Investment Sector Spreading

el-dog

Hi - advice/suggestions please.

I currently have a small(ish) ISA based portfolio of funds that is fairly heavily biased towards equities (about 80%) split between UK (most) US (some) Europe (little). The other 20% is in property and natural resources.

I'm looking towards using this years ISA allowance and off setting some of the risk by considering corporate/UK/global bonds. Does this seem a good plan for a cautious type investor and can anyone suggest the best sites to research into the various types of bonds?

Thanks

El-Dog

dunstonh

Diversification is always good.

UK bonds are slightly lower risk than global bonds but the degree of which would depend on the type of bonds you use. Typically,most are lower than medium risk. Commercial property funds in bricks and mortar (Rather than shares) are also lower risk.

Research would depend on what you are after. If its quick and simple, then morningstar or trustnet seem to be the best free feeds available.

moneytroll

IMO, bonds don't seem to be a very useful investment at the moment. Though usually good for diversification, I would rather put cash into a high-rate savings account (or diverisify by buying other funds ). If you browse trustnet, you'll see that bonds was one of the worst performing sectors recently.
Many will disagree, but I don't see how bonds are useful for offsetting risk; though they are lower risk but they still move pretty much in parallel with the market and at the moment they are clearly overpriced (it's only my opinion).
Though property is usually better for diversification than bonds (as there is a much lower correlation), at the moment, it seems to be peaking too.
Sometimes having two risky funds that aren't correlated is less risky than having two low risk funds that will move up/down simultaneously...
But please do your own research!
I am in the same position right now trying to use this year's ISA allowance to balance out my portfolio and decided not to buy into bonds or property after all. (But my risk profile is higher than yours).
For portfolio construction with various risk profiles, I found Bestinvest's site useful where you can click on various models: http://www.bestinvest.com/planning/portplan/index.htm
You can construct a portfolio, feed it into Morningstar's portfolio tool and X-ray it to see where you are "over/under-weight". (Sorry if you know that already.)
Hope it helps.

cheerfulcat

el-dog wrote:

I'm looking towards using this years ISA allowance and off setting some of the risk by considering corporate/UK/global bonds. Does this seem a good plan for a cautious type investor and can anyone suggest the best sites to research into the various types of bonds?

Thanks

El-Dog

Hi, El-Dog,

I'm with moneytroll on this; gilts and corporate bonds seem to be overpriced right now; I think that both fixed interest and property are higher risk than they were traditionally - yields on bonds have recently risen with increases in interest rates ( i.e. bond prices have fallen, and will fall further with any increase in rates ) and property has been very popular world wide for a few years now. This is not to say that you shouldn't invest in these areas, ( in fact, mt put it well - " Sometimes having two risky funds that aren't correlated is less risky than having two low risk funds that will move up/down simultaneously..." ) but they are not the haven for the cautious investor that they used to be.

Moneytroll, thank you for that fantastically useful portfolio analyser.

dunstonh

I am of a different opinion to those above. Whilst they currently do not appear good value in the short term, any investment is long term.

However, where they are still useful is on portfolios which are periodically rebalanced. Say you have spread of 10 funds and 10% in each (just for convenience of this example). If 50% is in low risk funds and 50% in higher risk funds, over a period of 12 months, the spread of 10% per fund will get out of sync. In a period of good stockmarket performance, the higher risk funds will go up faster than the lower risk. With rebalancing, the funds are brought back to 10% each with the "surplus" from the higher risk funds going into the lower risk funds. In effect pocketing your winnings. In a poor period of stockmarket performance, the money comes out of the lower risk funds and back into the higher risk. This means you get to invest in the higher risk funds when they are lower.

So, when used with rebalancing and asset allocation, lower risk funds can be vital to give you protection on your investment that you wouldnt get otherwise.

cheerfulcat

dh, I was not advocating avoiding those areas - just pointing out that they are not " low risk " right now. I agree that diversification across asset classes is important.

moneytroll

The reason I didn't go for bonds/property at this moment was because I didn't want to 'waste' my ISA allowance on them and get a bit more action by diversifying otherwise. Bonds have historically produced just slightly higher returns than cash (always quite a bit lower than equities) and you have to weigh out whether you want to bother spending the ISA allowance on them. (Past performance no guide to future etc etc)

Rates are more likely to go up than down so the situation with bonds might worsen. Unless you do the 'pound cost averaging' thingy (investing a small amount every month to avoid investing just before a correction in the market) the timing now is not good for them. And depending on your tax situation, the rates in internet savings accounts are not that bad in comparison with bonds right now, IMO.
Again, people will disagree (which is the whole point of having a discussion ;-)

(Glad you liked the tool, CC.)

el-dog

Thanks all.

I had similar thoughts about bonds only providing similar returns to high interest accounts but nevertheless wanted to use the shares ISA allowance and didn't really know where else to go.

Sometimes having two risky funds that aren't correlated is less risky than having two low risk funds that will move up/down simultaneously...

This is appealing although I may be being thick but I'm not sure what you mean by "aren't correlated"? For example would this be selecting funds from differing emerging markets ie Russia and China or going for something like a wider cap split? Certainly the Bestinvest portfolio tool doesn't like that sort of approach and keeps telling me to get bonds! but thats software for you - no intuition!

El-Dog :undecided

Debt_Free_Chick

I'm going to offer another view of the bond market ....

They are overpriced at the moment, compared to what they will yield, but it's worth remembering that the performance of a managed bond fund depends partly on the yield (the interest on the loans) but also partly on the repayment of the capital.

So .. you might be paying a premium to obtain the yield, but each bond should be redeemed at par (ignoring any that default, which is rare and needs to be considered as part of a mixed bond portfolio, compared with a single bond/debenture).

But I'm not sure what El-dog means by "offsetting some of the risk" compared with equities.

Bonds have a lower risk of not returning your capital. But a higher risk of producing return that is less than inflation (i.e. not a "real" rate of return).

My question for the El-dog is ... what risk are you hoping to offset? It seems to me that you have other risk in your portfolio ....

moneytroll

"This is appealing although I may be being thick but I'm not sure what you mean by "aren't correlated"?"

Not at all, it's hard to determine correlation factors. there are many big sectors like geographical sectors, information, service and manufacturing ones. Then smaller sectors within those. They are by no means all completely independent/not correlated from each other.
I found that constructing a virtual portfolio here of the funds you like was helpful: http://www.morningstar.co.uk/frames/ChooseAdvisorType.aspx?lang=

And then going to 'Portfolio X-ray' helps you understand what your portfolio is made of and where it needs adjusting etc. Not all sectors need to be equally balanced as well of course. (Cheap trick: Take some Fund of Funds, load them into the portfolio and see/compare/study what they are made of. Of course, you have to eventually make up your own mind.)

PS: Also not a good idea to put most of your liquid assets (not clear from post if that's the case) into shares/bonds etc, important to keep a relatively large proportion in cash (depending on risk profile). But definitely worth using the full ISA allowance each year for tax benefits.
So if you don't have too much cash to fall back on but still want to use ISA allowance, bonds/property is a good idea (though not necessarily right now - there's still a whole year till next April to see/observe the markets). if, however, you feel like you want your equity investments to see in full action asap (again, assesing risk profile is very important before doing anything!), there's not much point in them, IMO.