Cash better than bonds?

Legacy_user

For lower earners certainly I think cash can get good enough rates to render bonds obselete, they'd be better with equities:cash instead

Its less clear for people with more savings, but I feel cash is more useful for market timers and a rebalancing bonus, the interest rate risk that bonds introduce isn't enough I feel to justify any small negative correlation with equities it may have. In addition, cash covers you against interest rate rises.

I certainly wouldn't leverage vls20 over holding vls100 + cash

Thoughts appreciated

economic

I have never owned gov bonds I just don’t see the point right now in this cycle when you can get more interest from cash deposits and better return from equities. Plus peer to peer. I’m all cash and stocks.

Even when rates were high pre crisis cash deposits offered good returns without the rates risk.

Linton

“Bonds” covers investments with a very wide range of risks and returns. I assume you are only talking about very low risk developed country government bonds.

People with portfolios held in pensions and ISAs won’t have flexible access to high interest rate cash accounts, Cash will probably give them areturn not very different to safe bonds, it could be lower. It will certainly be lower than medium term inflation.

Over the past few years the interest on low risk bonds is at its lowest value in history. At times in the past gilts have provided a viable option for people living off a cash lump sum.

We haven’t had a decent crash for nearly 10 years. Many investors who haven’t experienced one appear not to take the possibility seriously. For those investors who do want some protection there is no one single completely satisfactory alternative investment to equity. The best answer in my view is to diversify. Possible options include allocations of cash, low risk bonds, higher risk bonds, REITs and funds which directly hold property, P2P lending, wealth preservation funds, and gold.

Audaxer

MatthewAinsworth wrote: »

For lower earners certainly I think cash can get good enough rates to render bonds obselete, they'd be better with equities:cash instead

Its less clear for people with more savings, but I feel cash is more useful for market timers and a rebalancing bonus, the interest rate risk that bonds introduce isn't enough I feel to justify any small negative correlation with equities it may have. In addition, cash covers you against interest rate rises.

I certainly wouldn't leverage vls20 over holding vls100 + cash

Thoughts appreciated

I know what you mean but I think a lot of medium risk investors would be nervous about having all their investments in 100% equities like a VLS100 that could lose 50% in a crash, even although they may have 40% of their overall money held in cash savings. If you look at the overall portfolio it would still be 60:40 but I think people with a medium risk mentality would be more comfortable with a VLS60 as well as having some cash savings.

System

Linton -

Possible options include allocations of cash, low risk bonds, higher risk bonds, REITs and funds which directly hold property, P2P lending, wealth preservation funds, and gold.

You could but:
High risk bonds - correlated to equities, unless someone wanted a kind of halfway house
Funds directly holding property - indirect would have better liquidity
P2P - advantage over high risk bonds?
Wealth preservation funds - hold the same underlying asset classes we can

Gold - a wild card, I'd have it more for a rebalancing bonus than as something to rely on.
But the negative correlation gold has does interest me, I'll have to think of it more. Still though cash has no correlation

Audaxer - all in the presentation I think, not panicking important and bonds might work for that psychology

Fund managers wouldn't like people deserting bonds!

Linton

MatthewAinsworth wrote: »

Linton -

You could but:

There is a "but" to everything, different options have different "but"s. Which is why I suggest you use a whole range.

High risk bonds - correlated to equities, unless someone wanted a kind of halfway house

Partially correlated though they have the advantage of supplying a steady income, until they dont.

Funds directly holding property - indirect would have better liquidity

Indirect property is simple equity. We are trying to get away from equity.

P2P - advantage over high risk bonds?

Possibly lower risk for the level of income. The main problem I see is that we havent had a crash since P2P became popular so we dont know.

Wealth preservation funds - hold the same underlying asset classes we can

Difficult, they may well use derivatives, private equity, FX etc etc.

Gold - a wild card, I'd have it more for a rebalancing bonus than as something to rely on

A wild card is good for a bit of diversification. "But" it's too volatile to form a major part of a sensible portfolio.

Still though cash has no correlation

"But" it provides a fairly certain real long/medium term loss through inflation.

Ray_Singh-Blue

With cash, you know where you are. For example, if today you put £20,000 into a certain cash ISA with a certain Building Society with a fixed interest rate of 2.15%, then you can map out its exact value from now until 30th November 2022 when it will be worth £22,440. But quite what £22,440 will buy in 2022 is a different question, and this makes me wary of cash.

With bond funds, I don't quite know where I am. Take a bond fund like Vanguard's $8 billion Global Bond Index. Despite the underlying bonds offering a yield of around 1.7%, in the past 4 years, total return of the fund has been 7.1%, 2.3%, 2.8%, 2,7%. Why has the total return has been higher than the yield? For how long can this continue, and is a reversion to the mean inevitable? I don't know the answer to these questions but it makes me a little wary of bond funds.

Edit: Despite being wary of both cash and bonds, I recognise that I want this sort of asset to reduce the volatility of my portfolio. Because whether they return in real terms +1%, -1%, +5% or -5%, that doesn't really matter as much as the fact that they could be dampening 50% swings in the value of equities. To me that is their real purpose and putting all these things together I have opted to hold both cash and bonds.

Thrugelmir

MatthewAinsworth wrote: »

Fund managers wouldn't like people deserting bonds!

UK investors have been buying bonds at the expense of equities recently.

Prism

You can also reduce risk during a crash by diversifying with pure equities. For example japan smaller companies went up during the last financial crisis (party due to the Yen), and emerging markets recovered much more quickly than developed. The global health sector between 2007 and 2010 was roughly on par with UK government bonds although was more volatile over a month to month basis

Glen_Clark

economic wrote: »

I have never owned gov bonds I just don’t see the point right now in this cycle when you can get more interest from cash deposits

I can't see any point in owning bonds when you can spread it round guaranteed retail accounts earning more. But thats not an option for large investors. To get the same security they are stuck with Government bonds with yields driven down to silly levels by QE. Its a rare case of the little investor getting a better deal than the big investor

economic wrote: »

better return from equities.

Won't know that without a crystal ball .........

System

I like the idea of using equities defensively, although again I couldn't rely on them

I think at least the emergency fund has to be cash, although I don't think I'd ever be more than 2 months from a paycheck in a new job if I needed one (agency work, etc) so any more in that pot is overkill. And I think cash beyond that is either to tame a scary portfolio or for, basically, market timing (by rebalancing) - and that's something gold might be more appropriate for

I'm wary of direct property being suspended again, I hope the equities of those things still have some relation to NAV in a crash. I own some indirect for diversification

How come P2P lower risk? To me it looks like lending money to strangers in a concentrated way, but in truth I don't know much about it

Derivatives are like futures on commodities? Like gold?

And PE is equities?

Sadly as ray says there is expected real terms loss for this part of the portfolio, hard to get around