Bond index fund vs savings account

masonic

btcp said:

grumiofoundation said:

I think if you are confused  might be due to the different usages of “bonds” - all of which are different products.  Bonds could be savings accounts (capital not at risk), government bonds, corporate bonds and more....

I was looking into Vanguard global bonds fund in particular as I felt it should be a balanced one, didn’t plan to get individual bonds. 

It's impractical to invest in global bonds directly, so a currency hedged global bond fund like the Vanguard one would make sense. Providing the fund holds bonds to maturity and your holding period is greater than the duration of the bond fund then you should get a similar result as if you held the bonds directly (running yield of the bond fund ~ average YTM of bonds in fund). So the average duration of bonds held within the fund, and its running yield are worth determining before you make a decision to invest.

MDMD

btcp said: 

Looks like premium bonds carry no risk of losing money, plus a potential to get extra. You can also instantly access it the same as cash. A better option than having cash with zero interest, if you are lucky enough.

The nominal capital put into premium bonds won’t decrease, however adjusting for inflation, the real-terms value of that original amount will not buy as much when you redeem them, so that inflation loss is your risk.

The inflation loss is offset by any prizes, so in the unlikely event you win £1m you will be comfortably ahead of inflation.

Eco_Miser

MDMD said:

btcp said: 

Looks like premium bonds carry no risk of losing money, plus a potential to get extra. You can also instantly access it the same as cash. A better option than having cash with zero interest, if you are lucky enough.

The nominal capital put into premium bonds won’t decrease, however adjusting for inflation, the real-terms value of that original amount will not buy as much when you redeem them, so that inflation loss is your risk.

The inflation loss is offset by any prizes, so in the unlikely event you win £1m you will be comfortably ahead of inflation.

This is true. It is equally true for cash in a bank account, or under the mattress, or for money invested in bonds or stocks, or funds thereof.

Like winning the £1m, interest or dividends or capital growth may offset the loss to inflation, but only interest is guaranteed to happen.

MDMD

Eco_Miser said:

MDMD said:

btcp said: 

Looks like premium bonds carry no risk of losing money, plus a potential to get extra. You can also instantly access it the same as cash. A better option than having cash with zero interest, if you are lucky enough.

The nominal capital put into premium bonds won’t decrease, however adjusting for inflation, the real-terms value of that original amount will not buy as much when you redeem them, so that inflation loss is your risk.

The inflation loss is offset by any prizes, so in the unlikely event you win £1m you will be comfortably ahead of inflation.

This is true. It is equally true for cash in a bank account, or under the mattress, or for money invested in bonds or stocks, or funds thereof.

Like winning the £1m, interest or dividends or capital growth may offset the loss to inflation, but only interest is guaranteed to happen.

Agreed, but I was commenting on the specific point that PBs carry no risk of losing money.

Ultimately nothing carries “no risk”, you need to choose the risk you are happy with, whether that is inflation, shortfall, liquidity, FX etc, or (better still) have a sufficiently diverse portfolio.

btcp

MDMD said

Agreed, but I was commenting on the specific point that PBs carry no risk of losing money.
Ultimately nothing carries “no risk”, you need to choose the risk you are happy with, whether that is inflation, shortfall, liquidity, FX etc, or (better still) have a sufficiently diverse portfolio.

Of course, everything is in the context. The question boiled down to choosing global bond fund, vs saving account with almost zero interest vs PBs to keep emergency money with instant access. Global bonds fund carries more risk vs both PBs and saving accounts (on top of inflation, which is kind of a given). PBs carry a chance to get additional money in, so it looks like a winner. 

HansOndabush

If you are invested in a SIPP or IS A, then premium bonds is not an option. That leaves cash, bonds, or maybe a gold ETF as the only alternatives to equities. Of those I think gold will protect best against inflation but with more short term volatility than one ideally would like.

masonic

HansOndabush said:

If you are invested in a SIPP or IS A, then premium bonds is not an option. That leaves cash, bonds, or maybe a gold ETF as the only alternatives to equities. Of those I think gold will protect best against inflation but with more short term volatility than one ideally would like.

Premium bonds could still be an option using a flexible ISA, but it would require you to miss out on 1-2 prize draws per year due to having to make replacement subscriptions to preserve the ISA status of cash. You'd need to be quite lucky for that to beat the best cash ISA.

If casting the net as wide as gold, then one could also consider bricks and mortar property and crypto-assets, not that I'd consider any of those a bonds/cash proxy.

HansOndabush

masonic said:

HansOndabush said:

If you are invested in a SIPP or IS A, then premium bonds is not an option. That leaves cash, bonds, or maybe a gold ETF as the only alternatives to equities. Of those I think gold will protect best against inflation but with more short term volatility than one ideally would like.

If casting the net as wide as gold, then one could also consider bricks and mortar property and crypto-assets, not that I'd consider any of those a bonds/cash proxy.

What 'bricks and mortar property' would you recommend within a SIPP or ISA? Commercial property has crashed, INTU has gone bust, Hammerson shares are a fraction of what they were, CAL is on the floor too. I might consider rental property company Grainger but what exactly did you have in mind?

masonic

HansOndabush said:

masonic said:

HansOndabush said:

If you are invested in a SIPP or IS A, then premium bonds is not an option. That leaves cash, bonds, or maybe a gold ETF as the only alternatives to equities. Of those I think gold will protect best against inflation but with more short term volatility than one ideally would like.

If casting the net as wide as gold, then one could also consider bricks and mortar property and crypto-assets, not that I'd consider any of those a bonds/cash proxy.

What 'bricks and mortar property' would you recommend within a SIPP or ISA? Commercial property has crashed, INTU has gone bust, Hammerson shares are a fraction of what they were, CAL is on the floor too. I might consider rental property company Grainger but what exactly did you have in mind?

I'm not making a recommendation. Personally I think gold/property/crypto are of little value to an already diversified investor. However, someone who wished to include property in their portfolio could include REITs and property-focused equities such as GRI (which would not be classed as 'bricks and mortar property') as you have mentioned. There are also residential property OEICs (if you are comfortable with your exit potentially being gated in a downturn), property exposure within certain legacy VCTs that still have annual offers for subscription, investment in property-backed securities via an IF ISA, etc.

Of the options above, I think the commercial property REITs, which you correctly point out have crashed due to Covid, present the most attractive opportunity, since there is an opportunity to buy low, but these are high risk assets and not appropriate as a replacement for low risk assets such as government bonds.

ChilliBob

Ive skimmed parts of this discussion, which were pretty interesting, but in the current climate I'm struggling see why somebody would choose to invest in bonds vs either (v low risk) savings sccounts/premium bonds, or (higher risk) equities in a lower risk fund likd World index tracker. 

I think I must be missing the *point* of this instrument in ones portfolio.. I get the low risk, but savings are even lower risk, and returns seem similar or even better. 

If either of you, or anyone else can point me to an article or give me some further info I'd find that both helpful and interesting

Cheers