Friend,
In June 2011, behemoth fund management group Vanguard launched their LifeStrategy range. To say these five funds have been successful is akin to noting that Novak Djokovic has quite the knack for getting the yellow thing over the net and within the lines: combined, the funds have around £38bn of investor money. I imagine most of you have heard of Vanguard; some of you might even have some money in a LifeStrategy variant.
Essentially, they are a “buy once and forget about it” solution. They are popular with many financial advisers. As well, the LifeStrategy approach is ideal for civvy street and Mrs Miggins, who doesn’t want to engage with an adviser and prefers to do her own cooking. The funds are low-cost, highly diversified and kind of look after themselves.
Unlike Mrs Miggins, sadly.
Investors, not investments, fail again
In 2023, over £400m was withdrawn across the LifeStrategy fund range. Money poured into the two equity-heavy variants. Tragically, way more money flowed out of the three bond1-heavy ones.
In particular, LifeStrategy 40% (40% in equities, 60% in bonds) saw investors withdraw £1.2bn, LifeStrategy 20% (yep, 80% in bonds) £405m. Why did people do this?
The last couple of years have been horrendous for bonds of all types. These assets do not like interest rate rises. And what have we had over the last year or so? A record number of interest rate hikes. Bond prices have taken a battering. Bond-heavy funds likewise.
And so adviser-less Mrs Miggins has panicked. It’s a tragedy of Shakespearean proportions.
There is nothing either good or bad, but thinking makes it so
As old Willy wrote, it’s not what happens to us that matters but how we choose to react to those happenings. Granted, if you’re rendered paraplegic in a horrendous car crash then your days on the ATP Tennis Tour are probably in the rearview mirror. But most events are within our purview as to how we react to them.
Repeated wrong reactions
People go into bond-heavy investments because they are supposedly “safer” than equity funds chock full of The Great Companies of The World (GCOTW). The fact that bonds can and sometimes do get eaten alive by inflation is apparently of no concern to these folks: as long as their annual statements show their investments are still there and have grown by a little bit, all is well.
For the last couple of years that has not been the case. Mrs Miggins reads in the Sunday Times Comic Section Money Supplement about how tech stocks are zooming ahead, subconsciously taking in all the tech fund banner adverts conveniently hanging around the piece like a bad smell.
Pulse racing she then looks at her LifeStrategy 20% (repeat: 80% in bonds) valuation and works out that it’s down 8.1% over the last three years. As an aside, if a sadistic adviser was on hand, he could whisper in her ear that the actual decline in the value of her money in the only terms that matter - purchasing power - is far higher, because of double-digit inflation over that period. But I digress.
And so Mrs M bails and sells out of her investment. A temporary decline, one on paper only, is turned into a permanent loss. With the sale proceeds, she invests in Tech Gizmo Rocket Fuel Fund, run by famed manager Tarquin Arbuthnot-Smithers. Rinse and repeat and, hey presto, destitution by design!
It’s cheaper so I want less of it
If you thought having 80% of your money in bonds was a good idea three years ago a) you need a good talking to and b) you should be over the moon right now, selling off your kidneys to get more money to plough into bonds, not out of them2.
Let me explain.
The Event: Amazon Black Friday.
The Reaction: “Honey, let’s remortgage the house to buy more things we don’t need with money we don’t have to impress people we don’t like.”
Black Friday isn’t a cultural “thing” because Amazon puts its prices up for a day. And right now, bonds are on sale! They are cheaper presently than they have been for a long time.
But with the Mrs Miggins’ of this world, they see declining portfolio prices and hey presto:
The Event: investments go on sale.
The Reaction: sell out of the thing that’s on sale.
This is bats-in-the-belfry stuff. Sadly, with investments, we are hardwired to do the wrong thing, at the wrong time, for the wrong reasons.
As the value of investments ▼, their expected future returns go ▲. Investments get less risky as their prices fall. It’s counterintuitive and the whole culture screams otherwise but it’s true.
And I’m all about the truth. The role of a trusted adviser is not to tell people what they want to hear but what they need to hear. If there’s a Mrs Miggins in your world, do let her know I’m always up for a chat. Tell her to call Marcus.
Also known as fixed-income. Sub-categories of which are gilts and corporate bonds. I’m dozing off just typing this stuff.
For the literal amongst you, this is not advice to sell either your kidneys or to buy more bonds.