Gilts Example

Apodemus

MK62 said:

It's all relative though........did you think the same about your Gilts in March last year, after your equites had just taken a walk off the edge

If the original reason for you holding Gilts still holds true, then you have to ask yourself what you'd do with the proceeds if you sold them.

Trouble is I only bought them in November when I finally managed to gain control of my pension! I had drawn-up my portfolio plans in Dec 19, but it took till November '20 to actually get the pension released into my SIPP. I am happy that the gilts proportion is still correct, and if I sold them it would only be to replace them with an I/L gilt to the same portfolio share.

MK62

Ah, I see.....my bad, I assumed you'd held them a bit longer.
However, the point still stands.......I've not checked, but recently it was posted on here that linkers currently have a break even of around 3% inflation......less than that and you lose vs conventional gilts....above that and you gain (again vs conventional gilts). I can't help you with what the inflation rate will be next year, let alone in 10 years or more......the BoE have a target of 2% iirc, and its currently under 1%.....you need to make your guesstimate there......my opinion is that it might well stay low for a while, but nobody really knows for sure.

Apodemus

MK, I completely agree that no-one knows where inflation is heading, except that it's unlikely to be down!  But I can't see how the Gov't can reduce the Covid debt without inflating it away.   Equally, it is difficult to envisage much of an upside on current long-dated gilt prices.

My gilts are (not surprisingly!) in the risk averse part of my SIPP.  This is a sub-fund in which I hold the equivalent of 5 years of planned drawdown, so that the rest of the portfolio would have a chance to weather any prolonged downturn and I could minimise my  "sequence of returns" risk.  I've noticed that my wealth preservation ITs have moved to I/L gilts to protect against an upturn in inflation and I suspect that they know rather more about investment strategy than I do!  This is the first time I've bought Gilts, so I'm relaxed about losing a bit on them as part of a learning curve.  I'm not about to rush into swapping them over, but keeping an eye on prices, just in case a chance arises.

valiant24

HansOndabush said:

It depends what you mean by a 'safe' investment. In nominal terms, in 16 years, you get back £862,143 but what would that buy you if in the meantime inflation shoots to 10% or more? I'd rather hold gold for 16 years as I think my gold would buy more than your gilts at the end of that time.

So here's the thing: I agree with you, gold might well be the better investment over that time.   But my SIPP is close to the lifetime allowance (LTE).  Once it exceeds the LTE I'll pay 55% tax on the excess.
Given that any upside is subject to 55% tax, the sensible strategy is (IMHO but would love to hear contrary views) to invest in something ultra-conservative, like gilts to protect against any downside.

Prism

HansOndabush said:

It depends what you mean by a 'safe' investment. In nominal terms, in 16 years, you get back £862,143 but what would that buy you if in the meantime inflation shoots to 10% or more? I'd rather hold gold for 16 years as I think my gold would buy more than your gilts at the end of that time.

Its a bit more complex than that, if an income is taken every six months as it would be with the gilts. You would need to sell some gold every six months regardless of the gold price which can be volatile. What you end up with after 16 years may be lower or higher than the Gilt equivalent based on the price of gold at that time but also on the sequence of prices that gold went through every six months.

HansOndabush

Looks like the overall return after 16 years is 11.1%. It might be acceptable but I doubt it. Essentials like food, housing, insurance, council tax, dentist fees(!) will have increased by a lot more over 16 years.

MK62

Apodemus said:

MK, I completely agree that no-one knows where inflation is heading, except that it's unlikely to be down!  But I can't see how the Gov't can reduce the Covid debt without inflating it away.   Equally, it is difficult to envisage much of an upside on current long-dated gilt prices.

Yep, I hear you........I doubt anyone thinks there's much upside in gilts atm......

That said though, sometimes 0.64% is a good return.....if everything else is dropping like a stone!

Nobody knows the future......you just have to call it as you see it. I can't honestly say whether, if you switched to linkers from your gilts, that you'd be better or worse off, nobody can. Personally, like you I wouldn't be in a rush to do it.......but then you should always keep an eye on your investments, and be prepared to act, if and when you become convinced that a change is called for.

It doesn't sound like you are in that position atm.

Notepad_Phil

valiant24 said:

HansOndabush said:

It depends what you mean by a 'safe' investment. In nominal terms, in 16 years, you get back £862,143 but what would that buy you if in the meantime inflation shoots to 10% or more? I'd rather hold gold for 16 years as I think my gold would buy more than your gilts at the end of that time.

So here's the thing: I agree with you, gold might well be the better investment over that time.   But my SIPP is close to the lifetime allowance (LTE).  Once it exceeds the LTE I'll pay 55% tax on the excess.
Given that any upside is subject to 55% tax, the sensible strategy is (IMHO but would love to hear contrary views) to invest in something ultra-conservative, like gilts to protect against any downside.

It sounds to me that you are possibly letting the tax tail wag the dog. If buying gilts meets your strategic goals then fair enough go ahead and buy them, but do make sure that you're not just doing it just because it means you'll have less tax to pay - personally I'm not adverse to paying tax from breaking the lifetime allowance as it will only happen if I've also made good returns.

valiant24

Notepad_Phil said:

It sounds to me that you are possibly letting the tax tail wag the dog. If buying gilts meets your strategic goals then fair enough go ahead and buy them, but do make sure that you're not just doing it just because it means you'll have less tax to pay - personally I'm not adverse to paying tax from breaking the lifetime allowance as it will only happen if I've also made good returns.

Yes, the "tail and dog" is exactly the metaphor that occurred to me too.   Does it make a difference if I add that I also have decent ISA (and even one PEP!) holdings plus a dealing account which I plan to put wholly into equities (well, per Lars Kroijer, a global tracker) to give me roughly a 40/60 gilts/equities mix?

Ash_Pole

Apodemus said:

MK, I completely agree that no-one knows where inflation is heading, except that it's unlikely to be down! 

You could well be right, but these days who knows. Interest rates plummeted after the 2008 crisis and the overwhelming consensus then was that the only way was up. The business I worked for smugly took out a fixed 10 year loan, as did many others. Fast forward 13 years...