VLS results over last year shows still worthwhile holding bonds

Linton

A_T wrote: »

I would always hold a good proportion in long term treasury funds as they are the asset most negatively correlated to equities - that way you achieve true diversity. Gilts have been the best performing IA sector over the last 12 months.

Gilts have been negatively correlated with equities in the past, whether that will continue into the future is another matter. The best we can hope for is a zero correlation, just like cash. The problem is that mathematically gilts cannot increase in price a lot more before yields to maturity go negative. To take 3 real examples:

4.5% gilt maturing 7/12/2042 current price £175. A rise of 18% would give a negative yield.

6% gilt maturing 7/12/2028 current price £151. A rise of 3% would give a negative yield.

4% gilt maturing 7/3/2022 current price £109. A rise of 0.7% would give a negative yield.

See
https://www.fixedincomeinvestor.co.uk/x/yieldcalc.html

A_T

Linton wrote: »

Gilts have been negatively correlated with equities in the past, whether that will continue into the future is another matter. The best we can hope for is a zero correlation, just like cash. The problem is that mathematically gilts cannot increase in price a lot more before yields to maturity go negative.

No the best we can hope for is that the negative correlation will continue - as it has since the high inflation of the 70s. Today investors are still buying long treasuries when equities wobble.

itwasntme001

A_T wrote: »

No the best we can hope for is that the negative correlation will continue - as it has since the high inflation of the 70s. Today investors are still buying long treasuries when equities wobble.

And they are buying bonds as equities rise. No the best a bond/stocks investor can hope for is both assets continuing to rise i.e. correlation of 1.


If going forward there is a perfectly negative correlation (assuming 50-50 mix), the investor would not have made any money and i would imagine he/she would be very unhappy.

A_T

itwasntme001 wrote: »

And they are buying bonds as equities rise. No the best a bond/stocks investor can hope for is both assets continuing to rise i.e. correlation of 1.


If going forward there is a perfectly negative correlation (assuming 50-50 mix), the investor would not have made any money and i would imagine he/she would be very unhappy.

not if they rebalance regularly

bostonerimus

itwasntme001 wrote: »

Agree about short term returns beign dangerous. Also agree that most people should not be all in equities and no one should ever be all in bonds. I think those that should consider being all in equities are those with at least 20 years away from retirement or those with enough income streams elsewhere to fund their lives.

Yes that sounds sensible to me. I'm retired with enough DB and rental income to live off so I am about 75/25 now and using a long term rising equity allocation strategy as I've simply stopped rebalancing.

itwasntme001

A_T wrote: »

not if they rebalance regularly

You dont know that for certain, depends more on timing (i.e. on luck). If i buy more of an asset that still continues to fall, i could end up worse.

itwasntme001

bostonerimus wrote: »

Yes that sounds sensible to me. I'm retired with enough DB and rental income to live off so I am about 75/25 now and using a long term rising equity allocation strategy as I've simply stopped rebalancing.

I do not see the point of rebalancing frequently - i rather let the winners win in the long term and the most probable winners in the long term are going to be stocks imo. Rebalance only if need to reduce risk as you need to protect your capital - but even then would i want to buy bonds yielding 1%? I am not so sure (although i am not 100% convinced either).

A_T

itwasntme001 wrote: »

If going forward there is a perfectly negative correlation (assuming 50-50 mix), the investor would not have made any money and i would imagine he/she would be very unhappy.

who said anything about a perfectly negative correlation?

itwasntme001

Could the western world be turning into Japan? Scary to think but it could very well be. Given yields are going lower and lower, all you need now is a stock market correction and for stocks to remain low. I do not think we would see a crash like Japan in the late 80s since PE ratios are not as high in the west. But Japan PE ratios went to about 10 and stayed that low for a while. This means (ignoring any slowdown in earnings) would mean a US stock market correction of 50% - still a crash! Of course if earnings fall (for example of there is a recession) then PE ratios would rise and so a bigger crash could happen.


So the above should give good reason why some investors prefer bonds. Owning equities is certainly not for the faint of heart and even as a long term investor where you are willing ride out the crashes, it does take some mental power to stick with the plan.

itwasntme001

A_T wrote: »

who said anything about a perfectly negative correlation?

you mentioned negative correlation being the best outcome. I just stated the worse case is for the correlation to be perfectly negative. Far better to be closer to zero correlation then -1. So disproving your point.