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

AlanP_2

My wife and I are in a similar situation - mid 50's and both with reasonable DB pensions to look froward to.

We elected for VLS80 to be the core of the SIPP we set up a few months ago (OK you are looking at an ISA, but the underlying fund choices are the same at the end of the day).

The reason that we went for the higher end of the equity ration on offer was that we are treating the DB schemes as the "safer / more stable" bond type element that will smooth the ups and downs of the equity investment and so were prepared to accept greater volatility.

dutchism1958

That makes perfect sense given our age and pension situation,and a rational way of looking at the risk/safety element.Thanks very much for sharing this,much appreciated!.

bowlhead99

AlanP wrote: »

The reason that we went for the higher end of the equity ration on offer was that we are treating the DB schemes as the "safer / more stable" bond type element that will smooth the ups and downs of the equity investment and so were prepared to accept greater volatility.

Just an observation, but un-correlated asset classes like shares, real estate funds, bonds and alternative assets can all make good bedfellows in a portfolio because as they rise and fall at different times you can sell a portion of one and rebalance into another when you are overweight/ underweight compared to your desired mix.

A DB pension is a great and stable income stream, which might of course allow you to take larger risks with the rest of your money, if the DB and worst-case-scenario from the equities and other assets will cover all your necessities.

But you cannot easily sell a bit of DB to top up your equities and you can't easily sell out of equities and stick it in DB (unless you have a "buy extra years" option).

So the DB does not exactly "smooth the ups and downs" of the equities, albeit having a constant and steady stream of cash coming in through rain or shine, will perhaps allow you to weather the effects of the peaks and troughs of the equities.

AlanP_2

Bowlhead - Thanks for that, I always find your posts illuminating, to the point and thought provoking.

I agree you can't easily sell / buy part of the DB element but I feel that a "good" DB provision does cloud the issue (favourably hopefully) a bit when planning.

We are in the fortunate position that we "know" what our stable / guaranteed income will be post-retirement which means that we can be more adventurous with what we are investing into the market than if we had DC pots and were taking on all the risk elements ourselves.

At the moment the value of the SIPP and our level of monthly investment is fairly low so it's volatility has a limited impact on our overall position. At the current level it will also have a negligible affect on our retirement income

Not sure I've explained my logic particularly well there but perhaps this might help. This show the %'age allocation of each investment type

CASH = 4%
SIPP = 2%
AVC = 1.5%
DB pensions = 92.5% - based on 20x Annual Pension at Age 65 (Normal Pension Age for schemes) according to latest statements

I doubt if this will alter a great deal although I can foresee the DB element dropping to be about 90% once we have got the Offset Mortgage down to an "interest free loan" in a year or so and then save / invest more each month.

If we had the all of the nominal 20x DB "pot" value, the AVC and the SIPP all in DC/ISA/SIPP type arrangements then we would have been very unlikely to have a ~85/15 split between Equities and Bonds at this point in time as are both within 10 years of NRA for the schemes.

I suppose the main thrust of what I was aiming to put across to the OP is that the DB element provides an amount of security and safeguarding in the overall scheme of things (that Bonds would have typically supplied in the past within an all DC/SIPP/ISA scenario) to the extent that we don't have 80% of our retirement assets invested in Equities even though we opted for the VLS80 fund for as part of our DIY SIPP pot.

NOTE: %'age allocations are based on a "Steady State" scenario. If our circumstances were to change drastically (redundancy / illness?) or a good inheritance then the %'age allocations would be skewed and we would need to rethink.