Bonds Bonds Bonds

Dh6

Hi all, I know there’s another thread running on bonds currently but my situation is slightly different and I’d like some thoughts from you knowledgeable folk on here please. 

I’m mid thirties and I’m currently 100% equities across my LISA, SIPP and S&S isa.

As I’m approaching six figures in my portfolio I’m looking to introduce bonds into the mix. I’m looking achieve a 90% equities 10% bonds ratio to begin with. At this level I understand I’m not de-risking much but it’ll give me some re- balancing opportunities and obviously I’ll increase the equities to bonds ratio in the coming years.

Im looking to implement the Lars Kroijer strategy and I’m currently using HSBC FTSE all world global tracker as my equities exposure.  I’d like some help with my minimal risk exposure which according to Lars should be in UK GILTS. 

My issue is I don’t know which GILTS. Do I go for a GILT index fund, short duration GILTS, medium or long duration GILTS??

My time frame to start accessing the money I’m currently drip feeding monthly into my investments will be 13-15 years.

Do I forget about bonds and simply use cash savings which will obviously be exposed to inflation. I can’t justify holding cash for 13-15 years, surely??

Any information would be gratefully received.

Kinds regards DH

masonic

All assets are exposed to inflation. A gilt index fund will have a long duration, so will be very sensitive to interest rate changes. Expected rate rises are priced into gilts, but if rates go higher than anticipated, then they would continue to fall in value. A short or medium dated fund will be less sensitive, but will have a lower yield. A hedged global bond fund is an alternative option, which would give you a lower index duration, a higher yield, and lower volatility. All options should be compared with cash savings, since there is no point taking on risk for the same or worse expected return.

If you intend to gradually building up a position in bonds, then the current situation is not so important, as your future contributions will buy you better value if your early contributions end up falling in price.

dunstonh

90:10 is barely worth the effort unless you intend using high yield bonds.

Remember that you invest in bonds (other than HYB) to reduce volatility in the short term knowing that it will almost certainly reduce returns in the long term.  A 10% reduction is dipping your toe rather than doing anything effective.

I’d like some help with my minimal risk exposure which according to Lars should be in UK GILTS.

My issue is I don’t know which GILTS. Do I go for a GILT index fund, short duration GILTS, medium or long duration GILTS??

And that is the problem with following a strategy you don't really understand.  You would invest in a general gilt fund and not have a specific focus.  Even if it's the wrong time to invest in certain types of gilts because that is the strategy you are following with Lars.

My time frame to start accessing the money I’m currently drip feeding monthly into my investments will be 13-15 years.

Accessing it in what way? 100% withdrawal in 13-15 years or smaller frequent draws (such as income)?

Do I forget about bonds and simply use cash savings which will obviously be exposed to inflation. I can’t justify holding cash for 13-15 years, surely??

Everyone needs some cash put aside.  If 10% of your investments is cash then many would argue that it is too low and you should be holding more cash. 

If you plan to follow lars then you wouldn't care about short term issues or how markets change.  You would invest blindly that way.

Linton

I would be very wary about following any self-proclaimed guru too closely on anything, particularly bonds.  The point is that different bonds, even different gilts, behave in different ways.  You need to choose a set that is appropriate to your needs, not what Lars thinks they should be.

In the ideal world if you are using gilts to provide extra safety their maturity dates should tie in with when you need the cash.  If the maturity date is significantly later than your need you could see sufficient volatility to compromise your safety requirement.   On the other hand short dated bonds are close to cash.

One feature of a general gilt index fund is that the maturity dates will be all over the place, on average perhaps 13 years.  That may sound like what you want, but the downside is that in 13 years time the average maturity will still be 13 years further oon which you certainly dont want.  Unfortunately in the UK there dont seem to be any finely tuned date-targetted bond funds, in fact from a quick look I couldn't find a medium term gilt fund at all, just long and short.

So what to do?  My solution for the problem of controlling medium term volatility is to use Wealth Preservation funds.  However if you want to use gilts I think you need to be looking at medium term ones, possibly switching to short term or cash when you are closer to taking the money.

JohnWinder

If you plan to follow lars then you wouldn't care about short term issues or how markets change.  You would invest blindly that way.

Harsh but fair, or just fairly harsh?

I don’t know how to make this brief AND comprehensible, but could you trawl back over the last few weeks of posts about bonds, not just in one thread, pick up an understanding and let us know what you think are the relevant aspects to bond investing?

Duration is important when your spending horizon is quite a bit shorter than the bonds’ duration. Bond funds comprise bonds, but they behave a bit differently because bonds’ durations are always falling but bond funds’ aren’t. That’sinterest rate risk.

Default risk the other one to consider, and lastly inflation protected or nominal.

in fact from a quick look I couldn't find a medium term gilt fund at all, just long and short.

A way around that would be to hold long and short in the proportions that give the ‘length’ you want. Not suggesting it.

Dh6

Some excellent food for though straight away, thanks Masonic and Dunstonh.

I’ll try and answer the points but I’m unsure how to use the quote function.

I do intend to drip feed around £3-400 into a minimal risk asset monthly over the next decade or so, increasing with time into cash or bonds.

I accept your point dunstonh about dipping my toe in, I’m doing my research currently on which is the best way to do this!

Id be happy ( I think ) to invest in a general gilt fund as I accept I’ve no knowledge on what will happen in the future, as per the Kroijer philosophy.

Yes I’m looking to sell this portion of my portfolio to cash in around 13-15 years to realise my early retirement spending ( all being well ) 

I’m working and have got a cash buffer and wages going forward to cover my outgoings and investments so my portfolio will only need to be accessed upon retirement or going part time.

 Your last point about investing blindly is kind of where I’m at but I’d phrase it as accepting market returns and not claiming to know anything that others don’t with regards to my investments.

kind regards DH

Albermarle

I’m mid thirties and I’m currently 100% equities across my LISA, SIPP and S&S isa.

My time frame to start accessing the money I’m currently drip feeding monthly into my investments will be 13-15 years.

As I am sure you are aware you will not be able to access the SIPP for more than 20 years, and the LISA for more than 25 years ( without a large penalty) 

Dh6

I am yes, my SIPP “should” be accessible at 55 but I’m not banking on it.

Im talking about starting to draw on my investments in my S&S isa in 13-15 
years.

 Thanks DH

JohnWinder

One feature of a general gilt index fund is that the maturity dates will be …, on average perhaps 13 years.  That may sound like what you want, but the downside is that in 13 years time the average maturity will still be 13 years further oon which you certainly dont want. 

Perhaps it’s just what we want. We now know the OP is aged 35, wants to start withdrawing at 50, and hints at spending this bond money over several years. That makes the ‘duration’ of her spending 15 + about 3 yrs ie 18 years. A bond fund with a duration of 13 years is not crazy stupid now (quite the opposite, as noted above) and in 10 or so years could be progressively turned into cash or some other short duration fixed income option.

ChilliBob

The Lars book was my first reading around this subject, and before I was even invested. Its drummed the passive perspective into me but I still haven't really deviated from 100% equities and cash, apart from some sort of minor exposure via some multi asset funds.

There's other non equity choices though besides bonds, such as infrastructure and real estate. 

Obviously there's others too like commodities and PE but if the goal is to reduce volatility I think both of those would be a bad idea!

Personally I have emergency fund and then a decent chunk of cash at the moment in addition to the near 100% equities. I did dip my toe in via L&G infra index, but if I'm honest with myself it's too small a position to really make any difference - besides seeing a tiny flicker of green when there's lots of red!

Helpful? Probably not, just thought I'd chip in. Y thoughts!

Essentially a heck of a lot has changed since Lars wrote the book. Especially the relationship between bonds and equities 

dunstonh

I am yes, my SIPP “should” be accessible at 55 but I’m not banking on it.

The minimum age is going to 57 and the plan is to maintain 10 years less than state pension age.