Bonds newbie

chucknorris

EdGasketTheSecond wrote: »

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

But the yield on my alternative investments:

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

is not less than inflation, that is what I want to avoid, which is why bonds are not for me.

EDIT: I realise that some of that 4% cash (net, after tax) will be marginally below inflation, but that is unavoidable, and why I have limited it to only a small part of that 4%.

I'm starting to wonder if a better strategy would be to keep one of my highest yielding property until my mid 70's (another decade than planned), that would change my retirement portfolio to something like:

45% shares (excl VCT, approx 13% REIT incl)
25% fixed pension (DB and state, might be able to get up to 25%)
20% investment property
4% cash (regular savers/NSI cert/some savings acc)
4% P2P (possibly)
2% VCT (possibly)

Malthusian

EdGasketTheSecond wrote: »

No yield. But that is not the point. The point is to protect you from inflation.

If that's the point of gold's existence then it's exceptionally lousy at it. Since 1972, gold has returned more than RPI inflation over ten years in only 35% of the ten-year periods in that timeframe. For comparison, the MSCI World returned more than inflation 83% of the time.

Gold only protects you from inflation if it goes up, and the chances of it going up are essentially random.

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

Governments can't just print more panda excrement either but I wouldn't invest in panda excrement. The fact that something is rare or difficult to produce does not make it valuable.

justme111

intetesting. I wondered if we go back more than 30 years and/or use longer timeframe than 10 years ? What if we compare that fund with gold from the point of view of real values drops ?

coyrls

https://www.forbes.com/sites/danielfisher/2013/08/08/gold-not-much-of-a-hedge-for-anything-unless-youre-a-centurion/#13fa27ab6a74

grey_gym_sock

chucknorris wrote: »

I suppose my real struggle is changing my investment approach (as I get older) from investing for growth, to investing defensively to protect my capital.

does age really matter (for investment)?

it depends what you're trying to do with your capital. often, it does matter, because a person/couple is hoping to spend a relatively high percentage - perhaps 3% to 5% - from their investable capital, and would (if possible) like to increase that spending each year in line with inflation, without running out of capital while they're alive. in that case, too much in equities can be dangerous, because they will be selling some equities each year, and if equities have just crashed (especially just after retirement), that could put their remaining capital into a downward spiral, from which it might not recover in time.

OTOH, if you're only spending perhaps 1% from investable capital, then there's much less risk from having a lot in equities. though nor is there from having rather less in equities. in this case, you're unlikely to run out of capital either way. and how to invest is (within broad limits) a matter of taste, or a matter of investing for your heirs.

are you in the latter camp? (ISTR you've mentioned not spending as much as you could.)

I prefer the look of individual corporate bonds held to maturity rather than bond funds (mainly to protect myself from falling values if interest rates go up).

this supposed difference between corporate bond funds and individual corporate bonds is mostly illusory. both can fall (in current market value) when interest rates rise. but in both cases, if you continue to hold, you will initially be being paid the same income (in £; or, a higher income, as a percentage of the now-reduced capital value). and if you are reinvesting that income, it will be reinvested at the higher interest rates which now prevail. and the same goes for reinvesting the whole capital from a corporate bond which you hold when it matures, or which a bond fund holds when it matures.

it is a little more complicated than that, because bond funds could be doing slightly different things, other than just holding bonds until maturity and then reinvesting the proceeds in new bonds. however, they are on average likely to be selling bonds which are relatively close to maturity, and buying bonds which are relatively new to replace them. so on average you can expect to see a similar effect on bond funds as on individual bonds when interest rates rise. though some bond funds may be doing more unusual things, and could be outliers (i.e. do much better or much worse than the pack).

that is the mechanics of it, but i'm not very scared about interest rate rises, at least for reasonably short-term bonds - certainly up to 5 years till maturity, and perhaps up to 10 years. i can't really see rates rising by more than 1% or 2% in the foreseeable future. the point of rate rises is supposed to be to choke off excessive borrowing. and people are so used to very low rates now that that's about all it would take. i can't see bank base rate going back to 5% or 10% any time soon, just because it's been there before.

re rates on individual bonds: it might be worth considering individual bonds (especially new issues) on the LSE's ORB (order book for retail bonds). these might pay between c. 4% and 6% on issue. these are from much less well known names than the bonds bowlhead mentioned earlier in the thread. you need to take a view on whether each issue is worth the risk.

e.g. an issue of a bond from a housing association (hightown housing association), paying 4% for 10 years closed today (i might have bought some of this, if i'd been quicker off the mark - 10 years is a little long for my taste, but this seems relatively low risk). some discussion of this issue: http://www.fixedincomeinvestor.co.uk/x/analysis.html?type=bond-of-the-week&cat=analysis-comment&y=2017&aid=1527

or: recently, a proposed bond issue from an unlisted property company (select property group), which would have paid 6% for 6 years, was cancelled because there weren't enough buyers. (this 1 looked far too risky to me - very weak covenants.)

those 2 examples are of bonds issued by companies that aren't themselves listed on the stock market. but there are also plenty of issues from companies which are listed.

most bonds already issued are currently trading at well over their face value. and for those that aren't, there are usually very good reasons why not, so beware! that said, here is a yield map of current issues: http://www.fixedincomeinvestor.co.uk/x/bondtable.html?groupid=12&zoom=1

note that individual corporate bonds (issued in £) are generally exempt from capital gains tax (if they are "qualifying corporate bonds" - QCBs). so, especially when you're on higher-rate tax, you may want to avoid buying them at a premium. but, OTOH, buying at issue at face value, and later selling at a premium, could give you tax-free capital gains.

... or you could just lose your capital, if the issuer defaults. this is similar to the risks of shares. but the risk comes in a slightly different form from shares - viz. actual defaults, or crashes in the prices of individual bonds when it appears more likely that they might default. so it might provide some diversification from shares.

comparing this to p2p, the latter can pay substantially higher rates, at least before defaults (10%+, if you pick appropriate platforms). i have not gone in for p2p, mainly because it seems like far too much work to do it sensibly. also, there is less regulation of p2p. and i suspect the secondary markets would dry up more severely in a crisis (though the volume of trading on the ORB is also pretty low, compared to trading of shares on LSE).

EdGasketTheSecond

coyrls wrote: »

https://www.forbes.com/sites/danielfisher/2013/08/08/gold-not-much-of-a-hedge-for-anything-unless-youre-a-centurion/#13fa27ab6a74

Yet gold has outlived all fiat currencies as a store of wealth and I guarantee it will outlive the pound and us dollar.

coyrls

EdGasketTheSecond wrote: »

Yet gold has outlived all fiat currencies as a store of wealth and I guarantee it will outlive the pound and us dollar.

I doubt either of us will be round to see it.

EdGasketTheSecond

coyrls wrote: »

I doubt either of us will be round to see it.

Well don't be so sure. The average life of a fiat currency is only 27 years! And before you say the dollar has been around far longer don't forget that it and the pound were pegged to gold for most of their early life and have become fiat currencies more recently.

grey_gym_sock

EdGasketTheSecond wrote: »

Well don't be so sure. The average life of a fiat currency is only 27 years! And before you say the dollar has been around far longer don't forget that it and the pound were pegged to gold for most of their early life and have become fiat currencies more recently.

never mind longevity: that shows a shocking lack of stability! without reasonable stability, you may still have a store of value, but not a very good one.

to think that gold, which was once tied to the value of major currencies, such as the pound and the dollar, has since become a free-floating commodity, whose (inflation-adjusted) price can oscillate wildly about! i'll never trust it again ...

ams25

Thanks for your post grey gym. This chimes with my feeling...though I am a bond newbie so good to read it from a more experienced bond investor. With all the doom and gloom you read about bonds its sometimes appears like it's a one way bet with a guarantee of a capital loss. I also agree re interest rates...increases in the short term more likely to be at a slow pace and reasonably limited.

How do you view strategic bond funds, e.g. M&G optimal or Twenty Four dynamic? My objective with bonds is the usual portfolio diversification and something to sell in an equity down market. Would be happy with a real return of 0%, any more is a bonus.