Novice investor asset allocation - bonds or cash?

guymo

Hi,

I'm planning to get started with an S&S ISA and have two questions about asset allocation which I'm going to post in two threads because I think they're orthogonal.

Background: I'm 41, married, 2 kids, mortgage of £220k on a £500k property, have a few months' expenditure in cash, pension in good order (final salary scheme), and a little spare money each month to stash away. My goal at the moment is to build up some funds to give myself options in 10-15 years' time -- e.g. the ability to pay off the mortgage early, or help the kids, or…

Question:

Most investment advice I've read would suggest a portfolio of somewhere between a 70/30 and 50/50 mix of stocks and bonds, depending on how aggressive the commentator is.

However, my plan is to invest something like £500 per month, and I already have cash reserves around £8000. Meanwhile, bond prices are high and yields are lower than one can get in a cash ISA.

So, is there a role for bonds in my portfolio at the outset? Is it just as sensible to continue increasing the amount of cash in decent-interest accounts, or is there a reason to include bonds from the outset? I'm not particularly talking about "timing the bond market" here, but I can see liquidity advantages to holding cash, and I can't see any counterarguments in favour of bonds as things stand.

All thoughts gratefully appreciated!

jimjames

When I first started I had no bonds at all. I now have a very small amount but it is still only around 2%. I'm similar age but am happy to have very high equity holdings rather than cash.

Wilkins

Just my current inclination, but I have no bonds at present and nearly as much cash as equities.

Sobryma

One approach which I like is Roger Gibson's approach in his asset allocation book. He splits non equity approx 50 short term, 50 longer term, For the shorter term the split is cash and short term bonds. This can be done pretty easily (Vanguard do a s/t bond fund). As regards future bond returns his analysis points to low returns future returns from here on but also with less predictability - based on prior bond highs.

Linton

In your situation and under current circumstances I dont see much point in holding bonds. Look again in 5-10 years time when you may know when you will need the money and hopefully the world economy has returned to a more normal state.

However perhaps your cash reserves could be a bit higher. 6 months living expenses is one guideline.

SomeUser

A golden rule is diversify your assets if you want to hedge against different types of risk.

If inflation goes mental, and interest rates don't keep up, then your cash won't be worth as much. If inflation goes mental, then you're far less likely to lose real value if invested in bonds because the value of those bonds will also increase.

If going for bonds, we suggest using a high quality all duration bond fund (again, diversifies in the bond world).

If using diversifying as your principle to hedge your bets against the different risks, then I'd probably go for some cash ISA (i.e. deposit) and consider a cash/money market fund, plus some bonds plus some equities.

For equities, a market weighted global fund with currency hedging is currently considered the gold standard for the average investor (Market weighted is approx 30/60/10 UK/overseas/emerging market).

If no currency hedging then 50/40/10 UK/overseas/EM allocation.

(I'm a pensions consultant - advising companies on their scheme design, fund range etc)

pip895

SomeUser wrote: »

A golden rule is diversify your assets if you want to hedge against different types of risk.

If inflation goes mental, and interest rates don't keep up, then your cash won't be worth as much. If inflation goes mental, then you're far less likely to lose real value if invested in bonds because the value of those bonds will also increase.

I thought the received wisdom was
inflation up = interest rates up = bonds down ???

ffacoffipawb

pip895 wrote: »

I thought the received wisdom was
inflation up = interest rates up = bonds down ???

Yes and down in nominal terms too, at least cash will maintain its nominal value.


Bonds are one thing I don't own (apart from fixed rate bonds which are not bonds in this context). I have equities (ISA and SIPP) and I have cash (ISA and non-ISA).


Bonds are uninvestible at current levels.

cathybird

I would be interested to know if anyone has holdings in funds that invest in asset classes that are neither equities nor bonds (eg commodities, property, gold etc). I ask because I'm currently wrestling with the same question as guymo.

gadgetmind

I hold infrastructure, financial capital, and property both directly and via funds.

I bought into these when they presented value and went fairly heavy on the infrastructure as I figured that "safe money" would flood into it with bonds being so "risky".

I'm happy holding but may dump infrastructure soon as the premiums can't last.

Wilkins

SomeUser wrote: »

If inflation goes mental, then you're far less likely to lose real value if invested in bonds because the value of those bonds will also increase.

Could you just run that one by me again or do you mean only index-linkers?