Rebalancing equity and bond holding

[Deleted User]

Bonds are easy compared to shares. Its all about comparing premium and risk. And the risk is evaluated for you by the agencies, assuming you trust them. With shares one ought to do a LOT of homework if you want to try and beat the market.

Starts to get tricky when you get into junk bonds or prefs, but as long as you stay away from them... Someone with a large enough portfolio could buy bonds directly rather than through a fund. 

Thrugelmir

Albermarle said:

Thrugelmir said:

barnstar2077 said:

https://www.youtube.com/watch?v=fdI59Dv3JUg

Pensioncraft just released a video about this very subject.

While it's informative I was left wanting more. Nothing contained in the video that hasn't been in the public domain for a while. 

I think it is really aimed at investors with less experience than you . More for the reasonably well informed but amateur types, like me !

The videos do provide solid building blocks and at least provide awareness. From which to investigate further. 

NedS

Thrugelmir said:

Albermarle said:

Thrugelmir said:

barnstar2077 said:

https://www.youtube.com/watch?v=fdI59Dv3JUg

Pensioncraft just released a video about this very subject.

While it's informative I was left wanting more. Nothing contained in the video that hasn't been in the public domain for a while. 

I think it is really aimed at investors with less experience than you . More for the reasonably well informed but amateur types, like me !

The videos do provide solid building blocks and at least provide awareness. From which to investigate further. 

I like his videos and find them useful. He is always clear that his videos do not represent personal advice and he is also very clear that he does not offer predictions about future performance. He is happy to discuss investment topics and offers a very knowledgeable perspective which he succeeds in getting across in a manner that folks like myself can understand. He never tries to lead you to a conclusion nor does he express an opinion, but rather presents an impartial discussion of the topic with the sole aim of imparting sufficient understanding such that the viewer may be able to draw their own, hopefully more informed, opinions.

itwasntme001

Deleted_User said:

itwasntme001 said:

Deleted_User said:

Albermarle said:

With recent significant equity growth I feel I should be rebalancing towards bonds

A lot of posters on here are expressing negative sentiment about bonds, although opinions vary as usual. Long dated ones do seem out of favour though as if interest rates were to rise from the current floor, these bond prices will get hit . 

However finding other non bond investments to balance out a portfolio is not that straightforward . As Dunstonh says cash and gilts are safe enough but with very low returns 

The issue you are describing applies to gilts too.  If you buy them now, you are guaranteeing a loss in real terms.  Is it really “safe”? 

Cash and cash-like products or less unusual products like preferred shares and Chinese government bonds are possible alternatives. 

You are not guaranteeing a loss in real terms if you buy bonds now because you do not know what inflation will do.  If inflation turns out to be as expected given break-evens, then you guarantee a loss if the bond is held to maturity.  Otherwise you could sell a bond in the interim and if yields fall even further you could still gain in real terms for this interim period.

True. Guarantee is too strong. But the expected return is negative.

I do wonder whether expectations have been distorted by central bank buying of TIPs as well as pension/insurance funds looking to hedge inflation linked liabilities.

Because I think what is happening is that the FED actually does want break even inflation rates to rise in order to encourage the economy to get out of this deflation trap and the way to set expectations for this is to be aggressive buyers of TIPs (relative to nominals) which lowers real yields on them and thus increases inflation break evens. The TIPs market is less liquid than nominals so in theory it should work quite well.  Obviously hasn't actually worked yet as the world still expects disinflationary conditions to persist and so nominals have a decent bid.  And if there really is a distortion, we may not even get the expected inflation which means that holding bonds to maturity may still provide a positive real return.

Interesting times.

itwasntme001

You don't buy bonds anymore for the yield (basically coupon).  You buy it because of the equity like returns due to a further lowering of rates, which, due to convexity, can have sizeable gains yet, particularly for longer duration bonds.

jamesd

barnstar2077 said:

In a recent PensionCraft video he showed that the longterm bonds held up better than anything else surpringly. 

That would be more than just surprising because in the current context - low interest rates - long bonds are the most vulnerable bonds because they move most in response to interest rate changes.

The rebalancing video is a useful introduction but it's mostly during a bull market for bonds.

JohnWinder

fcandmp said:

.. already both in the form of Vanguard life strategy 60:40 and Ishares Ultrashort bonds in lieu of cash. I had thought of rebalancing straight equity funds into the life strategy product but was looking to challenge my options in his instance 

I'm clearer now on all that. It sounds like you're not sure which bonds to put the sold equities into, and perhaps whether to rebalance at all. No idea what options you have for challenging if they're beyond existing holdings, so can't help there.

Some people would already have some sort of 'statement of intent', some call it an investment policy statement which sets out the sort of investment philosophy you believe in (Hale calls it a mindset or beliefs that your decisions will be based on e.g. 'I can pick winners', or 'be diversified'), and how to pursue that. Ferri's approach sounds sensible: have a philosophy, with some aims; devise a strategy to implement the philosophy; finally, stick with it with discipline. Because as Ferri says, sticking with your plan gives it the best chance of delivering for you. https://rickferri.com/investment-philosophy/

If you don't have such a beast it might help you to think one through, because you will then be less likely to make your decisions on the basis of where you think the markets are heading (good luck with that one), or worse where I think they're heading, or what a very unrepresentative bunch of well-meaning (let's leave it at that) folk suggest.

The strategy part of your investment policy statement, hereafter IPS, will say which credit grade of bonds you favour, what duration suits you, how many are nominal and inflation linked, which country they're from and whether they're currency hedged for example. Your strategy might also indicate whether you want all your funds with one company (Vanguard) or if you want to diversify that risk by having some with iShares....tick.

So, to answer your original question, you just go back and read your IPS and follow the prompts. At that time, or during biennial reviews, you might see what new investment products have become available which might suit you, eg a new bond fund, and consider going into this. But this latter is likely to be small beer. Did your investment policy say 'when interest rates are rubbish I give up on long bonds and take more credit risk', or did it say 'i own bonds because they reduce an equity portfolio's volatility, have and ought to provide better returns than cash in the long term, and could save my bacon if equities flat-line for 15 years as they have in the past'?

That just leaves 'do I rebalance?' What does your IPS say? The enthusiasts say you do it to keep your risky/less risky assets in the mix that makes you comfortable. You don't up the risk just because returns are poor and you want better returns - therein lies unhappiness. You accept that you can't get better than market returns unless you take on more risk or gamble a bit, and your IPS didn't envisage this at the time of writing it. Some folk feel there's money to be made by rebalancing; and in times of see-sawing asset values of course you can, but in times of progressively increasing/decreasing asset values you lose out by selling the continuing 'winners' and buying the continuing 'losers'. Sadly, we don't know what 'times' we're in until they end.

barnstar2077

jamesd said:

barnstar2077 said:

In a recent PensionCraft video he showed that the longterm bonds held up better than anything else surpringly. 

That would be more than just surprising because in the current context - low interest rates - long bonds are the most vulnerable bonds because they move most in response to interest rate changes.

The rebalancing video is a useful introduction but it's mostly during a bull market for bonds.

I think you may have skipped a bit, as he goes back as far as 1871 in parts.  Any excuse to fit some more graphs in! :  ) 

Bimbly

When I first took my pension pot out of the default investment plan around 2015/6, I took a look at how the lifestyling de-risked to bonds over time, and the bond allocation was half UK government gilts and half corporate bonds. I think it moved towards more short term gilts in the last five years.

Now I look at the funds it would use for de-risking and they're about one third each gilts, corporate bonds and international bonds (some of them, even less corporate bonds and a higher holding of international bonds). Now, I get that corporate bonds are more risky new considering the economy, but I would have thought international bonds have a big currency risk, especially with the pound having fallen in value.

These people must know something - right?

MK62

......non-Sterling international bonds are often currency hedged to Sterling for UK investors.........as you say, a supposed "safer" asset wouldn't be all that safe if it involved potentially significant currency exchange risk...