Getting rid of bonds: would that be a silly thing to do?

MK62

No offence, but that's a highly selective article.
Even the title is misleading - the article itself states that over the whole period, cash didn't beat shares, and that's using a FTSE100 tracker for the shares - an index which hasn't been a stellar performer and could hardly be described as representing "shares" in general.
The "cash" and the way it was assumed it would be invested is also a bit selective...

I wonder how the results would look if the period from Jan 1st 2016 to today was also included - where the FTSE100 has risen around 30%.....


I don't think anyone would suggest that investing in shares always beats cash - over some periods it clearly won't - that's the risk/volatility of equity investing.
However, I'd also wager that few equity investors would have invested solely in a FTSE100 tracker for varying periods over 21 years......if they did they should sack their adviser and/or do a bit of research themselves on how not to invest in the stock market for 20+ years.

I'd also wager that few equity investors would invest for a fixed period, "n", and sell out on a specific date, if the market was bad - that's just not the way most equity investors operate.....at least not the ones I know.

Ray_Singh-Blue

Filo25 wrote: »

On the face of it, it is a significant change in the risk profile of your portfolio, although I share your distrust of bonds in the current environment, I previously had an 80:20 equity:bond split but have now moved that to 80:20 equity:cash, and yes I do know the cash element is eternally losing to inflation, but am concerned about the short and medium term outlook for bonds so have done the ultimate de-risking of that part of the portfolio

Same here. Stepped back and tried to figure out why I might need bonds in my portfolio- couldn't think of a single reason. Have no need for my investments to generate income: salary, and later pension, will do that. Equities for growth, and cash to dampen the volatility.

Thrugelmir

Ray_Singh-Blue wrote: »

Same here. Stepped back and tried to figure out why I might need bonds in my portfolio- couldn't think of a single reason. Have no need for my investments to generate income: salary, and later pension, will do that. Equities for growth, and cash to dampen the volatility.

Reinvestment of income is equally rewarding as growth.

kidmugsy

MK62 wrote: »

No offence, but that's a highly selective article.

Outside a few branches of the sciences everything said about everything is selective. The point is that his selections are well judged and highly relevant to Joe Soap, investor. To imply otherwise is entirely to miss the point.

Investment analysts who disparage cash are almost always using the yield on Treasury Bills which - as far as I can tell - is typically lower than the personal investor can get with his bank or BS savings accounts, regular savers, or current accounts. For example the current three month bill is reported as yielding 0.51% p.a. Meantime Joe Soap can make virtually ten times that on some of his cash and two or three times that on the rest. To use the rates on bills as somehow representative of the personal investor's cash is near as damnit lying. Alas the incentives for investment managers to mislead on this topic are all too clear.

Moreover the author's measure of the success of equity investment was probably too kind to equities because he made no allowance for charges other than those internal to the tracker. Somebody paying, let us say, 0.25% to his platform and 0.5% to his IFA is going to do worse. Moreover a FTSE-100 tracker is precisely the sort of investment Joe Soap turns to when he attempts DIY investment management as is clearly shown by lots of enquiries here over the years. OK, in this case he saves the 0.5% to the IFA but he still has to pay for his platform.

For the personal investor the scale of inferiority of cash to equities is repeatedly - and I suspect dishonestly - exaggerated by the professionals.

chucknorris

gif1 wrote: »

Hi all,
I am 45, investing 1000 monthly in a 75% (global) equity /25% (strategic) bond, active portfolio. As it seems that bonds are going nowhere I am considering replacing that entire 25% with an equity global small-cap fund (small-cap are not currently catered for in my allocation). Apart from that, I have one-year worth of salary in saving accounts.
Would this be a crazy idea to implement?
I would appreciate your expert opinions and suggestions.
Thank you

I've got a slightly different but related problem. I have plenty in equities, but slightly more in investment property, which I have started to sell. I just don't know where to place the released equity.

masonic

The sort of people who would end up with a FTSE100 tracker for their S&S investments would probably the very same people who would otherwise have their money languishing around in a low rate default savings account offered by their bank. Those who were rate tarts and actively managed their savings would no doubt put in some rudimentary work to determine that a FTSE100 tracker did not represent a balanced portfolio and would probably do a little shopping around when it came to costs.

The point that consumers have access to risk free products with a far better return than bonds is an important one. Recently it's been on an ever diminishing amount of capital, but it still pays to make use of those current accounts and regular savers and even savings accounts before going near anything short-dated in the bond markets.

kidmugsy

masonic wrote: »

The sort of people who would end up with a FTSE100 tracker for their S&S investments would probably the very same people who would otherwise have their money languishing around in a low rate default savings account offered by their bank.

Do you have any evidence for that?

Filo25

bostonerimus wrote: »

Yes cash is good......a bit of guaranteed interest in a saving account should be in most people's portfolio. I have that and then a fund with some intermediate government and investment grade corporate bonds which has a 3% yield which I expect to go up. Of course if that happens the price will fall, but I will continue to reinvest the income and eventually will do ok and probably better than keeping the money in cash for 10 years.

Probably a bit of a different calculation in the US to be fair where bonds are a lot further along in the tightening cycle, you aren't likely to be getting 3% returns on government and investment grade in the UK unfortunately, even the 25 year is still under 2% and obviously has a lot of rate risk in the price on that maturity

MK62

kidmugsy wrote: »

Outside a few branches of the sciences everything said about everything is selective. The point is that his selections are well judged and highly relevant to Joe Soap, investor. To imply otherwise is entirely to miss the point.

Well we will have to disagree on that.
I take it then that you are immediately selling out of your equity holdings and moving it all into cash?;):p

I think you are right in that the selections are well judged, but I think they are well judged in the sense of deciding the outcome first, and then selecting evidence to support that outcome.
So I'm not missing the point - I just don't agree with it.

As I said, the title "CASH BEAT SHARES FROM 1995 TO 2015" is misleading enough, especially as the article itself then states "Money invested in best buy cash over the whole 21 year period from 1 January 1995 to 1 January 2016 would have produced an average annual compound return of 5.0%. Over the same period the tracker would have produced a compound annual return of 6.0%.

I understand the article then goes on to select various investment period lengths which show that cash can beat "shares" (or a FTSE100 tracker anyway), in a majority of cases, though not over the whole period - this misses a crucial point, in each case where there was a winner either way, how much is the difference?
As the FTSE100 tracker has a higher return over the whole period, the 24 times it won must then outweigh the 38 times cash won, as the margin of difference is bigger on average.

Investment analysts who disparage cash are almost always using the yield on Treasury Bills which - as far as I can tell - is typically lower than the personal investor can get with his bank or BS savings accounts, regular savers, or current accounts. For example the current three month bill is reported as yielding 0.51% p.a. Meantime Joe Soap can make virtually ten times that on some of his cash and two or three times that on the rest. To use the rates on bills as somehow representative of the personal investor's cash is near as damnit lying. Alas the incentives for investment managers to mislead on this topic are all too clear

Well Treasury bills are not equities, but I wouldn't argue that some investment managers will often over egg the pudding the other way too.

Moreover the author's measure of the success of equity investment was probably too kind to equities because he made no allowance for charges other than those internal to the tracker. Somebody paying, let us say, 0.25% to his platform and 0.5% to his IFA is going to do worse

There are cheaper accounts than 0.25% - are we supposed to believe that this Joe Soap will do all the research needed to find the best cash deals, but not do the research to find the cheapest account to hold a FTSE100 tracker?
And if Joe Soap is paying 0.5% to an IFA, and all that IFA comes up with is a FTSE100 tracker, he should get rid of that IFA, as there would be almost nil value in retaining him/her (though I suspect very few IFAs would recommend a FTSE100 tracker as your sole investment)

Moreover a FTSE-100 tracker is precisely the sort of investment Joe Soap turns to when he attempts DIY investment management as is clearly shown by lots of enquiries here over the years.

Though how many of those enquiries have resulted in an endorsement of a FTSE100 tracker alone.....or are people on here likely to recommend a more balanced approach to equity investing? Personally I think the latter (though that doesn't mean a FTSE100 tracker may not feature at all, just that it wouldn't be the only, or even the main, investment).

For the personal investor the scale of inferiority of cash to equities is repeatedly - and I suspect dishonestly - exaggerated by the professionals.

I wouldn't argue that it's not often exaggerated, but that's not the same as saying you'd be better off in cash - though I accept that for selected timeframes you might well be.

Run the same analysis vs an All-Share tracker, or a FTSE250 tracker, or a S&P500 tracker, and you'll get different results - to varying degrees.

masonic

kidmugsy wrote: »

Do you have any evidence for that?

Only anecdotal - people I know fall into two groups, those who have spent time chasing the best savings rates and have subsequently caught the investment bug and done their homework, and those who are too apathetic to move their savings around and who think the FTSE 100 and the stockmarket are synonyms.

The attributes that make one an informed and effective saver are highly transferable to investments.