Please help me understand why bonds might be better- or worse- than cash.

masonic

HansOndabush said:

If I have invested £100 in bond funds over the last 5 years I would have £121. But because I saved cash I only have £107 

Actually your cash investment has lost value to inflation of approx 13% over the last 5 years so your apparent gain of 7% is actually a 6% loss of purchasing power.

We have moved from a risk-free return environment 20 years ago to a return-free risk environment today. By which I mean simply to preserve one's wealth or purchasing power, it is necessary to take some risk.

CPI and CPIH have risen about 9% over 5 years using the latest figures. Someone's personal inflation figure may be higher or lower than that depending on what they spend their money on. 

eskbanker said:

HansOndabush said:

Albermarle said:

Thanks for your insights and advice,

One positive point for cash currently is that you can save at interest rates above inflation .

Was that a joke?

Seems factual to me, savings interest rates are generally poor but many still exceed CPI at only 0.3% currently....

Whether today's rates will exceed inflation can only be judged with the benefit of hindsight, as inflation over the next 12 months is an unknown. The most recent independent forecasts put CPI inflation at about 2% in 2021 with those forecasts ranging from 0.8-3.7%. Not that I'm saying they should be taken as gospel, they have generally predicted inflation rises that have not come to pass in practice, but I rather suspect the things that have held inflation down are beginning to lose their influence.

eskbanker

masonic said:

eskbanker said:

HansOndabush said:

Albermarle said:

Thanks for your insights and advice,

One positive point for cash currently is that you can save at interest rates above inflation .

Was that a joke?

Seems factual to me, savings interest rates are generally poor but many still exceed CPI at only 0.3% currently....

Whether today's rates will exceed inflation can only be judged with the benefit of hindsight, as inflation over the next 12 months is an unknown. The most recent independent forecasts put CPI inflation at about 2% in 2021 with those forecasts ranging from 0.8-3.7%. Not that I'm saying they should be taken as gospel, they have generally predicted inflation rises that have not come to pass in practice, but I rather suspect the things that have held inflation down are beginning to lose their influence.

Yes, wouldn't disagree with any of that but was reading and using 'currently' in the literal sense of 'now' (i.e. comparing actual published savings interest rates with most recently published inflation measures) rather than projecting forward for 12 months or any other period, during which time both sides of the equation can (and, in all likelihood, will) change!

Albermarle

HansOndabush said:

Albermarle said:

Thanks for your insights and advice,

One positive point for cash currently is that you can save at interest rates above inflation .

Was that a joke?

You can currently get up to 1% for a one year fix.
Premium bonds pay approx.0.8% to 1 % ( depending on how you calculate it)
If you have some fixed rate savings which were started last year/earlier this year ( which many people will have ) you can be getting up to 2%.
These are all above the current rate of inflation , although as Masonic points out this might not be the case in 12 months time.

HansOndabush

masonic said:

HansOndabush said:

If I have invested £100 in bond funds over the last 5 years I would have £121. But because I saved cash I only have £107 

Actually your cash investment has lost value to inflation of approx 13% over the last 5 years so your apparent gain of 7% is actually a 6% loss of purchasing power.

We have moved from a risk-free return environment 20 years ago to a return-free risk environment today. By which I mean simply to preserve one's wealth or purchasing power, it is necessary to take some risk.

CPI and CPIH have risen about 9% over 5 years using the latest figures. Someone's personal inflation figure may be higher or lower than that depending on what they spend their money on. 

No you are wrong. The inflation rate for past 5 years from two different sources, one being the Bank of England, say inflation has been 13%:

http://inflation.iamkate.com/

https://www.bankofengland.co.uk/monetary-policy/inflation/inflation-calculator

Anyway CPI is not real inflation which is a lot higher than CPI. But whether you think that or not, a return of £107 for £100 invested over 5 years has definitely lost purchasing power over that period, even by CPI rates of inflation.

masonic

HansOndabush said:

masonic said:

HansOndabush said:

If I have invested £100 in bond funds over the last 5 years I would have £121. But because I saved cash I only have £107 

Actually your cash investment has lost value to inflation of approx 13% over the last 5 years so your apparent gain of 7% is actually a 6% loss of purchasing power.

We have moved from a risk-free return environment 20 years ago to a return-free risk environment today. By which I mean simply to preserve one's wealth or purchasing power, it is necessary to take some risk.

CPI and CPIH have risen about 9% over 5 years using the latest figures. Someone's personal inflation figure may be higher or lower than that depending on what they spend their money on. 

No you are wrong. The inflation rate for past 5 years from two different sources, one being the Bank of England, say inflation has been 13%:

http://inflation.iamkate.com/

https://www.bankofengland.co.uk/monetary-policy/inflation/inflation-calculator

Anyway CPI is not real inflation which is a lot higher than CPI. But whether you think that or not, a return of £107 for £100 invested over 5 years has definitely lost purchasing power over that period, even by CPI rates of inflation.

The official data comes from neither of those sources, it is determined by the ONS. Official figure for CPI (CPIH) in December 2015 is 100.3 (100.4) and figure for November 2020 is 108.9 (109.1). Percentage increase is determined by calculating the ratio of the latter to the former.

The "iamkate" website not using CPI or CPIH, it is using the discredited RPI. The BoE calculator is not using the latest CPI data (it only goes up to 2019).

I stated that your personal inflation rate may differ and is dependent on what you spend your money on. My personal inflation figure has been closest to CPI (using about 15 years of annual expenditure data).

HansOndabush

RPI was not 'discredited', it has been replaced by CPI because it suits the government to understate inflation. Take a look at Shadowstats to see what is going on. Although a US site, the same thing applies here too. Continual fudging of inflation to produce a more favourable outcome that suits the government.

masonic

HansOndabush said:

RPI was not 'discredited', it has been replaced by CPI because it suits the government to understate inflation. Take a look at Shadowstats to see what is going on. Although a US site, the same thing applies here too. Continual fudging of inflation to produce a more favourable outcome that suits the government.

The calculation methodology is flawed. It is being phased out over the next few years. If it is your preferred measure of inflation then you will need to find a replacement. I'm not into conspiracy theories, but thanks anyway.

As I have mentioned twice now, your personal measure of inflation is what matters, and that is something you can determine for yourself by tracking your spending over time.

bowlhead99

HansOndabush said:

RPI was not 'discredited', it has been replaced by CPI because it suits the government to understate inflation. Take a look at Shadowstats to see what is going on. Although a US site, the same thing applies here too. Continual fudging of inflation to produce a more favourable outcome that suits the government.

It certainly suits conspiracy theorists who want to discredit the government, to state that all statistics are fudged by the government.

It's easier for the conspiracy theorists to do that than to look at the formula for RPI and understand how the results are likely to give a flawed measure of the changes of price of consumer goods over time. The UK started to use RPI seventy years ago; other advanced economies which came up with their current statistical measures at a later point in history decided not to use the same flawed formulae to do it, leaving the UK as a bit of an outlier among major world economies, and the UK came around to producing CPI as a comparable measure for what was being done in the modern world by other major economies, and then eventually to drop RPI and stop linking things to it.

Ray_Singh-Blue

Thankyou for the replies.

I understand that cash is likely to lose some purchasing power over time. That's OK by me. Because as I see it, the point of safe cash in the mix is to counterbalance the risky equities, and make the whole portfolio less risky. I don't see the point of cash as being to preserve purchasing power in its own right. But, taken together with stocks, I hope purchasing power of the 50:50 portfolio will grow. And so far that's what has happened.

For now I am planning to stick with cash as the "safe" half of my portfolio. However, in the long term I would like bonds in the mix. If you have given up on bonds "for now" - maybe because you expect interest rates to rise, or maybe because yields are very low- then what needs to change for you to start buying them again?

I am thinking, higher yield available on bond fund than on cash, that would probably be enough to sway me. Specifically, when the yield on a global weighted bond index, is higher than I can get is a cash ISA or with NS&I. Does this sound like a reasonable starter for 6?

masonic

Ray_Singh-Blue said:

For now I am planning to stick with cash as the "safe" half of my portfolio. However, in the long term I would like bonds in the mix. If you have given up on bonds "for now" - maybe because you expect interest rates to rise, or maybe because yields are very low- then what needs to change for you to start buying them again?

I am thinking, higher yield available on bond fund than on cash, that would probably be enough to sway me. Specifically, when the yield on a global weighted bond index, is higher than I can get is a cash ISA or with NS&I. Does this sound like a reasonable starter for 6?

If you mean the running yield, net of fund and platform fees, then it could be a very long time indeed before that is true - I'm struggling to recall a time when it was previously true, not in my living memory. Very crudely, the top fixed term accounts have been a good 1+% above BoE base rate during normal times and have remained above Gilt yields after the base rate was savagely cut in 2008. I'm seeing similar US data comparing CD rates with 10 year Treasuries yields. The outperformance of bonds vs cash has been the result of capital appreciation, not higher yields.