Why bonds?

zolablue25

OK, sorry for what is probably a stupid question but what is the advantage of investing in bonds rather than, say, keeping it in cash. For example, what is the benefit of going for the Vantage LS 80 over putting 80% of my cash into LS100 and keeping the other 20 as cash?

ChopperST

Bonds are seen as a defensive asset to stabilise your portfolio when asset prices are falling.

What is your risk appetite and timescales for investing. That should dictate your asset allocation.

Also your tax status would allow people to suggest whether keeping cash would be wise, alongside emergency funds etc.

With the new tax changes the amount of cash could also be relevant.

zolablue25

Thanks for repsonding. I appreciate that bonds are seen as a defensive asset, but so is cash. What I am unsure about is why buy bonds rather than keep cash? What is the advantage of spending your cash on bonds?

Of course there must be an advantage (otherwise bonds wouldn't exist) but, to a retail investor, what are their advantages over cash?

DominicH

There's bonds and there's bonds. Short-term bonds of your domestic government are considered the asset with the lowest possible risk, which is why they are often recommended for the "safe" part of a portfolio. But at the moment, for small portfolios I think it is debatable whether that type of bond is better than savings accounts, because yields are so low and it is possible to get reasonable interest rates of 4% or more on cash savings of maybe £10,000, with a little effort. With larger portfolios you run out of options, and for minimal-risk assets it's shorter-term domestic government bonds or nothing.

In theory, short-term UK bonds are even safer than cash for a UK investor (because the risk is the UK government defaulting, which doesn't happen, rather than some bank failing, which occasionally does.) But FSCS-protected savings should be about as safe, in practice.

Other types of bonds can often feature in a portfolio, but they're more for diversification than for risk avoidance. Foreign government bonds, corporate bonds, and longer-term government bonds all carry more risk of various kinds.

zolablue25

Thanks Dominic, I think that's pretty much confirmed what I was thinking. Bonds are a wise defensive investment if you have large portfolios or if market conditions were more "normal" (historically speaking) when their yields could be expected to outdo a high street bank current account!

My current portfolio is not so large that my lower risk part can't be covered by a Santander 321 account, so I don't think I really need to add bonds to my portfolio at the moment.

ChopperST

I'd also look at P2P as an alternative to bonds. I share the same sentiment as you that gilts in particular are unattractive at present and cash and P2P fills that gap nicely for me.

collingbone614

zolablue25 wrote: »

What I am unsure about is why buy bonds rather than keep cash? What is the advantage of spending your cash on bonds?

Over longer periods of time, bonds beat cash on returns.

Eco_Miser

Bonds are fixed interest, and can be for much longer periods than the five years a bank will be willing to lock in a rate.

In the current low rate environment, that's not much use, but when rates are high, you can lock in that high income.

kidmugsy

At the moment cash knocks bonds into a cocked hat, unless you want, say, to gamble on US inflation by buying an ETF of TIPS.

jennyjenssen1990

Bonds are the safest placement of your money, safer than bank. Also there is no such hard and fast rule if investing you can formulate your asset allocation and then put your money, these are slow, safe and steady way of investing money with predictable results.

zolablue25

jennyjenssen1990 wrote: »

Bonds are the safest placement of your money, safer than bank. Also there is no such hard and fast rule if investing you can formulate your asset allocation and then put your money, these are slow, safe and steady way of investing money with predictable results.

How are bonds safer than a bank? I suppose that depends on the quantities involved. My particular portfolio has less cash in any single institution than is covered by the government "insurance"