Drawdown Portfolio - Which Bond Fund?

DairyQueen

I need advice from those knowledgeable in fixed interest investments. Could anyone help please?

I am in the process of preparing our portfolio for drawdown. We plan to use OH's SIPP for discretionary spends and will withdraw variable amounts (UFPLS) beginning in 2/3 years.

I wish to allocate 35/40% of the SIPP to fixed interest. The intention is to sell bonds to fund SIPP withdrawals, and replenish bonds from sale of equities during periods when equities perform well.

We are planning for this SIPP to meet discretionary expenses throughout retirement. Anything left for our heirs will be a bonus but approx. 2/3rds of the capital will be invested for 10+ years.

I know practically zilch about bond funds but would like to cover a spectrum of global government and corporate bonds in no more than three funds (ideally one). I would prefer a cost-effective ETF but have read that an actively managed fund may be more appropriate for this asset class.

Concerns - rightly/wrongly:
- inflation heading in the wrong direction in the short-term.
- market size means high allocation to US treasuries by global ETFs and therefore...
- currency risk,especially for USD denominated funds (should I opt for sterling hedged ?)

[Deleted User]

Personally, I like short term domestic government bonds. Something like this: http://www.morningstar.co.uk/uk/funds/snapshot/snapshot.aspx?id=F00000W0FD

Such funds are basically cash. Bonds are for protection and source of funds for rebalancing during a major scare. Company bonds could easily be pressured if there are bankruptcies all around. Foreign bonds carry currency risk, and hedging isn’t free. Long term bonds are sensitive to long term interest rates. Which leaves short term government bonds.

bostonerimus

Put enough into cash and a savings bond ladder so you can ride out a 2 or 3 year down turn and the rest into a global bond index fund.

Prism

Although not in drawdown yet, I use a savings bonds ladder (1-3 years) with some easy access and P2P thrown in. Average interest rate is about 2.5% at the moment with the only risk being a burst of inflation or a P2P failure.

If I was to use a bond fund it would be a short/mid term government passive fund

shinytop

bostonerimus wrote: »

Put enough into cash and a savings bond ladder so you can ride out a 2 or 3 year down turn and the rest into a global bond index fund.

If the general view is that equities generate 5-6% (or whatever) over the long term (10 years?) what it the equivalent figure for a diversified global bond index? Is it much more than the 1.5-2% available via savings 'ladders'?

AlanP_2

A read through this and the comments may help:

https://monevator.com/the-slow-and-steady-passive-portfolio-update-q1-2019/

Linton

There are a wide range of bond funds that serve different purposes. Personally I wouldnt go for UK Government Bonds at all at the moment, if you want something cash-like why not use cash? For the long term, over the past 5 years you would have been better off in Premium Bonds than a short term UK government bond, not that I am necessarily recommending Premium Bonds.



Possibly worthwhile bonds include strategic bond funds where the fund manager chooses a wide range of bonds across the world. I hold Jupiter Strategic Bond as part of my wealth preservation portfolio. Or if you want income and/or diversification from equities there are many corporate bond funds and funds that focus on higher risk government bonds. - I also hold bond funds in these areas.



Bonds should be thought of as diversifiers, not merely as safe havens.

[Deleted User]

For the long term, over the past 5 years you would have been better off in Premium Bonds than a short term UK government bond, not that I am necessarily recommending Premium Bonds.

Last 5 years = a bull market. Not what bonds are for. Nor are they for getting the best return. They are for safety, to help mitigate short term risk of a market crash.

Thrugelmir

shinytop wrote: »

If the general view is that equities generate 5-6% (or whatever) over the long term (10 years?) what it the equivalent figure for a diversified global bond index? Is it much more than the 1.5-2% available via savings 'ladders'?

In the past bonds and equities were uncorrelated investments. Now well into the era of central bank monetary policy intervention. Both dance to the tune of interest rates. Institutional investors being happy to lose money holding (for example) German Bunds rather than equities. A topsy turvey world, where the rules of the past are best ignored.

The often quoted 5% (allowing for inflation)comes from what is now the annual Barclays Equity Gilt Study of the UK market. Using a 118 years of data. The return over the entire period would be in the region of 5% with income reinvested or 0.5% without. No account of dealing costs has been factored into these figures. For the UK. At best Gilts would provide a return little better than inflation. Though of course your capital remains intact.

westv

My current thinking is that I'll use a bond fund for the part of my drawdown fund covering the 10 years between expected retirement next year and the State pension.

shinytop

The often quoted 5% (allowing for inflation)comes from what is now the annual Barclays Equity Gilt Study of the UK market. Using a 118 years of data. The return over the entire period would be in the region of 5% with income reinvested or 0.5% without. No account of dealing costs has been factored into these figures. For the UK. At best Gilts would provide a return little better than inflation. Though of course your capital remains intact.

So am I choosing between a guaranteed 0.5% below inflation (cash ladders) or a possible 0.5% above with a bit of risk (bonds) to smooth out my equities investments?

BTW not trying to be clever (I can't be on this subject!); this is a genuine question for me.