If not bonds then what?

Sobryma

Jevvers wrote: »

And thanks Sobryma I'll look again at short dated gilts.

The only issue is what happens when there's a goverment debt crisis. Guns and ammo OEIC anyone?

bowlhead99

Jevvers wrote: »

Yes I was intending to hold bond to maturity so I would hope to avoid the interest rate problem to so extent. But then the only way is up for rates at the mo.

One thing you can do, if you are willing to buy individual bonds and hold to maturity rather than using some sort of bond fund, is build yourself a 'ladder'.

So effectively you can have one tranche maturing in 2016, one in 2017, one in 2019, one in 2024 etc. With the proceeds of each tranche, you can buy more with a later maturity. Or a different class of assets entirely depending on your view of the world at the time.

So for example imagine you have options with your bank for fixed term savings account products. The 5 year fix always pays more than the 3 which is more than the 2 and more than the 1-year. But instead of putting all the cash into the 5 year product, you split your cash into a few slices.

During that first year your blended average return is lower than if you had just gone into the 5 year. However, after year 1 you get a quarter of your cash back, and can then buy another 5 year product with it, probably at a higher AER than you would have got today.

And the next year you get your second chunk back, and can roll it on for another 5 years, extending the ladder. As you go forward, pretty much every year you get another chunk of cash returning the principal and interest. In a rising interest rate environment, you are able to deploy the proceeds to catch those new higher rates as they become available. Or, in a stock market crash you are able to use the maturing cash to buy in at low prices and effectively rebalance your overall holding.

The analogy with the fixed-term cash accounts can be extended to short dated gilts, investment grade corporate bonds and riskier/ higher yield bonds. If you're holding them to maturity you don't need to be so concerned with the market price each day.

However, if you are looking at soon-maturing gilts, you might think the returns are so low that there is really no point having a 5-year one that pays less than 2% when a bank will give you 2-3% with FSCS protection. The potential advantage would only come if you came to a point in 4 years time and you really wanted to top up your equities - the gilt could be sold in a heartbeat with a click of a button (for pretty much its maturity value), while with a cash account you might have to mess around with notice periods and interest penalties and tugging on the bank's heartstrings to claim extreme hardship to get your money out, if at all.

Generally I think the returns on short dated gilts are so low, it doesn't make a lot of sense to hold them over cash ISAs or high street promo-rate current account products. Corporate bonds are better and as you get to higher yielding bonds (but still relatively short dated) they will take less of a value hit if market interest rates rise.

As an aside, on the equities side of things I agree with Gadget that you should diversify away from the FTSE. There is a whole world of equities out there (literally) and UK shares have done relatively well - for a UK investor, taking into account exchange rate movements - compared to some overseas markets in recent years. So if everything evens out over time, spreading your wings wider could be sensible, to catch the other markets that perform better than FTSE from here.

On the face of it one might think that a sterling liability (the mortgage lump sum) is best supported with UK shares. However, you don't know whether sterling will be stronger than the average of everything else, or not. If it weakens then having some dollars and Euros and Yen and RMB etc etc which became worth more in pound terms, could have helped you pay the mortgage faster. So, I wouldn't be scared of overseas markets when trying to diversify and balance my portfolio.

gadgetmind

Blimey, it's a while since we've had the bullets+beans brigade and the gold bugs around. I kind of miss them!

gadgetmind

bowlhead99 wrote: »

So, I wouldn't be scared of overseas markets when trying to diversify and balance my portfolio.

Agreed for equities. Companies have an intrinsic value that's independent of currencies, and this value tends to persist (albeit at the whims of markets and business environment) even as global currencies bob up and down like crazy.

Fixed interest OTOH is an area where I prefer either sterling issues (which I'm happy to hold directly) or overseas ones that are suitably hedged (which I don't have the skill or inclination to do myself!)

System

Absolute return fund another defensive option?

gadgetmind

I'm no big fan of the AR funds, but the Personal Assets Trust and Ruffer ITs have good track records (but add to your equity exposure!) and there is always Capital Gearing Trust, but that sits on a silly premium.

Sobryma

gadgetmind wrote: »

I'm no big fan of the AR funds, but the Personal Assets Trust and Ruffer ITs have good track records (but add to your equity exposure!) and there is always Capital Gearing Trust, but that sits on a silly premium.

Easy way to hold defensives such as Gold and ILG. Miton another possibility but less convincing track record.

System

gadgetmind wrote: »

I'm no big fan of the AR funds, but the Personal Assets Trust and Ruffer ITs have good track records (but add to your equity exposure!) and there is always Capital Gearing Trust, but that sits on a silly premium.

Not a big fan of absolute return either, particularly as the sector is a bit of a minefield. However, if you do the research they are a useful diversification tool. With bonds falling out of favour, they may become popular again. Property would also be an option, but again there are vastly different funds in this sector.

Someone also mentioned gold. I personally prefer to avoid the gold mining funds, but rather hold physical gold within a fund, for example troy trojan.

gadgetmind

I hold a fair bit of commercial property and infrastructure as I pushed this up to 15% allocation as I dropped bonds to 10%.

However, with the likes of TR property now 75% up*, and even *steady* investments such as HICL being up nearly 20% since I bought and now sitting on a far premium, it's likely that I'll be trimming soon.

* - yes, figures based on my buying price, so not of great relevance, but does suggest that these sectors are now becoming fashionable and my allocation is now too high,

kidmugsy

Jevvers wrote: »

But then the only way is up for rates at the mo.

Yes, but the questions are when, and by how much? Take a look at this
http://3.bp.blogspot.com/_6zFiwogUkPk/SqAZWmAucjI/AAAAAAAABo0/NCBI8iNyUS4/s1600-h/japan+bond+yield.png

You see that ten year stretch with yield between 1% and 2% p.a.: bound to rise, surely?


Now note that current Japanese govt bond yield
http://www.tradingeconomics.com/japan/government-bond-yield