VLSx versus Global Track + cash

bogleboogle

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.

Nonsense. The risk of a negative yield means that you have a risk of losing (part of) your deposit; thus, (i) is absolutely not a 'red herring'.

Sailtheworld

bogleboogle 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.

Nonsense. The risk of a negative yield means that you have a risk of losing (part of) your deposit; thus, (i) is absolutely not a 'red herring'.

If you buy a £100 gilt you get £100 back at maturity. The negative yield simply means the market price of the gilt was more than £100 - that's the price of safety and it's known upfront.

If you can take the same sum of money, leave it for the same length of time and have more money left at the end you've either been taking more risk or someone else (the taxpayer) has been taking that risk on your behalf. 

Sailtheworld

coyrls said:

Sailtheworld said:

coyrls said:

You can't buy gilts at the issue price; they are auctioned and sell for higher than the issue price.

That's right - there's a cost associated with the increased security.

So why did you say:

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.

When it is not possible to get the £100,000 back in five years, as you would have had to pay more than the issue price.

I've said about 15 times now you may have to pay what is effectively an upfront fee to guarantee you'll get that £100k back. 

grumiofoundation

Sailtheworld said:

coyrls said:

Sailtheworld said:

coyrls said:

You can't buy gilts at the issue price; they are auctioned and sell for higher than the issue price.

That's right - there's a cost associated with the increased security.

So why did you say:

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.

When it is not possible to get the £100,000 back in five years, as you would have had to pay more than the issue price.

I've said about 15 times now you may have to pay what is effectively an upfront fee to guarantee you'll get that £100k back. 

Both government bonds and cash in a bank/NSandI are backed (in some way) by the treasury. Why are you so certain that in the very unlikely event of the UK government having to default on debt they will choose to let individual savers lose money rather than defaulting on government bonds?

coyrls

Sailtheworld said:

coyrls said:

Sailtheworld said:

coyrls said:

You can't buy gilts at the issue price; they are auctioned and sell for higher than the issue price.

That's right - there's a cost associated with the increased security.

So why did you say:

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.

When it is not possible to get the £100,000 back in five years, as you would have had to pay more than the issue price.

I've said about 15 times now you may have to pay what is effectively an upfront fee to guarantee you'll get that £100k back. 

You can call it an upfront fee if you like but the effect is the same: you will get back less than you put in, so you would not get your original £100k back.

bowlhead99

coyrls said:

Sailtheworld said:

coyrls said:

Sailtheworld said:

coyrls said:

You can't buy gilts at the issue price; they are auctioned and sell for higher than the issue price.

That's right - there's a cost associated with the increased security.

So why did you say:

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.

When it is not possible to get the £100,000 back in five years, as you would have had to pay more than the issue price.

I've said about 15 times now you may have to pay what is effectively an upfront fee to guarantee you'll get that £100k back. 

You can call it an upfront fee if you like but the effect is the same: you will get back less than you put in, so you would not get your original £100k back.

In fairness, you would get your original £100k back... you just wouldn't get back all the money you paid on top of the £100k as a premium... [ducks]
  

coyrls

bowlhead99 said:

coyrls said:

Sailtheworld said:

coyrls said:

Sailtheworld said:

coyrls said:

You can't buy gilts at the issue price; they are auctioned and sell for higher than the issue price.

That's right - there's a cost associated with the increased security.

So why did you say:

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.

When it is not possible to get the £100,000 back in five years, as you would have had to pay more than the issue price.

I've said about 15 times now you may have to pay what is effectively an upfront fee to guarantee you'll get that £100k back. 

You can call it an upfront fee if you like but the effect is the same: you will get back less than you put in, so you would not get your original £100k back.

In fairness, you would get your original £100k back... you just wouldn't get back all the money you paid on top of the £100k as a premium... [ducks]
  

Well the original (unlikely) scenario was:

If you have £100,000 and need to pay for an operation in 5 years time

Not "if you have £100K plus some extra money to pay effectively an upfront fee to guarantee you'll get the £100K back."

Sailtheworld

grumiofoundation said:

Sailtheworld said:

coyrls said:

Sailtheworld said:

coyrls said:

You can't buy gilts at the issue price; they are auctioned and sell for higher than the issue price.

That's right - there's a cost associated with the increased security.

So why did you say:

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.

When it is not possible to get the £100,000 back in five years, as you would have had to pay more than the issue price.

I've said about 15 times now you may have to pay what is effectively an upfront fee to guarantee you'll get that £100k back. 

Both government bonds and cash in a bank/NSandI are backed (in some way) by the treasury. Why are you so certain that in the very unlikely event of the UK government having to default on debt they will choose to let individual savers lose money rather than defaulting on government bonds?

It's more of a working assumption than a certainty.

HMG operates on the basis that, no matter the circumstance, borrowing more is the solution and it's the norm. Given potential for government default one response would be to try and borrow more to repay debt that's due - this seems to me very likely. The voters are on board with this; yes in 2010 there was a 'who can have a balanced budget the quickest' competition which fell by the wayside shortly thereafter and has now been blown out if the water by Coronavirus.

The UK borrows in Sterling so will never default anyway because she can print money to repay but that's default by another name and lenders know it so they'll be less willing to lend. As well as having to pay more for future debt the UK would have to demonstrate they're an improved risk - the way to convince international lenders they're priority debt is to shaft the locals. If you're in government and defaulting you need/ want more debt more than you need the votes.

History suggests that it's rare (never happened) for a country to default and prioritise debt owned by her citizens.

The spin machine would go into overdrive to try and mitigate the political manage but there's a chunk of national debt held in NS&I accounts by people with UK post codes and UK bank accounts and it's easy to see how it could be done. A slow run could be instigated so nominal amounts are protected but withdrawals are only allowed at the rate of £10/ month. Legislation could be introduced to allow debt owned by citizens to be changed to different terms whether partly or fully i.e. you get £10 in every £100 back and 90 Boris Bonds and so on.

Of course as the UK's debt has increased the proportion owned by the citizens has increased too due to QE which reduces the likelihood of a 'proper' default but, IMO, the UK will never repay her debts so someone somewhere isn't going to get back what they thought they would.

grumiofoundation

Sailtheworld said:

grumiofoundation said:

Sailtheworld said:

coyrls said:

Sailtheworld said:

coyrls said:

You can't buy gilts at the issue price; they are auctioned and sell for higher than the issue price.

That's right - there's a cost associated with the increased security.

So why did you say:

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.

When it is not possible to get the £100,000 back in five years, as you would have had to pay more than the issue price.

I've said about 15 times now you may have to pay what is effectively an upfront fee to guarantee you'll get that £100k back. 

Both government bonds and cash in a bank/NSandI are backed (in some way) by the treasury. Why are you so certain that in the very unlikely event of the UK government having to default on debt they will choose to let individual savers lose money rather than defaulting on government bonds?

It's more of a working assumption than a certainty.

And since it is your assumption you cannot then say (well you can say it but it is meaningless) that "government bonds are safer than cash" can you?

Since both are 'government backed' up until the point the government defaults they are both equally 'safe' since you have no evidence as to which of them the government of the day (of whichever flavour) would prioritise.