Bonds newbie

chucknorris

coyrls wrote: »

For a retail investor, you’re probably better off putting money into fixed term savings accounts, rather than buying individual corporate bonds and holding until maturity. The return is likely to be higher and, so long as you stay under £85,000 with any one institution, you’ll have gilt levels of security.

I can't even find one savings account that pays more (net) than inflation (for a significant amount), so I think that I am going to have to be more heavily invested in equities, which would make my retirement portfolio look something like this:

60% shares (excl VCT)
25% fixed pension (DB and state, might be able to get up to 25%)
4% investment property
4% cash (regular savers/NSI cert/some savings acc)
5% P2P (possibly)
2% VCT (possibly)

chiang_mai

The question for me is, that balanced portfolio, the one that contains 50% equities and 50% bonds, when is it actually actually balanced. Is it when the 50% bond holdings contains all high yield bonds, I don't think so since they move in the same direction as equities. Is it when they contain high credit worth corporate bonds, hmm, probably not in a rising interest rate environment. Is it international government bonds, fixed rate gilts (I doubt it very much) and so on and so on.

I think the answer to the above is, if you want to hold a safe cash proxy in your portfolio to balance your equity holdings, index linked gilts might be an answer, but be prepared to not make much of a return (or in fact loose money perhaps) on them in the good times. Thereafter it's a case of assuming increasing ammounts of risk in that cash proxy until such time as greed has truly distorted the picture and you end up holding 50% in low credit worth junk bonds. Is that about the way it is?

ams25

chucknorris wrote: »

I can't even find one savings account that pays more (net) than inflation (for a significant amount), so I think that I am going to have to be more heavily invested in equities, which would make my retirement portfolio look something like this:

60% shares (excl VCT)
25% fixed pension (DB and state, might be able to get up to 25%)
4% investment property
4% cash (regular savers/NSI cert/some savings acc)
5% P2P (possibly)
2% VCT (possibly)

how are you valuing the fixed pension/DB element?

chucknorris

ams25 wrote: »

how are you valuing the fixed pension/DB element?

To most people it is worth more (I think) but I personally (it is very subjective) use a multiplier of 28.5 (3.51% yield). The multiplier is obviously less than an annuity, but then an annuity is only at best reasonable value, and rarely a perfect fit to what is required.

EdGasketTheSecond

I invest regularly in gold and silver ETFs. Imho a much better store of wealth than bonds at the moment.

Currencies are devaluing by inflation all the time and as you say, you can't match it with savings accounts or bonds. However whatever the inflation rate, an ounce of gold is still an ounce of gold and on average will purchase whatever an ounce of gold can both today and in the future; admittedly with some intervening fluctuations. But the outlook for gold and silver is especially good right now with inflation rising and gifts holding off raising interest rates as long as they care. Add in brexit, N. Korea and a few other worries to support the gold and silver prices.

chucknorris

EdGasketTheSecond wrote: »

I invest regularly in gold and silver ETFs. Imho a much better store of wealth than bonds at the moment.

Currencies are devaluing by inflation all the time and as you say, you can't match it with savings accounts or bonds. However whatever the inflation rate, an ounce of gold is still an ounce of gold and on average will purchase whatever an ounce of gold can both today and in the future; admittedly with some intervening fluctuations. But the outlook for gold and silver is especially good right now with inflation rising and gifts holding off raising interest rates as long as they care. Add in brexit, N. Korea and a few other worries to support the gold and silver prices.

But do you get some sort of yield, if so, what?

justme111

I would guess not but it meets your requiremwnt in that it supposed to match inflation so at least you should not lose.

economic

bowlhead99 wrote: »

Thing is, so-called 'defensive' equities have risen substantially since interest rates fell to the floor and everyone started piling their money into whatever could pay a dividend, offer capital growth, and maybe not fall so much as cyclical stocks in a recession or market downturn.

If you look at popular fund 'Fundsmith', it holds a concentrated portfolio of stocks and the manager likes strong profitable global brands. Consumer staples have been its largest sector and the top ten holdings over those last five years have included consumer staples / defensives such as Philip Morris (tobacco), Imperial Tobacco, Pepsi, Dr Pepper, Johnson & Johnson, Colgate, Diageo, Reckitt Benckiser, Microsoft etc. OK - Microsoft is Tech but their products are ubiquitous with a virtual global monopoly on office productivity software, desktop operating systems etc and they have been a profitable dividend payer for years so you might see them as more akin to a defensive stock than a trendy dotcom stock.

That fund is up over 170% in five years. That's a lot to potentially unwind.

You may find that using defensive equities, certain types of infrastructure stocks etc as 'bond proxies' is something that comes undone if/when market conditions cause bonds and their substitutes to fall out of favour. It is difficult to know 'where to hide' if you are trying to preserve capital but unwilling to use bonds or investment trusts with a cautious / capital preservation strategy, and predominantly want to consider index-based investing for your equities exposure (rather than managed funds), yet demand a high level of income at the same time.

what we have seen historically is that, during a bull market, these defensives tend to flat line during rates rising rather then fall, so they underperform the market but they still hold their value. in a bear market you would expect defensives to hold up well which is what fundsmith himself has said and i would agree with him.

i think there is potential for a big rate rally and full blown bull market in equities, for these defensives to not only underperform but sell off quite a bit - the unwind you talk about. thats certainly a possibility, that hasnt occured in recent history but one that should not be ruled out.

EDIT: looking at the fundsmith portfolio it looks like his portfolio is mainly growth orientated rather then defensives. so fundsmith may not be a good example but he does have some defensive names so its not overly growth orientated.

bigadaj

EdGasketTheSecond wrote: »

I invest regularly in gold and silver ETFs. Imho a much better store of wealth than bonds at the moment.

Currencies are devaluing by inflation all the time and as you say, you can't match it with savings accounts or bonds. However whatever the inflation rate, an ounce of gold is still an ounce of gold and on average will purchase whatever an ounce of gold can both today and in the future; admittedly with some intervening fluctuations. But the outlook for gold and silver is especially good right now with inflation rising and gifts holding off raising interest rates as long as they care. Add in brexit, N. Korea and a few other worries to support the gold and silver prices.

A slightly obscure problem with gold and probably even more so silver is that they are commodities as much as currencies.

So as the price of the commodity rises and falls this affects the amount being produced and mined, just like oil, copper, coal etc

So as the price of gold and silver rise mining companies will increase production and exploration, and the a mint being produced expands until the price drops, mines are mothballed etc etc

EdGasketTheSecond

chucknorris wrote: »

But do you get some sort of yield, if so, what?

No yield. But that is not the point. The point is to protect you from inflation. The yield on your alternatives are all less than inflation so not fully protecting you. Gold and silver should rise in value against a devaluing currency as unlike the £ and dollar govts can't just print more