Uncorelated Assets

vax2002

Look at your local area and ask, do these people have £3 or £4 to spend on one bun.
Or is that a meal for a family.

gadgetmind

TCA wrote: »

I intend to read the Tim Hale book, but just want to ask now, what is the advantage or rationale to holding bonds or gilts over cash if holding equities too? Assuming you fixed your cash at around 4%, why would you want a lower interest bearing asset?

Because gilts and bonds *usually* have higher returns than cash because of their "risk premium". Gilts are currently seen as so safe that the returns are negative in real terms. High-quality corporate bonds are also seen as safe, so ditto but to a lesser extent. Lower quality corporate bonds, and sovereign bonds from less fiscally astute countries, are seen as higher risk so you can get a much higher return, but with a risk of a haircut or wipeout!

Anyone who sailed into this mess with a portfolio of gilts and equities will have been selling the gilts as the price soared and buying equities as the price dropped. I did this, but made the same mistake as many and went too far and too soon. Lesson learned!

Those buying now may prefer to keep their exposure to very low yield bonds/gilts down and bias their non-equity investments elsewhere. I've done this with corporate bonds (mostly held in low-TER ETFs) but I've also put some money into infrastructure and even some into financial bonds/prefs where I think the risk versus reward ratio is out of kilter.

I'm also holding some commercial property, but I've carefully chosen REITs with low gearing as I think we're in for some "interesting times" in this sector.

It's very off topic, but here's a report that came out today from one of my property holdings.

http://www.londonandstamford.com/media_centre/rns/?id=26406

The yield of 6.6% suggests that the market sees more risk than I do. I guess time will tell who is right and who is wrong!

gadgetmind

Perelandra wrote: »

only to realise he'd said something similar at 8:04! Oh well... lol

Yeah, so either we're both right or we're both wrong!

Radiantsoul

TCA wrote: »

I intend to read the Tim Hale book, but just want to ask now, what is the advantage or rationale to holding bonds or gilts over cash if holding equities too? Assuming you fixed your cash at around 4%, why would you want a lower interest bearing asset?

It is a good point. Bond prices move inversily to interest rates, so you have a risk of a capital gain or loss which doesn't exist(ignoring inflation for savings accounts).

Bond holders have done well as interest rate expectations have fallen and so their capital value has gone upwards.

SnowMan

gadgetmind wrote: »

Because gilts and bonds *usually* have higher returns than cash because of their "risk premium". Gilts are currently seen as so safe that the returns are negative in real terms. High-quality corporate bonds are also seen as safe, so ditto but to a lesser extent. Lower quality corporate bonds, and sovereign bonds from less fiscally astute countries, are seen as higher risk so you can get a much higher return, but with a risk of a haircut or wipeout!

If you look at the redemption yields on roughly 5 year government gilts they are in the ballpark region of just under 1%pa at the moment.

You can get 4.4% ish (gross) for a 5 year fixed rate savings account.

So I am not sure why a private individual would want to invest in gilts?

Yes if interest rate expectations lower still further then gilt prices may rise but the market has priced in their best expectations so it could go either way.

Now I presume that if interest rate expectations lower that would indicate a further or more long lasting slowdown in the economy which may hit equities so there is a 'uncorrelated asset' argument for holding gilts especially much longer term ones (much more than 5 years) where a reduction in interest rate expectation has greatest effect in increasing price.

But given the very low redemption yields (even on the longer term gilts) is the cost of that 'uncorrelation' protection really worth it?

Discuss

gadgetmind

SnowMan wrote: »

You can get 4.4% ish (gross) for a 5 year fixed rate savings account.

If it were possible to do that in an ISA and/or SIPP, then I would be a happy man.

But given the very low redemption yields (even on the longer term gilts) is the cost of that 'uncorrelation' protection really worth it?
Discuss

I'm currently avoiding gilts due to the asymmetric risk/reward situation, which is a decision that I'm not entirely comfortable with, to say the least!

crittertog

gadgetmind wrote: »

If it were possible to do that in an ISA and/or SIPP, then I would be a happy man.

Birmingham Midshires/Halifax 5 Yr ISA (with transfers in) 4.25%, Halifax 4 Year ISA 4.15%, 3 Year ISA 4%.

SnowMan

crittertog wrote: »

Birmingham Midshires/Halifax 5 Yr ISA (with transfers in) 4.25%, Halifax 4 Year ISA 4.15%, 3 Year ISA 4%.

I think gadget is referring to using his stocks and share ISA allowance to invest in gilts and corporate bonds etc (on the assumption his cash ISA allowance has alraedy been used up).

That stocks and shares ISA allowance couldn't be used to invest in cash ISAs but it could be used to invest in corporate bonds etc and so it changes the comparison over that given in my earlier post to 3.52% (4.4 x 0.8) for 5 years against the gilt redemption yield of around 1%, which is a resonable point.

gadgetmind

SnowMan wrote: »

I think gadget is referring to using his stocks and share ISA allowance to invest in gilts and corporate bonds etc

Yup. Having different asset classes in different wrappers/pots makes life hard when rebalancing.

on the assumption his cash ISA allowance has alraedy been used up.

I have rarely bothered with cash ISAs as I use the full lot for S&S. I have used NS&I linkers, but this is in case the printing presses are switched back on.

I have a 50 trillion dollar note on my desk to remind myself how easily this can be done. Silly old Reserve Bank of Zimbabwe!

JohnyBM

gadgetmind wrote: »

Yup. Having different asset classes in different wrappers/pots makes life hard when rebalancing.



I have rarely bothered with cash ISAs as I use the full lot for S&S. I have used NS&I linkers, but this is in case the printing presses are switched back on.

I have a 50 trillion dollar note on my desk to remind myself how easily this can be done. Silly old Reserve Bank of Zimbabwe!

The printing presses will be switched back on for sure, if they are not already in a stealthy manner.

So would gold and silver bullion that you buy privately and keep away from prying eyes count as uncorelated assets? They are certainly a protection against the power of the printing presses.