How to Diversify in current climate

Linton

itwasntme001 wrote: »

I am staying away from OEIC bond funds as i think they will have serious liquidity issues in the next downturn. Plus yields do not look appealing given risks e.g. junk bonds.

Looking at the top 10 holdings in Liontrust Monthly Income portfolio I see:
HSBC
Lloyds
AT&T
Standard Chartered
BT
Deutsche Telecom
Orange SA (formerly France Telecom)


Hardly junk bonds.

Do you have suggestions for infrastructure funds to invest a large sum into?

It depends what you mean by a large sum and at what % of your total portfolio. I hold Premier Global Infrastructure at the moment. This is about 15% of my income portfolio. I am looking at Legg Mason RARE Global Infrastructure Income though will probably wait a while as it is relatively new.

itwasntme001

Linton wrote: »

Looking at the top 10 holdings in Liontrust Monthly Income portfolio I see:
HSBC
Lloyds
AT&T
Standard Chartered
BT
Deutsche Telecom
Orange SA (formerly France Telecom)


Hardly junk bonds.

That is about 20% of the portfolio. What about the rest? What makes it yield 5% when credit spreads using iTraxx IG europe is less than 60bps and UK 30y gov yield is 120bps?

Surely there is quite a lot of junk (high yield) bonds in the portfolio, to bring it up to 5% overall yield? Need the full list before you can make your presumptions.

itwasntme001

bostonerimus wrote: »

This discussion is like so many others when it comes to investing; people want a magic bullet, some way to beat the average and the odds. Well that's not going to happen for most people and you are likely to be one of those "most people". All the old rules apply and those have worked through numerous market cycles. So keep your nose clean and just be sensible when you spend and invest.

The problem is your rules feel like they work given past performance so it is easy for you to say just blindly buy into a particular stock/bond portfolio split in a passive way.

It may work out in 10, 20, 30 years. Or it may not. Key determinant of actual performance is at what prices you buy in at. Always has been. You could argue easily that it is a good time to stock up on some cash and wait for a correction just as easily as you can say its all about time in the market. We will not know which is the correct approach in hindsight and either one could be devastating to one's wealth in the long run.

through_and_through

itwasntme001 wrote: »

The problem is your rules feel like they work given past performance so it is easy for you to say just blindly buy into a particular stock/bond portfolio split in a passive way.

It may work out in 10, 20, 30 years. Or it may not.

Yes, there are huge uncertainties about what returns the next 10 or 20 years will give us. And there is a risk of investors not meeting our objectives as a result (except for those investors who start with what is likely to be significantly more than enough capital to meet their objectives, which gives them a cushion).

This is the big weakness in the idea that people should save for retirement via DC pensions. They should bun that idea, and bring back SERPS.

However, getting back to the topic of investing (since we have to do it, as things stand) ... how is this different from usual? Future returns are always a big unknown.

Key determinant of actual performance is at what prices you buy in at. Always has been. You could argue easily that it is a good time to stock up on some cash and wait for a correction just as easily as you can say its all about time in the market. We will not know which is the correct approach in hindsight and either one could be devastating to one's wealth in the long run.

With hindsight, you'd choose to time the market, and would do it successfully. But do you know how to do it successfully? Most investors would be best served by assuming we don't know how to.

If you determine that (for instance) 60% equities gives about the right level of risk, given your objectives, starting capital, stomach for choppy markets, and so on, then why would you (for instance) start at 20% equities and plan to go up to 60% later on? If you decide you have no ability to time the market (or at least: that it's safer to assume you don't have any such ability), then why not start at 60%?

Or alternatively, if (for instance) the thought of 60% is making you nervous, perhaps 40% would be more appropriate for you, and you should start (and stick) at 40%?

Linton

itwasntme001 wrote: »

The problem is your rules feel like they work given past performance so it is easy for you to say just blindly buy into a particular stock/bond portfolio split in a passive way.

It may work out in 10, 20, 30 years. Or it may not. Key determinant of actual performance is at what prices you buy in at. Always has been. You could argue easily that it is a good time to stock up on some cash and wait for a correction just as easily as you can say its all about time in the market. We will not know which is the correct approach in hindsight and either one could be devastating to one's wealth in the long run.

The problem is how to deal with an unknown future. You could take the view that anything could happen and so anything is worth trying, or perhaps its not worth doing anything. As an example of the latter you get people saying that since one could die tomorrow saving is a waste of time, just live for the day. But there is a more constructive approach and one more likely to be successful.


Its like a game of bridge. You are dealt a bad hand, what do you do about it? You could just give up. But you could assume the cards have fallen right for you and then play on that assumption. If they do, you win, if they dont you would have lost anyway.


That is the answer to the might die tomorrow argument. If you do you would be dead so it wont matter, if you dont you are better off saving.


Back to investing. The one basic assumption we as investors have to make is that in the long term prices in general will rise. If they dont we are all doomed. So given the assumption how do you best ensure that you benefit? One easy and certain way is to invest in everything. Given the basic assumption you are guaranteed to win. With any other strategy you may win or you may lose.


There may be arguments as to the best way to invest in everything, but that really is a secondary concern.


Perhaps you could come up with a different basic assumption which would lead to a different strategy, but I cant think of one. At least the ongoing rise assumption has a few hundred years of history.

Thrugelmir

itwasntme001 wrote: »

That is about 20% of the portfolio. What about the rest? What makes it yield 5% when credit spreads using iTraxx IG europe is less than 60bps and UK 30y gov yield is 120bps?

Understand the difference between running yield and the yield if held to maturity, i.e. income now at the expense of a capital loss in the future. Likewise the basis on which funds value their holdings on a daily basis.

itwasntme001

Thrugelmir wrote: »

Understand the difference between running yield and the yield if held to maturity, i.e. income now at the expense of a capital loss in the future. Likewise the basis on which funds value their holdings on a daily basis.

This maybe true, i.e. differences in the type of yield and of course itraxx main is a CDS index, however a bond fund which yields 5% is going to have significant positions in junk bonds given the current market.

Thrugelmir

itwasntme001 wrote: »

This maybe true, i.e. differences in the type of yield and of course itraxx main is a CDS index, however a bond fund which yields 5% is going to have significant positions in junk bonds given the current market.

UK Treasury 8% 2021 which the fund holds, yields over 7% at current market price. Is this a junk bond?

itwasntme001

Thrugelmir wrote: »

UK Treasury 8% 2021 which the fund holds, yields over 7% at current market price. Is this a junk bond?

But it is ytm that matters as if i buy the fund today, on maturity of that uk 2021 gilt, the proceeds would be the nominal amount and me buying the fund at today's price would be me having bought the bond way above par.

Thrugelmir

itwasntme001 wrote: »

But it is ytm that matters as if i buy the fund today, on maturity of that uk 2021 gilt, the proceeds would be the nominal amount and me buying the fund at today's price would be me having bought the bond way above par.

Correct. However the fund will treat the stock as yielding 7% on a distribution basis. Not the 1% if held to maturity. As time passes the market value will decrease.

Lloyds Bank 6.5% 2040 would yield you a return to maturity of less than 1%.

If you wanted to buy some riskier stock at a discount to nominal and obtain a decent return to maturity. Then you'd need to consider Wasps, Provident Financial, Burford Capital and the like.