DIY plan review on the eve of crystallisation

Thrugelmir

Linton said:

Thrugelmir said:

JohnWinder said:

gm0 said:

The confusion of the bonds discussion matches my own.
We covered this topic where I asked about it as I too was (and am) puzzled as to what is best for the minimal risk assets.
But in assessing bond funds conceptually against very negative market "stress test" scenarios I am underwhelmed by holding great swathes of US corporate B and worse - this being held up by central bank magic.  And it will be for an undefined while yet.  But not forever. And probably not for 20-40 years. 

I am just unconvinced that the -ve equities correlation will hold for the shonkier corporate stuff in some developed markets in whatever form of PE revaluation cycle we go through next.  Which we undoubtedly will.  We know that but not when. That being so I am not sure I want lots of it. Or if I do have it then I want to trade some risk+yield for quality and a better chance of the -ve correlation standing up when the screaming is happening

Surely shonkier corporate bonds will be well correlated with equities in the same market as they're both high-ish risk.

If a company fails then it's both the bond and equity holders that get wiped up. Holding both asset classes in the same company provides no diversification. 

Holding corporate bonds does not provide protection in the event of a complete failure but it does provide protection against a major fall in that interest will still be paid even if dividends are cut.

Companies can suspend interest payments on fixed interest securities ( bonds, preference shares etc) as well.  There's no default protection. 

Linton

Thrugelmir said:

Linton said:

Thrugelmir said:

JohnWinder said:

gm0 said:

The confusion of the bonds discussion matches my own.
We covered this topic where I asked about it as I too was (and am) puzzled as to what is best for the minimal risk assets.
But in assessing bond funds conceptually against very negative market "stress test" scenarios I am underwhelmed by holding great swathes of US corporate B and worse - this being held up by central bank magic.  And it will be for an undefined while yet.  But not forever. And probably not for 20-40 years. 

I am just unconvinced that the -ve equities correlation will hold for the shonkier corporate stuff in some developed markets in whatever form of PE revaluation cycle we go through next.  Which we undoubtedly will.  We know that but not when. That being so I am not sure I want lots of it. Or if I do have it then I want to trade some risk+yield for quality and a better chance of the -ve correlation standing up when the screaming is happening

Surely shonkier corporate bonds will be well correlated with equities in the same market as they're both high-ish risk.

If a company fails then it's both the bond and equity holders that get wiped up. Holding both asset classes in the same company provides no diversification. 

Holding corporate bonds does not provide protection in the event of a complete failure but it does provide protection against a major fall in that interest will still be paid even if dividends are cut.

Companies can suspend interest payments on fixed interest securities ( bonds, preference shares etc) as well.  There's no default protection. 

They can, but it's a major step compared with cutting the dividend and I believe unlikely to be done unless the company was really in dire straits as it would damage their ability to issue further bonds.

gm0

Thank you Linton - a most helpful example. 

I had earlier on been ending up with an equities+cash shape and conceptually/emotionally "not enough bonds in the picture".  Feeling this was a potential weakness - creating vulnerabilities I hadn't thought about properly as well as helping with issues that I had.  This led to the curiosity about what bonds were best to pick for the desired portfolio damping from asset class -ve correlation. I had veered away from entirely global passive equities + cash solution hence the multi-asset or wealth preservation piece alongside. 

70% equities, *14% bonds, 16% cash as % investible (using an example multi-asset on my list)
*Bonds in this particular multi-asset is corps, gilts, alts (the multi-asset moves some global sovereign debt around to alts). 

I can of course tune that "down curve" if I choose by buying ISA bonds instead of equities to around 64%/20%/16%. Or choose a less aggressive multi-asset. 

I am getting some confidence now that this is fairly mainstream thinking for "moderately aggressive" risk appetite.

Thrugelmir

Linton said:

Thrugelmir said:

Linton said:

Thrugelmir said:

JohnWinder said:

gm0 said:

The confusion of the bonds discussion matches my own.
We covered this topic where I asked about it as I too was (and am) puzzled as to what is best for the minimal risk assets.
But in assessing bond funds conceptually against very negative market "stress test" scenarios I am underwhelmed by holding great swathes of US corporate B and worse - this being held up by central bank magic.  And it will be for an undefined while yet.  But not forever. And probably not for 20-40 years. 

I am just unconvinced that the -ve equities correlation will hold for the shonkier corporate stuff in some developed markets in whatever form of PE revaluation cycle we go through next.  Which we undoubtedly will.  We know that but not when. That being so I am not sure I want lots of it. Or if I do have it then I want to trade some risk+yield for quality and a better chance of the -ve correlation standing up when the screaming is happening

Surely shonkier corporate bonds will be well correlated with equities in the same market as they're both high-ish risk.

If a company fails then it's both the bond and equity holders that get wiped up. Holding both asset classes in the same company provides no diversification. 

Holding corporate bonds does not provide protection in the event of a complete failure but it does provide protection against a major fall in that interest will still be paid even if dividends are cut.

Companies can suspend interest payments on fixed interest securities ( bonds, preference shares etc) as well.  There's no default protection. 

They can, but it's a major step compared with cutting the dividend and I believe unlikely to be done unless the company was really in dire straits as it would damage their ability to issue further bonds.

If a company is in breach of it's banking covenants. Then it has no option but not to. 

JohnWinder

gm0 said:

I had veered away from entirely global passive equities + cash solution hence the multi-asset or wealth preservation piece alongside. 

Nice journey to reach this near end-point. Do write clearly in your investment policy statement your thinking that brought you to this point, and perhaps include 'I expect this asset mix may disappoint me at some stage, but it's well founded (unless a whole new economic theory is invented meantime) and I'm going to stick with it, because I have fall back strategies and it will work best in the long run if I don't tamper with it too much.' Even saint Jack Bogle said he spent half his time regretting he had so much in bonds, and the other half regretting he had so much in equities.

Linton

JohnWinder said:

gm0 said:

I had veered away from entirely global passive equities + cash solution hence the multi-asset or wealth preservation piece alongside. 

Nice journey to reach this near end-point. Do write clearly in your investment policy statement your thinking that brought you to this point, and perhaps include 'I expect this asset mix may disappoint me at some stage, but it's well founded (unless a whole new economic theory is invented meantime) and I'm going to stick with it, because I have fall back strategies and it will work best in the long run if I don't tamper with it too much.' Even saint Jack Bogle said he spent half his time regretting he had so much in bonds, and the other half regretting he had so much in equities.

Bonds aren’t just padding, they must satisfy clear objectives. Only then can you make a rational decision as to which bonds to buy. Or you may conclude that at their current price bonds are not capable of providing all the benefits you may want.

With this approach, unlike Jack Bogle, you should avoid spending your life regretting your investment decisions.