100% equity - why bother with bonds

masonic

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.

When you take into account the downside potential of higher risk bonds (sub-prime lenders like Provident Financial are a hugely risky bet in my view) then you might as well be in equities where the upside potential is higher, or create a blend of cash:equities with a similar average return and lower risk.

Or you could grasp the nettle and lend your money directly to sub-prime borrowers via a P2P platform

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

3.75% to 4.75% in the future might well equate to something quite low risk. Once upon a time such rates were risk free and perhaps one day they will be again. It's worth remembering that Government bonds have historically beaten inflation by about 1%.

MaxiRobriguez

Others have given you solid information.

With almost two decades to go until crystilsaition then you can go with a 100% equities strategy.

If you don't want to go for bonds due to their relatively high price and possibility of interest rate rises in the horizon then you also cannot take a hedge in gold. Your option is cash, really, and there's nothing wrong with holding a minority position of cash and using it as dry powder if your equities drop - but if you do that you need to act with certainty when stocks are in a correction as it's very easy to wait and see if it drops further and then miss out on the bounce back like many did in January/February this year.

talexuser

The grandkids have a 16 year timescale, so at the moment it's Lifestrategy 100% for them.

When I started Peps 25+ years ago, I had around 20% in bond funds as per recommendations for volatility. After 6 or 7 years I looked at the relative returns and gave up on them and went all into equities (apart from those funds which had some small exposure themselves). This was on the basis that I had a long term horizon and would never cash in on a crash.

The last year or so I worry about increasing debt and whether QE has really solved anything or is just going to make the next crash worse by all the new income seekers panicking in a mass sell off.

So am now around 25% in more defensive ITs. I'm still not convinced about bond funds per se and prefer the managers of my defensive ITs to balance their ratios. I just have a personal oppinion that the lack of volatility does not balance the lack of long term growth too well, and QE has just made it worse. If your time horizon is smaller than mine your criteria will be entirley different.

chucknorris

masonic wrote: »

When you take into account the downside potential of higher risk bonds (sub-prime lenders like Provident Financial are a hugely risky bet in my view) then you might as well be in equities where the upside potential is higher, or create a blend of cash:equities with a similar average return and lower risk.

Sorry but I don't agree with you, you are perhaps right for what you want to do, but I want something invested that I can potentially move into equities from if equities suffer a correction, to take advantage of the lower prices. I am very comfortable with the risk of Provident financial, I have £50k maturing next April, I think that is quite safe, and £78k maturing the following year, again I think reasonably safe. I already have approx £1.5m in equities, I want some diversity. Although I would be happy to invest more at post crash prices.

I'm happy to hear negative comments, because someone might raise an issue that I had not thought of, this isn't one.

masonic

chucknorris wrote: »

Sorry but I don't agree with you, you are perhaps right for what you want to do, but I want something invested that I can potentially move into equities from if equities suffer a correction, to take advantage of the lower prices. I am very comfortable with the risk of Provident financial, I have £50k maturing next April, I think that is quite safe, and £78k maturing the following year, again I think reasonably safe. I already have approx £1.5m in equities, I want some diversity. Although I would be happy to invest more at post crash prices.

Where we seem to fundamentally disagree is that I see Provident Financial bonds as having a real risk of failing under the economic stress that may occur over the next few years, whereas you see them as a cash-proxy. My views are formed of personal experience of losses from this sector of the market and the realisation of how little it takes to tip such companies over the edge. You will have done your due diligence on Provident Financial, so will know more than me about what is on their balance sheet, what true assets underlie the business, what they will do if they cannot borrow sufficient funds at a manageable rate to repay their maturing bonds, and what mitigations they have in place to cope with a rise in defaults, interest rates, etc, I'm sure.

Personally, I have separate pots of investments with different purposes, and I'm agnostic about which asset classes those pots may contain providing their overall characteristics meet some criteria. The criteria for my defensive pot is an average return of at least inflation and a loss potential of no more than 10% judged on historical returns for the constituents.

I'm happy to hear negative comments, because someone might raise an issue that I had not thought of, this isn't one.

Then I'll consider my views summarily dismissed. Sorry to have wasted your time.

chucknorris

masonic wrote: »

Then I'll consider my views summarily dismissed. Sorry to have wasted your time.

I never consider it a waste of my time to hear what people with different views think.

bowlhead99

chucknorris wrote: »

I am very comfortable with the risk of Provident financial, I have £50k maturing next April, I think that is quite safe, and £78k maturing the following year, again I think reasonably safe.

I think what can be said about those bonds (yield to maturity of just under 4.5% and 4.9% respectively) is that assuming the company doesn't go bust, that will be a nice safe return