Gilts - my unanticipated nightmare

masonic

valiant24 said:

Diplodicus said:

Interesting comments. I know very little about the subject but the immediate vulnerability that strikes me is the total reliance on the U.K. 

I’m not an advocate of “balance” nor diversification but, presumably, people include gilts in the portfolio thinking they are spreading risk.

I can't speak for most gilts investors, but my own reason for choosing exclusively UK gilts was to follow the advice of Lars Kroijer and other passive investing advocates that the "minimum risk" asset should be gilts demoninated (where possible) in the currency in which you'll eventually need the money.  This is very different from those same advocates' advice on the equity portion, which is to diversify widely using global trackers.

This is to avoid currency risk, although a currency-hedged global government bond fund will be less volatile, bearing in mind hedging itself carries costs and risks and over the long term performance is similar. Tim Hale suggests 100% short dated index linked gilts for those with the lowest risk tolerance, though at current prices that would lock you in to about RPI-4%. Ideally these would be directly held (as mentioned earlier in the thread) so that their market price was irrelevant and your precise return would be known.

Someone who has a significant proportion in equities and a long investment horizon is not the sort of nervous investor who would necessarily need to hold the minimum risk asset, so could rationally choose to reduce or eliminate bonds from their portfolio. It comes back again to what is purpose of the asset in your portfolio? Volatility reducer? Somewhere to park cash before investing later? Investing money that will be needed in the short-medium term? Just a way to pay less tax by investing in something with no growth potential? Without a rationale you stand little hope of selecting an appropriate solution.

Thrugelmir

valiant24 said:

Diplodicus said:

Interesting comments. I know very little about the subject but the immediate vulnerability that strikes me is the total reliance on the U.K. 

I’m not an advocate of “balance” nor diversification but, presumably, people include gilts in the portfolio thinking they are spreading risk.

I can't speak for most gilts investors, but my own reason for choosing exclusively UK gilts was to follow the advice of Lars Kroijer and other passive investing advocates that the "minimum risk" asset should be gilts demoninated (where possible) in the currency in which you'll eventually need the money.  This is very different from those same advocates' advice on the equity portion, which is to diversify widely using global trackers.

That's the inherent danger with taking something written as being gospel and set in stone. All era's do eventually come to an end. When many people copy the same idea any benefit becomes nullified. The book was originally written in 2013 and the data used precedes this. 

valiant24

masonic said:

 It comes back again to what is purpose of the asset in your portfolio? Volatility reducer? Somewhere to park cash before investing later? Investing money that will be needed in the short-medium term? Just a way to pay less tax by investing in something with no growth potential? Without a rationale you stand little hope of selecting an appropriate solution.

1. I don't want to end up living in a cardboard box because the equities market experienced 1929 levels of loss just when I needed the dosh.

2. I am in the fortunate position I am now through, over 30 years, investing in equities in a set-and-forget manner.  All else being equal I would plough on, accepting rough with smooth.   HOWEVER, the LTA completely distorts the maths.   A SIPP with assets whose value is close to the LTA could be left wholly or largely in equities, but any gains will be taxed ruinously.  So if the upside, because of the LTA, is so miserable, surely much better to lock in its value at or near the LTA, with little prospect of loss in absolute terms?

Diplodicus

masonic said:

valiant24 said:

Diplodicus said:

Interesting comments. I know very little about the subject but the immediate vulnerability that strikes me is the total reliance on the U.K. 

I’m not an advocate of “balance” nor diversification but, presumably, people include gilts in the portfolio thinking they are spreading risk.

I can't speak for most gilts investors, but my own reason for choosing exclusively UK gilts was to follow the advice of Lars Kroijer and other passive investing advocates that the "minimum risk" asset should be gilts demoninated (where possible) in the currency in which you'll eventually need the money.  This is very different from those same advocates' advice on the equity portion, which is to diversify widely using global trackers.

This is to avoid currency risk, 

Well it seems to me quite the opposite, if you look at your fortune holistically. Against the dollar, sterling is 5% down from its post-Brexit high at the start of June. You keep parity with your neighbour but you are poorer in the world. And if economic conditions markedly worsen from here, we can expect to see a flight of money to the dollar. That is what usually happens in a crisis.

Thrugelmir

Diplodicus said:

masonic said:

valiant24 said:

Diplodicus said:

Interesting comments. I know very little about the subject but the immediate vulnerability that strikes me is the total reliance on the U.K. 

I’m not an advocate of “balance” nor diversification but, presumably, people include gilts in the portfolio thinking they are spreading risk.

I can't speak for most gilts investors, but my own reason for choosing exclusively UK gilts was to follow the advice of Lars Kroijer and other passive investing advocates that the "minimum risk" asset should be gilts demoninated (where possible) in the currency in which you'll eventually need the money.  This is very different from those same advocates' advice on the equity portion, which is to diversify widely using global trackers.

This is to avoid currency risk, 

Well it seems to me quite the opposite, if you look at your fortune holistically. Against the dollar, sterling is 5% down from its post-Brexit high at the start of June. You keep parity with your neighbour but you are poorer in the world. And if economic conditions markedly worsen from here, we can expect to see a flight of money to the dollar. That is what usually happens in a crisis.

Perhaps the US will face a crisis?  A softer $ wouldn't come as a surprise to some US market commentators. 

Albermarle

 I am in the fortunate position I am now through, over 30 years, investing in equities in a set-and-forget manner.  All else being equal I would plough on, accepting rough with smooth.   HOWEVER, the LTA completely distorts the maths.   A SIPP with assets whose value is close to the LTA could be left wholly or largely in equities, but any gains will be taxed ruinously.  So if the upside, because of the LTA, is so miserable, surely much better to lock in its value at or near the LTA, with little prospect of loss in absolute terms?

From what I see in other discussions on this , it seems the usual advice in your position is to crystallise the whole SIPP at just under LTA now . Then  make sure all growth is withdrawn as income before the test at 75. In this case you would not pay any LTA tax .

valiant24

Albermarle said:

From what I see in other discussions on this , it seems the usual advice in your position is to crystallise the whole SIPP at just under LTA now . Then  make sure all growth is withdrawn as income before the test at 75. In this case you would not pay any LTA tax .

But ... but ... my poor, feckless kids ...!!!

Diplodicus

Thrugelmir said:

Diplodicus said:

masonic said:

valiant24 said:

Diplodicus said:

Interesting comments. I know very little about the subject but the immediate vulnerability that strikes me is the total reliance on the U.K. 

I’m not an advocate of “balance” nor diversification but, presumably, people include gilts in the portfolio thinking they are spreading risk.

I can't speak for most gilts investors, but my own reason for choosing exclusively UK gilts was to follow the advice of Lars Kroijer and other passive investing advocates that the "minimum risk" asset should be gilts demoninated (where possible) in the currency in which you'll eventually need the money.  This is very different from those same advocates' advice on the equity portion, which is to diversify widely using global trackers.

This is to avoid currency risk, 

Well it seems to me quite the opposite, if you look at your fortune holistically. Against the dollar, sterling is 5% down from its post-Brexit high at the start of June. You keep parity with your neighbour but you are poorer in the world. And if economic conditions markedly worsen from here, we can expect to see a flight of money to the dollar. That is what usually happens in a crisis.

Perhaps the US will face a crisis?  A softer $ wouldn't come as a surprise to some US market commentators. 

Perhaps. But again, if you look at your fortune in the round, your house, salary, state pension etc are already tied to £ valuations.

masonic

Diplodicus said:

masonic said:

valiant24 said:

Diplodicus said:

Interesting comments. I know very little about the subject but the immediate vulnerability that strikes me is the total reliance on the U.K. 

I’m not an advocate of “balance” nor diversification but, presumably, people include gilts in the portfolio thinking they are spreading risk.

I can't speak for most gilts investors, but my own reason for choosing exclusively UK gilts was to follow the advice of Lars Kroijer and other passive investing advocates that the "minimum risk" asset should be gilts demoninated (where possible) in the currency in which you'll eventually need the money.  This is very different from those same advocates' advice on the equity portion, which is to diversify widely using global trackers.

This is to avoid currency risk, 

Well it seems to me quite the opposite, if you look at your fortune holistically. Against the dollar, sterling is 5% down from its post-Brexit high at the start of June. You keep parity with your neighbour but you are poorer in the world. And if economic conditions markedly worsen from here, we can expect to see a flight of money to the dollar. That is what usually happens in a crisis.

I agree that being locked into a devaluing currency is a risk in itself and I am glad I have always had significant exposure to global equities. These days much of our spending is on goods and services primarily valued in other currencies, so I would not be too bothered about unhedged currency exposure personally.

However, your comment about an expectation of a flight of money to the dollar in an economic crisis appears specious. In fact UK gilts outperformed US treasuries during the Covid crash, and underperformed once the recovery was underway. I don't think the relative performance of these assets in such times can be predicted.

Diplodicus

What I know about gilts could be written on the rim of a brandy glass with a crayon but this what happened to cable when covid became a panic:

https://uk.finance.yahoo.com/quote/GBPUSD=X?p=GBPUSD=X&.tsrc=fin-srch