Gilts - my unanticipated nightmare

masonic

aroominyork said:

These days, more people than usual think fixed interest does not provide the risk-adjusted returns and diversification of the past and favour, say, 80% equities + 20% cash instead of 75% + 25% fixed interest.

Are those two allocations equivalent in risk? I would have assumed that replacing 25% (government) bonds, you would need greater than 25% cash to achieve the same volatility.

If considering alternative strategies, I like to take a look at what the main actively managed defensive funds and investment trusts are doing, and it seems for them the name of the game today is inflation protection, for which cash is about the worst tool in the armoury.

aroominyork

masonic said:

aroominyork said:

These days, more people than usual think fixed interest does not provide the risk-adjusted returns and diversification of the past and favour, say, 80% equities + 20% cash instead of 75% + 25% fixed interest.

Are those two allocations equivalent in risk? I would have assumed that replacing 25% (government) bonds, you would need greater than 25% cash to achieve the same volatility.

If considering alternative strategies, I like to take a look at what the main actively managed defensive funds and investment trusts are doing, and it seems for them the name of the game today is inflation protection, for which cash is about the worst tool in the armoury.

I meant the equity/cash alternative to give a flavour of how some people are thinking. When the OP asked for fund/cash suggestions I should have made that clear - thanks for picking me up on it.

Yes, there are multiple ways to slice this, including the shiny G word getting a look-in. However I would be cautious about being over-influenced by defensive funds and ITs; even if cash is a good option might they feel they are not earning their 'active' fees by plumping for something that boring? (That is a genuine question, not rhetorical.)

MK62

It does depend on where that cash is though.......with 10yr gilts currently returning iro of 0.9%, there's little inflation protection there either, and money funds are closer to 0%, as are platform cash balances, so if your cash is stuck in a pension (and so is taxable on withdrawal) it seems you have little option........if your cash is outside a pension, however, retail rates on fixed rate savings can fetch up to 2%.......still not full inflation protection, but better (assuming you can't put that cash in the pension and get the 20% tax relief....)

EDIT....added "10yr" in front of gilts, to avoid confusion

masonic

aroominyork said:

Yes, there are multiple ways to slice this, including the shiny G word getting a look-in. However I would be cautious about being over-influenced by defensive funds and ITs; even if cash is a good option might they feel they are not earning their 'active' fees by plumping for something that boring? (That is a genuine question, not rhetorical.)

Yes, I wasn't specifically pointing to the lack of cash holdings in these funds, rather the variants of defensive assets they have chosen to hold as an indicator of what they perceive to be principal risks to mitigate. There is commentary coming from some of these that they will hold cash equivalents if they believe it is warranted, but I wouldn't presume that would happen in practice.

MK62 said:

It does depend on where that cash is though.......with gilts currently returning iro of 0.9%, there's little inflation protection there either, and money funds are closer to 0%, as are platform cash balances, so if your cash is stuck in a pension (and so is taxable on withdrawal) it seems you have little option........if your cash is outside a pension, however, retail rates on fixed rate savings can fetch up to 2%.......still not full inflation protection, but better (assuming you can't put that cash in the pension and get the 20% tax relief....)

This is a good point and my comments so far have been around holding cash equivalents in a pension. I am more of an advocate of holding consumer savings accounts as part of defensive assets as the risk-return is more favourable. That doesn't help the OP however, who needs to decide what to hold in the pension and is averse to putting growth investments there.

MK62

masonic said:

 That doesn't help the OP however, who needs to decide what to hold in the pension and is averse to putting growth investments there.

Fair point......

csgohan4

Diplodicus said:

valiant24 said:

Diplodicus said:

  It's as likely to have lost another 3% in 10 years' time as it is to have recovered its purchase value, isn't it?  

I'm 100% equities (and older than you) but I'm pretty sure the answer to your question is a resounding No. 
Otherwise gilts would not be an investment toted by the industry.

But look on the bright side, valiant24. 
3 or 4 from the IFA chorus line have suggested you employ an IFA. If you avoid hiring one, to "manage" your whole portfolio, you can pretty much guarantee saving £30,000 a year on an ongoing basis.
Good luck.

What's the "IFA Chorus Line"?? ;-)

A bunch of posters distinct from actual IFAs (who may have 100k posts in support of their trade) because

1) They employ IFAs themselves and want to justify their fees.
2) They are DIY investors who like to think themselves more experienced/skillful than "ordinary" posters - as evidenced on this thread - they like to feel superior.
3) They want to keep on the right side of the real IFAs on this board, because they value their free advice. 

So your left with, don't bother posting

This is an open forum and from people from different background and you guessed it different opinions. 
OP is clearly risk adverse and not happy with their glits dropping 4%, you  wonder what their investment strategy then is? especially for their equities

My investments dropped 30% before recovering, it is something I have made peace with, but the OP has their own risk appetite which is different

There is no right opinion

One man's meat is another man's poison

Diplodicus

jamesd said:

valiant24 said:

Diplodicus said:

Nightmare? 

You don't want the sum to go up and breach LTA. So what if it goes down 3% initially?  You're not expecting to "touch this dosh" (a spare£1 million) in any significant way for at least 10 years. I'm struggling to see your problem.

I guess it was the variance that took me aback.   It's as likely to have lost another 3% in 10 years' time as it is to have recovered its purchase value, isn't it?  

No. To think that's possible requires misunderstanding of market expectations.

It's expected that over the next few years interest rates will gradually rise. End point may in ten years be around 5%. What this means is that it is expected that an investment in medium and long term gilts will see continuing falls with occasional blips upwards for the next ten years or more, with the time and magnitude depending on how fast rates rise.

And that's the problem that you have which Diplodicus was struggling to see. While some things are a random walk, when central banks tell you their interest rate intentions, you'd better believe them because they have the power to make them happen. Just when things happen will have lots of variability, but not the long term intention.

Don't bet against the BoE interest rate plans.

That is certainly an eye opener for me, jamesd. For long suffering investors in gilts, I thought the economic circumstances of the next decade may finally be (forgive me) "their chance to shine." But the prospect you paint is quite miserable. Is that the accepted wisdom?  I can see valiant24's problem in that case.



 

Thrugelmir

Diplodicus said:

jamesd said:

valiant24 said:

Diplodicus said:

Nightmare? 

You don't want the sum to go up and breach LTA. So what if it goes down 3% initially?  You're not expecting to "touch this dosh" (a spare£1 million) in any significant way for at least 10 years. I'm struggling to see your problem.

I guess it was the variance that took me aback.   It's as likely to have lost another 3% in 10 years' time as it is to have recovered its purchase value, isn't it?  

No. To think that's possible requires misunderstanding of market expectations.

It's expected that over the next few years interest rates will gradually rise. End point may in ten years be around 5%. What this means is that it is expected that an investment in medium and long term gilts will see continuing falls with occasional blips upwards for the next ten years or more, with the time and magnitude depending on how fast rates rise.

And that's the problem that you have which Diplodicus was struggling to see. While some things are a random walk, when central banks tell you their interest rate intentions, you'd better believe them because they have the power to make them happen. Just when things happen will have lots of variability, but not the long term intention.

Don't bet against the BoE interest rate plans.

That is certainly an eye opener for me, jamesd. For long suffering investors in gilts, I thought the economic circumstances of the next decade may finally be (forgive me) "their chance to shine." But the prospect you paint is quite miserable. Is that the accepted wisdom?  I can see valiant24's problem in that case.



 

In what context are Gilts investors long suffering?  

Diplodicus

Thrugelmir said:

Diplodicus said:

jamesd said:

valiant24 said:

Diplodicus said:

Nightmare? 

You don't want the sum to go up and breach LTA. So what if it goes down 3% initially?  You're not expecting to "touch this dosh" (a spare£1 million) in any significant way for at least 10 years. I'm struggling to see your problem.

I guess it was the variance that took me aback.   It's as likely to have lost another 3% in 10 years' time as it is to have recovered its purchase value, isn't it?  

No. To think that's possible requires misunderstanding of market expectations.

It's expected that over the next few years interest rates will gradually rise. End point may in ten years be around 5%. What this means is that it is expected that an investment in medium and long term gilts will see continuing falls with occasional blips upwards for the next ten years or more, with the time and magnitude depending on how fast rates rise.

And that's the problem that you have which Diplodicus was struggling to see. While some things are a random walk, when central banks tell you their interest rate intentions, you'd better believe them because they have the power to make them happen. Just when things happen will have lots of variability, but not the long term intention.

Don't bet against the BoE interest rate plans.

That is certainly an eye opener for me, jamesd. For long suffering investors in gilts, I thought the economic circumstances of the next decade may finally be (forgive me) "their chance to shine." But the prospect you paint is quite miserable. Is that the accepted wisdom?  I can see valiant24's problem in that case.



 

In what context are Gilts investors long suffering?  

In the context of missing out on this historic bull market, Thrugelmir.

For example VGOV, in which the OP is invested has gone up less than 5% in the last five years.
https://www.justetf.com/uk/etf-profile.html?isin=IE00B42WWV65#chart

VLS60 has appreciated c 43% over the same time period. Even VLS20 is up 20%.

To be fair, though, the last three months have been particularly bad for VGOV. Seems to coincide with the late weakness of £.

Prism

Diplodicus said:

Thrugelmir said:

Diplodicus said:

jamesd said:

valiant24 said:

Diplodicus said:

Nightmare? 

You don't want the sum to go up and breach LTA. So what if it goes down 3% initially?  You're not expecting to "touch this dosh" (a spare£1 million) in any significant way for at least 10 years. I'm struggling to see your problem.

I guess it was the variance that took me aback.   It's as likely to have lost another 3% in 10 years' time as it is to have recovered its purchase value, isn't it?  

No. To think that's possible requires misunderstanding of market expectations.

It's expected that over the next few years interest rates will gradually rise. End point may in ten years be around 5%. What this means is that it is expected that an investment in medium and long term gilts will see continuing falls with occasional blips upwards for the next ten years or more, with the time and magnitude depending on how fast rates rise.

And that's the problem that you have which Diplodicus was struggling to see. While some things are a random walk, when central banks tell you their interest rate intentions, you'd better believe them because they have the power to make them happen. Just when things happen will have lots of variability, but not the long term intention.

Don't bet against the BoE interest rate plans.

That is certainly an eye opener for me, jamesd. For long suffering investors in gilts, I thought the economic circumstances of the next decade may finally be (forgive me) "their chance to shine." But the prospect you paint is quite miserable. Is that the accepted wisdom?  I can see valiant24's problem in that case.



 

In what context are Gilts investors long suffering?  

In the context of missing out on this historic bull market, Thrugelmir.

For example VGOV, in which the OP is invested has gone up less than 5% in the last five years.
https://www.justetf.com/uk/etf-profile.html?isin=IE00B42WWV65#chart

VLS60 has appreciated c 43% over the same time period. Even VLS20 is up 20%.

To be fair, though, the last three months have been particularly bad for VGOV. Seems to coincide with the late weakness of £.

I doubt many would have been solely invested in gilts over the last 5 years, with the exception of some DB pension funds maybe. So VGOV should have been used in the same way that VLS20-80 uses it, which is as a balance to equities. In that regard it has historically done well and provided a small return along the way.

Also if we go back a bit further you will find that gilts easily exceeded the return on equities for many years.