Novice investor asset allocation - bonds or cash?

gadgetmind

Wilkins wrote: »

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

Index linkers currently have negative yields to maturity.

Fixed interest is more of a gamble but high inflation will see it faring even worse.

I'd love to see someuser's working here with particular reference to convexity.

http://en.wikipedia.org/wiki/Bond_convexity

dunstonh

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.

It is your risk profile and capacity for loss along with knowledge and understanding that matters. Not non-advised articles on the internet.

kidmugsy

If you want to hold a bit of liquidity in an S&S ISA so that you can buy more shares when next their prices take a tumble, an ETF of short maturity corporate bonds might be a decent answer. Or you could build a "ladder" of five year gilts rolling down to two years, for instance, again with a view to rebalancing to equities as suits.

Either might also pay off well if interest rates stay low for many years, as they have in Japan. On the other hand if your crystal ball says that interest rates are going to rise tomorrow and that equities will be indifferent, why not buy just equities? Investing is so much easier when one knows what the future will bring.

gadgetmind

dunstonh wrote: »

It is your risk profile and capacity for loss along with knowledge and understanding that matters.

Agreed.

Not non-advised articles on the internet.

As the vast majority of my knowledge and understanding of volatility and asset allocation has come from such articles (and books recommended by same) then I'd personally like to give the internet three hearty cheers!

guymo

kidmugsy wrote: »

If you want to hold a bit of liquidity in an S&S ISA so that you can buy more shares when next their prices take a tumble, an ETF of short maturity corporate bonds might be a decent answer. Or you could build a "ladder" of five year gilts rolling down to two years, for instance, again with a view to rebalancing to equities as suits.

Thanks for this.

I'm afraid I still haven't grasped what advantages this would have over cash in today's conditions, though. I think I understand that short-dated bonds are less susceptible to interest-rate changes and recover more quickly, so I can see an argument for short-dated bonds over long maturity ones, but at the moment I can't see how bonds help:

--- yields are low, so you can achieve comparable interest rates in cash
--- prices are correspondingly high, so can't offer protection if equities start to fall

Have I got something wrong here? You've hinted that I'm really asking a crystal-ball question, which was not my intention at all. I'm trying to understand the mechanisms at work so that I can make informed decisions. I know for sure there is plenty I do not understand about bonds, so I'm wondering if I've missed something fundamental.

Many thanks once again.

pip895

guymo wrote: »

Thanks for this.

I'm afraid I still haven't grasped what advantages this would have over cash in today's conditions, though. I think I understand that short-dated bonds are less susceptible to interest-rate changes and recover more quickly, so I can see an argument for short-dated bonds over long maturity ones, but at the moment I can't see how bonds help:

--- yields are low, so you can achieve comparable interest rates in cash
--- prices are correspondingly high, so can't offer protection if equities start to fall

Have I got something wrong here? You've hinted that I'm really asking a crystal-ball question, which was not my intention at all. I'm trying to understand the mechanisms at work so that I can make informed decisions. I know for sure there is plenty I do not understand about bonds, so I'm wondering if I've missed something fundamental.

Many thanks once again.

You have summarised my position exactly - I have a few High yield bonds but am mainly in Targeted/Absolute return funds - but some of these are very opaque and it is something I am monitoring very carefully.

C_Mababejive

It would be useful to differentiate when speaking of bonds..

guymo

I feel a bit bad bumping my own thread, but I really would like to see a discussion / information / explanation of what, if anything, bond holdings would offer for a new and small-sum investor in the current situation.

What arguments or factors are there in favour of buying bonds right now? (I think I can see the arguments against, so it's the arguments in favour that I'm interested to explore.)

Thanks again to everyone who has pitched in here!

gadgetmind

The advantage of holding different classes of assets is that you don't know what will happen in the future. Yes, there are predictions, but that's all they are.

There are periods where cash has beaten bonds, and such a period might be coming, or it might not.

I'm heavy on equities but am also very happy to hold property, infrastructure, bonds (various), and cash.

guymo

gadgetmind wrote: »

The advantage of holding different classes of assets is that you don't know what will happen in the future. Yes, there are predictions, but that's all they are.

Sure --- so I guess what I am trying to understand is what could happen that would make bonds bought in today's situation valuable or preferable to cash. A drop in interest rates would do it; what else?

Thanks again.