100% equity - why bother with bonds

lpgm

I've never bought a bond. I'm roughly 80% equity and 20% cash(like). The cash is high because I'm not earning anymore. I'm 46.

Alexland

Voyager2002 wrote: »

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).

The low interest rate environment has also distored the price of equities where people are willing to pay high prices for low yield. Sometimes bonds outperform equities so I wouldn't discount them completely. They are also useful as some firepower so you can increase equity exposure at times when prices are more attractive. I was switching my bonds into equties just over 6 months ago and it really paid off.

Alex

AnotherJoe

losthere wrote: »

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

...snip.....

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.

If you have at least 18 years before you will retire you have no reason to fear a "crash" because you'll be buying investments cheaper after that and eventually that will more than over compensate for the fall when they rise again. "Crashes" and falls along the way are your friends and not to be feared.

chucknorris

Tom99 wrote: »

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

So far I have not invested that much (% of my portfolio) and I went for more riskier ones rather than the very safe ones, that I first had in mind, because they did not cover tax and inflation.

I invested in 3 different Provident financial bonds that mature in 2020, 2021 and 2023, yielding between 2.8% (2021, I know this does not cover tax and inflation) and 5.2% (2023) and a more riskier wasps bond paying over 9% equivalent net (as things stand they can't repay in 2023). But the bond debt is secured on their stadium (which is worth more than the bond debt), so I anticipate and I'm happy to accept the risk, that they can refinance the debt. Going forward I'm not sure, but I am happy with my Provident Financial choice, Wasps is right at the end of my risk tolerance, and I wouldn't want to invest more than the £30k that I did. I would like to invest in companies like Tesco, but I would like to cover tax and inflation, and I think that is unlikely to be achievable, so I am not sure.

Prism

I am 100% equities in my SIPP. I am 47 and plan to semi-retire somewhere between 55 and 60. Within the next 5 years I will likely look to introduce a bond fund - probably a passive government medium term one.

My out of pension allocation is around 55% equities and 45% fixed term savings accounts and P2P. Again, no bond funds at the moment. At least part of this is for possible spending so it needs to be less risky and I don't see bond funds covering that at the moment.

chucknorris

masonic wrote: »

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.

I listed my bonds in my post above. I am much more comfortable taking on some risk that would provide a small profit after tax and inflation (if the bond is repaid). But I just can't force myself to invest in a bond that guarantees a real time loss (after tax and inflation), I just can't do that.

I think that I would target bonds paying about 3.75% to 4.75% in future, but I am still deliberating.

Prism

chucknorris wrote: »

I listed my bonds in my post above. I am much more comfortable taking on some risk that would provide a small profit after tax and inflation (if the bond is repaid). But I just can't force myself to invest in a bond that guarantees a real time loss (after tax and inflation), I just can't do that.

I think that I would target bonds paying about 3.75% to 4.75% in future, but I am still deliberating.

I have so far avoided individual retail bonds as I can never work out exactly what the return is going to be, assuming I keep them until maturity, and what the risks of default actually are. Besides, there seems to be only a very limited range available (utilities and finance companies mainly). I am sticking to P2P for the time being

jsinc

People have been saying bonds are overpriced for about a decade.
Of Japanese bonds they've been saying it for a generation.


Nobody knows so would just invest as you see fit.

Linton

My income portfolio is targetted at about 50% high yield bond funds paying around 6% and 50% dividend paying equity with a similar yield. The reason for the higher yield focus is.....


The retirement strategy requires about £12K/year of steady-ish income. This could be achieved with £400K at 3% yield, £300K at 4% or £200K at 6%. But total assets are obviously limited, the more money that goes into providing income the less goes into the 100% equity growth portfolio. It seems better to me therefore to extract the most income from minimal capital to allow high growth elsewhere.



To give a specific example of what I am trying to achieve consider CTY (City of London Investment Trust) which invests largely in dividend paying FTSE100 companies. It has a yield of 4.25% and without income reinvested increased by 11.7% over the past 5 years. To achieve my £12K/year aim I would need £282K invested and would get £33K increase in capital in £ terms.


Alternatively I could put £200K in my income portfolio with 9% without income re-invested capital growth over 5 years and £82K in my high growth portfolio and get 91% with any income reinvested over 5 years giving a total of £92.6K capital growth.


The key point being that if one wants capital growth getting it from income focused investments is not the best of ideas.

Wassa123

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.

True, but then this has been the case over the last few years anyway.