FT & Vanguard downgrade 60:40 mix.

threlkeld53

I was reading an interesting article a couple of days ago in the Financial Times. The opinion was that it's possible multi asset funds with a 60:40 split may no longer be suitable.
The basis of their opinion seemed to be based on the fact that bonds are just not an advantage to hold. 

As it happens Vanguard have also recently downgraded their forecast of 60:40 for the next decade.

Ok September was a bad month, but is the above a bit of scaremongering? Should people read anything into the opinions of these two institutions?

There are millions of people throughout the world who are invested in multi-asset funds with a 60:40 equity:bond split, especially those in their 60s and older, who are already retired. What would be an alternative? Is selling all 60:40 funds and buying 100% equities through index funds the answer?
It's easy to be spooked when FT and Vanguard make such comments and downgrades. 

dunstonh

The opinion was that it's possible multi asset funds with a 60:40 split may no longer be suitable.

it will be suitable if that is the investment strategy you want.   Most multi-asset funds do not have a rigid equity content and adapt depding on economic data and where we are in the cycle.    A rigid 60% equity cant do that.

The basis of their opinion seemed to be based on the fact that bonds are just not an advantage to hold.

In growth markets, bonds are never an advantage to hold.  In falling markets, they are as they fall less and the reduced volatility is the reason people hold them.  Most consumers cannot handle a 40% loss on the investments.

As it happens Vanguard have also recently downgraded their forecast of 60:40 for the next decade.

Most have downgraded expectations on fixed interest securities.

but is the above a bit of scaremongering?

There is no scaremongering.   The expectation is that fixed interest securities will enter the next phase in their cycle (or perhaps already have).   Returns in the last decade have been far higher than the long term average and for pretty obvious reasons.  Those reasons are not going to be there in the decade ahead.

Should people read anything into the opinions of these two institutions?

Its not just those two. Its pretty much everybody. 

There are millions of people throughout the world who are invested in multi-asset funds with a 60:40 equity:bond split, especially those in their 60s and older, who are already retired.

The 60/40 equity bond split is actually not that common outside of Vanguard.   As I said above, the majority of multi-asset funds are more fluid in their allocation splits.

Is selling all 60:40 funds and buying 100% equities through index funds the answer?

It is only the answer if you can handle the volatility and losses of 100% equity. If you can, then what were you doing in a 60% equity fund in the first place?

If you cant then its not the answer.

csgohan4

At this time, bonds seem to be out of favour and underperforming for their role. 

What I am seeing is wealth preservation funds coming into play and they have had a good track record over the years, even during economic stress. 

Personal preference and risk appetite. Some people put their money in Gold/Krugerands e.t.c as well

As I am far from retirement, I am 100% equities and don't see Bonds in my strategy at this time. If I were to de risk my portfolio, I would probably put some into WP and Income funds if i was doing that now. In 30 years who knows

MK62

If currently held I wouldn't necessarily sell out ......whether any new purchases make sense is debatable, and pretty contentious tbh.
With buying govt bonds atm, you know you are going to be losing a little money in real terms (ie after inflation).......but with equities you don't know anything....you might make a bit or a lot, or lose a bit or a lot.......if equities lose eg 20%, then losing eg 2% on your bonds might suddenly seem a good return.

PS....govt bonds are not the only type of bonds though....

Linton

People on these forums have been saying for months if not years that safe government bonds such as UK Gilts are no longer as appropriate as previously for the purpose that most investors buy them.

Since the Great Crash government bonds have been increasing in price significantly as interest rates fall .  This is unsustainable because when they mature they are redeemed for the same £100 they originally cost and now interest rates are very close to zero so cant fall much more.

There is no completely satisfactory alternative.  Perhaps 70/30 equity/cash rather than 60/40 equity/bonds may partly do the job.  However if you are a hands-off investor with limited experience, ie the sort of investor for whom multi-asset funds are intended, then in my view you probably should continue investing as you have been.  If you stay with high/medium % equity VLS I believe there will be somewhat lower overall returns than would otherwise be the case but the problem with safe bonds should not cause a catastrophe.

Some multi-asset funds, unlike the VLS series, change their allocations to keep the risk level constant.  For example L&Gs multi index fund closest to 60:40 appears to be holding significant cash or close to cash, higher risk bonds, more niche investments such as forestry and infrastructure but a low % (if any) Gilts.

csgohan4

Linton said:

People on these forums have been saying for months if not years that safe government bonds such as UK Gilts are no longer as appropriate as previously for the purpose that most investors buy them.

Since the Great Crash government bonds have been increasing in price significantly as interest rates fall .  This is unsustainable because when they mature they are redeemed for the same £100 they originally cost and now interest rates are very close to zero so cant fall much more.

There is no completely satisfactory alternative.  Perhaps 70/30 equity/cash rather than 60/40 equity/bonds may partly do the job.  However if you are a hands-off investor with limited experience, ie the sort of investor for whom multi-asset funds are intended, then in my view you probably should continue investing as you have been.  If you stay with high/medium % equity VLS I believe there will be somewhat lower overall returns than would otherwise be the case but the problem with safe bonds should not cause a catastrophe.

Some multi-asset funds, unlike the VLS series, change their allocations to keep the risk level constant.  For example L&Gs multi index fund closest to 60:40 appears to be holding significant cash or close to cash, higher risk bonds, more niche investments such as forestry and infrastructure but a low % (if any) Gilts.

Would WP be something you will still do, in conjunction with income and equity ?

Thrugelmir

threlkeld53 said:

It's easy to be spooked when FT and Vanguard make such comments and downgrades. 

Investing comes with risk. Doing as much research and due diligence before dipping your toe in the water is always worthwhile. Always least gain a basic understanding of what you are investing in. Very easy to make an instinctive decision quickly. There's no shortage of articles or discussions on Government bonds online if you patiently trawl away.  Once you comprehend the principles you'll understand the current negative stance. 

Linton

csgohan4 said:

Linton said:

People on these forums have been saying for months if not years that safe government bonds such as UK Gilts are no longer as appropriate as previously for the purpose that most investors buy them.

Since the Great Crash government bonds have been increasing in price significantly as interest rates fall .  This is unsustainable because when they mature they are redeemed for the same £100 they originally cost and now interest rates are very close to zero so cant fall much more.

There is no completely satisfactory alternative.  Perhaps 70/30 equity/cash rather than 60/40 equity/bonds may partly do the job.  However if you are a hands-off investor with limited experience, ie the sort of investor for whom multi-asset funds are intended, then in my view you probably should continue investing as you have been.  If you stay with high/medium % equity VLS I believe there will be somewhat lower overall returns than would otherwise be the case but the problem with safe bonds should not cause a catastrophe.

Some multi-asset funds, unlike the VLS series, change their allocations to keep the risk level constant.  For example L&Gs multi index fund closest to 60:40 appears to be holding significant cash or close to cash, higher risk bonds, more niche investments such as forestry and infrastructure but a low % (if any) Gilts.

Would WP be something you will still do, in conjunction with income and equity ?

I still maintain separate Equity Income and Wealth Preservation portfolios and cash.  According to morningstar the WP portfolio is approx:

25% equity 
22% inflation linked bonds (I think it's mainly US TIPs)
9% government bonds (probably not much UK government)
15% corporate bonds
12% cash
plus some "other"

So the bond component is very different to a standard bond allocation you would find in a multi-asset fund.  I am more than happy to let the funds manage global bond allocations as its far beyond my knowledge to come up with something meaningful.

Looking at the performance of my current portfolio and VLS20 which is fairly close in broad allocations I see over 10 years the WP portfolio has outperformed VLS20 by a small amount with a lower volatility.  Looking at the past 5 years discrete data VLS20 returns varied between 0.1% and 11.2% in individual years.  The WP portfolio figures show a minimum of  1.8% and a maximum of 8.9%.

However I dont think my allocations are that relevent to a discussion of bonds in multi-asset funds since my objectives are very different to most multi-asset fund investors.  I am after safety in the medium term specifically for the WP assets rather than generally damping volatility in a broader portfolio.

csgohan4

Linton said:

csgohan4 said:

Linton said:

People on these forums have been saying for months if not years that safe government bonds such as UK Gilts are no longer as appropriate as previously for the purpose that most investors buy them.

Since the Great Crash government bonds have been increasing in price significantly as interest rates fall .  This is unsustainable because when they mature they are redeemed for the same £100 they originally cost and now interest rates are very close to zero so cant fall much more.

There is no completely satisfactory alternative.  Perhaps 70/30 equity/cash rather than 60/40 equity/bonds may partly do the job.  However if you are a hands-off investor with limited experience, ie the sort of investor for whom multi-asset funds are intended, then in my view you probably should continue investing as you have been.  If you stay with high/medium % equity VLS I believe there will be somewhat lower overall returns than would otherwise be the case but the problem with safe bonds should not cause a catastrophe.

Some multi-asset funds, unlike the VLS series, change their allocations to keep the risk level constant.  For example L&Gs multi index fund closest to 60:40 appears to be holding significant cash or close to cash, higher risk bonds, more niche investments such as forestry and infrastructure but a low % (if any) Gilts.

Would WP be something you will still do, in conjunction with income and equity ?

I still maintain separate Equity Income and Wealth Preservation portfolios and cash.  According to morningstar the WP portfolio is approx:

25% equity 
22% inflation linked bonds (I think it's mainly US TIPs)
9% government bonds (probably not much UK government)
15% corporate bonds
12% cash
plus some "other"

So the bond component is very different to a standard bond allocation you would find in a multi-asset fund.  I am more than happy to let the funds manage global bond allocations as its far beyond my knowledge to come up with something meaningful.

Looking at the performance of my current portfolio and VLS20 which is fairly close in broad allocations I see over 10 years the WP portfolio has outperformed VLS20 by a small amount with a lower volatility.  Looking at the past 5 years discrete data VLS20 returns varied between 0.1% and 11.2% in individual years.  The WP portfolio figures show a minimum of  1.8% and a maximum of 8.9%.

However I dont think my allocations are that relevent to a discussion of bonds in multi-asset funds since my objectives are very different to most multi-asset fund investors.  I am after safety in the medium term specifically for the WP assets rather than generally damping volatility in a broader portfolio.

Interesting to include 15% corp bonds, volatile from my understanding.

Either way your previous allocation of equity, income and WP seems a reasonable strategy come retirement, I would put 1/5 in equity, 2/5 Income and WP


but in 30 years time who knows what will happen, maybe bonds will come back in favour alot more. 

ranciduk

Hmm

i recently made my first step into investing and went with the LS60 fund as it’s seemed the best option for me

I’m hoping for half decent returns over the next 5 years - nothing brilliant, just a nice return , I’m not greedy

reading the above is making me think I might have made a mistake?!

Thrugelmir

ranciduk said:

Hmm

i recently made my first step into investing and went with the LS60 fund as it’s seemed the best option for me

I’m hoping for half decent returns over the next 5 years - nothing brilliant, just a nice return , I’m not greedy

reading the above is making me think I might have made a mistake?!

What research did you undertake before selecting this investment?  Why did you consider it the best option? 

I always find writing down the pros and cons of a particular investment on a piece of paper helpfull. Helps focus ones attention.