Why hold bonds at all?

In_For_A_Penny_2

I am a relative novice investor and like to keep things simple as possible.

Assuming you don’t have a huge portfolio and can get 3-5% interest on current accounts why would you hold bonds for a similar yield but risk of loss?

I currently have a combination of cash in “high” interest rate accounts and investments solely in VLS 100. Am I missing something or do bond funds have some additional benefit I don’t understand?

jimjames

Good question. I think you're right, for small portfolios cash can perform the same function.

However bonds do have potential for capital growth as been seen recently as well as possible losses

Reaper

Individual bonds ought to pay you a higher yield to compensate for the risk, if they don't then avoid them.

Bond funds are a little different as they could have all sort of odd things in them and they allow you (hopefully but don't depend on it during a crash) to exit whenever you want. So if you are looking at bond funds you may see lower rates.

pjread

I think the logic is that typically the two markets have moved counter to each other (shares fall, bonds rise...) so ignoring the income component they provide a cushion to take the edges off equity spikes/troughs.

It all sounds very sensible and reasonable. I'm 100% equities though for long-term/pension/etc (but then if it all goes pear shaped I've a decade or two yet to sort it out, and I might change my mind when I get older...)

Glen_Clark

Large investors can't spread their £millions around small bank accounts even if they were open to them. So if they can't take the risk of an asset price fall there isn't much else for them but bonds. They are taking a currency risk, but if their liabilities are in the same currency (as in Pension funds) thats OK.

coyrls

In_For_A_Penny wrote: »

I am a relative novice investor and like to keep things simple as possible.

Assuming you don’t have a huge portfolio and can get 3-5% interest on current accounts why would you hold bonds for a similar yield but risk of loss?

I currently have a combination of cash in “high” interest rate accounts and investments solely in VLS 100. Am I missing something or do bond funds have some additional benefit I don’t understand?

One thing to point out is that over the last 12 months, bond funds have done pretty well and 12 months ago the vast majority of commentators were predicting losses. Two examples that I hold:

Royal London Corporate Bond Fund M Acc: 8.2%
Fidelity Moneybuilder Income Y Acc: 7.8%

Held tax free in an ISA, you can also add tax rebates to these returns, so they easily beat taxable current accounts over the last 12 months.

That's not to say that they will do as well for the next 12 months but it does demonstrate the virtue of sticking to your asset allocation (which should probably include bonds) and not trying to time coming in an out of asset classes.

Pincher

Diversification?

In_For_A_Penny_2

Thanks for all the replies.

Pincher wrote: »

Diversification?

I perhaps didn't set out my personal position very well. As someone with a relatively small portfolio I just couldn't see the benefit of holding bond funds over cash. I just didn't necessarily feel that a "balanced portfolio must include bonds".

Granted that for larger portfolios, the limited options on savings accounts mean that moving into bonds is necessary.

I also accept that the bonds market hasn't really behaved the way many were expecting it to and would in large, have out performed cash over the past 12months. What the future holds however is still far from clear.

kidmugsy

We've just sold our bonds fund. Cash in interest-bearing current accounts is much more attractive at the moment, and the subscription limit for ISAs is now so high that a couple can move £30k into ISAs in the blink of an eye.

TrickyDicky101

Corporate Bonds (where the rates are better than Govie debt) are horribly illiquid too so individual holdings may be difficult to realise into cash.

If you do want exposure to bonds, a bond fund would be best for a retail investor of 'ordinary' means.

Personally (and this is just opinion) I wouldn't invest significant money into any kind of bond investment.

The-Joker

Looking at the debt burden of the UK, there is no way they way all those bonds, sell out now. The first to sell will get paid the last ones trying to get out won't.