Lars Kroijer - Rational Portfolio and Government Bonds

segovia

I have been reading Investing Demystified by Lars Kroijer and spending sometime on the section about Government Bonds as a low risk investment for a rational portfolio. I can understand the fundamentals as to why its low risk but I am struggling to see the benefits when compared to keeping cash. I was thinking of UK Gov Bond ETF, which will have a basket of UK bonds that expire at different intervals. How do maturing bonds in an ETF generate a yield ? Are expired and cashed in bonds reinvested and therefore my stake in the ETF increases, a bit like dividend reinvestment on Equity ETF's     

[Deleted User]

Some ETFs pay out the income. Others use income to buy more shares/bonds. Proceeds from maturing bonds would typically be used to buy more bonds but not always. ETFs usually sell and replace bonds before they mature.  It does not matter in a tax sheltered portfolio.  The only difference would be to the cost of buying and selling ETF shares that you need to execute and that cost should be very small/insignificant.  Just focus on your total  return. 

Government bonds do have major advantages vs cash.  The main one being positive expected return over the long term (in real terms).  Governments have been manipulating the bond market so right now this may not be the case.

A lot depends on the answer to “why am I holding fixed income?”  If you hold it as a safety cushion to help keep you afloat during a major crisis then government bonds are still better than cash. In a crisis people rush to the safety of gilts and treasuries and interest rates drop so your bonds become more valuable.  Cash just keeps losing value to inflation over time. 

Note that bonds dropped for just a few days in March 2020.  Banks needed liquidity based on recent regulatory requirements. So during that crisis they were forced to sell bonds, the asset which could still generate liquidity.  But it was a short term effect of government regulations. 

bostonerimus

I think the simplest way to include bonds in your portfolio is inside a multi-asset fund. Then you'll get different types and maturities of bonds. Government bonds are seen as a "safe bet" so the returns won't be large and as with any bond fund you'll be exposed to interest rate risk which means that if rates rise the price of your bonds will fall. But if you are investing for the long term and buying more bonds with the income they produce any price falls should work themselves out over the years.

segovia

I am okay at the moment, I have 100% in equities with a GLOBAL ETF. When I move in to drawdown I'll want to be more cautious and reduce my % in equities. Not sure of the ratio yet but form what I have learned so far I'd be reluctant to move more that 30% into bonds. Another option would be BlurChip corporate bond ETF. 

bostonerimus

segovia said:

I am okay at the moment, I have 100% in equities with a GLOBAL ETF. When I move in to drawdown I'll want to be more cautious and reduce my % in equities. Not sure of the ratio yet but form what I have learned so far I'd be reluctant to move more that 30% into bonds. Another option would be BlurChip corporate bond ETF. 

I like the idea of Blue Chip Dividend stocks to fund your retirement as long as you can live with the volatility your pot will experience. But if you can manage on mostly natural yield it's a good solution.

[Deleted User]

Dividend investing is problematic in a couple of areas. 

 TOTAL RETURN VS INCOME INVESTING: SAME, BUT DIFFERENT

In short, focusing on dividends and income produced by your portfolio just doesn’t make any sense. Not only is it essentially the same thing as total return investing, but it can hurt your portfolio. You need to focus on the things that are actually under your control. Focus on taking the right types of risk and diversifying as much as possible. These things get you through retirement, not gimmicks like income investing.

https://www.mcleanam.com/total-return-vs-income-investing-same-but-different/

You should care about meeting your spending goals, not how you get your money out of your portfolio. There’s a lot that you need to manage with your portfolio: the amount of risk in your portfolio, your level of diversification, your asset location, your expenses, and all sorts of other things. The amount of income your portfolio puts out is not one of them.

https://retirementresearcher.com/can-rely-dividends-income/

Audaxer

Deleted_User said:

Dividend investing is problematic in a couple of areas. 

 TOTAL RETURN VS INCOME INVESTING: SAME, BUT DIFFERENT

In short, focusing on dividends and income produced by your portfolio just doesn’t make any sense. Not only is it essentially the same thing as total return investing, but it can hurt your portfolio. You need to focus on the things that are actually under your control. Focus on taking the right types of risk and diversifying as much as possible. These things get you through retirement, not gimmicks like income investing.

https://www.mcleanam.com/total-return-vs-income-investing-same-but-different/

You should care about meeting your spending goals, not how you get your money out of your portfolio. There’s a lot that you need to manage with your portfolio: the amount of risk in your portfolio, your level of diversification, your asset location, your expenses, and all sorts of other things. The amount of income your portfolio puts out is not one of them.

https://retirementresearcher.com/can-rely-dividends-income/

I understand all the arguments against income investing, but for many retirees, having at least part of their portfolio in dividend paying funds or ITs makes sense. Retirees with a regular stream of dividend income from buy and hold ITs, may be less concerned about the volatility of their capital, as no decisions are required as to when is the best time to sell.

[Deleted User]

Audaxer said:

Deleted_User said:

Dividend investing is problematic in a couple of areas. 

 TOTAL RETURN VS INCOME INVESTING: SAME, BUT DIFFERENT

In short, focusing on dividends and income produced by your portfolio just doesn’t make any sense. Not only is it essentially the same thing as total return investing, but it can hurt your portfolio. You need to focus on the things that are actually under your control. Focus on taking the right types of risk and diversifying as much as possible. These things get you through retirement, not gimmicks like income investing.

https://www.mcleanam.com/total-return-vs-income-investing-same-but-different/

You should care about meeting your spending goals, not how you get your money out of your portfolio. There’s a lot that you need to manage with your portfolio: the amount of risk in your portfolio, your level of diversification, your asset location, your expenses, and all sorts of other things. The amount of income your portfolio puts out is not one of them.

https://retirementresearcher.com/can-rely-dividends-income/

I understand all the arguments against income investing, but for many retirees, having at least part of their portfolio in dividend paying funds or ITs makes sense. Retirees with a regular stream of dividend income from buy and hold ITs, may be less concerned about the volatility of their capital, as no decisions are required as to when is the best time to sell.

I am all for dividends. Any property diversified portfolio has lots. Its just that if high dividends become a screening criterion then your long term returns will be hurt for a given level of risk. 

Audaxer

Deleted_User said:

Audaxer said:

Deleted_User said:

Dividend investing is problematic in a couple of areas. 

 TOTAL RETURN VS INCOME INVESTING: SAME, BUT DIFFERENT

In short, focusing on dividends and income produced by your portfolio just doesn’t make any sense. Not only is it essentially the same thing as total return investing, but it can hurt your portfolio. You need to focus on the things that are actually under your control. Focus on taking the right types of risk and diversifying as much as possible. These things get you through retirement, not gimmicks like income investing.

https://www.mcleanam.com/total-return-vs-income-investing-same-but-different/

You should care about meeting your spending goals, not how you get your money out of your portfolio. There’s a lot that you need to manage with your portfolio: the amount of risk in your portfolio, your level of diversification, your asset location, your expenses, and all sorts of other things. The amount of income your portfolio puts out is not one of them.

https://retirementresearcher.com/can-rely-dividends-income/

I understand all the arguments against income investing, but for many retirees, having at least part of their portfolio in dividend paying funds or ITs makes sense. Retirees with a regular stream of dividend income from buy and hold ITs, may be less concerned about the volatility of their capital, as no decisions are required as to when is the best time to sell.

I am all for dividends. Any property diversified portfolio has lots. Its just that if high dividends become a screening criterion then your long term returns will be hurt for a given level of risk. 

I agree you shouldn't just be focusing on high dividend paying funds or ITs. However if someone retired 30 years ago with a portfolio of some of the ITs that have been paying increasing levels of dividends every year for decades, they would have had a regular rising income stream without any hassle. There is however no guarantee that they will be able to continue with increasing dividends over the next 30 years, so I agree a mixed approach is probably best.

Thrugelmir

Audaxer said:

Deleted_User said:

Audaxer said:

Deleted_User said:

Dividend investing is problematic in a couple of areas. 

 TOTAL RETURN VS INCOME INVESTING: SAME, BUT DIFFERENT

In short, focusing on dividends and income produced by your portfolio just doesn’t make any sense. Not only is it essentially the same thing as total return investing, but it can hurt your portfolio. You need to focus on the things that are actually under your control. Focus on taking the right types of risk and diversifying as much as possible. These things get you through retirement, not gimmicks like income investing.

https://www.mcleanam.com/total-return-vs-income-investing-same-but-different/

You should care about meeting your spending goals, not how you get your money out of your portfolio. There’s a lot that you need to manage with your portfolio: the amount of risk in your portfolio, your level of diversification, your asset location, your expenses, and all sorts of other things. The amount of income your portfolio puts out is not one of them.

https://retirementresearcher.com/can-rely-dividends-income/

I understand all the arguments against income investing, but for many retirees, having at least part of their portfolio in dividend paying funds or ITs makes sense. Retirees with a regular stream of dividend income from buy and hold ITs, may be less concerned about the volatility of their capital, as no decisions are required as to when is the best time to sell.

I am all for dividends. Any property diversified portfolio has lots. Its just that if high dividends become a screening criterion then your long term returns will be hurt for a given level of risk. 

I agree you shouldn't just be focusing on high dividend paying funds or ITs. However if someone retired 30 years ago with a portfolio of some of the ITs that have been paying increasing levels of dividends every year for decades, they would have had a regular rising income stream without any hassle. There is however no guarantee that they will be able to continue with increasing dividends over the next 30 years, so I agree a mixed approach is probably best.

30 years ago the costs of investing would have may made this a far less appealing option when compared to annuities.