High yield bonds: equity proxy… for what?

assetallocator

chucknorris said:

...at the moment HYB are 9.5% of my portfolio, but I also have 5.7% in individual bonds which (hopefully) mature next May and August...

Interesting that you hold a mixture of individual bonds, and I assume funds making up the 9.5%? What was it that led you to invest in the individual bonds? Were they issued by companies you had specialist knowledge of and could be reassured wouldn't be at risk of defaulting in a downturn? From what you say, it sounds like you don't hold very many different bonds for diversity. I share your view of holding cash, and don't really like the look of government bonds at the moment, so I'm keen to learn as much as I can about higher yielding corporate bonds.

chucknorris

I liked individual bonds because the price doesn't usually fall if you hold to maturity (of course the other side of that is that you can lose everything), although I will consider myself lucky if the Wasps bond redeems at 100 pence, but I do expect it still to show a decent capital gain (capital gains are tax free on individual bonds). I did not have any specialist knowledge, I did try and read as much as I could about the issues that they were having, but I can't pretend that I knew anything special about their situation. I didn't invest in many bonds because most were priced over 100 pence and their returns were quite low. 

JohnWinder

If the market were fully efficient, then the price of a bond (or its yield) would fully reflect all the information available about it. As a consequence a bond with more risk would yield more than one of lesser risk to a commensurate extent. Were this so, it shouldn’t matter which bonds you choose; except that choosing one only exposes you to 100% loss, whereas choosing 50 exposes you to much less loss. That’s why folk diversify their holdings.
But almost certainly the market is not perfectly efficient, and there are better than market returns to be had if you can exploit that inefficiency.

I did not have any specialist knowledge, I did try and read as much as I could about the issues that they were having, but I can't pretend that I knew anything special about their situation.

That’s an honest person admitting they can’t take any advantage of market inefficiency other than by the luck of the gambler. What does one think of one’s own skills/knowledge/capacity to exploit market inefficiencies?

I share your view of holding cash, and don't really like the look of government bonds at the moment, so I'm keen to learn as much as I can about higher yielding corporate bonds.

If you reduce your low risk investments, like cash and government bonds, and replace them with equities and corporate bonds because you don’t like the returns on the low risk assets, then you’re taking on more risk to get similar returns to those available before government bonds’ yields became so low. Care is needed. The common advice is to take as much risk as you’re comfortable with, and accept the returns that ensue. Your approach sounds like ‘ratchet up the risk until I can get the returns I want’.  But the market can only give market returns, unless you can exploit inefficiencies, so to get more than current low government bond returns you’re taking on more risk.

If that’s your wish, one could argue whether you should go the ‘more equities’ route or go the ‘corporate bonds’ route as either would work by increasing risk and promising better returns. So perhaps the question is: which route can be done at lower cost (trading costs, buy sell spreads, fund fees etc)? One might think that the corporate bond route is lower risk than the equity route, and if the bond market was totally separate from the equity market then there could be a relevant difference. But if anyone can buy equities as easily as corporate bonds, as they can, then both assets are in the same market and there should be no market inefficiencies leading to different risk adjusted returns to exploit, or if there are can you exploit them?

chucknorris

JohnWinder said:

That’s an honest person admitting they can’t take any advantage of market inefficiency other than by the luck of the gambler. What does one think of one’s own skills/knowledge/capacity to exploit market inefficiencies?

It depends on the market, one of the reasons that I moved to London (from Newcastle) in the early 90's was to take advantage of the high yields available from residential property, that was just about the only thing that I invested in at that time (apart from ISA's, known as Pep's and Tessa's at the time). It was after I made quite a bit from property, and every man and his dog also seemed to be getting into property that I started to slowly diversifying into equities, and about 10 years ago much more so. It is only in recent years that I invested in bonds. But I don't have to beat the market, in fact, I should really be looking to avoid risk and preserve my investments, which I am slowly accepting (that is why I would never invest in something like the Wasps bond again). I think my problem is that I do have a tolerance for taking on risk without being uncomfortable, but that doesn't actually suit my financial situation. You could say that in the last few years I have been in denial and carried on behaving if I was still trying to make more, it's a hard habit to break, but I do realise that I need to change my attitude.

aroominyork

chucknorris said:

JohnWinder said:

That’s an honest person admitting they can’t take any advantage of market inefficiency other than by the luck of the gambler. What does one think of one’s own skills/knowledge/capacity to exploit market inefficiencies?

It depends on the market, one of the reasons that I moved to London (from Newcastle) in the early 90's was to take advantage of the high yields available from residential property, that was just about the only thing that I invested in at that time (apart from ISA's, known as Pep's and Tessa's at the time). It was after I made quite a bit from property, and every man and his dog also seemed to be getting into property that I started to slowly diversifying into equities, and about 10 years ago much more so. It is only in recent years that I invested in bonds. But I don't have to beat the market, in fact, I should really be looking to avoid risk and preserve my investments, which I am slowly accepting (that is why I would never invest in something like the Wasps bond again). I think my problem is that I do have a tolerance for taking on risk without being uncomfortable, but that doesn't actually suit my financial situation. You could say that in the last few years I have been in denial and carried on behaving if I was still trying to make more, it's a hard habit to break, but I do realise that I need to change my attitude.

Rich people trying to get off the ladder of being even richer: a predicament many of us would like! Well done on amassing well over £20m!

chucknorris

aroominyork said:

chucknorris said:

JohnWinder said:

That’s an honest person admitting they can’t take any advantage of market inefficiency other than by the luck of the gambler. What does one think of one’s own skills/knowledge/capacity to exploit market inefficiencies?

It depends on the market, one of the reasons that I moved to London (from Newcastle) in the early 90's was to take advantage of the high yields available from residential property, that was just about the only thing that I invested in at that time (apart from ISA's, known as Pep's and Tessa's at the time). It was after I made quite a bit from property, and every man and his dog also seemed to be getting into property that I started to slowly diversifying into equities, and about 10 years ago much more so. It is only in recent years that I invested in bonds. But I don't have to beat the market, in fact, I should really be looking to avoid risk and preserve my investments, which I am slowly accepting (that is why I would never invest in something like the Wasps bond again). I think my problem is that I do have a tolerance for taking on risk without being uncomfortable, but that doesn't actually suit my financial situation. You could say that in the last few years I have been in denial and carried on behaving if I was still trying to make more, it's a hard habit to break, but I do realise that I need to change my attitude.

Rich people trying to get off the ladder of being even richer: a predicament many of us would like! Well done on amassing well over £20m!

I wish it was that much! It's in the £m's but nowhere near £20m, did I post something that implied that much (maybe there is a typo somewhere)? If it was when I said 'well over a 6 figure sum' that was misleading, I meant well over £100k (it was actually £180k). Which give you a clue, my wife also isn't far behind me too, so collectively we are well positioned.

The thing is that what I like doing doesn't cost much i.e. walking/hiking, running, cycling (I do it for fitness not to race, so I am still using a bike that I bought 20 years ago), bowls (indoor and outdoor are both quite inexpensive), chess, holidays are with our dog, so we can't (or won't) go flying off somewhere and leave him.

masonic

chucknorris said:

aroominyork said:

chucknorris said:

JohnWinder said:

That’s an honest person admitting they can’t take any advantage of market inefficiency other than by the luck of the gambler. What does one think of one’s own skills/knowledge/capacity to exploit market inefficiencies?

It depends on the market, one of the reasons that I moved to London (from Newcastle) in the early 90's was to take advantage of the high yields available from residential property, that was just about the only thing that I invested in at that time (apart from ISA's, known as Pep's and Tessa's at the time). It was after I made quite a bit from property, and every man and his dog also seemed to be getting into property that I started to slowly diversifying into equities, and about 10 years ago much more so. It is only in recent years that I invested in bonds. But I don't have to beat the market, in fact, I should really be looking to avoid risk and preserve my investments, which I am slowly accepting (that is why I would never invest in something like the Wasps bond again). I think my problem is that I do have a tolerance for taking on risk without being uncomfortable, but that doesn't actually suit my financial situation. You could say that in the last few years I have been in denial and carried on behaving if I was still trying to make more, it's a hard habit to break, but I do realise that I need to change my attitude.

Rich people trying to get off the ladder of being even richer: a predicament many of us would like! Well done on amassing well over £20m!

I wish it was that much! It's in the £m's but nowhere near £20m, did I post something that implied that much (maybe there is a typo somewhere)?

The linked post stated "I only invested about 0.5% of my portfolio (still a significant well over 6 figure sum..." I did the same maths (£100,000 / 0.005 = £20,000,000) and figured you had quite the property empire at some time!

chucknorris

Ahh there is the typo, it should have been 5% (but it was quite a bit over £100k), thanks I will edit that post

aroominyork

masonic said:

chucknorris said:

aroominyork said:

chucknorris said:

JohnWinder said:

That’s an honest person admitting they can’t take any advantage of market inefficiency other than by the luck of the gambler. What does one think of one’s own skills/knowledge/capacity to exploit market inefficiencies?

It depends on the market, one of the reasons that I moved to London (from Newcastle) in the early 90's was to take advantage of the high yields available from residential property, that was just about the only thing that I invested in at that time (apart from ISA's, known as Pep's and Tessa's at the time). It was after I made quite a bit from property, and every man and his dog also seemed to be getting into property that I started to slowly diversifying into equities, and about 10 years ago much more so. It is only in recent years that I invested in bonds. But I don't have to beat the market, in fact, I should really be looking to avoid risk and preserve my investments, which I am slowly accepting (that is why I would never invest in something like the Wasps bond again). I think my problem is that I do have a tolerance for taking on risk without being uncomfortable, but that doesn't actually suit my financial situation. You could say that in the last few years I have been in denial and carried on behaving if I was still trying to make more, it's a hard habit to break, but I do realise that I need to change my attitude.

Rich people trying to get off the ladder of being even richer: a predicament many of us would like! Well done on amassing well over £20m!

I wish it was that much! It's in the £m's but nowhere near £20m, did I post something that implied that much (maybe there is a typo somewhere)?

The linked post stated "I only invested about 0.5% of my portfolio (still a significant well over 6 figure sum..." I did the same maths (£100,000 / 0.005 = £20,000,000) and figured you had quite the property empire at some time!

chucknorris said:

Ahh there is the typo, it should have been 5% (but it was quite a bit over £100k), thanks I will edit that post

Did you realise it was 5% and not 0.5% when you used the word "only"?

chucknorris

aroominyork said:

masonic said:

chucknorris said:

aroominyork said:

chucknorris said:

JohnWinder said:

That’s an honest person admitting they can’t take any advantage of market inefficiency other than by the luck of the gambler. What does one think of one’s own skills/knowledge/capacity to exploit market inefficiencies?

It depends on the market, one of the reasons that I moved to London (from Newcastle) in the early 90's was to take advantage of the high yields available from residential property, that was just about the only thing that I invested in at that time (apart from ISA's, known as Pep's and Tessa's at the time). It was after I made quite a bit from property, and every man and his dog also seemed to be getting into property that I started to slowly diversifying into equities, and about 10 years ago much more so. It is only in recent years that I invested in bonds. But I don't have to beat the market, in fact, I should really be looking to avoid risk and preserve my investments, which I am slowly accepting (that is why I would never invest in something like the Wasps bond again). I think my problem is that I do have a tolerance for taking on risk without being uncomfortable, but that doesn't actually suit my financial situation. You could say that in the last few years I have been in denial and carried on behaving if I was still trying to make more, it's a hard habit to break, but I do realise that I need to change my attitude.

Rich people trying to get off the ladder of being even richer: a predicament many of us would like! Well done on amassing well over £20m!

I wish it was that much! It's in the £m's but nowhere near £20m, did I post something that implied that much (maybe there is a typo somewhere)?

The linked post stated "I only invested about 0.5% of my portfolio (still a significant well over 6 figure sum..." I did the same maths (£100,000 / 0.005 = £20,000,000) and figured you had quite the property empire at some time!

chucknorris said:

Ahh there is the typo, it should have been 5% (but it was quite a bit over £100k), thanks I will edit that post

Did you realise it was 5% and not 0.5% when you used the word "only"?

What you said doesn't make sense, how could I possibly be aware when it was a typo (think about what you are saying). A typo is something that you are unaware of. But if you mean me being relaxed about the situation, the answer is yes.

Because 5% of my portfolio was very likely to be at risk because the bond of £35m is secured upon a stadium valued at over £50m, so even in the event of a bizarre set of circumstances the actual amount at risk would probably not be any near 5% of the value of my portfolio. Which is why I invested a further significant amount (above my original investment) when the price fell under 40 pence, I thought that was fantastic value. I was very happy to be invested at an average of 59 pence when the bond is secured against an asset valued  at over 50% of the debt, and I am invested more than 40% below the face value (based on security being over 50% of the debt). And not forgetting the running yield being so high too.