Confused between long-dated gilts & index-linked gilts

evilplan

Hi everyone

I'm a brand new investor - a few months now - and I'm gradually gaining lots of knowledge.

I've been convinced by Tim Hale's book, Smarter Investing, to adopt a mostly tracker-based portfolio (but I've bought a few active ones just for fun and interest).

I'm roughly using his 80-20 risky/defensive approach.

For this approach, he recommends 20% into long-dated gilts.

My confusion is over a simple issue. In his book, he also mentions index-linked gilts, but calls these "short-dated".

Now, if I look at 2 trackers, Legal & General All Stocks Gilt Index (which Hale recommends as a short-dated gilt tracker) and Legal & General All Stocks Index-Linked Gilt I see that the "index linked" one's holdings are much longer dated than the non lindex-linked one. You can see the top holdings by scrolling down the page on the links I just gave.

I've researched what people mean by short and long-dated, and the L&G fund fact-sheet does say that the index-linked one is for around 9-10 years and the non-index linked one is for up to 15 years. But the holdings picture is the opposite - the index-linked one goes 20-40 years off.

So, when I look at the holdings, am I just seeing an unrepresentative snapshot of the moment? Should I ignore these holdings and stick with what people are saying (eg buy non index linked gilts)?

Sorry if this is a simple question. I guess for some diversity, I may as well hold onto what I've bought already - and, as it's a new portfolio, it's not a big deal to make a mistake. I've only got £1800 saved up

B_Blank

When was this book written?

B_Blank

80-20 sounds extreme. I would say 60/40 stock/bond ratio is good

evilplan

Hi B Blank.

The 2nd edition was written in 2009.

It's definitely at the riskier end of the spectrum, I grant you.

The book is actually a cracking read, and really disciplined me against active fund chasing.

He offers a number of model portfolio splits. The one I'm roughly following is this:

Emerging markets 8%
Global commercial real estate 8%
Commodities 8%
World ex-UK all-share 20%
World ex-UK value 8%
World ex-UK small cap 8%
UK value 4%
UK all-share 12%
UK small cap 4%
Long-dated UK gilts 20%

So you can see that 20% of it is in gilts as a defensive investment, 80% in equities as a growth strategy. Perhaps "risky/defensive" isn't the right term, given that 8% goes into FTSE all-share (I just took the terminology from one part of the book).

Hale recommends mixes with everything from 0% in gilts (100% equity, risky) to 100% in gilts and nothing in equities, a totally defensive position which I'll move over to as I get old and grey.

evilplan

I am gonna do some searching on the forums about this, actually, to widen it out. For example, I absolutely understand the need for true diversity in a portfolio - but should that diversity extend to, for example, buying two different passive FTSE all-share index trackers? I'm finding it really enjoyable, reading everyone else's experiences. The one thing I've learned is, I've got very high risk tolerance, which means I can play a lot more.

Lokolo

No point buying 2 index trackers, as they do the same thing. The only difference will be the tracking error, so get the one which has the best.

B_Blank

Its possible that with the fiscal debt crisis that so called defensive stocks arent as such. In the UK we still seem to have gilts in demand. I have noticed that with my 60/40 (roughly) portfolio that it has really taken the sting out of recent stock market falls so I am down about 3% this year.

As for your question I cant answer it. But I presume the index linked gilts are also available for different durations of time just like normal gilts.

B_Blank

evilplan wrote: »

I am gonna do some searching on the forums about this, actually, to widen it out. For example, I absolutely understand the need for true diversity in a portfolio - but should that diversity extend to, for example, buying two different passive FTSE all-share index trackers? I'm finding it really enjoyable, reading everyone else's experiences. The one thing I've learned is, I've got very high risk tolerance, which means I can play a lot more.

They key moment is knowing when to buy imo. As is obvious. I would consider building your portfolio monthly if you dont trust your judgement on when to buy.

evilplan

Indeed B Blank, I'm doing just that - drip-feeding around £450 a month into different funds, changing them each month so I start to build up a solid base (for example, last month putting chunks into FTSE all-share, emerging markets, gilts etc. (all trackers), and next month putting money into trackers for Asia, US, Europe, then rotating back to the other funds - will probably have about 10-12 funds in the end; am also building up cash so I can buy a few ETF trackers without losing a big % in dealing charges).

I definitely am glad I read Hale's book - up to that point, I would've been cocky and assumed I could learn how to time the market. But the probability of me being able to truly do that is low enough to make it much more attractive to buy into trackers, even the riskier ones.

Now the only thing I really need to learn is patience

Lokolo

Not sure why you want to go very risky, but don't want to go for managed funds and try and time the market. That's the fun bit about investing!

evilplan

I guess I'm mitigating my high risk strategy by making it all passively managed

I do plan to put aside some "fun" money - I really don't like the idea of (using Hale's advice) only looking at, and rebalancing, the portfolio once a year. Where's the fun in that?

So I've also bought some of the star names, like Aberdeen Emerging Markets, JPM Natural Resources etc. I might have a "10% fun, 90% dull" strategy on top of my "80% equities 20% gilts" one.