Going up or down with bond risk.

ANGLICANPAT

With all the talk of  bonds overheating ,  not doing their balancing job,  boiling over, about to crash etc   ,  if I had been going to  invest in  the low end risk level of a global multi asset fund  , sacrificing  growth for preservation ( theoretically)   since Im in my earlyish 70's   --then  should I be thinking about going up a risk level for a while, hence ditching  a % of bonds ,  to help minimise my losses if bonds are likely to crash horribly , but hopefully not equities to the same degree at the same time? 

bowlhead99

ANGLICANPAT said:

    --then  should I be thinking about going up a risk level for a while, hence ditching  a % of bonds ,  to help minimise my losses if bonds are likely to crash horribly , but hopefully not equities to the same degree at the same time? 

What happens if/when it's equities that 'crash horribly' after you decide to buy more of them? If the extra equities you bought halve in value, together with the equities you already have, how does that help you 'preserve capital'?

With all the talk of  bonds overheating ,  not doing their balancing job,  boiling over, about to crash etc   , 

'They' have been saying bonds have been overheated, all time highs, reward-free risk, etc etc for the last five years or more. Last Feb-March, FTSE Developed equity index dropped 34%, IA Sterling Strategic Bond sector dropped 10%.

ANGLICANPAT

 I just seemed to have read rather a lot about bonds dropping more recently and not being useful defensively ,  and at the same time ,about there maybe a steady  recovery in equities ,so just thought  changing  balance for a while might be useful since  you can always change back later . Just  a thought .   Good to have the experienced putting things into perspective , thanks . 

AlanP_2

US, but relevant showing how equities can lose in a day what takes bonds a year.

Worst Days for equities and Worst Years for selected bonds between 1928 and 2020.

JohnWinder

ANGLICANPAT said:

With all the talk of  bonds overheating ,  not doing their balancing job,  boiling over, about to crash etc 

ANGLICANPAT said:

 I just seemed to have read rather a lot about bonds dropping more recently and not being useful defensively ,

Can you point us to where we can read those views, so we might try to interpret them for you?

Alexland

While bonds will help dampen the volatility of a portfolio that doesn't make them a good long term investment unless interest rates continue to decline into deep negative territory. Rather than going too heavy into bonds it might be worth diversifying your non-equities exposure into cash, gold, etc. There are also things you can do with holding more defensive equities to reduce volatility depending on how complicated you want to go.

Albermarle

JohnWinder said:

ANGLICANPAT said:

With all the talk of  bonds overheating ,  not doing their balancing job,  boiling over, about to crash etc 

ANGLICANPAT said:

 I just seemed to have read rather a lot about bonds dropping more recently and not being useful defensively ,

Can you point us to where we can read those views, so we might try to interpret them for you?

There are plenty of mentions of this scenario in various threads on this forum . There is definitely some nervousness, especially about long dated bonds:
Also of course plenty of opposite opinions ( like Bowlhead ) 

dunstonh

With all the talk of  bonds overheating ,

The term bond covers a wide range of options (ignoring the non fixed interest securities with bond in the name).  There is a lot of difference in the types of bond available.     Gilts, Inded linked gilts, investment grade bonds and within those high yield bonds and others.  You then also have global versions of these where currency movements can come into play.  If you placed every fixed interest security fund on a 1-10 risk scale you could probably get funds appearing in 2-10.

It is important not to bundle all bonds as being the same thing. Much in the same way you shouldn't bundle all equities together to be the same thing.

I just seemed to have read rather a lot about bonds dropping more recently and not being useful defensively , 

Yes but within the context, it is investment grade bonds where you are seeing this.  Gilts still have a place although you are increasingly seeing money market/cash getting increased ratios.  High Yield bonds, for example, have never been a risk reducer.

The problem is that investment grade bonds have had warnings about their suitability as a volatility reducer questioned since the credit crunch.  And gilts have been treated as the least worst option for most of the decade since.  Yet they had a very strong decade (which will give a false impression of likely future returns to many newer investors in low risk investments).    Every year it has been said that it will have to end.  And it hasn't yet.  It will at some point and the wavy line will turn the other way.

Every time there is a financial crisis, liquidity risk in investment grade bonds raises its head.  It was no different this time.    

bowlhead99

Albermarle said:

JohnWinder said:

ANGLICANPAT said:

With all the talk of  bonds overheating ,  not doing their balancing job,  boiling over, about to crash etc 

ANGLICANPAT said:

 I just seemed to have read rather a lot about bonds dropping more recently and not being useful defensively ,

Can you point us to where we can read those views, so we might try to interpret them for you?

There are plenty of mentions of this scenario in various threads on this forum . There is definitely some nervousness, especially about long dated bonds:
Also of course plenty of opposite opinions ( like Bowlhead ) 

In various threads I've explained some of the downside potential of bonds (including long dated bonds, high yield bonds, international bonds, etc etc) and their relative usefulness or uselessness within a portfolio - so I wouldn't want to be portrayed as having some opposite or contrarian opinion to what should be  common knowledge (the kind of points made by dunstonh above). 

I do think it's important to be able to see things from multiple perspectives, so will often post a devil's advocate view when someone gives their opinion or concern, whether I personally agree or disagree. Otherwise a forum can just become an echo chamber of people reinforcing whatever the most vocal opinion happens to be at that time, as if it were Gospel.

HansOndabush

JohnWinder said:

ANGLICANPAT said:

With all the talk of  bonds overheating ,  not doing their balancing job,  boiling over, about to crash etc 

ANGLICANPAT said:

 I just seemed to have read rather a lot about bonds dropping more recently and not being useful defensively ,

Can you point us to where we can read those views, so we might try to interpret them for you?

There's no need, anyone can see bonds are in a massive bubble caused by QE and artificially low interest rates. When you buy a government bond now you are agreeing to loan the government your money for up to 30 years and are guaranteed to get back less than you lent after inflation. No one in their right mind would do that unless they think in the short term bonds could go higher still on even more QE/negative interest rates, and that they could sell the bonds on for a small profit; no point holding until maturity.

OP if you want to reduce your risk then you need to take some money out, or if that is not possible, look at switching to one or more of:

1) Cash funds

2) Absolute return funds (in theory these spread out risk in equity markets with shorts)

3) Diversification of equity funds e.g. good geographical and sector diversification. Also consider an allocation to commodities.

DiggerUK

ANGLICANPAT said:.....to help minimise my losses if bonds are likely to crash horribly.......

Worrying about financial chaos is good, but don't  forget, the whole point of a problem is to develop a solution.
Despite everybody and their dog on MSE knowing about gold, it still amazes me how little it is accepted as part of a solution..._