Stay in cash or where to invest it?

saverted

So many views and helpful replies thank you all.

Considering the suggestions I am now considering dividing my 35% cash between 3 types of bond funds. So my portfolio will look like this:

65% equities (uk and global markets, low cost trackers)
35% bonds split:
12% Vanguard Global Short-Term Bond Index Fund GBP Hedged Acc
12% iShares FTSE Gilts 0-5 ETF
11% iShares £ Corporate Bond 1-5yr UCITS ETF (GBP) IS15


How does that look?

The fees and charges for the iShares FTSE Gilts 0-5 ETF says the TER is 0.2% but says 3% Switching Fee. If anything will cost me 3% then I can rule this one out.

I shortlisted the iShares Markit iBoxx GBP Corporate Bond ex-Financials (GBP) ISXF, but this is currently trading at a 5% premium which concerns me a bit as the price is more likely to fall with any outflow from bonds.

coyrls

bowlhead99 wrote: »

I wouldn't have thought a UK 0-5 year gilts fund would have yielded massively more than cash at a bank or with NS&I, to be honest. The short duration would help avoid a crash of capital value in the face of rising interest rates but cash has no risk of that anyway. And if the returns from the 0-5 gilt tracker were better than cash, it would only be because the fund is tilted more towards the 5 year than 6 month maturities, with more likelihood of a hit from interest rate changes.

I think you're right and for the ISA he now has the option of moving the cash to a cash ISA at a known interest rate and counting this as part of his low-risk investment. At a later date when he has more confidence in bonds he can move it back to a S&S NISA. For the SIPP, he doesn't have this option unless his provider pays interest on cash holdings.

coyrls

saverted wrote: »

The fees and charges for the iShares FTSE Gilts 0-5 ETF says the TER is 0.2% but says 3% Switching Fee. If anything will cost me 3% then I can rule this one out.

Note sure where the 3% switching fee comes from, the KiiD only shows a .02% ongoing charge, nothing else.

Although I'm looking at iShares UK Gilts 0-5, not FTSE Gilts (which I can't find).

davide691

Any reason IGs didn’t make it through, despite your inflation worries?

saverted

coyrls wrote: »

I think you're right and for the ISA he now has the option of moving the cash to a cash ISA at a known interest rate and counting this as part of his low-risk investment. At a later date when he has more confidence in bonds he can move it back to a S&S NISA. For the SIPP, he doesn't have this option unless his provider pays interest on cash holdings.

Thank you. This is something I will look at.

saverted

davide691 wrote: »

Any reason IGs didn’t make it through, despite your inflation worries?

What are IGs?

davide691

saverted wrote: »

What are IGs?

Sorry: index linked gilts

saverted

davide691 wrote: »

Any reason IGs didn’t make it through, despite your inflation worries?

Index Linked Gilts. Thank you.

Could there be a downside to holding 35% of my portfolio in these?

I am wondering why among all the other suggestions for bonds no-one else has suggested these! What's the catch?

I don't want to keep 35% (150K) of my portfolio in cash, and my criteria is:
Less risk than equities
At least keeping value with inflation
Able to sell quickly to buy more equities if markets fall sharply

Are ILGs the answer?

davide691

Index linked gilts may be PART of the answer, combined with say the short-dated corporate bond ETF you mentioned.

They will protect you against unexpected RPI inflation, and are a great hedge against an equity market correction. Catch is they're not cheap. Some explanation here:
http://moneyweek.com/why-im-buying-index-linked-bonds-63200/

Buying a bunch of index linked gilts through the ETF I mentioned provides diversification and the liquidity you want

bowlhead99

saverted wrote: »

Index Linked Gilts. Thank you.

Could there be a downside to holding 35% of my portfolio in these?

I would not put 35% of a portfolio into those, no. Some strategic bond funds would have an allocation to them, and various multi-asset or conservatively managed funds would use them or have at least used them in the past. But not your entire non-equity holding.

You have to remember that when you are participating in the bond market only the coupon (how much does it pay per year) is fixed (or inflation linked in this case). The actual principal you get back depends on market movements.

You buy a bond in the market, effectively second-hand, at a price based on what everyone else will pay at that point in time. When you come to sell, you will get a different price based on what everyone else will pay at that time. Will you keep pace with inflation? Not necessarily, no.

Why is that? Well, the buy price already reflected the market's expectations for inflation. If everyone thinks inflation is going to stick at 1.5%, then when it does indeed stick at 1.5% and we know the bond will actually pays out those amounts - the value of the bond is no more valuable than it was when you bought it and people assumed it was going to pay out those amounts anyway.

If people are expecting inflation to be 2% this year and it's only 1.5% then the bond will be paying a lower coupon and a lower redemption payment than everyone thought, so the price will fall.

For example according to BBC today, BoE just halved its expectations for wage growth this year, to 1.5% from a much bigger number. That will feed into everyone's expectations for overall price inflation. So if people were assuming the indexed gilt would reflect 2% inflation for this year they will now be rethinking it and be happy to offload the indexed gilts as compared to regular gilts.

And more generally if a gilt is set up to be paying x% plus inflation and then market interest rates go up to 2x% plus inflation then the capital value of the bond still gets hammered - although perhaps changes in inflation expectation might soften some of the blow.

If inflation goes up more than the market thought, then yes the bond makes money. So over the long term it can give you protection against rising prices. Of course this only in terms of whatever government inflation measure it's linked to, and not your personal inflation rate based on the price of gadgets or bottles of wine or housing or stock market investments that you want to buy in future.

So there are quite a few things to think about

Less risk than equities [yes, because the government won't go bust]
At least keeping value with inflation [no, for reasons above]
Able to sell quickly to buy more equities if markets fall sharply [yes, like cash deposits or any other listed instruments like regular gilts or corporate bonds or bond funds or equity income funds or absolute return funds etc etc etc]