Next recession, trade wars, up to 50% portfolio losses

Sally57

Is there not an argument to hold some bonds (whether Strategic, High Yield or Corporate) as well as a cash buffer? I hold Artemis Strategic Bond and feel this fund does the job for me in wealth preservation but I also have a good cash buffer in the best bank accounts available. Although, I'm still about 70% equities to my 30% bond & cash buffer.

masonic

Sally57 wrote: »

Is there not an argument to hold some bonds (whether Strategic, High Yield or Corporate) as well as a cash buffer? I hold Artemis Strategic Bond and feel this fund does the job for me in wealth preservation but I also have a good cash buffer in the best bank accounts available. Although, I'm still about 70% equities to my 30% bond & cash buffer.

While bonds do have some correlation with equities, they tend to hold their value to a greater extent than equities during economic downturns, so I believe they have value as part of a portfolio. For those investing in SIPPs and ISAs, they are a necessity given the difficulty moving money in and out of these. All three of the types of bond fund you mention tend to outperform cash during the good times (i.e. the majority of the time) and strategic bond funds in particular have demonstrably held up quite well during the last major stockmarket crash.

However, in the current interest rate environment there is some additional risk, in that interest rate rises would lead to capital losses in bond funds. To some extent this is priced in to long dated bonds, and it's hard to conceive of a scenario in which a situation that would cause a stockmarket crash would at the same time prompt a sharp rise in interest rates, given recent monetary policy, but the risk nevertheless exists. Personally, I hold some bonds, but have made use of P2P investments and cash to reduce my holding vs what I might have held ten or fifteen years ago.

Sally57

masonic wrote: »

While bonds do have some correlation with equities, they tend to hold their value to a greater extent than equities during economic downturns, so I believe they have value as part of a portfolio. For those investing in SIPPs and ISAs, they are a necessity given the difficulty moving money in and out of these. All three of the types of bond fund you mention tend to outperform cash during the good times (i.e. the majority of the time) and strategic bond funds in particular have demonstrably held up quite well during the last major stockmarket crash.

However, in the current interest rate environment there is some additional risk, in that interest rate rises would lead to capital losses in bond funds. To some extent this is priced in to long dated bonds, and it's hard to conceive of a scenario in which a situation that would cause a stockmarket crash would at the same time prompt a sharp rise in interest rates, given recent monetary policy, but the risk nevertheless exists. Personally, I hold some bonds, but have made use of P2P investments and cash to reduce my holding vs what I might have held ten or fifteen years ago.

Thank you for your input it is most appreciated and I agree with all your comments. However, I don't quite understand your comment " For those investing in SIPPs and ISAs, they are a necessity given the difficulty moving money in and out of these" so please can you explain to a simpleton.

masonic

Sally57 wrote: »

Thank you for your input it is most appreciated and I agree with all your comments. However, I don't quite understand your comment " For those investing in SIPPs and ISAs, they are a necessity given the difficulty moving money in and out of these" so please can you explain to a simpleton.

If you want to hold a fixed percentage of your portfolio in cash savings accounts instead of holding bond funds inside your ISA or SIPP, then you would normally need to rebalance from time to time. More often than not this will be out of high risk assets into low risk assets. But, if you take money out of your ISA there is a limit to the amount you can put back (partial transfers from S&S ISAs to cash ISAs are not usually permitted by providers). You might not be able to take any money out of your SIPP. Hence it is difficult to maintain a portfolio where a key asset class cannot be held together with your other investments.

kidmugsy

masonic wrote: »

But, if you take money out of your ISA there is a limit to the amount you can put back

True, but flexible S&S ISAs would accept all the money back as long as it is returned within the same tax year. In addition the £20k annual allowance for ISAs, and therefore £40k for a couple, is probably conveniently large for many people.

If I had a lot of capital in S&S ISAs I'd anyway hold them across several providers for reasons of security. Consequently occasionally transferring one to a Cash ISA might be a reasonable move.

masonic

kidmugsy wrote: »

True, but flexible S&S ISAs would accept all the money back as long as it is returned within the same tax year. In addition the £20k annual allowance for ISAs, and therefore £40k for a couple, is probably conveniently large for many people.

Sadly, few S&S ISA providers permit flexible withdrawals (for example, HL, AJ Bell, II and iWeb do not, but Charles Stanley Direct does). This would tend to be a problem for larger portfolios of say >£200,000 (where CSD is not likely to be very cost effective) and/or those with higher incomes who are able to use most of their annual allowance or who have legacy or inherited unwrapped holdings they are in the process of bed and ISA'ing.

If I had a lot of capital in S&S ISAs I'd anyway hold them across several providers for reasons of security. Consequently occasionally transferring one to a Cash ISA might be a reasonable move.

Yes, this is an option, but it comes at a cost (platform costs and potentially trading costs if it's necessary to rebalance holdings elsewhere following a sale and transfer). Another is to maintain some unwrapped holdings, which are unlikely to generate significant capital gains and are non-accumulating and UK domiciled to simplify tax.

At the moment I have a S&S ISA, LISA and trading account, each with a different provider, plus 3 IFfy ISAs, unwrapped P2P holdings in 5 further accounts and cash spread between 6 different banks. And I still need to include bonds as I don't want to risk more P2P exposure and further cash would need to be placed in a losings account. First world problem I know, but it's frustrating.

Vet

Not enough invested yet to worry :P

System

2008 FTSE 250 crashes 38%. 2009 FTSE 250 rises 50%, 27% the following year and over the following decade after the 2008 crash most of the years were gains and double digit gains too.

Anyone who had a FTSE 250 tracker and panic sold in 2008 got their pants pulled down. Anyone who followed the sage advice of time in the market is more important and held fast today has a fund worth over 3 times what it had dropped to in 2008 and 1.7 times what it was at its pre-recession peak.

kidmugsy

Tarambor wrote: »

2008 FTSE 250 crashes 38%. 2009 FTSE 250 rises 50%, ....

To make the arithmetic simple: it fell from 100 to 62 and then rose again to 93. At this point it has still lost 7 percent of its original value. Many naive people would not realise that when they see 38% compared to 50%. This is therefore a rotten way to report events.

JohnRo

Vet wrote: »

Not enough invested yet to worry :P

That should apply whatever the amount invested.

If you are 'enough' invested and worried then that suggests something is wrong.

The implication is that some of the following probably apply

... far too much invested
... lack of understanding
... lack of patience
... lack of strategy
... unrealistic expectations
... low tolerance to volatility
... strong aversion to paper losses
... overexposed to unsuitably high investment risk