Bond, investment Bond 31 October 2014 at 9:20AM in Savings & investments 13 replies 1.1K views

Mistermeaner

Me again, continuing my learning journey thanks to the ever knowledgeable and helpful members of this forum.

For my purposes at least I thin I kind of understand how equity funds and the like work now, and am confident enough in my knowledge to make what I feel are informed decisions regards investments in them.

An area I would like to understand a little more is bonds.

I have a S&S ISA which is a short-med term investment for me, for no other reason than I have spare cash, cash savings and a separate pension I want to have a play around with investing. After umming and arring I went for a VLS60 fund and have about 2K in there.

I'm a tinkerer, cant help it, but also think that as Im dealing with small amounts of money at the moment I can afford to make a few mistakes and learn from them for when the pot gets a bit bigger.

Long story short Im thinking of selling the VLS (which would be for a small loss at the moment) and instead splitting my S&S ISA 50/50 into Woodford equity Income Fund Acc and the Vanguard UK investment grade bond index GB Acc.

My logic for doing so is that I think I need to tinker, and the vanguard doesn't really allow for that. I like the woodford guy and believe him to be well rated, and the 50/50 split (which I would actively play with form time-to-time) allows me to in part mimic the vanguard 20/40/60/80 equity/bond approach as I see fit.

However from what I have read on here and also various articles on line is that Bonds are not a wise choice at the moment, being overpriced and having low expected returns in the future due to continually low interest rates. However some articles say I should ignore all that and buy them anyway. Makes the head spin.

Would be interested to know what people on here think about the above plan and also bonds in general?

Would having 50% of my S%S in bonds make that 50% 'safe'ish such that while it might make some minimal returns it is unlikely to drop in value?

ColdIron

You will be moving from a well diversified fund with 26% UK to 100%, do you think the UK is going to outperform every other country in the world?

Porcupine

Bonds are lower volatility than equities (usually). So if equities are too much, bonds are a lower risk. But bonds return more than cash, with more risk than cash.

However... usually the investment community's baseline for cash is bank base rate. Bonds return more than the bank rate, so hence all these arguments about bonds being better than cash.
But most of us don't have millions to invest like the fund managers do, so the rates we can get in everyday savings accounts are higher than base rate. This makes cash more attractive than the commentators usually make out.

When base rate rises, bond prices fall. They have to, because why would anyone buy a bond paying 2% today when they can get 3% on cash in the central bank? They wouldn't, until the price of that bond is corrected so the yield is more attractive for the purchaser.

When base rate rises, cash rates rise. So the gamble is: how long do you think we're going to stay in a low-rate environment, and how long can you stay invested in bonds before getting out before base rate goes up (too much)?

The alternative strategy is to buy bonds and hold them to maturity. That means it doesn't matter what the resale value is, you always get back the face value at maturity. So in essence you're agreeing to fix the yield at today's rate until the bond matures. Short-dated bonds mean you don't have to be in this game for too long, however the yield on those isn't great.

Personally I don't want to try and time the bond market, hence I'm staying well clear. Since that decision I see plenty of money being made there despite this, so maybe I'm wrong. Only hindsight will tell us.

dunstonh

Bond, investment Bond

Just a comment on your thread title. You say investment bond in the title but there is no reference to investment bonds in your post. You may wish to edit your topic.

However from what I have read on here and also various articles on line is that Bonds are not a wise choice at the moment, being overpriced and having low expected returns in the future due to continually low interest rates. However some articles say I should ignore all that and buy them anyway. Makes the head spin.

The same articles have been saying the same thing for some years now. You buy bonds to diversify your assets and have a class that typically performs differently to equity. Depending on the type of bonds you buy you will also affect the volatility of your portfolio and this will allow you to build the portfolio at an appropriate volatility level to match your risk profile, capacity for loss and volatility tolerance.

Long story short Im thinking of selling the VLS (which would be for a small loss at the moment) and instead splitting my S&S ISA 50/50 into Woodford equity Income Fund Acc and the Vanguard UK investment grade bond index GB Acc.

What you have suggested there is a good example of a DIY investor making a mistake because of bad research and lack of knowledge.

You are trying to second guess the markets on the basis of the internet. A recipe for disaster. You dont have the knowledge and understanding and the internet is an unregulated soup of opinion (some good, some awful).

My logic for doing so is that I think I need to tinker, and the vanguard doesn't really allow for that. I like the woodford guy and believe him to be well rated, and the 50/50 split (which I would actively play with form time-to-time) allows me to in part mimic the vanguard 20/40/60/80 equity/bond approach as I see fit.

For some reason you think that UK equity and investment grade bonds are going to be the best option going forward and that your research, knowledge and due diligence is better than Vanguards. I would disagree.

Would having 50% of my S%S in bonds make that 50% 'safe'ish such that while it might make some minimal returns it is unlikely to drop in value?

No, it would increase the risk through bad diversification.

Mistermeaner

Thanks all for replies.

General sentiment I'm getting is don't ditch the vanguard

Not questioning the advice just want ti understand some of the reasoning.

Re Woodford; appreciate he's UK heavy, but according to my limited research he's 74% UK, not 100%. So while not perhaps as geographically diversified as the vanguard (which is 15% UK) he's not all eggs in one countries basket - plus the idea in backing woodford is that the guy knows what he's doing so I would be taking a gamble he will do better than the vanguard boys. What's so wrong with that?

Re the Bond fund; the fund I mention is 45% UK; again UK heavy but not exclusively UK so don't understand the point there.

While my proposed portfolio may not be as diversified as the Vanguard 60 I don't think its too much in one basket and if I believe the UK will be relatively strong moving forwards why not?

I get the point about this being a badly diversified portfolio but this is only £2K of my total investments - I have 30 times this amount in Pension scheme which is more broadly spread geographically. AND also have cash reserves.

ColdIron

ggb1979 wrote: »

if I believe the UK will be relatively strong moving forwards why not?

Why not indeed, if that's what you believe, you may turn out to be right. My point was that your motivation was - I think I need to tinker - and wondered if you had overlooked some obvious consequences while you are on your learning journey

Linton

With only £2K you wont do anything life changing but rather you are playing and hopefully learning how to invest. From the first point of view, sure, invest in anything that takes your fancy. From the second though I think you could usefully operate as if you had a larger portfolio that was going to affect the rest of your life.

Forgetting that its just £2K I would agree with the others that your investment is far too focussed. The UK may do unusually well. Woodford may have magic hands. The problem is that if either or both of these conditions arent met you could lose out. That is why you need to have more eggs in your basket, more irons in the fire, or whatever.

The Woodford fund is set up to meet stated objectives:

The aim of this Fund is to provide a reasonable level of income together with capital growth. This will be achieved by investing primarily in UK listed companies. The Fund may also invest in unlisted companies and overseas entities.

Do these objectives fully match yours? Do you want a significant focus on income even if it were to be at the expense of capital growth?

The fund's sector allocation could be considered unusual with virtually no exposure to technology and oil, and little exposure to telecomms, or perhaps oddly for an income fund, utilities. On the other hand it has a very high 1/3rd of the total investment in healthcare. So to me it looks very much like a niche conviction fund rather than the core component of a balanced portfolio.

bowlhead99

ggb1979 wrote: »

Re Woodford; appreciate he's UK heavy, but according to my limited research he's 74% UK, not 100%. So while not perhaps as geographically diversified as the vanguard (which is 15% UK) he's not all eggs in one countries basket - plus the idea in backing woodford is that the guy knows what he's doing so I would be taking a gamble he will do better than the vanguard boys. What's so wrong with that?

. The world stock market is rather bigger than the UK. UK is maybe 8% by value of all listed companies out there. So, 74% is rather a lot. And the token few companies in Europe and the US have been selected because they meet a specific criteria which excludes a lot of the market in those other countries.

Also, within stock market investing there are a whole mix of styles. Woodford's style is to focus on income and ignore great chunks of the market even within the small part of the world he's looking at (ie mainly UK).

So, even if he " knows what he's doing" with that part of the world and that type of company, that doesn't help when that part of the world and that type of company perform poorly compared to others. He could be in the top 5% in his specific sector and still be worse than a poor performer whose fund was investing in better countries and better types of companies for that part of an economic cycle. The best boxer in the world still loses to a toddler with a machine gun.

So yes you be taking a gamble by ignoring most of the world's investible economy, and selecting a specialist fund that is designed to be held as part of a wider portfolio. But that is your right, to do if you want.

Re the Bond fund; the fund I mention is 45% UK; again UK heavy but not exclusively UK so don't understand the point there.

It is a specialist fund that holds pound sterling denominated, investment grade (AAA to BBB) fixed income securities from within that investible universe. No BB or B or C grades or below, no government bonds or index linked gilts or foreign sovereign debt or Asia or emerging markets or other currencies. 90% of the entities are based in 5 countries or supranational; but basically UK centric because UK economics helps to price GBP debt.

While my proposed portfolio may not be as diversified as the Vanguard 60 I don't think its too much in one basket and if I believe the UK will be relatively strong moving forwards why not?

I get the point about this being a badly diversified portfolio but this is only £2K of my total investments - I have 30 times this amount in Pension scheme which is more broadly spread geographically. AND also have cash reserves.

There is nothing wrong with investing in what you like. Once you make some mistakes with small numbers you can change your plans before you invest bigger numbers. The worst thing for you would be for these funds to do well, and then you will think it was a good strategy after all, rather than you just getting lucky. Then you might apply the zero knowledge you gained from the £2k gambling pot, when looking at more serious numbers later in your life, and come unstuck.

But if we're only talking £2k you can tinker all day long. But some people would treat a £2k portfolio as practice for a £20k or £200k portfolio and so wouldn't just hold 2 specialist funds in it. Either get 10 specialists or 1-2 generalist.

Mistermeaner

Once again thank you all for the input, greatly appreciated.

ChesterDog

Your need to tinker is likely to have a very detrimental effect on your returns.

I realise you are learning, enjoying, 'playing' perhaps at the moment, but chopping and changing costs money and means you are likely to miss out on gains that would come if you left things alone.

Do lots of research, choose carefully, buy well. Hold. Review from time to time, but mostly sit on your hands. Neil Woodford, Terry Smith et al have made very successful careers from it. Not to mention Warren Buffet.

Trading isn't investing.

Mistermeaner

Oh how to resist the urges!

Going to set a strategy this weekend, implement it. Then not mess with it for 12 months.

Will come back to this thread in 12 months and see how we're doing.