Bond allocation advice please!

baffledben

My investment horizons have recently changed and I may need to start drawing an income in the next 5 years. The general advice for someone in my position seems to be to reduce investment in equities in favour of bonds.

I have always been all in equities but have decided to reduce this and hold 20% in bonds. Some people say now is a bad time to invest in bonds. Is it? If it is I cannot move my investment horizons so what to do? I am considering 20% in 'Vanguard UK Government Bond Index Fund'. The rest will remain well diversified in UK and world equities.

All views welcomed.

Your_Hero

Gilts are overvalued at present, so it's probably not a good idea. No guarantees of course, no one has the crystal ball. Might want to stick to short-dated corporate bonds, or strategic bonds/high yield corporate bonds etc.

dunstonh

Some people say now is a bad time to invest in bonds. Is it?

Some have been saying that for the last 5 years and yet the bad event hasnt happened. It will at some point but it wont be to the same level as a drop in equities which again, some have been saying is coming.

You do not reduce your volatility to make more money in the long run. You do so to reduce your losses in the short term.

You need to consider how you are drawing your income as well. It may be that you just need to position your portfolio to match an income drawdown strategy as that is what you could be utilising for the next 20-30 years.

xylophone

Consider hedging your bets by using a "distribution fund"?

Example http://www.invescoperpetual.co.uk/portal/site/ip/products/productDetail?contentId=205ce6233e0ed210VgnVCM1000002e1ebf0aRCRD

http://www.ftadviser.com/2013/10/18/investments/equities/distribution-funds-income-vs-growth-S4ZfBegJfmxiVhMtQhJvQJ/article.html

kidmugsy

Why not just buy a five year gilt?

baffledben

Your_Hero wrote: »

Gilts are overvalued at present, so it's probably not a good idea. No guarantees of course, no one has the crystal ball. Might want to stick to short-dated corporate bonds, or strategic bonds/high yield corporate bonds etc.

I am not too sure about corporate and high yield bonds. As the rest (80%) of my investment will stay in equities, I wanted the 20% bonds to provide the steadying safe haven. The Vanguard Government Bond Index Fund states an average AA+ grade, average 14.7 years maturity.

kidmugsy

baffledben wrote: »

The Vanguard Government Bond Index Fund states an average AA+ grade, average 14.7 years maturity.

If your time horizon is five years, why buy a fund with average maturity about fifteen years? If you buy a five year gilt, then when it matures you could buy bonds at whatever is the prevailing price then.

baffledben

kidmugsy wrote: »

If your time horizon is five years, why buy a fund with average maturity about fifteen years? If you buy a five year gilt, then when it matures you could buy bonds at whatever is the prevailing price then.

The maturity is the average maturity of all holdings in the Vanguard fund, it doesn't mean I have to hold the fund for that long.

Taking your point, if 5 year gilts are a better option, what would be a good low cost fund for holding 5 year gilts?

kidmugsy

baffledben wrote: »

The maturity is the average maturity of all holdings in the Vanguard fund, it doesn't mean I have to hold the fund for that long.

Indeed. But why invest with that average maturity?

baffledben wrote: »

Taking your point, if 5 year gilts are a better option, what would be a good low cost fund for holding 5 year gilts?

In my experience with ISAs I haven't bought a fund of gilts, I've just bought a particular gilt, in much the same way as you'd buy a particular share. You can do the same in a SIPP.

baffledben

kidmugsy wrote: »

Indeed. But why invest with that average maturity?



In my experience with ISAs I haven't bought a fund of gilts, I've just bought a particular gilt, in much the same way as you'd buy a particular share. You can do the same in a SIPP.

How do you buy a gilt? My online dealing account has funds, ETFs etc but I cannot see an option to buy gilts.

purch

It will probably have to be a telephone order if it is not offered as an online dealing option.

As the King rightly say's. If your horizon is 5 years, buying a fund with a different maturity length increases your risk significantly.