40-60% Funds Worried

ChainsawCharlie

I am just retired and currently living off cash.

Linton

What are you worried about?

Bond values dropping to zero?

The value of the type of bonds held by VLS60 is not going to drop to zero since the majority are underwritten by the goverments of the worlds largest developed countries. For them to fail the US givernment, the UK government, the Japanese government  etc must have ceased to exist.  In which case. as in all doomsday scenarios, I dont think people's main priority will be their  investments.

Bond values dropping further in the near to medium term future?

This is perfectly possible.  For the past 40 years interest rates have been falling.  This led  to an artificial rise in bond prices since an old bond paying say 5% is far more desirable than a new bond paying 2%.  We reached the point in the past few years when interest rates were close to zero and could not drop significantly more.  Interest rates are now rising.  An old bond paying close to 0% interest is less valuable than a new one paying 2%.  Although they have risen recently interest rates are still historically low and so could well rise further with  a corresponding fall in bond prices.

Bonds will lose money in the long term?

As interest rates rise bond funds will increase in value more by the interest payments.  At some point income from the interest will outweigh the falls in bond values caused by rising interest rates.  So bond funds will recover in perhaps a few years.

So given your timeframe is 10 years or more I cant see you have anything to worry about. In any case your future long term growth will come mainly from equity.  The role of bonds in your portfolio is more to dampen excessive equity volatility.  Holding both bonds and equity provides insurance against major losses should one asset perform poorly.  Just ride the waves.

JohnWinder

Yes, those bonds stay at the same interest rate. Ignore floating bonds at the moment, whose interest rate can be varied, which are very uncommon, and the rest are the bonds we all talk about: guaranteed to pay a specified interest, on specified days several times/year, and to return your principal in full with the last interest payment. That’s the contract the bond represents. You know exactly what you’ll get with a bond.

But then you and I have discussed this before: https://forums.moneysavingexpert.com/discussion/6355093/bonds/p2

https://forums.moneysavingexpert.com/discussion/6356845/60-40mixed-asset-funds/p1

https://forums.moneysavingexpert.com/discussion/6348510/xxxxxcccc#latest

A bond fund holds many different bonds. As they mature the fund manager replaces them with new bonds so as to keep the fund’s characteristics (average maturity, duration, mix of government/corporate etc) as they want them to be. The newly bought bonds will pay more interest than the old ones when interest rates are rising. So if you’re holding your bond fund for a good few years you’d like to see rising interest rates.  The concerns of many people about rising interest rates and harm to bond funds follow from not understanding how bonds work, yet it’s not that difficult. You can get a sense of the time course for a fund buying new bonds in the graphics here: 

And #2, probably, since a lot of equities have fallen in value this year. But you can work it out for yourself. Read what your three funds’ have as their different asset classes eg equities, bonds, cash, gold etc. Then use a website to show how those assets’ values have changed over the period you’re interested in. Portfoliovisualiser is one website, backtest.curvo.eu looks like another. Someone will chime in with better suggestions for your particular funds’ assets.

bostonerimus

If you were all stocks and no bonds you'd be down a lot more right now and if you hold the bonds for a time roughly equal to their average maturity bonds of higher interest rates will compensate for drops in price.

Iain_For

The effective yield to maturity on the predominant bond fund in VLS60 was 3.1% as of April 30 and its average duration 7.3 years. I expect the next published YTM will be higher. Overall VLS60 has an average duration of around 9 years. If that fits with your investment time frame then the bond funds in VLS60 are doing their job.

JohnWinder

Linton said:

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.
One feature of a general gilt index fund is that the maturity dates will be all over the place, on average perhaps 13 years.

Iain_For said:

The effective yield to maturity on the predominant bond fund in VLS60 was 3.1% as of April 30 and its average duration 7.3 years. I expect the next published YTM will be higher. Overall VLS60 has an average duration of around 9 years. If that fits with your investment time frame then the bond funds in VLS60 are doing their job.

The time to maturity date will be longer than the duration, since the maturity date is the date of the last payment you get, while the duration is the average time to each payment (weighted by how much the payment is). And since you get some of your money back during the years leading up to maturity, the average time to get your money back must be less than the time to maturity. But with low interest payments little comes back early, most at the end, so time to maturity and duration don’t vary that much.  I think.
Nice work, folk.

adindas

ChainsawCharlie said:

I am just retired and currently living off cash.

My Sipp portfolio is to be kept untouched for another 10 years maybe longer if both my wife and have state pensions coming in (Both alive to take them)

I have 3 funds in my SIPP portfolio which are 40-60%and causing me concern

Liontrust MA Passive Interm Passive S Acc
£9,325 invested ( Currently down by 4.48% since January)
 
Royal London Sustainable Div C Acc
£9,312 Invested 
( Currently down by 9.27% since January)

Vanguard Lifestrategy 60%
£17,060 Invested ( Currently down by 1.88% since January)

I am really worried about the bonds part of the investment in each of the above funds.

Whilst I am not entirely blaming bonds for the performance to date of these funds, It has got me thinking with what I am seeing and hearing of late, that bonds over the next 10 years are not going to provide adequate returns, I do realise they are not there for making actual returns as such, but currently they are surefire ways to lose money, and my worry is in 10 years time they will have lost a large chunk of each corresponding fund.

£92,000 is my portfolio size pre losses &
When I calculate my 40% of the above 3 funds with Bonds this totals £14,278 invested in the total bond element of my portfolio.

I am truly worried about the future of Bonds in the above 3 funds in my portfolio.

This whole portfolio is for our future fall back cash and wont be required for at least 10 years.

I am hoping someone with way more knowledge than me can offer me some reassurance about bonds in the above funds please.

Thanks

To me I do not own any bond, no intention to own them. I have owned VLS for a few years and it has always been 100% equity. I prefer VLS100%, Index funds, plus hand picks individual stocks.

My Bonds (similar function) are my saving accounts, Regular saving accounts. The advantage of this is it could easily be deployed when you need it.

The bond should be expected to hedge equity during the bear market, in reality they fail especially if you choose the wrong type of bonds.

In the bull market which is the default of the stock market the bond market underperform the equity market by a larger degree, especially if you could pick the right stock, funds .

IMO this is the golden opportunity that you will be missing by keep owing bond, The stock market rallies happened a few times a year especially during the bull market, there is no such rallies similar to the stock market ever happen in the bond market. Bond is just like taking medicine to sooth your nerve but in the long run, it is worse for your financial health.

Albermarle

Vanguard Lifestrategy 60%
£17,060 Invested ( Currently down by 1.88% since January)

VLS 60 is down 7% Year to date, and 5% down since the end of January.

ChainsawCharlie

Albermarle said:

Vanguard Lifestrategy 60%
£17,060 Invested ( Currently down by 1.88% since January)

VLS 60 is down 7% Year to date, and 5% down since the end of January.

Thanks, not sure what I'm doing wrong here, I was looking at the AJ Bell figures which showed the change in fund value based on cost when bought, against current value

ChainsawCharlie

As my portfolio is currently around 16% bonds via my 3 × 60-40%  multi asset funds, 

In order to balance my portfolio with more bonds to rebalance I would like to possibly increase the bond allocation by approx another 15%, does anyone have any suggestions please for a good bond fund  where I can pretty much set it and forget it? 

Iain_For

You could try JustETF’s screener to look at bond ETFs. It allows you to filter by region, country, maturity, currency hedging, corporate/government, etc. Useful starting point even if you then go for OIEC equivalents. Hedged global aggregate bond funds give good general exposure with medium term maturity and a mix of global government and corporate bonds, such a fund is the dominant bond holding in VLS60. Shorter duration funds will have less volatility and lower returns. Not advice, but the bond funds I personally hold in the 70/30 growth part of my overall portfolio are below (for context the other parts are WP and cash). These suit my time frame (10+ years) and goal (balanced growth for a portion of our ISAs to take us into our 70s).

VAGP Vanguard Global Aggregate Bond UCITS ETF GBP Hedged
IGLT iShares Core UK Gilts UCITS ETF

IS15 iShares GBP Corporate Bond 0-5yr UCITS ETF

These are distributing ETFs, there are accumulating versions of some.