equities / bonds - investment strategy

[Deleted User]

When a bond is issued the total profit over its life is cast in stone.

In addition to the impact of inflation, there are several reasons why this does not hold true in real life:

1. Yield to maturity makes assumptions about the future. You don’t actually know these things; it’s guesses.

2. Someone with a bond fund keeps buying and selling bonds. Let’s say interest rates drop. Great. Your long term bonds are more valuable as of today. Let’s say interest rates go up. That’s bad, right? Not really. Now you are using the coupon paid today to buy new bonds with higher coupon. So, over time you will get back on track.

3. Now let’s assume your government decided to buy lots of bonds (quantitive easing). What is the effect? Same as when the government decides to buy lots of steel or petrol or bananas. The price of the bonds you have goes up. Market sentiment in general is important. If everyone is rushing for government bonds during a market crash then bonds hold or grow in value.

4. Let’s say I buy government issued inflation linked bonds with 30 year duration (which I do). How on earth am I to know “profit over its life”??? It’s directly linked to FUTURE inflation.

5. Even if I get the same number of pounds back for bonds as what I had paid up front, but there was a bout of deflation in between, then my purchasing power went up. Note that corporate profits and hence stocks really suffer when that happens.

It all comes down to diversification between asset classes, assuming you are trying to preserve your wealth. If, on the other hand, the objective is to have the highest probability of becoming filthy rich then buying a few penny stocks should do the trick.

Thrugelmir

Deleted_User wrote: »

Nothing guarantees a fixed return.

Gilts do...........

Yield to maturity makes assumptions about the future.

No assumptions. Just hard facts.

[Deleted User]

Thrugelmir wrote: »

Gilts do...........

No assumptions. Just hard facts.

Gilts do not guarantee the future. Investors in gilts experienced massive losses through most of the 20th century - until late 1970s.

Repeating “future is a fact” does not make it factual.