equities / bonds - investment strategy

[Deleted User]

One last point... Salary/pension = fixed income. A lot of people ignore that and have too much FI as a result.

Apodemus

On the cusp of retirement (and with old-fashioned views on investments), my spreadsheet currently has me making a final transfer into my SIPP and using that to construct a ladder of short-dated Gilts to give five-years equivalent of the natural yield on the rest of the SIPP portfolio (plus 2.5% increase each year). The plan is to use the yield to keep buying the forward Gilts and use the gilt redemptions (at term) as the annual income from the SIPP. I am hoping that this gives me sufficient hedge against a sequence of returns risk. The Gilts total will form about 10% of total SIPP value.

I guess I could simply retain cash in the SIPP or withdraw it early and keep it elsewhere at a higher rate of interest. But (at least on paper) i’m currently minded to go for the Gilts.

Linton

C_Mababejive wrote: »

With continuing low interest rates, could it be that it will be harder and harder for bond funds to acquire good quality bonds with a decent coupon? Surely all the decent long dated bonds have now been bought up by the likes of pension schemes or bond funds? If a company were floating a bond issue now, its rate would surely be much lower than one issued 10 years ago or more?

Essentially,are we heading toward a shortage of decent bonds and therefor fund prices are getting more and more expensive to buy into to get that return? Dare i say,,over priced? Same with gilts i guess?

Bonds continuously change in price so that the current returns for the same time period to maturity are equivalent and independent of the coupon (stated rate of return for a £100 bond).. So for example a £100 gilt paying £4 every year for the next 40 years will cost you £195. The market ensures that there is not a shortage.

waveydavey48

I've followed Lars Kroijer's view that in the long run you won't go far wrong with a mix of equities which track the market and bonds provided you are widely diversified and the mix reflects your risk profile.

Do many forum members now think he's wrong?

Linton

To return to the OP:

There are simplistic rules of thumb and recommendations given in popular dummy's guides to investing and by investment gurus regarding % bonds and the types of bond one should use. They almost probably not disastrously wrong, but they may not be the best allocations for your specific circumstances and objectives or for the current state of the world economy.


As with any investment you should buy bonds to meet an objective. Without an objective any % is as right or wrong as any other. One simple objective is to constrain the likely fall of your investment pot in a crash. If one assumes an equity fall of 50% and constant safe bond prices then it's simple maths to determine the % bonds for any given desired maximum portfolio fall. Of course that same objective could be achieved with cash rather than bonds.


If you are investing for the very long term and have a steady income from elsewhere then you may decide to accept a 50% fall in equity and hold no bonds at all. Another objective could be to achieve a moderately steady income.


So for example I hold a growth portfolio and a separate income portfolio. The growth portfolio is 100% equity. The income portfolio is split to provide diversification and comprises 55% equity and 35% corporate and emerging market bonds, and 10% other investments. None of the bonds are gilts or similar very safe developed country government bonds since they produce minimal income.

Linton

waveydavey48 wrote: »

I've followed Lars Kroijer's view that in the long run you won't go far wrong with a mix of equities which track the market and bonds provided you are widely diversified and the mix reflects your risk profile.

Do many forum members now think he's wrong?

You won't go far wrong, although optimisation and modification of that simple statement for your particular circumstances can be beneficial. However when you get to the next level of detail things get more complex. Keeping to the topic of bonds, what % and what type are important questions.

[Deleted User]

waveydavey48 wrote: »

I've followed Lars Kroijer's view that in the long run you won't go far wrong with a mix of equities which track the market and bonds provided you are widely diversified and the mix reflects your risk profile.

Do many forum members now think he's wrong?

He’s right.

george4064

I'm 28, actively contributing to my DC pension and I am 100% global equities.

C_Mababejive

Linton wrote: »

Bonds continuously change in price so that the current returns for the same time period to maturity are equivalent and independent of the coupon (stated rate of return for a £100 bond).. So for example a £100 gilt paying £4 every year for the next 40 years will cost you £195. The market ensures that there is not a shortage.

Yes but would you want to pay £195 for a £4 return every year for 40 years? I guess if its to fund retirement you wouldnt mind as when you snuff it, it wont be your problem ??

[Deleted User]

C_Mababejive wrote: »

Yes but would you want to pay £195 for a £4 return every year for 40 years? I guess if its to fund retirement you wouldnt mind as when you snuff it, it wont be your problem ??

It’s not a “£4 return every year for 40 years”. Return depends on several factors, such as future interest rates, and cannot be predicted.

Not sure what “snuffing” has to do with your point, which seems to be “current interest rates are low”.