Index-linked Gilts

Aegis

lemon26 wrote: »

Thanks Aegis, I'm 26 and will be retiring in 29 years. I was thinking of getting a lump sum now which would take me to 20% of portfolio then increasing my equities holdings (and maybe even property) over time which would reduce the proportion of gilts in my portfolio. Or would a regular savings plan be better as it will build up over time and I can pound-cost average?

To be honest, gilts aren't likely to form a particularly large part of your ideal portfolio. At age 26 you'd typically want to focus more on cash (for saving up for things) and equities (for longer term wealth building and retirement planning). You might end up with a small fraction of your portfolio dedicated to fixed interest, but 20% into gilts is likely to be far too much if you're looking for long term growth rather than income.

Is this part of your pension? You specified when you were looking to retire, so it makes sense that you're looking at your pension, but correct me if I'm wrong.

purch

Pretty low risk & guaranteed to have returns above inflation

Unless, of course you buy them at too high a price, like they are currently.

Remember Index Linked Gilts are not the same as Index Linked Savings. Gilts trade on the open market, and can be at a discount or premium to their neutral level, which will have an effect on the returns you can expect to receive.

The only thing about Gilts or Index Linked Gilts that can/should be classed as Low Risk is the counterparty risk.

lemon26

This isn't anything to do with my pension, merely a longer-term savings plan (10+ years) that I've started small and aim to grow over time. My pension is totally seperate through work and non-contributory.

My portfolio is quite small at present so if I was to put the minimum purchase (£250) into the Gilt fund it would amount to 18% of my portfolio - although I am building it over time with monthly savers whereas I would only purchase the Gilts as a one-off so over time the proportion would decrease. Would a monthly saver into the Gilt fund be a better option than a one-off purchase?

fg22

As purch says, these are expensive at the moment and you may easily make a loss if they decease in price. For my long-term savings I don't have a gilt (conventional or index linked) fund but have perhaps a few % held as part of other funds. When nearing retirement they can be useful as the price of annuities depends on them. For protection in the long term against inflation think about real assets such as equities and property - income from which should increase - or think about commodities. If you want less risk choose NS&I certificates which guarantee to beat inflation (or occasional products from other providers)

bristol_pilot

A youngster should be in cash, equities and property IMHO. I'm in cash and equities and I'm over 40. Gilts are for grannies.

lemon26

Thanks, I might stay away from the gilts for a while and I had considered a property fund but people on here had advised against - was thinking of the Threadneedle UK Property Trust - as I've already got a high proportion of equities and I'm into commodoties with 5% of my portfolio in the JPM Natural Resources fund.

I was also thinking of a FTSE 250 tracker to capture any growth in smaller companies in the UK but I don't have any emerging markets funds - would they be an idea?

mal4mac

Bogle the index tracking guru suggests (roughly) putting the same amount in gilts as your age. So on that reckoning 26% is the amount for a 26 year old. "Gilts are for grannies" is just one person's opinion -- I'm not a granny and it's not my opinion. The other 74%, according to Bogle, would go into a UK all stocks index tracker. You can set this up cheaply at fidelity supermarket -- ignore all those other expensive funds though Before making these investments I'd be paying off a mortgage (diversifying into property!) and taking out a Cash ISA (diversifying into cash!). I'd take out my full equity ISA following this shares/gilts pattern and then pump the rest into a pension on the same pattern. Then I'd forget about all this investing malarkey, and sleep happy knowing bankers et. al. are getting the absolute minimum in expenses from me. I'd then live on the remaining wages from my naff job & aim to retire at 44. But that's just my plan. What do I know?

I've seen it argued that an all stocks tracker captures enough small companies and emerging markets are covered 'cause UK companies have many dealings abroad. Seems reasonable to me, after reading Bogle's books & a few others. But, again, I'm no expert.

Aegis

mal4mac wrote: »

Bogle the index tracking guru suggests (roughly) putting the same amount in gilts as your age. So on that reckoning 26% is the amount for a 26 year old. "Gilts are for grannies" is just one person's opinion -- I'm not a granny and it's not my opinion. The other 74%, according to Bogle, would go into a UK all stocks index tracker. You can set this up cheaply at fidelity supermarket -- ignore all those other expensive funds though Before making these investments I'd be paying off a mortgage (diversifying into property!) and taking out a Cash ISA (diversifying into cash!). I'd take out my full equity ISA following this shares/gilts pattern and then pump the rest into a pension on the same pattern. Then I'd forget about all this investing malarkey, and sleep happy knowing bankers et. al. are getting the absolute minimum in expenses from me. I'd then live on the remaining wages from my naff job & aim to retire at 44. But that's just my plan. What do I know?

I've seen it argued that an all stocks tracker captures enough small companies and emerging markets are covered 'cause UK companies have many dealings abroad. Seems reasonable to me, after reading Bogle's books & a few others. But, again, I'm no expert.

I honestly couldn't take myself seriously as an investor if I had almost 30% of my money in gilts right now... Far too boring for me!

sabretoothtigger

26 is very young investment wise because you have another 30 years till retiring.
A quarter of all wealth in gilts would only make sense if you needed that money soon, maybe its a house deposit ? That'd make more sense


Also if Purch says index gilts are at the top of their valuations thats probably good advice. Im kinda surprised because I thought index linked might be lower because of the whole deflation fear but gilts are demanded either way I guess


At 26 growth is the key thing and buying a security at the top of its market would not fit into that. Same could be said of gold however in general terms gold has risen since 2000 and gilts have risen since 1981. On a basic level gold is more likely to continue its growth trend I would say



This is american debt but I expect its similar, yield on 10 year bond is shown. Invert this for the rise in bond prices over the last few decades

jon3001

I think too many replies here focus on how gilts behave in isolation as an asset class (low risk, low return) rather than their overall affect within a rebalanced portfolio.

Literature I've read suggests that even a high-risk portfolio should have a minimum of 20% dedicated to fixed-income. Via funds, I've got some index-linked gilts but have also further diversified with high-rated GBP and international corporate bonds. I also include my emergency savings (cash ISA) in that allocation but they wouldn't be rebalanced.

In the long-run, yes - you'd sacrifice a smidgen of your returns. However the volatility of the portfolio will appreciably decrease giving you more predictable returns. This is because fixed-coupon and index-linked bonds are basically unaffected by the inevitable declines in equity markets. They then give the investor some dry-powder to rebalance their portfolio, selling their bonds to buy equities at a cheap price. This is how you get an extra return above what gilts/bonds would usually deliver.