Bonds

jim8888

My understanding was that Bonds were a relatively safe bet in managing your pension and that while you may be happy with an 80% equity 20% bonds split in your forties, you should maybe be looking at a 20% equities 80% bonds split in your sixties.
I keep reading, however, that the bond market is currently tanking and is "losing money". Is this the case for pension "lifestyle" accounts that use an equity/bond mix, or is the bond market something more short term that lies outside of such portfolio management? 

dunstonh

you should maybe be looking at a 20% equities 80% bonds split in your sixties.

Not heard that one before.    That is a very defensive split and lower than the average consumer in retirement.   

I keep reading, however, that the bond market is currently tanking and is "losing money". 

It is worth remembering that a bond crash is a 5% loss.   Unlike an equities crash which is a 20% loss.  So, "tanking" needs to be in some context.  So, whilst gilts have crashed, equities haven't yet (although some industries have the market, in general, has not).

 Is this the case for pension "lifestyle" accounts that use an equity/bond mix, or is the bond market something more short term that lies outside of such portfolio management? 

Lifestyle risk reductions will include gilts and other fixed interest securities and cash.  The objective of lifestyling is not to make more but to lose less in the majority of periods.   Indeed, lifestyling results in lower returns over the period of risk reduction in around three quarters of periods.  It is only better in a quarter.   

Fixed interest securities do poorly in periods when interest rates and/or inflation rise or expected to rise.  We have both currently.

Albermarle

you should maybe be looking at a 20% equities 80% bonds split in your sixties.

If you were looking to buy an annuity at retirement , then 20% equities , reducing to maybe zero by proposed retirement date would be OK.

The other 80% would not be all bonds , probably quite a lot of cash as well.

However if you are looking to drawdown the pot, maybe for 30years + , then something around 50%  equity at retirement would be more typical , or even more .

JohnWinder

Bonds are a pretty safe bet, because a bond is a contract to return exactly however much the government or a company borrowed from the bond owner like you, and to pay some interest which is set in the contract. And a bond fund is just a bunch of bonds, from various bond issuers and with a range of interest rates (a narrow range at present). So when you buy a bond you know exactly how much you’ll get back, and when, and what interest you’ll receive. Between you buying it and you getting your money back, the price of the bond can jump around depending on economic circumstances, but it will always be drawn to its guaranteed return to you value as it gets closer and closer to maturity. So, if you don’t sell when the price falls you can’t lose out; other than your money is tied up in that bond so you can’t afford to buy a newer one paying more interest (if interest rates have risen as they are now).

A bond fund is pretty much the same, except that when a bond matures the fund buys more bonds like that with the money; and if interest rates have risen in the meantime (as they are now), then the fund is buying bonds paying better interest. Isn’t that just exactly what you’d like to happen if you own VLS: for the bond part of VLS to be paying more and more interest as interest rates rise? 

The only disadvantage you might suffer from rising interest rates and falling bond prices, as now, is if you have to sell those bonds within about 8 years of the most recent interest rate rise, and the rate rise is big and/or sudden. But if it puts your mind at rest, you’re unlikely to be selling all of your bonds at once - you’re going to trickle sell them to fund your retirement over 30 years I’m guessing; and, as those decades pass you’re getting all the benefit of the interest rates that have risen.

So, as a bond holder you want interest rates to rise: fast is OK when you’re a while off needing the money, and slower if you’ll need it soon.  And something that’s not obvious, when the central bank raises (the cash) interest rate it has only an indirect effect on the interest rates of bonds lasting 5, 10 or 20 years. Predictions about the economy have a big effect.

Bond fund prices have fallen this year, and certainly it is the same for pension accounts with equities and bonds. And no, the bond market is nothing different.

Fixed interest securities do poorly in periods when interest rates and/or inflation rise or expected to rise.  We have both currently.

True enough, but what is ‘poorly’ and what sort of rises are we talking about. Just to put this in perspective, if interest rates rise slowly/gently one can see almost no loss in value (see accompanying link). ‘As well, when the central bank interest rate rose from 1 to 1.8% in four months in 2004, an ordinary old bond fund rose 2.5% in value.’

https://www.bogleheads.org/forum/viewtopic.php?p=6657139#p6657139

And, "the Fed raised rates." (They raised rates from 1% to 5.25% over about two years, 2004-2006, and bond funds made money anyway).

https://www.bogleheads.org/forum/viewtopic.php?p=6616264#p6616264