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Should new money go into Bonds/Gilts?
Dudley05
Posts: 13 Forumite
As some of my other posts show I am currently starting out on my investing journey with a passive index tracking portfolio geared towards growth to start off with but one that hope to "lifestyle" as time goes by. Therefore I have only allocated a small 10% of my portfolio to bonds/gilts (which I am still yet to buy), but here is the question:
My research so far has suggested that Bonds/Gilts are expensive at the min and when interest rates rise will take a large loss. Now as a passive investor I think I am supposed buy in, top up and rebalance, and sit it out. If I had already bought bonds then I would do just that. However, I have not yet, and wonder if putting in cash now could be throwing money away when interest rates inevitably rise over the coming years, would I be better holding cash and getting in as they fall? Are there alternative fixed income investments? I intended to buy bonds in an index tracking fund.
People seem to always talk of bonds as "safe" (relatively) and less volatile, but my research would suggest they are just as susceptible to mishaps as everything else. Please Help.
My research so far has suggested that Bonds/Gilts are expensive at the min and when interest rates rise will take a large loss. Now as a passive investor I think I am supposed buy in, top up and rebalance, and sit it out. If I had already bought bonds then I would do just that. However, I have not yet, and wonder if putting in cash now could be throwing money away when interest rates inevitably rise over the coming years, would I be better holding cash and getting in as they fall? Are there alternative fixed income investments? I intended to buy bonds in an index tracking fund.
People seem to always talk of bonds as "safe" (relatively) and less volatile, but my research would suggest they are just as susceptible to mishaps as everything else. Please Help.
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Comments
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Although you lump gilts and bonds together I would separate them. UK/US Gilts are dreadful value, some company bonds are more appealing depending whether you think interest rate rises are approaching.
You mentioned passive investing. If that is what you want to do then don't try to guess the market at the outset. Choose your weightings and go for it.would I be better holding cash and getting in as they fall?
Lots e.g. I have posted before about preference shares.Are there alternative fixed income investments?
There are varieties of bond funds if that is your chosen route. Since you are looking at passive investing you might like to consider a strategic bond fund where the manager has the flexibility to shift the focus as they see fit.I intended to buy bonds in an index tracking fund.0 -
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There are varieties of bond funds if that is your chosen route. Since you are looking at passive investing you might like to consider a strategic bond fund where the manager has the flexibility to shift the focus as they see fit.
Surely not right for someone who believes in passive investing! Though I agree that a Strategic Bond fund could be appropriate for the current state of the bond market.0 -
A bond fund in this point in the interest rate cycle is not a good idea. Interest rates are on the rise in the foreseeable future. It is said that a 1% interest rate rise causes about a 4% drop in the fund so why invest now?
If investing for the long term and there is a requirement for growth then why consider bonds. Bond funds are mainly for those wishing to receive an income in my opinion.
There are of course different types of bond funds. Some invest in high quality stock and others in high risk (junk bonds). Other funds invest in a mix of shares and bonds and are heavily laden with preference shares. Some use short dated bonds and others long dated to keep until maturity.
If I really wanted a bond fund then I would opt for a fund where the manager is not tied to 100% bonds and has the flexibility to switch into shares or even natural resources such as gold when conditions are appropriate. A good fund to hold where the manager has complete flexibility to invest in a mixture of asset classes is Artemis Strategic Assets where there is even the ability to invest in instruments to protect the down side. But why would you want to protect the downside if only 10% of the portfolio is invested in this type of fund? If investing for the long term this kind of fund is inappropriate but is probably excellent for those wishing to protect a high percentage of their savings in retirement.Take my advice at your peril.0 -
Ah true. I was taking their interest in passive investing to mean they did not want to actively monitor the portfolio, but you are right as it really means avoiding managers in theory a passive investor could be chopping and changing all the time.Surely not right for someone who believes in passive investing! Though I agree that a Strategic Bond fund could be appropriate for the current state of the bond market.0 -
By not investing in bonds, you're effectively trying to time the market, which doesn't sit well with the passive investing mindset. People have been saying this for some time, now, and if you are following Monevator's passive portfolio real-life example (where a set of rules are being rigidly adhered to), you'll see that the bond allocation has actually done fine over the period that it's been running for.
Having said that, I'm also avoiding bonds. I can't bring myself to buy them either.0 -
If I really wanted a bond fund then I would opt for a fund where the manager is not tied to 100% bonds and has the flexibility to switch into shares or even natural resources such as gold when conditions are appropriate.
Such as M&G Optimal Income, which has recently greatly reduced its equity holdings and is now close to fully invested in bonds?
I do hold bonds, both government and corporate, but I've "diluted" this holding with quite a few infrastructure funds. I also upped my property exposure a couple of years ago.I am not a financial adviser and neither do I play one on television. I might occasionally give bad advice but at least it's free.
Like all religions, the Faith of the Invisible Pink Unicorns is based upon both logic and faith. We have faith that they are pink; we logically know that they are invisible because we can't see them.0 -
when things go badly, shares are perfectly capable of halving in value. bonds are not likely to do anything that extreme. if you don't want the volatility and risk of 100% equities, then you can certainly make your portfolio more stable by adding a little bit of suitable bonds.
suitable means:
(a) gilts, or safer corporate bonds - not high-yield bonds - this is the usual idea when using bonds as ballast; and
(b) short-duration - this is to deal with the current risk of interest rates rising, which would hit long-duration bonds (where you're locked into an interest rate for a longer time) harder than short-duration.
it's not as obvious as is made out that long-duration bonds will be in trouble. some interest rate rises are already anticipated - it's in the price. if rates rise further or faster than is anticipated, long bonds will probably do badly; if rock-bottom rates continue longer than is expected, they may be well.
however, if you want ballast for your portfolio, why take any risk with longer bonds? short-term, quality bonds are the obvious way to get it. they haven't stopped working. if you don't want ballast, you don't have to have it.0 -
It's funny, i have so far invested 80% in equities, ear marked 10% for emerging market equities, yet the decision i am struggling with is the 10% for bonds/gilts. I guess it is the fact that trouble ahead for bonds seems almost certain yet the not knowing with equities helps make clicking the purchase button easier. I guess i understand equities a bit more than bonds too (i didn't know what a bond was 2 weeks ago). I'm already rubbish at this passive investing lark!!
How about i forget the Emerging markets and the bond fund and just put the last 20% of my portfolio into a vangard Lifestyle 60/40, or am i just getting silly now?0 -
If you're not totally happy with bonds, then stick the 10% in cash instead and put it an ISA or other savings account. Include it in the numbers when you're looking at your portfolio, as it will provide the ballast that you were looking for in bonds. It just wont grow or shrink in value quite the same way bonds may, which may be a good or bad thing. And it'll still be there to invest in the future when you are sure what you want to invest it in.
I haven't bought any bonds yet either due to the same concern you have, but I'm also in it for 20-30 years so have plenty of time to get some if and when I think I need some. For now, the volatility doesn't bother me and long term growth is my number 1 requirement.0 -
Dudley05,
In my opinion whack the lot in something like lifestrategy 80% and walk away from it.
At least it will stop you fiddling as there is always something thats too high, too low, about too crash, is crashing, can't possibly get any worse. You may spend your whole life in a state of anxiety.
There are so many signals and noise about that maybe ignorance is bliss.
An active bonds fund today , tomorrow an expert in Emerging markets must be used , the next month an active commodoties fund is needed.
Set asset allocation according to need/desire - rebalance once a year if you are doing passive - and go fishing.
Else do active.
Well thats what I think anyway.0
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