What and how much cash?

coyrls

JohnWinder said:

For a 15 year investing horizon, it makes theoretical sense to own a bond or fund that has a duration of 15 years - it should have a higher interest payment than a shorter duration security(ies), and mature when you need the money back

What you say is true for a bond but not for a bond fund.  If you own a bond fund with an average duration of 15 years, then it is likely that in 15 year's time, the bond fund will still have an average duration of around 15 years.

ex-pat_scot

jamesd said:

Albermarle said:

 I notice amongst all this talk about falling bond yields , that most bond funds have fully or partly recovered from the drops earlier in the year . The ones I checked seem to be in fact marginally above where they were this time last year .
I confess to having no idea why though.

It's been about rising yield and hence falling capital values, which has a substantial effect on bond fund values, the effect being greater the longer the maturity of the bonds held. One thing that bond funds normally disclose is the current average maturity of the bonds held.

If you hold actual bonds and are able to hold them to maturity this doesn't matter because then you get the interest rate you signed up for and your capital back, The single date bond funds that bostonerimus mentioned also have this property.

Personally, I've dodged the issue by using P2P lending and cash, most in a mortgage offset account, as bond substitutes.

Frankly why bother to hold any cash reserves at all, if you can hold an offset mortgage account?
That does presuppose that:
- the funds will be available on demand (check the small print for the T&Cs of the offset mortgage and any rights of offset)
- the mortgage rate is reasonable

My investment horizon is roughly 45 years, as the money has to outlast my wife who will likely live to 90+.
I'm happy with the vagarities of the market, and selling down assets as and when liquidity is required, in spite of any market downturn.

bostonerimus

coyrls said:

JohnWinder said:

For a 15 year investing horizon, it makes theoretical sense to own a bond or fund that has a duration of 15 years - it should have a higher interest payment than a shorter duration security(ies), and mature when you need the money back

What you say is true for a bond but not for a bond fund.  If you own a bond fund with an average duration of 15 years, then it is likely that in 15 year's time, the bond fund will still have an average duration of around 15 years.

This is exactly why US investment firms have developed "target maturity" bond funds.

JohnWinder

coyrls said:

What you say is true for a bond but not for a bond fund.  If you own a bond fund with an average duration of 15 years, then it is likely that in 15 year's time, the bond fund will still have an average duration of around 15 years.

Yes, that is exactly the problem. Another possible solution, for the committed, is to hold two bond funds of different duration - a long and a short. You hold them in the appropriate proportions, more of one or the other, depending on how long it is before you need the money. As that time approaches you progressively sell some of the longer fund and buy more of the shorter fund, to have your funds' 'average' duration suitable for you. IF you can find such funds, and if you can be bothered. I think it's described here: https://www.financialwisdomforum.org/forum/viewtopic.php?t=119663&start=50

jamesd

Thrugelmir said:

jamesd said:

Albermarle said:

 I notice amongst all this talk about falling bond yields , that most bond funds have fully or partly recovered from the drops earlier in the year . The ones I checked seem to be in fact marginally above where they were this time last year .
I confess to having no idea why though.

If you hold actual bonds and are able to hold them to maturity this doesn't matter because then you get the interest rate you signed up for and your capital back, 

You don't get your capital returned per se. To cite @Linton above. If you pay £200 for a £100 of nominal stock of 4% Treasury 2060. Then you'll make a capital loss of £100. As only £100 will be returned to you upon redemption. The 2% running yield maybe attractive for income purposes but is only part of the story. 

When you buy them direct at issuance at the issue price that's exactly what you get back at redemption: all of your nominal capital.

Buy later in the open market and hold to redemption (impossible in normal funds) and you get back the issue price and can gain or lose capital depending on whether you bought higher or lower. Which is the point I've been making in most of my posts on this topic.

jamesd

ex-pat_scot said:

jamesd said:

...
Personally, I've dodged the issue by using P2P lending and cash, most in a mortgage offset account, as bond substitutes.

Frankly why bother to hold any cash reserves at all, if you can hold an offset mortgage account?
That does presuppose that:
- the funds will be available on demand (check the small print for the T&Cs of the offset mortgage and any rights of offset)
- the mortgage rate is reasonable

The property was sufficiently inexpensive that the mortgage is around 50k. I need a lot more than that as a bond substitute.

The mortgage terms are the protected version, without right of offset of savings and current account against mortgage balance in the event of bank failure.

coyrls

jamesd said:

Thrugelmir said:

jamesd said:

Albermarle said:

 I notice amongst all this talk about falling bond yields , that most bond funds have fully or partly recovered from the drops earlier in the year . The ones I checked seem to be in fact marginally above where they were this time last year .
I confess to having no idea why though.

If you hold actual bonds and are able to hold them to maturity this doesn't matter because then you get the interest rate you signed up for and your capital back, 

You don't get your capital returned per se. To cite @Linton above. If you pay £200 for a £100 of nominal stock of 4% Treasury 2060. Then you'll make a capital loss of £100. As only £100 will be returned to you upon redemption. The 2% running yield maybe attractive for income purposes but is only part of the story. 

When you buy them direct at issuance at the issue price that's exactly what you get back at redemption: all of your nominal capital.

Buy later in the open market and hold to redemption (impossible in normal funds) and you get back the issue price and can gain or lose capital depending on whether you bought higher or lower. Which is the point I've been making in most of my posts on this topic.

Given that Gilts are auctioned at issue, it is not possible to buy direct at the issue price.

coyrls

JohnWinder said:

coyrls said:

What you say is true for a bond but not for a bond fund.  If you own a bond fund with an average duration of 15 years, then it is likely that in 15 year's time, the bond fund will still have an average duration of around 15 years.

Yes, that is exactly the problem. Another possible solution, for the committed, is to hold two bond funds of different duration - a long and a short. You hold them in the appropriate proportions, more of one or the other, depending on how long it is before you need the money. As that time approaches you progressively sell some of the longer fund and buy more of the shorter fund, to have your funds' 'average' duration suitable for you. IF you can find such funds, and if you can be bothered. I think it's described here: https://www.financialwisdomforum.org/forum/viewtopic.php?t=119663&start=50

I was making the point because in your original post, you said "bond or fund".

JohnWinder

coyrls said:

Given that Gilts are auctioned at issue, it is not possible to buy direct at the issue price.

Yes, that's my half-understood understanding. Gilts, all of them, seem to be issued with set coupon rates (obviously, they have to) and those rates vary one from another in one eighth of a percentage increments. Interest rates on traded bonds move every day, all day every I suppose if there's enough buyers/sellers, so that at any time on any day no one will know what the yield on any bond will be the next day or even the next hour.

If that 'no one' includes the office of Treasury issuing a new bond, if they issue it for purchase at face value, then it'll be either a bargain or over-priced unless the coupon they've nominated for it is exactly what current yield (for that type of bond) is.

So they have to be auctioned, or under-priced they'd be rushed (and should be auctioned), or over-priced (and would not sell).

jamesd

coyrls said:

Given that Gilts are auctioned at issue, it is not possible to buy direct at the issue price.

Then there will be a gain or loss at redemption for that type of bond. Likely small but there.