing contribution of 100 pounds a month but the most important fact of all is that these are one decision funds which means that once you've worked out which one is right for you that's it you do not need to invest in anything else and this is actually a really big thing because when it comes to investing each time that you have to make a decision is ultimately just another chance to mess things up now this is simply just because our little monkey brains are really not very well evolved for dealing with the emotional trials and tribulations that come with investing in the stock market which is why when it comes to investing simplicity really is king and if you can set up a direct debit to one of these funds that comes out of your account straight after you get paid your salary each month and you can just leave it and forget about this you are going to do far better than the vast majority of investors out there performance and expected returns so now we're looking at the performance of each of these funds over the last 10 years and at the top a we've got 100 equities and at the bottom e we've got 20 equities now as you can see they are pretty evenly spread out which means that they're doing what they say on the tin but as you can see from the period of 2010 up to about 2013 the difference in performance wasn't actually that much and that's because bonds were actually doing very very well over the period so just because you're investing in a 100 stocks fund it does not mean that you're likely to be ahead all of the time so what i want to show you here is what each of these funds did in march last year because it's a great example of what you might expect to happen during the next crash and there will be another crash so as you can see the 100 stop portfolio performs the worst and drops by over 25 and for the 80 stocks minus 20 and 60 minus 15 and it goes up and you can see that the 20 stock portfolio only fell by about eight percent so i hope this gives you a good idea of what sort of fund you think you would be comfortable investing in now this last graph that i want to show you plots the volatility of these funds aka the risk which you can see on the x-axis against that annualized return over the last 10 years now as you can see they're doing exactly what they say on the tin slightly less risk and slightly less return as you add more bonds now if bonds and stocks were in fact perfectly correlated we would expect these portfolios to sit along a straight line where as you're adding more bonds you're also getting less risk and getting less return in an equal measure but as you can see these portfolios do not fit along a straight line and this is evidence of exactly what i was talking about earlier this is the free lunch of diversification this shows us that stocks and bonds are uncorrelated to some degree and as you mix them together you get the same return but you get it for a lot less risk as you can see the 60 40 portfolios are the ones that get the biggest benefit because they're the ones with the biggest mix of stocks and bonds how to pick the right fund for you so we've already covered how you could try and work out what your tolerance for risk is and if you were to use a risk tolerance questionnaire you need to remember that the results of this should only really be used as a guide because there are several other factors that you need to consider the first of these is your capacity for loss so imagine if we had two high risk investors we've got alice who's 25 years old we've got ben who's 65 and he is just about to retire now think about how a sudden 30 drop in the markets would affect each of these investors well for alice who's got a whole lifetime of earning and investing ahead of her this is actually a really good thing because when she goes to invest next month she's going to be buying in at a lot lower price and she's got time on her side to wait for the markets to come back ben on the other hand does not have any time to wait and it's probably best if ben reduces the risk of his portfolio as he gets closer to retirement to avoid any nasty shocks now vanguard actually has a set of funds their target retirement funds that operate in a very similar way to the life strategy funds but they will automatically reduce your exposure to stocks as you get closer to retirement and the final factor is how much risk are you going to need to take how much growth do you need to help you achieve the things that you want in life but remember if you get greedy and you end up with a much higher risk level than you can tolerate then the chances are that you're going to panic and you're going to sell out at exactly the wrong time and it may take you a long time to come back to the markets well that's it for today guys i hope you can see that instead of just talking through a fun fact sheet i'm trying to teach you about some of the fundamental principles that go into investing because i believe that if you understand the science that goes into portfolios like this you're much more likely to stick with it and ultimately become a better investor now if that sounds good to you then please do think about subscribing because i'm going to be creating a lot more content exactly like this

Channel: James Shack

Views: 275,127

Keywords: vanguard investments uk, vanguard index funds for beginners, index funds for beginners, vanguard uk, Lifestrategy, Vanguard lifestrategy, Vanguard lifestrategy funds, lifestrategy 100, lifestrategy 80, lifestrategy 60, index funds, Lifestrategy funds explained

Id: lGQ9KyQq8Jw

Length: 19min 53sec (1193 seconds)

Published: Fri Jan 22 2021