100% equity - why bother with bonds

losthere

Hello,
I am struggling to understand how I reduce the risk of my pension investments and the role of bonds / gilts.

On this forum and others the steer seems to be that bonds, both corporate and gilts, are so overpriced and are so correlated with EQ that there is little point in buying them to diversify your portfolio.

So what should I be using to diversify my portfolio and reduce the risk of loss, if not bonds. This is really something I am failing to grasp.

I only have one investment and that is my pension set up by my employer. I have been looking to reduce my risk as I am worried about a stock market crash

The only other non equity funds my pension scheme offers are 1) cash fund 2) a 50% cash and 50% managed bond fund 3) an annuity type fund which invests in long term gilts and corporate bonds (you can invest at any time but its designed for people who want an annuity).

Should I stick to conventional wisdom and invest in bonds? I get nervous about investments so I am unsure what to do; work do not offer advice; the pot is too small to warrant a IFA; and what I read online confuses me more.

I am approx. 18 years from being able to draw my pension and am nervous about what might happen if there is another crash. I have no other investments aside from this pension.

Voyager2002

Since you have more than ten years before you expect to retire, investing solely in equities does not represent an unreasonable risk. An additional point is that the market for bonds has been distorted by 'quantitative easing' and the exceptionally low interest rates that we have seen for the last decade, and the expectation that in the near future interest rates will return to normal (which would immediately reduce bond valuations).

bostonerimus

If you have the guts 100% equities is a valid strategy....but I'll also point out that you are asking the question at a current high in a long bull market.

chucknorris

It can be quite subjective depending upon your attitude to risk.

My own opinion is that now that I am 61, and that I only work two days per week, I am much less able to invest after a correction to take advantage of the lower prices. So I am more vulnerable to a correction, I am still considering what my retirement portfolio should be, and it is further complicated by moving out of investment property, but I am thinking something along the lines of:

My portfolio is currently:

35% Equities (excluding REIT)
28% Investment property
15% Fixed pension (DB)
8% Cash (a bit more than I actually wanted in cash)
7% REIT
7% Individual corporate bonds

After selling a significant proportion of my investment property as I approach retirement, I think my retirement portfolio in a few years will look something like this:

40% Equities (excluding REIT)
15% Fixed pension (DB)
15% Individual corporate bonds
15% REIT
10% Investment property
5% Cash

I would be happy to hear peoples views, especially negative comments. I do wonder if I should maybe have more in individual corporate bonds at the expense of equities, or maybe just move the last 10% of investment property into bonds when I am in my early 70's and have moved out of property by then. I think the trend for me (as I get older) will be to slowly move more into bonds, I prefer individual bonds rather than bond funds.

losthere

bostonerimus wrote: »

If you have the guts 100% equities is a valid strategy....but I'll also point out that you are asking the question at a current high in a long bull market.

I don't have the guts, I haven't being paying much attention to my pensions in the past. I have been investing as much as I can over the past few years, evening cutting down costs in other areas. I don't want that to go to waste, so I am looking to derisk,

losthere

Voyager2002 wrote: »

Since you have more than ten years before you expect to retire, investing solely in equities does not represent an unreasonable risk. An additional point is that the market for bonds has been distorted by 'quantitative easing' and the exceptionally low interest rates that we have seen for the last decade, and the expectation that in the near future interest rates will return to normal (which would immediately reduce bond valuations).

This is what I keep reading, does this make bonds a no go then as a tool for diversification / derisking

masonic

chucknorris wrote: »

I would be happy to hear peoples views, especially negative comments. I do wonder if I should maybe have more in individual corporate bonds at the expense of equities, or maybe just move the last 10% of investment property into bonds when I am in my early 70's and have moved out of property by then. I think the trend for me (as I get older) will be to slowly move more into bonds, I prefer individual bonds rather than bond funds.

I'm pretty sceptical of corporate bonds, although holding them directly would be my preferred option over investing through a fund. What percentage of your corporate bond holding would need to default in order to take your returns below what could be achieved risk-free? Bonds with YTM >4% in general look quite risky and if you spread your money between 10 of those and just one defaulted badly over a 5 year period, you might as well have been in cash. I think you need to look at YTM % to find much in the way of low risk corporate bonds and at that level of return it's hard to justify these over FSCS protected fixed term accounts, depending on your tax situation.

I hold bonds because I have to (money already in a S&S ISA and want to keep it there and 'readily accessible' for rebalancing purposes), and have gone for a fund mostly weighted towards international government bonds (particularly US) where the yield is a little more reasonable. But I also hold a ladder of fixed term accounts as an alternative to having a higher exposure to bonds.

masonic

losthere wrote: »

This is what I keep reading, does this make bonds a no go then as a tool for diversification / derisking

If you have the option to hold cash and get a return on it, then this may be preferable. It obviously isn't possible within a pension or S&S ISA, but savings held outside of an pension or ISA could replace bonds to the extent this money could be invested in the event of a crash.

barnstar2077

I have sixteen years until I retire. My SIPP is pretty much 100% equities. As long as your equities are diversified across sector and region then you are stressing about nothing (and not in individual shares.) I wouldn't start thinking about changing things until you are ten years away from retirement. Even if there was a 40% adjustment tomorrow you would be fine. Not to mention that if that did happen that your monthly purchase would be made at a discounted rate, which would help to offset the drop as the markets recover.

All in all, with 18 years to go you are worrying about nothing,

firestone

i assume from the OP that the pension is investing in funds(or fund) if so what type of fund is it and did you pick it?.Its possible that as well as picking individual funds the provider may offer a life style/managed type fund within their fund range which would do the mixing of assets for you

Tom99

chucknorris wrote: »

It can be quite subjective depending upon your attitude to risk.

My own opinion is that now that I am 61, and that I only work two days per week, I am much less able to invest after a correction to take advantage of the lower prices. So I am more vulnerable to a correction, I am still considering what my retirement portfolio should be, and it is further complicated by moving out of investment property, but I am thinking something along the lines of:

My portfolio is currently:

35% Equities (excluding REIT)
28% Investment property
15% Fixed pension (DB)
8% Cash (a bit more than I actually wanted in cash)
7% REIT
7% Individual corporate bonds

After selling a significant proportion of my investment property as I approach retirement, I think my retirement portfolio in a few years will look something like this:

40% Equities (excluding REIT)
15% Fixed pension (DB)
15% Individual corporate bonds
15% REIT
10% Investment property
5% Cash

I would be happy to hear peoples views, especially negative comments. I do wonder if I should maybe have more in individual corporate bonds at the expense of equities, or maybe just move the last 10% of investment property into bonds when I am in my early 70's and have moved out of property by then. I think the trend for me (as I get older) will be to slowly move more into bonds, I prefer individual bonds rather than bond funds.

Out of interest which individual corporate bonds are you planning to invest in?