Bond index fund vs savings account

masonic

barnstar2077 said:

I just thought that holding a small amount of equity would allow you to build up a bit of a buffer for when interest rates do eventually start to rise, which would then mean you could get your money out before you have taken any real loss (because any small drop would be taken out of the buffer you have built up.)

It really depends how long it is before interest rates start to rise. Even over a 5 year period, there is still an appreciable risk that equities will underperform bonds and you'd be worse off then just holding 100% bonds. Over 10 or 20 years, you'd be extremely unlucky not to have built up a buffer. The other aspect is whether bond funds can continue to beat the returns available in consumer savings accounts (up to this point falling interest rates have driven capital gains in bonds, but how much more of this can happen?) So there are three options really, 1) 100% cash, (2) X% bonds Y% equities, (3) X% cash Y% equities.

Alexland

masonic said:
There will surely come a period where returns must turn negative for a protracted period. 

Well if we see rising interest rates (and the expectation of even further rises in future) it won't just affect bonds but also long duration equity (quality, low beta assets) which have done so well recently. Terry Smith has been profiting from the same 30 year economic conditions as bonds. Short duration equity - cyclical, financials and materials would be back into fashion. After this virus is out the way will people want to go out to enjoy life and give us another roaring 20s? Maybe the best way to reduce risk is having much more money than you really need invested in a balanced portfolio of equities? Does a global tracker fund give you that anymore or has it become too heavily weighted to what has done well recently and a fixed rather than cap weighted sector allocation might be a safer bet?

Another_Saver

Edit: TL;DR I'm referring to a supply-side capital model combined with demography, apologies for the lazy writing.

Interest rates have to stay this low until Boomers start materially divesting. Peter Zeihan has put this at 2022 for the US, for the UK the post-war boom are already there but the 60s boom peaked in 1964. Most people retire around or shortly before SPA, but then wealth is very sharply distributed with a Gini of 0.63-0.73, compared with 0.3-0.35 for income (depends on source, depends what counts as an asset, depends on gross/take-home/disposable/discretionary income).

This should lower convert the high wealth to GDP ratio, the "Boomer savings glut" which has been building up since the 80s (the "big bang" or "expansionary 80s") and lower the working population relative to the total, probably driving inflation and a rise in interest rates though nowhere near 60s-90s levels. Over the 20s we can expect this transition to start, it should be "fully started" by 2030, but by 2050 (60s Boomer life expectancy) half the Boomers will be around still at the age when they cost the most to keep going and the Millennials (peak year or birth around 1990) will be 60, in their pre-retirement drive.

So I see a peak of wealth in this decade (i.e.a bubble, or a bottoming out of interest rates, like Turn of the Century, late 1920s, late 60s/early 70s, 2000s), bottoming out around 2040 (interest rates peak), and then building back upto Millennials pre-retirement peak in the 2050s. But these fluctuations should be milder than the extremes we saw from the interest rate highs of the 60s-90s, to the lows of the past decade because the Millennials are a smaller generation, less of an extreme bulge in the population age pyramid than the Boomers, and they'll be supporting (directly or indirectly)1/3 extra old people than Boomers.

This is obviously an incomplete model, thatdoesn't take account of unexpected population changes, gender differences, unknown new technologies, and the asset mix of wealth/capital - also globalisation makes things messy and who knows if that will continue, dwindle, or perhaps settle into an accepted norm over the next 30 years.

On asset allocation, Im sure I've found a source somewhere before that showed an allocation around 1/3 stocks 2/3 gilts is the optimal for minimum volatility, and 2/3 stocks 1/3 gilts for maximum risk adjusted return. Stocks and bonds always diversify each other so even adding 1% either way to a 100% stocks/bonds portfolio should always lower the volatility and increase the risk adjusted return, upto those two peaks.
Nb UK gilts have much longer maturities than most other developed country's debt so this general rule may not be as true at a global level.

Also equity dividend yields are currently higher than bond yields (~2% for most global equity indices, 0.7%-0.8% for global bond indices) so by introducing say 20%-40% equity into the mix you should end up with a lower volatility, higher risk adjusted return, higher long term returns potential and higher income portfolio.

masonic

Another_Saver said:

Interest rates have to stay this low until Boomers start materially divesting. Peter Zeihan has put this at 2022 for the US, for the UK the post-war boom are already there but the 60s boom peaked in 1964. Most people retire around or shortly before SPA, but then wealth is very sharply distributed with a Gini of 0.63-0.73. This lowers the capital supply or ratio of wealth to GDP which has been rising sharply since the Boomers started saving in the 80s ("big bang" or "expansionary 80s") and lowers the working population relative to the total, probably driving inflation and a rise in interest rates though nowhere near 60s-90s levels...

Please never get a job at The Plain English Campaign! Please could you explain why interest rates, which principally determine how much companies can affordably borrow and how much leverage they can use to drive earnings, should be determined by the date of birth of their shareholders or the number of working age people available for employment? Company shares can be traded at any time and are owned at all times. The number of employees needed to generate the same quantity of earnings has been continuously falling.

Or are you saying, to put it in simple terms, that most of the world's wealth is trapped in cash held by old people, and we have to wait for them to die and their heirs to invest it before the economy can get back to normal?

Another_Saver

masonic said:

Another_Saver said:

Interest rates have to stay this low until Boomers start materially divesting. Peter Zeihan has put this at 2022 for the US, for the UK the post-war boom are already there but the 60s boom peaked in 1964. Most people retire around or shortly before SPA, but then wealth is very sharply distributed with a Gini of 0.63-0.73. This lowers the capital supply or ratio of wealth to GDP which has been rising sharply since the Boomers started saving in the 80s ("big bang" or "expansionary 80s") and lowers the working population relative to the total, probably driving inflation and a rise in interest rates though nowhere near 60s-90s levels...

Please never get a job at The Plain English Campaign! Please could you explain why interest rates, which principally determine how much companies can affordably borrow and how much leverage they can use to drive earnings, should be determined by the date of birth of their shareholders or the number of working age people available for employment? Company shares can be traded at any time and are owned at all times. The number of employees needed to generate the same quantity of earnings has been continuously falling.

Or are you saying, to put it in simple terms, that most of the world's wealth is trapped in cash held by old people, and we have to wait for them to die and their heirs to invest it before the economy can get back to normal?

Er... I think you've misunderstood me in your first para. I don't understand you at all sorry.

Im talking about demographics and capital supply. In a neo-liberal economy wealth tends to be concentrated at the age of retirement. Different age structures affect the relative capital suppl, cash/bonds is the largest form of capital in the UK, all other assets need to be divested into cash or generate cash before they can be used for consumption. I think this is the main factor in determining rates but plenty of others come into it.
Your second para is so extremely simplified that it's not an accurate representation of y point - I haven't mentioned inheritance and Boomers dying and the inheritance of their wealth won't solve the problem, the abnormal savings glut needs to be consumed to reduce the wealth/GDP ratio for interest rates to get back to normal.

dunroving

btcp said:

Thank you, looks a bit more complex than I thought. Letting emergency money sit without any interest could be a better option. 

If it's specifically emergency money you're talking about, then yes, surely you want minimal risk, i.e., low-interest cash deposits. By definition, emergency money is cash you might need tomorrow, or the day after. Or in 6 months. 

masonic

Another_Saver said:

masonic said:

Another_Saver said:

Interest rates have to stay this low until Boomers start materially divesting. Peter Zeihan has put this at 2022 for the US, for the UK the post-war boom are already there but the 60s boom peaked in 1964. Most people retire around or shortly before SPA, but then wealth is very sharply distributed with a Gini of 0.63-0.73. This lowers the capital supply or ratio of wealth to GDP which has been rising sharply since the Boomers started saving in the 80s ("big bang" or "expansionary 80s") and lowers the working population relative to the total, probably driving inflation and a rise in interest rates though nowhere near 60s-90s levels...

Please never get a job at The Plain English Campaign! Please could you explain why interest rates, which principally determine how much companies can affordably borrow and how much leverage they can use to drive earnings, should be determined by the date of birth of their shareholders or the number of working age people available for employment? Company shares can be traded at any time and are owned at all times. The number of employees needed to generate the same quantity of earnings has been continuously falling.

Or are you saying, to put it in simple terms, that most of the world's wealth is trapped in cash held by old people, and we have to wait for them to die and their heirs to invest it before the economy can get back to normal?

Er... I think you've misunderstood me in your first para. I don't understand you at all sorry.

Im talking about demographics and capital supply. In a neo-liberal economy wealth tends to be concentrated at the age of retirement. Different age structures affect the relative capital suppl, cash/bonds is the largest form of capital in the UK, all other assets need to be divested into cash or generate cash before they can be used for consumption. I think this is the main factor in determining rates but plenty of others come into it.
Your second para is so extremely simplified that it's not an accurate representation of y point - I haven't mentioned inheritance and Boomers dying and the inheritance of their wealth won't solve the problem, the abnormal savings glut needs to be consumed to reduce the wealth/GDP ratio for interest rates to get back to normal.

Yes, very crudely, people have peak wealth at the point they retire, they build it through paid employment up to that point, and after that point they use it to fund their living costs and deplete it. I think that has little to do with the setting of interest rates, which is mainly dependent on the predicted state of the economy several months ahead, which in turn depends on various factors, such as the rate of inflation, the rate of GDP growth, unemployment figures etc. It is not typically impacted at all by the amount of consumer savings held in deposit accounts, or the amount people have in their pensions. The MPC, who set the BoE base rate, outline the factors they consider when deciding the rate, so this is not a matter for speculation.

You mention the UK boom of the 60s, centred on 1964. Someone born in 1964 will be around 57 years old today and therefore could have another 8 years of human capital left in them until reaching state retirement age. Due to the changing nature of work, people can and often do stay engaged with paid work up to and beyond the point they could choose to retire. This is especially true of high earners, so they may not dip into their pension savings for quite some time. If your prediction is that UK interest rates will stay at historic lows until these people have depleted their retirement savings, then that is certainly an interesting and novel view, but not one, as far as I can see, supported by evidence.

If there is convincing evidence to support that interest rates won't be rising for quite some time, then that would be extremely useful information for anyone able and willing to load up on cheap debt in order to pursue (rapidly expanding companies, BTL landlords, etc), as well as being a safety net for investors in bond funds.

Another_Saver

masonic said:

Another_Saver said:

masonic said:

Another_Saver said:

Interest rates have to stay this low until Boomers start materially divesting. Peter Zeihan has put this at 2022 for the US, for the UK the post-war boom are already there but the 60s boom peaked in 1964. Most people retire around or shortly before SPA, but then wealth is very sharply distributed with a Gini of 0.63-0.73. This lowers the capital supply or ratio of wealth to GDP which has been rising sharply since the Boomers started saving in the 80s ("big bang" or "expansionary 80s") and lowers the working population relative to the total, probably driving inflation and a rise in interest rates though nowhere near 60s-90s levels...

Please never get a job at The Plain English Campaign! Please could you explain why interest rates, which principally determine how much companies can affordably borrow and how much leverage they can use to drive earnings, should be determined by the date of birth of their shareholders or the number of working age people available for employment? Company shares can be traded at any time and are owned at all times. The number of employees needed to generate the same quantity of earnings has been continuously falling.

Or are you saying, to put it in simple terms, that most of the world's wealth is trapped in cash held by old people, and we have to wait for them to die and their heirs to invest it before the economy can get back to normal?

Er... I think you've misunderstood me in your first para. I don't understand you at all sorry.

Im talking about demographics and capital supply. In a neo-liberal economy wealth tends to be concentrated at the age of retirement. Different age structures affect the relative capital suppl, cash/bonds is the largest form of capital in the UK, all other assets need to be divested into cash or generate cash before they can be used for consumption. I think this is the main factor in determining rates but plenty of others come into it.
Your second para is so extremely simplified that it's not an accurate representation of y point - I haven't mentioned inheritance and Boomers dying and the inheritance of their wealth won't solve the problem, the abnormal savings glut needs to be consumed to reduce the wealth/GDP ratio for interest rates to get back to normal.

Yes, very crudely, people have peak wealth at the point they retire, they build it through paid employment up to that point, and after that point they use it to fund their living costs and deplete it. I think that has little to do with the setting of interest rates, which is mainly dependent on the predicted state of the economy several months ahead, which in turn depends on various factors, such as the rate of inflation, the rate of GDP growth, unemployment figures etc. It is not typically impacted at all by the amount of consumer savings held in deposit accounts, or the amount people have in their pensions. The MPC, who set the BoE base rate, outline the factors they consider when deciding the rate, so this is not a matter for speculation.

You mention the UK boom of the 60s, centred on 1964. Someone born in 1964 will be around 57 years old today and therefore could have another 8 years of human capital left in them until reaching state retirement age. Due to the changing nature of work, people can and often do stay engaged with paid work up to and beyond the point they could choose to retire. This is especially true of high earners, so they may not dip into their pension savings for quite some time. If your prediction is that UK interest rates will stay at historic lows until these people have depleted their retirement savings, then that is certainly an interesting and novel view.

I wish I would claim credit, but if you search Peter Zeihan, David Willetts The Pinch or The Great Demographic Reversal you'll find I'm as novel as a Star Wars sequel.

masonic

Another_Saver said:

masonic said:

Another_Saver said:

masonic said:

Another_Saver said:

Interest rates have to stay this low until Boomers start materially divesting. Peter Zeihan has put this at 2022 for the US, for the UK the post-war boom are already there but the 60s boom peaked in 1964. Most people retire around or shortly before SPA, but then wealth is very sharply distributed with a Gini of 0.63-0.73. This lowers the capital supply or ratio of wealth to GDP which has been rising sharply since the Boomers started saving in the 80s ("big bang" or "expansionary 80s") and lowers the working population relative to the total, probably driving inflation and a rise in interest rates though nowhere near 60s-90s levels...

Please never get a job at The Plain English Campaign! Please could you explain why interest rates, which principally determine how much companies can affordably borrow and how much leverage they can use to drive earnings, should be determined by the date of birth of their shareholders or the number of working age people available for employment? Company shares can be traded at any time and are owned at all times. The number of employees needed to generate the same quantity of earnings has been continuously falling.

Or are you saying, to put it in simple terms, that most of the world's wealth is trapped in cash held by old people, and we have to wait for them to die and their heirs to invest it before the economy can get back to normal?

Er... I think you've misunderstood me in your first para. I don't understand you at all sorry.

Im talking about demographics and capital supply. In a neo-liberal economy wealth tends to be concentrated at the age of retirement. Different age structures affect the relative capital suppl, cash/bonds is the largest form of capital in the UK, all other assets need to be divested into cash or generate cash before they can be used for consumption. I think this is the main factor in determining rates but plenty of others come into it.
Your second para is so extremely simplified that it's not an accurate representation of y point - I haven't mentioned inheritance and Boomers dying and the inheritance of their wealth won't solve the problem, the abnormal savings glut needs to be consumed to reduce the wealth/GDP ratio for interest rates to get back to normal.

Yes, very crudely, people have peak wealth at the point they retire, they build it through paid employment up to that point, and after that point they use it to fund their living costs and deplete it. I think that has little to do with the setting of interest rates, which is mainly dependent on the predicted state of the economy several months ahead, which in turn depends on various factors, such as the rate of inflation, the rate of GDP growth, unemployment figures etc. It is not typically impacted at all by the amount of consumer savings held in deposit accounts, or the amount people have in their pensions. The MPC, who set the BoE base rate, outline the factors they consider when deciding the rate, so this is not a matter for speculation.

You mention the UK boom of the 60s, centred on 1964. Someone born in 1964 will be around 57 years old today and therefore could have another 8 years of human capital left in them until reaching state retirement age. Due to the changing nature of work, people can and often do stay engaged with paid work up to and beyond the point they could choose to retire. This is especially true of high earners, so they may not dip into their pension savings for quite some time. If your prediction is that UK interest rates will stay at historic lows until these people have depleted their retirement savings, then that is certainly an interesting and novel view.

I wish I would claim credit, but if you search Peter Zeihan, David Willetts The Pinch or The Great Demographic Reversal you'll find I'm as novel as a Star Wars sequel.

Is that the same David Willetts who is a Conservative peer in the House of Lords and was the universities minister who orchestrated the rise in university tuition fees to £9,000 per year?

Zeihan, so far as I can surmise, blames a lot on demographics, but I've not been able to find anything linking them to the historically low central bank interest rates we find today, or suggesting said interest rates cannot be raised until those fresh retirees spend down their capital. He does suggest that asset buying has driven up capital values in the bond market and that is evidence based, but the MPC and other interest rate setters do not need to mirror bond yields - otherwise rates would already be negative. At least I now know the origin of the rather abstruse text in your earlier post. If I read much more of his blog my eyes might cross.

So, if we entertain the notion that in the US in 2022 there is going to be a 'tsunami of government-bond-capital' and that that interest rates must be held at historic lows until the start or end of that process (based on your earlier posts, not anything I found Zeihan state), then you are making a prediction that the UK will have historic low rates for many years to come. Here are the UK demographics:

That 'boomer' generation you mentioned, that was born in the 60s and centred on 1964, whose average member is age 57 today, is right in the middle of the 55-59 year old band. Behind that are two highly populous bands, the 50-54 year-olds and the 45-49 year-olds. The youngest of these have over 20 years until state retirement age. Behind that comes another boom of 25-39 year olds, born in the 1980s and 1990s and almost as populous as the 45-59 year olds. Having survived into their 20s, very few of these will die off before they reach their 50s and 60s, and will have greater life-expectancy. So as the older group starts to shed their bond holdings, the younger group will be 'lifestyling' into bonds and slurp them up. Could be another 40+ years until the tsunami in the UK.

Linton

Another_Saver said:

masonic said:

Another_Saver said:

masonic said:

Another_Saver said:

Interest rates have to stay this low until Boomers start materially divesting. Peter Zeihan has put this at 2022 for the US, for the UK the post-war boom are already there but the 60s boom peaked in 1964. Most people retire around or shortly before SPA, but then wealth is very sharply distributed with a Gini of 0.63-0.73. This lowers the capital supply or ratio of wealth to GDP which has been rising sharply since the Boomers started saving in the 80s ("big bang" or "expansionary 80s") and lowers the working population relative to the total, probably driving inflation and a rise in interest rates though nowhere near 60s-90s levels...

Please never get a job at The Plain English Campaign! Please could you explain why interest rates, which principally determine how much companies can affordably borrow and how much leverage they can use to drive earnings, should be determined by the date of birth of their shareholders or the number of working age people available for employment? Company shares can be traded at any time and are owned at all times. The number of employees needed to generate the same quantity of earnings has been continuously falling.

Or are you saying, to put it in simple terms, that most of the world's wealth is trapped in cash held by old people, and we have to wait for them to die and their heirs to invest it before the economy can get back to normal?

Er... I think you've misunderstood me in your first para. I don't understand you at all sorry.

Im talking about demographics and capital supply. In a neo-liberal economy wealth tends to be concentrated at the age of retirement. Different age structures affect the relative capital suppl, cash/bonds is the largest form of capital in the UK, all other assets need to be divested into cash or generate cash before they can be used for consumption. I think this is the main factor in determining rates but plenty of others come into it.
Your second para is so extremely simplified that it's not an accurate representation of y point - I haven't mentioned inheritance and Boomers dying and the inheritance of their wealth won't solve the problem, the abnormal savings glut needs to be consumed to reduce the wealth/GDP ratio for interest rates to get back to normal.

Yes, very crudely, people have peak wealth at the point they retire, they build it through paid employment up to that point, and after that point they use it to fund their living costs and deplete it. I think that has little to do with the setting of interest rates, which is mainly dependent on the predicted state of the economy several months ahead, which in turn depends on various factors, such as the rate of inflation, the rate of GDP growth, unemployment figures etc. It is not typically impacted at all by the amount of consumer savings held in deposit accounts, or the amount people have in their pensions. The MPC, who set the BoE base rate, outline the factors they consider when deciding the rate, so this is not a matter for speculation.

You mention the UK boom of the 60s, centred on 1964. Someone born in 1964 will be around 57 years old today and therefore could have another 8 years of human capital left in them until reaching state retirement age. Due to the changing nature of work, people can and often do stay engaged with paid work up to and beyond the point they could choose to retire. This is especially true of high earners, so they may not dip into their pension savings for quite some time. If your prediction is that UK interest rates will stay at historic lows until these people have depleted their retirement savings, then that is certainly an interesting and novel view.

I wish I would claim credit, but if you search Peter Zeihan, David Willetts The Pinch or The Great Demographic Reversal you'll find I'm as novel as a Star Wars sequel.

The phrase "an interesting and novel view" may be used in academic circles when one doesnt want to offend someone expounding their latest dubious theory.  Whether that is the case here I cannot say.

Perhaps some of your assumptions could be open to question.  Naturally wealth will tend to be concentrated in older people generally, though far from particularly, because it takes time to accumulate.   However that does not mean the reduction in the numbers of older people will reduce the amount of stored wealth.  Far more employees are accumulating personal pension pots and those pension pots will be larger than was the case in the past.  Perhaps this will outweigh the decrease in numbers.

I would agree that the distribution of wealth does have major economic consequences many of them undesirable.  But this is not necessarily linked to age.  For example if you give more money to the very poor they will tend to use it for immediate consumption, thus adding to the economy.  If you give more money to the very rich they are far more likely to use it on buying assets so potentially inceasing inflation.  In the case of retirees there are comparatively few in the bracket where their assets greatly exceed their ability to consume.

Whether my comments address your theory I am far from clear so would appreciate it if you rephrased it in simple language, ideally incuding the mechanisms whereby the predicted undesirable consequences will be caused.