When to switch to cautious

aldershot

I think the industry is setting itself up for another huge problem as the traditional view of "cautious" no longer applies in the current environment. Moving a fund into bonds (the traditional approach) may blow up at precisely the wrong moment. Bonds are probably as or even more risky than equities at the moment.

dunstonh

aldershot wrote: »

I think the industry is setting itself up for another huge problem as the traditional view of "cautious" no longer applies in the current environment. Moving a fund into bonds (the traditional approach) may blow up at precisely the wrong moment. Bonds are probably as or even more risky than equities at the moment.

They are not. When the bond market crashes, it tends to be under 5% and typically no more than 10%. When the stockmarket crashes it is typically 20%+ and twice in the last 15 years it has exceeded 40%.

The downside remains greater with equities than it does bonds. Bonds don't have great potential (although I am seeing a 5% increase in value in the last 2 weeks). However, it is the scale of the downside that is how risk is measured.

aldershot

dunstonh wrote: »

They are not. When the bond market crashes, it tends to be under 5% and typically no more than 10%. When the stockmarket crashes it is typically 20%+ and twice in the last 15 years it has exceeded 40%.

The downside remains greater with equities than it does bonds. Bonds don't have great potential (although I am seeing a 5% increase in value in the last 2 weeks). However, it is the scale of the downside that is how risk is measured.

But that's exactly the past will guide the future thinking that is so dangerous. QE has pushed the bond market into a bubble that will burst one day and the move will be brutal and quick. If the current 30 gilt yield moves to 3.0%, which is hardly out of the question, it will lose 29% of it's price (from 174.22 to 124.56).

Less specifically, the L&G all index gilt fund is up 15% this year. it could give that back in a week. As you pointed out, bonds shouldn't move much but they've moved up a mile over the recent past and they can certainly give it back again.

Eric_the_half_a_bee

aldershot wrote: »

QE has pushed the bond market into a bubble that will burst one day and the move will be brutal and quick. If the current 30 gilt yield moves to 3.0%, which is hardly out of the question, it will lose 29% of it's price (from 174.22 to 124.56).

Are you suggesting that in the absence of QE, the base rate would be on a path to 3.0%? That doesn't seem very likely to me.

aldershot

Eric_the_half_a_bee wrote: »

Are you suggesting that in the absence of QE, the base rate would be on a path to 3.0%? That doesn't seem very likely to me.

Are you suggesting that rates are going to stay low for ever?

The long end of the gilt curve could move substantially if the BoE stopped buying and we have a large deficit to finance. We have become so wedded to QE and near zero rates that the thought of 3% rates seems extreme. It doesn't need base rate to move to 3% for 30 year yields to move there. I don't know when this bubble will pop, but many fixed income commentators believe we are in a bubble and there will be a substantial shift in bond prices one day. You don't want to have bought the fund the day before.

Eric_the_half_a_bee

aldershot wrote: »

Are you suggesting that rates are going to stay low for ever?

For ever? No. For the next 20 years? Quite possibly

I don't know when this bubble will pop, but many fixed income commentators believe we are in a bubble and there will be a substantial shift in bond prices one day.

a) Bond prices have rocketed since they started saying this 5 years ago

b) Look at the history of Japanese gilt yields over the last 25 years

aldershot

Eric_the_half_a_bee wrote: »

For ever? No. For the next 20 years? Quite possibly



a) Bond prices have rocketed since they started saying this 5 years ago

b) Look at the history of Japanese gilt yields over the last 25 years

You are a braver man than me to predict for the next 20 years.

(a) true, but that just makes the bubble bigger

(b) yep, all the way to negative. Nowhere to go from there unless you think they will carry on into negative territory, -1%, -2% -3%....maybe they will, but I still wouldn't want my pension fund invested in yield destructive assets. I'd rather have something else.

I also don't think we're Japan because we don't have the domestic savings they have and we have to finance externally.

I don't know what will happen (any more than you, Mark Carney, Janet or Abe) but I don't think bonds are "safe" any more.

bigfreddiel

Keep it simple, the time to get more cautious is when the timespan is less than five years that you need to start crystallising your funds, longer than that stay invested.

Cheers fj

Rayling

Thanks I was thinking along those lines too big fred

dunstonh

Rayling wrote: »

Thanks I was thinking along those lines too big fred

It is the wrong way to think though unless you are buying an annuity or planning a full withdrawal.