index-linked gilt fund - time to switch?

Phyllis

My ISA is currently invested in corporate bonds and these now look fully priced. Given the prospects for inflation over the next couple of years, might this be a good time to switch into an index-linked gilt fund? If so, what would be the likely return?

gozomark

on what basis do you judge them fully priced ?

what inflation rate do you expect in the next couple of years ?

Myrmidon_J

Phyllis wrote:

Given the prospects for inflation over the next couple of years, might this be a good time to switch into an index-linked gilt fund? If so, what would be the likely return?

The "prospects for inflation over the next couple of years" are by no means fixed. Some commentators think that inflation will feature prominently; others warn that we may in fact experience deflation. It is impossible to predict.

A lot depends on future Bank of England and government policies, which are (as yet) undefined.

In my opinion, (almost) all portfolios should incorporate an element on index-linking. However, I am unaware of your personal circumstances, so will not comment further.

Potential returns, as you might expect, are linked to inflation (RPI); over the long-term, index-linked gilts are almost certain to deliver modest, but significant, real returns. It's much harder to put a figure on this - and I won't even try!

purch

Index Linked Gilts are currently overpriced.

aqueoushumour01

stay in corps for a bit longer. with index linked gilt yields as low as they are I'd wait for a better opportunity to buy. I think corps have a little further to run. i hope you know though that if you move from corps to ILGs that you're reducing your risk and, commensurately, your expected return by holding ILGs. If this your plan then fine but otherwise you might want to find something to invest in alongside those ILGs to try to bump up your return a bit.

gozomark

aqueoushumour01 wrote: »

i hope you know though that if you move from corps to ILGs that you're reducing your risk and, commensurately, your expected return by holding ILGs. .

that should be potential, not expected return

Myrmidon_J

gozomark wrote:

that should be potential, not expected return

I disagree. Either term is valid.

(Almost) all returns are "potential" - it is, indeed, foolish to place too high a level of "expectation" on investment performance - but if you do not start out with some level of "expectation", then what is the point in any form of portfolio planning?

For instance, it is reasonable to "expect" that the long-term returns on equities will exceed the returns on cash, or cash-like securities.

... in my opinion.

gozomark

Myrmidon_J wrote: »

For instance, it is reasonable to "expect" that the long-term returns on equities will exceed the returns on cash, or cash-like securities.

why is it reasonable to expect that ?

Myrmidon_J

gozomark wrote:

why is it reasonable you expect that ?

What?
Really?

The alternative to placing a level of "expectation" on future investment returns is shrugging your shoulders and saying: I literally have no idea. So what is the point in portfolio planning? Why take any risk at all if you have no expectation of reward?

Is it just me, or is this investing 101?

gozomark

You haven't answered by question - why is it reasonable to expect equities to return more than cash in the long term ?

You are turning logic on its head.

Equities do not offer higher returns because they are riskier. The logic runs the other way round. You shouldn't invest in equities unless you expect the return to compensate you for the higher risk.

Myrmidon_J

gozomark wrote:

Equities do not offer higher returns because they are riskier. The logic runs the other way round. You shouldn't invest in equities unless you expect the return to compensate you for the higher risk.

So, the logic runs the other way round: equities are riskier because they offer higher returns. (Presumably) your words. And then: "you shouldn't invest in equities unless you expect the return..."

And yet you don't think it "reasonable" to expect anything?