Cash Vs Bonds

David_66

A lot of people seem to be talking about using cash as their non equity holding rather than bonds as they say returns for a retail investor are actually better with cash. With Vanguard U.K. Investment Grade Bond for example though I can see that the 12 month yield is only 2.42%, however the value has gone up 9.61% in 2019 and by 4.92% annualised over the last 5 years.

https://www.youinvest.co.uk/market-research/FUND:B1S74Q3

MaxiRobriguez

Bonds have gone up as interest rates continue to fall. Bonds can only continue going up if interest rates continue to fall. Most people expect that brick wall to be met fairly soon. If they're right, you're reliant on the coupon rate for the bonds only as your returns, and you're also hoping that interest rates don't pick up, otherwise you'll see a capital loss.

"Returns for a retail investor are actually better with cash" doesn't make sense. Cash holdings aren't there to provide returns, they are there to reduce portfolio risk and act as dry powder in the event that markets sell off. In such an event, you have cash sitting there already ready to buy new stocks/bonds at a discount.

IanSt

David_66 wrote: »

With Vanguard U.K. Investment Grade Bond for example though I can see that the 12 month yield is only 2.42%, however the value has gone up 9.61% in 2019 and by 4.92% annualised over the last 5 years.

I'm one of those who prefer cash to bonds, in my case it's because I'm more concerned about the next 5 to 10 years when (hopefully) the financial environment returns to a perhaps more 'normal' state of affairs where the world's central banks aren't out there spending billions on buying up assets.

In such times I can see interest rates and bond yields going up and hence those bonds will go down in value to compensate for the increase in yield.

If we do return to such an environment then I might return to bonds but until then I'll stick to cash for the non-equities portion of my portfolio.

shinytop

IanSt wrote: »

I'm one of those who prefer cash to bonds, in my case it's because I'm more concerned about the next 5 to 10 years when (hopefully) the financial environment returns to a perhaps more 'normal' state of affairs where the world's central banks aren't out there spending billions on buying up assets.

In such times I can see interest rates and bond yields going up and hence those bonds will go down in value to compensate for the increase in yield.

If we do return to such an environment then I might return to bonds but until then I'll stick to cash for the non-equities portion of my portfolio.

I've decided to let people more qualified and hopefully more skilled than I am to choose where my non-equity investments are. They are the HSBC fund managers who decide what puts the balance in "Balanced" or the VLS60 ones who decide where the other 40% goes. I back them rather than me to get it right and I'm reasonably sure they're better at it that I am. I do keep a bit of cash for the next couple of years.

Prism

I use both cash averaging about 2% and global government bond funds which have slightly less than a 1% yield. In a crash the bond funds may well go up in value (or not) and the cash will stay level. I have a bit of P2P to push the numbers up a little.

The rest of my non SIPP wealth is in equities inside ISA's

masonic

David_66 wrote: »

A lot of people seem to be talking about using cash as their non equity holding rather than bonds as they say returns for a retail investor are actually better with cash. With Vanguard U.K. Investment Grade Bond for example though I can see that the 12 month yield is only 2.42%, however the value has gone up 9.61% in 2019 and by 4.92% annualised over the last 5 years.

https://www.youinvest.co.uk/market-research/FUND:B1S74Q3

There is a big difference between Government Bonds (which are the bonds typically advocated as the defensive part of a passive portfolio and the type people generally advocate replacing with cash) and corporate bonds (which are the type primarily held by that fund). Though the arguments presented around interest rate movements hold for both types.

Worth remembering that unlike Government bonds and cash, there is default risk as well as interest rate risk. Corporate bond funds have historically lost 10-20% of their value during a significant stockmarket crash.

SonOf

When talking about bonds, it is important to differentiate between the different types. Corporate bonds are considered higher risk than gilts. And at the moment, corp bonds are considered not as attractive as gilts for downside protection. However, not all gilts are considered attractive either.

Corporate bonds can also vary in risk significantly with high yield bonds potentially losing similar in value to equities. Whilst others can be much closer to gilts.

So, you need to really look at fixed interest securities, not as a single entity, but a range of different options which vary in both risk and reward potential.

Moe_The_Bartender

masonic wrote: »

Worth remembering that unlike Government bonds and cash, there is default risk as well as interest rate risk. Corporate bond funds have historically lost 10-20% of their value during a significant stockmarket crash.

I well remember that after the GFC, some corporate bond funds lost a lot more than that. It was fill your boots time.

Some investment grade bond funds were yielding nearly 10% implying a default rate of also around 10% which was never going to happen.