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

masonic

MK62 wrote: »

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)

I started investing in the early-mid 2000s. At that time, charges were significantly higher. I ended up paying 1% for my portfolio of HSBC trackers (US, Europe and FTSE All share), albeit with no explicit platform charge since that was taken out of trail commission. I still managed to avoid sticking it all in a FTSE 100 tracker - and this was before I found this forum. Prior to that, I was 100% cash and no doubt making full use of many of the accounts used in Paul Lewis' comparison. Investments were a minor part of my assets until post-2008 when I started investing in earnest to make the most of the market lows and it wasn't until around 2011 that I went near 100% equities. I don't regret having done so and am able to ease off now to a more sensible 75% equities thanks to high returns and currency devaluation that we've experienced in the last several years.

The situation today is very different. Most low cost platforms offer some sort of guidance, which is no longer so heavily biased towards funds that line their pockets. There are comparison sites dedicated to investment platforms and literally dozens of resources available to DIY investors. Even the low quality bank-based structured products and investments are mainly geared towards investing globally these days, from what I have seen.

kidmugsy

MK62 wrote: »

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.

So you are arguing with his results using a mere conjecture that the results would be materially different if some detail were changed?

Golly, it's like being back at primary school.

jamesd

kidmugsy wrote: »

So you are arguing with his results using a mere conjecture that the results would be materially different if some detail were changed?

Best to give up now because:

1. He chose to compare to a HSBC tracker that underperformed the FTSE100 by 3.4% a year, returning 244% while the FTSE100 returned 316%. Are you ever going to recommend a tracker with such poor performance?

2. He picked a poor index. A global 50:50 portfolio beat cash most of the time. Not mere conjecture, actual data.

3. He picked an unusually bad time for equities, making them look less good than usual.

Of course you know that I pay attention to alternatives to shares and he does have a valid point if suggesting that cash or non-share investments can beat some shares sometimes. But overall, I expect that you'd suggest that a beginner use something like a Vanguard 80:20 or 60:40 fund and correctly expect it to trounce active cash long term.

MK62

jamesd wrote: »

1. He chose to compare to a HSBC tracker that underperformed the FTSE100 by 3.4% a year, returning 244% while the FTSE100 returned 316%. Are you ever going to recommend a tracer with such poor performance?

I didn't know that, but it's quite a sizeable tracking error - to the point where it's arguably not really a tracker at all.

2. He picked a poor index. A global 50:50 portfolio beat cash most of the time. Not mere conjecture, actual data.

That was my point really...

3. He picked an unusually bad time for equities, making them look less good than usual.

To be fair though, 2008-2016 has been a torrid time for cash accounts too, with low, near zero interest rates.

But overall, I expect that you'd suggest that a beginner use something like a Vanguard 80:20 or 60:40 fund and correctly expect it to trounce active cash long term.

Yep, agreed (though trounce might be a bit strong for the whole 21 year period)

MK62

kidmugsy wrote: »

So you are arguing with his results using a mere conjecture that the results would be materially different if some detail were changed?

It's not "mere conjecture" to state that the results would be different if he compared cash to different index trackers, it's fact.
The FTSE 100 has been outperformed, over the 21yr period, by all of the three indices mentioned - the FTSE All-share, the FTSE250 and the S&P500, quite comprehensively too in the latter cases.

Golly, it's like being back at primary school.

Really?

londoninvestor

jamesd wrote: »

1. He chose to compare to a HSBC tracker that underperformed the FTSE100 by 3.4% a year, returning 244% while the FTSE100 returned 316%. Are you ever going to recommend a tracer with such poor performance?

Also note the selective choice of "actual historic performance" vs "assumptions representative of the future".

For example, he excludes the effect of tax, although over this period, a basic rate taxpayer would have paid 20% on the cash interest, and nothing on the tracker dividends. That in itself is actually fair enough, if the aim of the exercise is to inform decisions that people might make starting from where we are now.

But then, he observes that the tracker had higher charges in the past, and uses the return net of those charges, rather than assuming the current, lower charges apply in the future.

This study isn't completely uninteresting - but Lewis clearly knew the result he wanted before he made his careful choice of data.

masonic

MK62 wrote: »

To be fair though, 2008-2016 has been a torrid time for cash accounts too, with low, near zero interest rates.

Most of that period was fine if you locked into 5 year fixed rates at the right time as I and many other forum users did. For example, Newcastle Building Society offered a 5 year fixed ISA and savings bond at 5% AER up to February 2010 (the ISA being effectively a 3 month notice account due to ISA rules protecting the right to access cash ISAs).

Those funds matured around summer 2014 to early 2015 depending on when you invested. It got a bit tricky after that and it was necessary to play the current account games to get a decent return, but this was still a lot easier than today with several 5% offers available, plus 6% regular savers.

MK62

masonic wrote: »

Most of that period was fine if you locked into 5 year fixed rates at the right time as I and many other forum users did. For example, Newcastle Building Society offered a 5 year fixed ISA and savings bond at 5% AER up to February 2010 (the ISA being effectively a 3 month notice account due to ISA rules protecting the right to access cash ISAs).

Those funds matured around summer 2014 to early 2015 depending on when you invested. It got a bit tricky after that and it was necessary to play the current account games to get a decent return, but this was still a lot easier than today with several 5% offers available, plus 6% regular savers.

Fair point - I was referring more to interest rates in general, but I accept that's not all that was/is available, especially if you are prepared to lock in for longer periods.

NS&I is always worth a look too for such accounts, as they often allow withdrawals from their non-ISA bonds, albeit at a penalty.

I wonder what results would get thrown up running a similar study against the best 5yr rates available.....

masonic

MK62 wrote: »

I wonder what results would get thrown up running a similar study against the best 5yr rates available.....

If memory serves me correctly, historically, 5 year fixes were only marginally better than the best 1 year fixes, with some risk that you would lock in to a relatively low rate in a rising interest rate environment.

I didn't have a lot of interest in them, barring the Newcastle offer (which was a bit different, because Newcastle had some serious cash-flow problems following the credit crunch and was forced to pay way over the odds in order to attract enough cash to stay afloat). I filled my boots, but was only able to do so because I wasn't already locked into long-term fixes. Had I previously invested in 5 year fixes, I'd only have a 20% chance of being able to take full advantage of the Newcastle deal.

So, I think it would be swings and roundabouts, but unlikely to materially affect things.

bostonerimus

If you buy individual bonds now I wouldn't plan on selling them before they mature for more than you bought them for. So we are back to using them for boring interest. If you can get more with a saving account do that, but maybe the individual bond ladder might get popular again.

If you have a bond fund expect it's price to fall as interest rates go up, so selling would lock in that lower price......or you can take the increased income as your funds buy higher rate bonds and reinvest it and as you get close to the average maturity you'll start to get your head above water again.