Working out % Equity allocation

Linton

pip895 said:

bostonerimus said:

it would be good to have a "target maturity" bond fund ladder although the returns would be dismal and they aren't available in the UK yet.

I know you are quite keen on these target maturity bonds, but don’t you loose just as much investing in them if interest rates go up?  

I know you get back the cash amount you put in, but at the end of the day you would be in exactly the same position if you sold out at a loss and bought the better yielding bonds.  They are just something that allows people to think they haven’t lost money when they have. 

For me anything long/med dated (>5year) and yielding <1% seams pretty pointless. I would prefer to sit in cash and wait for better rates - if I’m wrong and rates don’t improve I haven’t missed out on that much!

The idea of target maturity bond funds is that you hold the underlying bonds to maturity.  The value and total return at maturity of bonds is known from the time you buy them.  So you miss out on the potential short term gains and losses, which is rather the point.  Used in this way they operate exactly like fixed rate savings accounts.

What is being proposed is that you hold a ladder of target maturity bonds with one expiring every year.  In that way you get access to a tranche of the cash once a year whilst gaining from the higher returns of longer term bonds.without taking on the risk of capital losses with normal bond funds.

The problem for us in the UK is that bond ladders are more difficult to set up than in the US since AFAIK there aren't any target maturity funds available.  Also US government bonds pay significantly higher interest (eg 10 year bonds: US: 1.37%, UK:0.6%).

So at the moment in the UK cash is arguably the least worst option.

As to market timing purchases - if that is what you want to do surely equities provide better opportunities.

pip895

Linton said:

As to market timing purchases - if that is what you want to do surely equities provide better opportunities.

I don't think buying bonds only when they have a half way reasonable yield really counts as market timing though does it?  You are buying a product that promises to give you X% for Y years.  If X isn't a sufficient compensation for inflation and IR risk then don't buy! 

Target maturity bonds only give you the illusion of not loosing you money.   If you are stuck in something for 10 years earning 1% when you could be getting 4% you are suffering real losses.  Being in a bond fund would let you see those losses but after 10 years you would probably have the same amount of money. 

bostonerimus

Linton said:

pip895 said:

bostonerimus said:

it would be good to have a "target maturity" bond fund ladder although the returns would be dismal and they aren't available in the UK yet.

I know you are quite keen on these target maturity bonds, but don’t you loose just as much investing in them if interest rates go up?  

I know you get back the cash amount you put in, but at the end of the day you would be in exactly the same position if you sold out at a loss and bought the better yielding bonds.  They are just something that allows people to think they haven’t lost money when they have. 

For me anything long/med dated (>5year) and yielding <1% seams pretty pointless. I would prefer to sit in cash and wait for better rates - if I’m wrong and rates don’t improve I haven’t missed out on that much!

The idea of target maturity bond funds is that you hold the underlying bonds to maturity.  The value and total return at maturity of bonds is known from the time you buy them.  So you miss out on the potential short term gains and losses, which is rather the point.  Used in this way they operate exactly like fixed rate savings accounts.

What is being proposed is that you hold a ladder of target maturity bonds with one expiring every year.  In that way you get access to a tranche of the cash once a year whilst gaining from the higher returns of longer term bonds.without taking on the risk of capital losses with normal bond funds.

The problem for us in the UK is that bond ladders are more difficult to set up than in the US since AFAIK there aren't any target maturity funds available.  Also US government bonds pay significantly higher interest (eg 10 year bonds: US: 1.37%, UK:0.6%).

So at the moment in the UK cash is arguably the least worst option.

As to market timing purchases - if that is what you want to do surely equities provide better opportunities.

Thanks for giving that explanation. I think it points out the dilemma retirees have when it comes to using fixed income to generate income and that it applies from saving accounts, through bonds and into annuities. 

older_and_no_wiser

This is something I'm really struggling with too (working out a non equity portfolio percentage).

The conventional historic way of investing always included bonds. I will hold my hands up and say that I've been struggling to understand how they work and how I can pick the right ones for my personal circumstances.

Based on my current portfolio and investing into retirement (around 5 years from now), I will have sufficient in the pot to outlast my lifetime by a significant margin. I have no dependants and no desire to leave any legacy. I will be 58(ish) when I retire and will have full state pension (and an inherited property) when I hit 67. 

I plan to use flexi drawdown into retirement. My pension funds currently valued at around £410k with an extra £90k in stock ISAs and £20k in cash savings accounts. I'll be investing another £70k into my pension funds from employment and personal contribution before I retire....and building up further cash savings.

Annual spending in retirement will be around £25k per year. I live fairly modestly and this been calculated based on inflation and allowing me a lifestyle above what I currently have (more holidays, car purchases). I will not have a mortgage in retirement.

My current pension allocation is fairly risky - 95% equities split mainly (£210k) in 2 multi asset funds (HSBC Global dynamic and Blackrock mymap 6 - yes the risky ones!). Then a Fidelity World index tracker (£80k). Finally a few low percentage small cap UK funds, BG American and a Vanguard global small cap index tracker. 

I've taken the above approach due to my circumstances and it's currently paying off. I'm happy to have the higher risk level but I keep doubting myself and thinking I need more bonds in there. What if the markets tank in the next few years? Will bonds give me a safeguard? Do I even need this safety net as I have way more than enough in my pot to outlast me. 

I'm planning on always having 2 years of cash available in retirement to ride out any market crashes. I learnt this from the laddering principal I read in an investment book recently.

I suppose I just need some reassurances that I'm not completely bonkers by virtually ignoring bonds. Maybe I rebalance closer to retirement? I'm not even sure bonds would provide that buffer if the markets dropped 50% over a 2 year period? 

Notepad_Phil

swleventhal said:

I suppose I just need some reassurances that I'm not completely bonkers by virtually ignoring bonds. Maybe I rebalance closer to retirement? I'm not even sure bonds would provide that buffer if the markets dropped 50% over a 2 year period? 

Well I don't think you're completely bonkers as I early retired 4 years ago in my mid fifties and you're not a million miles away from how I've positioned our retirement portfolio. 

The big difference is that we actually have even more cash than you and we will soon be in the happy position of having a couple of small DB pensions (one has good inflation protection, the other is more like a level annuity).

Our portfolio has so far generated enough income for all our needs, so as we've way more cash then we need to get us to state pension age I've started to move some of the income back into 60/40 funds and drawing down the cash instead. These funds contain the sole bonds that we own (apart from a few percent that some of our active funds may hold), the rest is predominantly in worldwide 100% equities (split between active and indexed).

Inflation is of course the big concern for cash, but then again it is for bonds too if governments have to increase base rates to dampen it down. It helps that 99% of our cash is held outside ISA and pension wrappers so I can move our money around to the best rates that I can find.

So far I've been able to beat CPI on our cash since retirement, but I can see that being impossible for the next few years, though I still prefer the risk of inflation on our savings against the risk of base rate increases on bonds. If it looks like inflation is here to stay then I'll look to move even more money back into funds, and who knows, if bonds start to look interesting again then we could think of really upping the amount we have in them.

Sea_Shell

TBH I really don't have a grasp on the non-equity element of our investments.


One of our ISA funds is currently floating around the 60% equities level, but I don't really know much about how the other 40% is made up.

7IM AAP Balanced C Acc (if anyone's interested) - seems to be averaging about 5% growth over last 5 years.


Are you (in the know) basically saying that the only way to "guarantee" what your "40%" is invested in is to do it manually with cash.

So you have 60% of your assets in 100% equity funds, and keep the 40% as cash cash, not "other" within a split fund?

Albermarle

Based on my current portfolio and investing into retirement (around 5 years from now), I will have sufficient in the pot to outlast my lifetime by a significant margin. 

In this case I would not worry too much about asset allocations , but for what it is worth there are a few more options than cash or bonds , although probably no more than 10% in any one .

Gold/precious metals

Infrastructure funds 

Property funds 

older_and_no_wiser

Albermarle said:

Based on my current portfolio and investing into retirement (around 5 years from now), I will have sufficient in the pot to outlast my lifetime by a significant margin. 

In this case I would not worry too much about asset allocations , but for what it is worth there are a few more options than cash or bonds , although probably no more than 10% in any one .

Gold/precious metals

Infrastructure funds 

Property funds 

Thanks for that. I actually also have £10k just recently invested in Loanpad P2P lending platform. This is in their premium account generating 4%. I thought it was a good diversifier and read good things about Loanpad. I may put more in it at some point but realise that it isn't covered by the FCA scheme

AlanP_2

older_and_no_wiser said:

Albermarle said:

Based on my current portfolio and investing into retirement (around 5 years from now), I will have sufficient in the pot to outlast my lifetime by a significant margin. 

In this case I would not worry too much about asset allocations , but for what it is worth there are a few more options than cash or bonds , although probably no more than 10% in any one .

Gold/precious metals

Infrastructure funds 

Property funds 

Thanks for that. I actually also have £10k just recently invested in Loanpad P2P lending platform. This is in their premium account generating 4%. I thought it was a good diversifier and read good things about Loanpad. I may put more in it at some point but realise that it isn't covered by the FCA scheme

I doubt that anyone, ever put money into a P2P company that they read bad things about. The bad things don't get mentioned until there are problems, and even then, people keep quiet so they don't appear naive or stupid.

Be careful, many P2P lenders have run in to problems.

[Deleted User]

“ So far I've been able to beat CPI on our cash since retirement, but I can see that being impossible for the next few years, though I still prefer the risk of inflation on our savings against the risk of base rate increases on bonds.”

I hold fixed income specifically to help through major bear markets. The nice thing about bonds vs cash is that they tend to go up when stocks drop like a stone.  US bonds are particularly helpful in this respect because USD also goes up vs other currencies in a crisis.  Cash does not do that. Of course there is no guarantee bonds wont change their crisis behaviour.