Index Linked Pension?

Debt_Free_Chick

Here you go - one Index-Linked Bond Fund - there are probably others.

Bear in mind that these funds are closely correlated to interest rates and inflation .... so with low interest rates and inflation falling ..... are you sure this is where you want to be?

foncused

Thank you all for the help you're giving me.

My concern is that we're in recession for the long term, but government "stimulus" will cause high inflation. Would a bond fund keep up with inflation?

Debt_Free_Chick

foncused wrote: »

Thank you all for the help you're giving me.

My concern is that we're in recession for the long term, but government "stimulus" will cause high inflation. Would a bond fund keep up with inflation?

No guarantee that it would. The yield is more closely aligned to interest rates, plus a premium for the default risk.

You are experiencing a problem faced by many institutional pension funds, who need index-linked income to match the index-linked pensions they pay out (although, the problem here is one of duration). The only option here is index-linked securities, but supply lags demand (especially as pension funds are after them) so they can be expensive.

How old are you? If you are 10/15 or more years away retirement, you shouldn't really be worrying about this.

foncused

I'm a long way from retirement, but starting my first pension - I don't want to begin with an investment that's likely to go bad over the short term just because it may be better in in a few years' time.

To put in another way, I need to choose a fund for my pension, and I want to choose something which won't get off to a bad start. For the next few years, I would definitely prefer to sacrifice potential returns to avoid risk. Once the economy has settled, I can re-evaluate my position.

dunstonh

To put in another way, I need to choose a fund for my pension, and I want to choose something which won't get off to a bad start. For the next few years, I would definitely prefer to sacrifice potential returns to avoid risk. Once the economy has settled, I can re-evaluate my position.

Thats the reverse of what you should be doing though. If you wait until things are better, the markets will already be 30-50% higher than they are now. You will miss out on that and when you are feeling happy that the markets have gone up, you will move back in to them just in time for the next crash.

All asset classes perform differently at different times. You should never go 100% into one asset class. Trying to time the markets is futile. Your investment strategy at the moment is more aligned to someone in the last 3-5 years of their working life.

You need to remember that the markets have mostly priced in the recessions already. Yes, there will be short term volatility for a while yet but you take advantage of that with your monthly contributions by buying units cheap.

You should take a more balanced approach and look at a spread of fixed interest, property and different equity markets to give you proper diversification.

I think your problem is that you are young and whats going on is new to you (most under 35s havent experienced anything like this before). However, its a common event. The industries hit and the degree of the recession vary but they occur on average once every 7 years. You see times like this as a buying opportunity for very long term contracts.

jamesd

Given age you should be looking to equities more than bonds.

Bonds of all sorts go down in capital value during times of high inflation because the real (meaning after inflation) value of their regular payments is lower.

Bonds of all sorts go up in value in times of low inflation because the value of their regular payments is higher.

Corporate (company) bonds go up in value as fears of economic trouble recede (before they do recede) because the fear of companies not making their regular payments or going bust decreases. The lower the risk grade (higher risk), the greater the likely gain.

Government bonds (gilts) are where people go when very afraid and willing to sacrifice income for security. So that causes their prices to increase, which is where we're at today.

Index-linked bonds (corporate, not many of which exist, or gilts) tend to have capital growth just around the start of high inflation times because the index linking protects the ongoing payments from inflation.

Economic forecasts for the next year or two are low inflation or deflation (so value of bonds goes up) then reducing fear and economic recovery (so bonds go up for a while due to reduced fear, then later down as people no longer run to them for security but switch back to equities instead). Then high inflation (so bonds go down in value, except that index-linked go up due to buying by those who are still afraid). And throughout this as there's a hint of recovery, equities start to recover but still continue to bounce all over the place.

The movements in value of equities is greater than the movement in value of bonds.

Now is a good, if volatile, time for those investing for the long term to be buying equity funds. In the short term, corporate bonds look like a better deal than government bonds (because the price bubble effect is less, due to the higher fear factor, so capital value recovery likely, while the same fear factor reduction would cause a decrease in government bond prices as people switch from them to corporate bonds to get the higher corporate bond interest payments).

What you actually should be doing is a mixture, heavy on equities. You try to buy those when fear is at maximum. Now's not far off that. Probably. You never can get the exact bottom but since prices tend to bounce around it, now's close enough.

All of this is pretty much standard theory of how things happen, based on history. Except for the bits that pay attention to economic forecasts and try to work out what to do with what they are saying, and over what timeframe. And whether they are right, which is where it gets hard. But this doesn't change what you should be doing significantly: buying mostly equities.