VLS results over last year shows still worthwhile holding bonds

Thrugelmir

Brian65 wrote: »

The safest bonds eg Germany are well into negative interest rates. How much more negative can they go?

ECB has effectively sanctioned open ended QE. Reinvestment of maturing bonds, reinvestment of income plus a further buying programme could have interesting consequences.

Thrugelmir

Linton wrote: »

Bonds only provide capital preservation if you hold them to maturity.

Only if you buy them at nominal par value. Buying at a price above par value by default will incur a capital loss at maturity. Something that many retail investors fail to appreciate. Which is reflective of the opening post. Funds being valued at market current prices.

Thrugelmir

itwasntme001 wrote: »

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

Hence why QE was the choosen route by Central Banks. At the root of Japan's problems was a credit bubble. It's banks ranked 1 and 2 in the world at the time by balance sheet size. (For reference the UK banking giants ranked 3 of the top 4 in 2008).

Japan has continued to suffer since with a demographically ageing and declining population. A challenge which the West itself is going to have to face. As an aside Corporate culture in Japan is very different to that we know. Straight comparisons are therefore not meaningfull.

Audaxer

Thrugelmir wrote: »

Only if you buy them at nominal par value. Buying at a price above par value by default will incur a capital loss at maturity. Something that many retail investors fail to appreciate. Which is reflective of the opening post. Funds being valued at market current prices.

I appreciate that would be the case if buying individual bonds, but are you saying that there is not any point at present in buying any bond funds to include in a portfolio, even such as active Strategic Bond funds? Please note I am not disagreeing with you - I'm just asking a question.

itwasntme001

Interesting question:

What should a retiree (aged 65) buy today assuming he has children and he can only buy one:
1) An inflation linkedin annuity paying 3.3%
2) 30y UK gilt at current yield of 0.94%

itwasntme001

The above does not have a definite answer unless you know the age at death and also average annual inflation rate. Assuming average inflation to be 3% and age at death to be 87, what would the answer be?

Thrugelmir

Audaxer wrote: »

I appreciate that would be the case if buying individual bonds, but are you saying that there is not any point at present in buying any bond funds to include in a portfolio, even such as active Strategic Bond funds? Please note I am not disagreeing with you - I'm just asking a question.

As with any investment. One needs to understand it. If you don't then it's not for you. That's my mantra. Funds need to be considered on there own individual merits, i.e. the constituent holdings.

My concern is that people aren't fully understanding the longer term downsides of buying bonds at the current time. Historic performance data is becoming totally meaningless with many bonds offering a guaranteed capital loss at redemption. We are in a new unchartered era (of low interest rates and Central Bank buying programmes). Which will diminish future returns on new bond issuance.

I should add that I do personally hold fixed interest stocks in my portfolio.

Thrugelmir

itwasntme001 wrote: »

Interesting question:

What should a retiree (aged 65) buy today assuming he has children and he can only buy one:
1) An inflation linkedin annuity paying 3.3%
2) 30y UK gilt at current yield of 0.94%

What does having children to do with the decision?

Why not take the flat rate annuity and gift money to the children instead.

Linton

Thrugelmir wrote: »

Only if you buy them at nominal par value. Buying at a price above par value by default will incur a capital loss at maturity. Something that many retail investors fail to appreciate. Which is reflective of the opening post. Funds being valued at market current prices.

If you buy a 20 year gilt half way through its life it will be equivalent to buying a new 10 year gilt, in that you will get an equivalent total return on maturity. Otherwise no-one would buy the lower return gilts. The capital loss on an old high coupon gilt will be mitigated by a higher actual yield.



AIUI you dont buy gilts at par even when issued as they are auctioned.

Linton

itwasntme001 wrote: »

Interesting question:

What should a retiree (aged 65) buy today assuming he has children and he can only buy one:
1) An inflation linkedin annuity paying 3.3%
2) 30y UK gilt at current yield of 0.94%

Note that the published yields are to maturity and so incorporate the capital loss you would get if you held them that long. 4.25% 30 year gilts currently cost £1.87 and so give a simple interest of 4.25/1.87=2.27%. The published yield is 0.94%.



The two options are not comparable. If you want inflation linked income you would not buy gilts and if you wanted to provide an inheritance for your children you would not use an annuity. So your optimal choice depends on your objective.