A balanced portfolio.....are bonds a risk?

dutchism1958

Afternoon All,

Having trawled through various forums,financial websites,newspapers etc, there seems to be an air of negativity/uncertainty surrounding Bonds in the event of an interest rate rise?.
I have done all of the Savings Accounts investments and always filled the ISA allocations each year and was thinking of putting £30K into 2 S&S ISA's from money inherited.Looking at 5-10 year period.We are both in our late 50's,no mortgage,debts etc with final salary pensions.I was thinking of VLS,L&G Multi index or Blackrock Consensus.
I understand that at our age you want reduced risk, so in the case of VLS probably the 40 or 60 in equities. My concern is the Bond component.Am I misreading the situation regarding the possible risk of Bonds as a safe mid to long-term investment as part of a balanced portfolio?.
Thanks.
Gary.

masonic

It's worth putting the risk of interest rate rises in context. The potential downside of what is being termed a bond market crash in some places would be very much less than 'crash' would normally imply when applied to equity markets. Meanwhile, the event of an interest rate rise is being pushed further and further into the future. So, it does not seem like it needs to be a significant worry.

Having said that, as a retail consumer, you have access to financial products that are somewhat equivalent to bonds, but perhaps do not share the same sensitivity to rate rises. Aside from cash savings, which you already have, you could diversify into P2P lending for example. Overall you can maintain the same 40:60 or 60:40 split between equities and defensive assets using these other savings/investments, but use a higher % equity VLS fund to reduce your exposure to bonds.

dutchism1958

Thanks for your reply Masonic.

Your comments have been really helpful.
I haven't entered into the arena for P2P as yet,so will need to investigate this possibility.
Thanks,
Gary.

kidmugsy

dutchism1958 wrote: »

We are both in our late 50's,no mortgage,debts etc with final salary pensions.

My own view is that all financial assets look pricey - bonds, shares, property, even perhaps gold.

One view you can take is that two FS pensions are roughly equivalent to a (large?) holding of bonds anyway, but with less risk.

If you were older, a sensible way to hold an equivalent to bonds is to buy an annuity, which gives you a bond-like return, plus mortality credits (i.e. the gain you get by virtue of outliving some of your age cohort), plus a liability-matching performance, in that it pays out until you don't need the income any more because you're both dead.

Maybe the answer is to hedge your bets e.g. the "fund" Artemis Strategic Assets 'shorts' bonds - bets on their falling in value - while being 'long' equities - i.e. holds shares in the expectation that they'll increase in value. But I think that shares - at least on Wall St. - are too high too. It's a beggar and no mistake.

A disadvantage of an annuity bought with a pension pot is that it's exposed to income tax, whereas bonds in an ISA pay out tax-free. But then you'd have got tax relief when your money entered the pension. This may be irrelevant to you if you don't have any personal pensions or DC pensions.

dutchism1958

Thanks Kidmugsy,

I understand what you are saying.My wife has a personal pension but I don't.Neither of us have DC pensions.My idea was to go for more income generating shares from dividends,which is why i was considering the Vanguard UK dividend fund,but it seems I may be better doing more homework and identifying companies via the fools High Yield Portfolio and advfn.co.uk?.
Thanks for your reply.
Gary

le_loup

dutchism1958 wrote: »

Looking at 5-10 year period.We are both in our late 50's.........................
I understand that at our age you want reduced risk, so in the case of VLS probably the 40 or 60 in equities.

So you could both easily live for another 30 years or more. Why the imperative to reduce risk? You have cash and pensions as a no-risk slice. At your age I would think that equity based income would be the answer, unless you want to spend it within the next few years.

I think the low risk/no risk consensus is overplayed.

masonic

dutchism1958 wrote: »

My idea was to go for more income generating shares from dividends,which is why i was considering the Vanguard UK dividend fund,but it seems I may be better doing more homework and identifying companies via the fools High Yield Portfolio and advfn.co.uk?.

So you think you will be able to beat the market by picking your own shares? Unless you are an experienced stock market investor you would probably be better off looking for a suitable fund.

bowlhead99

dutchism1958 wrote: »

My idea was to go for more income generating shares from dividends,which is why i was considering the Vanguard UK dividend fund,but it seems I may be better doing more homework and identifying companies via the fools High Yield Portfolio and advfn.co.uk?.

Don't underestimate the level of work involved in evaluating all of the tens or hundreds of companies in the UK that pay a relatively high level of dividend income and deciding which ones are paying sustainably high income and which ones are paying income that is a large proportion of their current share price because the share price is falling because people don't think much of their prospects or because the future dividend is expected to be much lower than the historic dividend.

For someone who has reached their late 50s without ever having had a need to evaluate company financial statements or understand the dynamics of listed companies' businesses or stock market movements, it can be a lot to take on.

It is true that your work would be helped by reading the postings of others on Fool and ADVFN forums who have done some research themselves and have their own ideas about whether they would like to hold the individual companies.

Of course if a company share price is 200p, it is that price because if it moves to 201p there would be lots of people trying to sell it and if it moves to 199p there would be lots of people trying to buy it. Some individuals on a forum will have very well-reasoned opinions after doing their research, but what they write will not always be free from bias and building a portfolio based on tips is dangerous if you are not doing the same level of detailed raw research yourself to validate whatever tips or ideas you receive.

Spending your money on a portfolio of 20 individually researched shares and rebalancing among them every year can give you a reasonable portfolio (obviously with more exposure to a single company than you would get via a fund). However, if every year you are buying or selling each company - either to top it up when it's reduced in value relative to the others, to sell out when it's increased in value relative to the others, to exit if a company no longer meets criteria for inclusion, to add a new company which deserves inclusion and so on... that's quite a lot of trades. At a tenner each on 20 companies, plus the stamp duty, it can add up, as a proportion of your £30k portfolio.

The Vanguard portfolio gives you exposure to 130 UK companies that meet their criteria (although over 40% of value is in the top ten) and they only charge you 0.2% for managing it so including platform fees you are looking at half a percent or less as an annual running cost. That seems quite a reasonable alternative to spending hours evaluating all the 130 companies yourself and following all the news to ensure there's no adverse or positive change in circumstances that would make you want to tweak your portfolio mix.

Alternatively you could buy a more actively managed equity income fund from the likes of Woodford or others, which would charge more but claim to have evaluated the reasons for investment decisions more fully, and incorporate the manager's opinion and experience, while also looking beyond the London stock exchange to include some good income payers from Europe or US etc. It is impractical for you to research all the companies in the world and with the amount of money you are talking about, it would seem to me to be easier to buy a fund rather than construct a portfolio, unless you really have a lot of leisure time or want a new hobby.

dutchism1958

Thank you Le Loup,Masonic and Bowlhead,

Points taken from all of you....better off picking a suitable fund for ease of management,time and money given my lack of experience and knowledge,and caring for my wife.
I'll look at VLS 60 etc as well as some of the more actively managed equity income funds and additional income funds outside of London.
My sincere thanks to you all,this is all really helpful in guiding me in the right direction.Just wish I had started earlier....but we all say that,well most of us anyway!!

dunstonh

dutchism1958 wrote: »

Thanks Kidmugsy,

I understand what you are saying.My wife has a personal pension but I don't.Neither of us have DC pensions.My idea was to go for more income generating shares from dividends,which is why i was considering the Vanguard UK dividend fund,but it seems I may be better doing more homework and identifying companies via the fools High Yield Portfolio and advfn.co.uk?.
Thanks for your reply.
Gary

The MF HYP fell off a cliff in the credit crunch. Remember that these portfolios were heavy in banks, BP and Tesco amongst others. It highlighted the risk of having limited diversification. Indeed, I believe yours is the first post I have seen in years on this board mentioning it as a strategy. yet pre-credit crunch there were frequent posts on this board about it.

dutchism1958

The MF HYP has been recommended to me by one experienced poster recently as a good tool for research.