VLSx versus Global Track + cash

Sailtheworld

bogleboogle said:

Sailtheworld said:

bogleboogle said:

Sailtheworld said:

Bonds are lower risk than cash

Well that's just not true. 

Government bonds I was thinking.

Still not true. (I) Bond yields are very low and can be negative - capital is at risk and (II) governments can default on their debts. 

A good way to think about it is to compare bond yields with cash yields. If yields on cash are higher it's because greater risk is being taken and nobody takes greater risk without expecting to be paid for it - otherwise you've found the free lunch of lower risk and greater return which is unlikely.

Cash is nothing more than an IOU from the government so if they default it doesn't offer any protection.

grumiofoundation

Sailtheworld said:

bogleboogle said:

Sailtheworld said:

bogleboogle said:

Sailtheworld said:

Bonds are lower risk than cash

Well that's just not true. 

Government bonds I was thinking.

Still not true. (I) Bond yields are very low and can be negative - capital is at risk and (II) governments can default on their debts. 

A good way to think about it is to compare bond yields with cash yields. If yields on cash are higher it's because greater risk is being taken and nobody takes greater risk without expecting to be paid for it - otherwise you've found the free lunch of lower risk and greater return which is unlikely.

Cash is nothing more than an IOU from the government so if they default it doesn't offer any protection.

Just because something offers a greater return does not inherently make it riskier (and vice versa).

bogleboogle

Sailtheworld said:

bogleboogle said:

Sailtheworld said:

bogleboogle said:

Sailtheworld said:

Bonds are lower risk than cash

Well that's just not true. 

Government bonds I was thinking.

Still not true. (I) Bond yields are very low and can be negative - capital is at risk and (II) governments can default on their debts. 

Cash is nothing more than an IOU from the government so if they default it doesn't offer any protection.

Sovereign default ≠ a 'default' on cash in that currency. 

With bonds you are taking a double risk - (i) that the yield will be/stay >0% and (ii) the issuer will not default.

With cash there is only (ii) and even that is subject to the important distinction I mentioned above. Thus, your initial claim that "Bonds are lower risk than cash" is provably false.

bowlhead99

Sailtheworld said:

bogleboogle said:

Sailtheworld said:

bogleboogle said:

Sailtheworld said:

Bonds are lower risk than cash

Well that's just not true. 

Government bonds I was thinking.

Still not true. (I) Bond yields are very low and can be negative - capital is at risk and (II) governments can default on their debts. 

A good way to think about it is to compare bond yields with cash yields. If yields on cash are higher it's because greater risk is being taken and nobody takes greater risk without expecting to be paid for it - otherwise you've found the free lunch of lower risk and greater return which is unlikely.

Banks will pay a relatively high 'going rate' to retail depositors because they want to generate goodwill from retail depositors (and potentially up-sell profitable products to those customers) while indulging in a profitable lending business. Those retail depositors are insulated from the downside risk through an industry wide compensation scheme (which can borrow unlimited amounts from HM Treasury) which is not available to large corporate and institutional customers.  So a bank or building society deposit made by an individual or small business has a better risk/reward ratio than it has for larger depositors who need to put away millions or billions.

Meanwhile the demand for millions, billions or trillions of government securities by large institutional depositors and investors (from large corporates, insurance companies and pension schemes, to foundations and other world governmental entities) who are competing with each other for access to gilts and other government bonds, will bid up the prices (and bid down the returns) from government bonds until they are extremely low or negative. 

As such, the bond yields (driven by high demand from institutional investors set against the bond issuance that the government wants to supply) can be lower than the returns offered to customers of FSCS-protected bank accounts (driven by marketing teams who are motivated to increase  or maintain consumer demand at a certain level and maintain), even though the two things offer equivalent practical risk to a UK consumer/ individual.

Cash is nothing more than an IOU from the government so if they default it doesn't offer any protection.

You are right that if the government gives up on the idea of supporting the existence of the currency and reneges on its debts, you will lose your money, whether you had it with a bank supported by a financial services industry compensation scheme sponsored by government regulation or whether you directly held the government debt. If it doesn't, you won't. 

Assuming you choose to believe that money will continue to exist, you might as well put it in a bank within the limits of the compensation scheme (earning a return offered by the bank's marketing men) rather than directly in government bonds (in competition with the wall of institutional money which is bidding down the returns to as little as possible).  A bank deposit does generally mean you can get back as much as you had paid in, whenever you like, while a government bond means you may get less than you paid in if you require early access (and in some cases offer negative yields even if held to maturity, e.g. UK bonds of short duration) 

Sailtheworld

grumiofoundation said:

Sailtheworld said:

bogleboogle said:

Sailtheworld said:

bogleboogle said:

Sailtheworld said:

Bonds are lower risk than cash

Well that's just not true. 

Government bonds I was thinking.

Still not true. (I) Bond yields are very low and can be negative - capital is at risk and (II) governments can default on their debts. 

A good way to think about it is to compare bond yields with cash yields. If yields on cash are higher it's because greater risk is being taken and nobody takes greater risk without expecting to be paid for it - otherwise you've found the free lunch of lower risk and greater return which is unlikely.

Cash is nothing more than an IOU from the government so if they default it doesn't offer any protection.

Just because something offers a greater return does not inherently make it riskier (and vice versa).

For people scrabbling around trying to game an extra 0.1% of their savings whilst staying under compensation limits that might be true for reasons of customer loyalty / competition etc. It's quite niche though - in the real world a higher yield being offered for lower risk should be setting alarm bells ringing.

masonic

Sailtheworld said:

grumiofoundation said:

Sailtheworld said:

bogleboogle said:

Sailtheworld said:

bogleboogle said:

Sailtheworld said:

Bonds are lower risk than cash

Well that's just not true. 

Government bonds I was thinking.

Still not true. (I) Bond yields are very low and can be negative - capital is at risk and (II) governments can default on their debts. 

A good way to think about it is to compare bond yields with cash yields. If yields on cash are higher it's because greater risk is being taken and nobody takes greater risk without expecting to be paid for it - otherwise you've found the free lunch of lower risk and greater return which is unlikely.

Cash is nothing more than an IOU from the government so if they default it doesn't offer any protection.

Just because something offers a greater return does not inherently make it riskier (and vice versa).

For people scrabbling around trying to game an extra 0.1% of their savings whilst staying under compensation limits that might be true for reasons of customer loyalty / competition etc. It's quite niche though - in the real world a higher yield being offered for lower risk should be setting alarm bells ringing.

There are corporate bonds that are higher yield, but lower risk, then P2P loans. All you need for a risk-reward mismatch is an inefficient market. The cash savings market is inefficient because of cross-selling and cross-subsidisation (leading to higher than efficient market returns), whereas the P2P market is inefficient because of investor naivety and obfuscation of information (leading to lower than efficient market returns).

Sailtheworld

bogleboogle said:

Sailtheworld said:

bogleboogle said:

Sailtheworld said:

bogleboogle said:

Sailtheworld said:

Bonds are lower risk than cash

Well that's just not true. 

Government bonds I was thinking.

Still not true. (I) Bond yields are very low and can be negative - capital is at risk and (II) governments can default on their debts. 

Cash is nothing more than an IOU from the government so if they default it doesn't offer any protection.

Sovereign default ≠ a 'default' on cash in that currency. 

With bonds you are taking a double risk - (i) that the yield will be/stay >0% and (ii) the issuer will not default.

With cash there is only (ii) and even that is subject to the important distinction I mentioned above. Thus, your initial claim that "Bonds are lower risk than cash" is provably false.

Apples & oranges. When we're talking about risk we're talking about the risk of losing your deposit - not the risk of getting a lower yield so (i) is a red herring.

It's nailed on that when you buy a UK government bond you're going to get the principle back. If you have more than the compensation limits in cash it isn't - wouldn't any sensible person demand a higher yield for taking that risk?

If you have £100,000 and need to pay for an operation in 5 years time then you can buy a government bond and get that £100,000 back in 5 years - no other investment vehicle has such a cast iron guarantee. Such are the times we live in you may have to pay the government for this - that's the current price of safety.

Ciprico

Sailtheworld said:

bogleboogle said:

Sailtheworld said:

bogleboogle said:

Sailtheworld said:

bogleboogle said:

Sailtheworld said:

Bonds are lower risk than cash

Well that's just not true. 

Government bonds I was thinking.

Still not true. (I) Bond yields are very low and can be negative - capital is at risk and (II) governments can default on their debts. 

Cash is nothing more than an IOU from the government so if they default it doesn't offer any protection.

Sovereign default ≠ a 'default' on cash in that currency. 

With bonds you are taking a double risk - (i) that the yield will be/stay >0% and (ii) the issuer will not default.

With cash there is only (ii) and even that is subject to the important distinction I mentioned above. Thus, your initial claim that "Bonds are lower risk than cash" is provably false.

Apples & oranges. When we're talking about risk we're talking about the risk of losing your deposit - not the risk of getting a lower yield so (i) is a red herring.

It's nailed on that when you buy a UK government bond you're going to get the principle back. If you have more than the compensation limits in cash it isn't - wouldn't any sensible person demand a higher yield for taking that risk?

If you have £100,000 and need to pay for an operation in 5 years time then you can buy a government bond and get that £100,000 back in 5 years - no other investment vehicle has such a cast iron guarantee. Such are the times we live in you may have to pay the government for this - that's the current price of safety.

Is that totally accurate ? If you buy bonds at issue and keep until redemption you get all your money (plus yield) back. If you buy at any other time the price fluctuates so you may get back more or less than you originally put in...?
I don't think bonds would be a good place for your "operation money" or have I missed something...

grumiofoundation

Sailtheworld said:

bogleboogle said:

Sailtheworld said:

bogleboogle said:

Sailtheworld said:

bogleboogle said:

Sailtheworld said:

Bonds are lower risk than cash

Well that's just not true. 

Government bonds I was thinking.

Still not true. (I) Bond yields are very low and can be negative - capital is at risk and (II) governments can default on their debts. 

Cash is nothing more than an IOU from the government so if they default it doesn't offer any protection.

Sovereign default ≠ a 'default' on cash in that currency. 

With bonds you are taking a double risk - (i) that the yield will be/stay >0% and (ii) the issuer will not default.

With cash there is only (ii) and even that is subject to the important distinction I mentioned above. Thus, your initial claim that "Bonds are lower risk than cash" is provably false.

Apples & oranges. When we're talking about risk we're talking about the risk of losing your deposit - not the risk of getting a lower yield so (i) is a red herring.

It's nailed on that when you buy a UK government bond you're going to get the principle back. If you have more than the compensation limits in cash it isn't - wouldn't any sensible person demand a higher yield for taking that risk?

If you have £100,000 and need to pay for an operation in 5 years time then you can buy a government bond and get that £100,000 back in 5 years - no other investment vehicle has such a cast iron guarantee. Such are the times we live in you may have to pay the government for this - that's the current price of safety.

Unfortunately your example doesn't support your argument - for £100000 you just stick it in 2 banks - no FSCS compensation limit issue. 

Or just put it in NSandI - backed by the treasury?

But since that currently pays 1.16% this is far more risky than government bonds- which are backed by....?

Sailtheworld

123mat123 said:

Sailtheworld said:

bogleboogle said:

Sailtheworld said:

bogleboogle said:

Sailtheworld said:

bogleboogle said:

Sailtheworld said:

Bonds are lower risk than cash

Well that's just not true. 

Government bonds I was thinking.

Still not true. (I) Bond yields are very low and can be negative - capital is at risk and (II) governments can default on their debts. 

Cash is nothing more than an IOU from the government so if they default it doesn't offer any protection.

Sovereign default ≠ a 'default' on cash in that currency. 

With bonds you are taking a double risk - (i) that the yield will be/stay >0% and (ii) the issuer will not default.

With cash there is only (ii) and even that is subject to the important distinction I mentioned above. Thus, your initial claim that "Bonds are lower risk than cash" is provably false.

Apples & oranges. When we're talking about risk we're talking about the risk of losing your deposit - not the risk of getting a lower yield so (i) is a red herring.

It's nailed on that when you buy a UK government bond you're going to get the principle back. If you have more than the compensation limits in cash it isn't - wouldn't any sensible person demand a higher yield for taking that risk?

If you have £100,000 and need to pay for an operation in 5 years time then you can buy a government bond and get that £100,000 back in 5 years - no other investment vehicle has such a cast iron guarantee. Such are the times we live in you may have to pay the government for this - that's the current price of safety.

Is that totally accurate ? If you buy bonds at issue and keep until redemption you get all your money (plus yield) back. If you buy at any other time the price fluctuates so you may get back more or less than you originally put in...?
I don't think bonds would be a good place for your "operation money" or have I missed something...

Yes the price fluctuates between purchase and redemption. If you have an absolute requirement for the nominal value of the gilt to be returned in 5 years then a gilt needs to be purchased with a maturity date in 5 years time. Buying, say, a 10 year bond introduces a risk that the value of the gilts in 5 years may be less than the nominal value.