40-60% Funds Worried

JohnWinder

….many bonds funds I look at are down a lot more than my 100% stock fund.  

I think it’s reasonable to think that 5.4 months of the behaviour of stocks compared to bonds would give you a lot less sense of what the future might be like than comparing their behaviour over 60 years. So try that. Then compare cash returns with bond returns, keeping in mind the bond (funds’) duration(s) and your spending timeframe. You’ll know as much as the rest of us then.

GazzaBloom

JohnWinder said:

….many bonds funds I look at are down a lot more than my 100% stock fund.  

I think it’s reasonable to think that 5.4 months of the behaviour of stocks compared to bonds would give you a lot less sense of what the future might be like than comparing their behaviour over 60 years. So try that. Then compare cash returns with bond returns, keeping in mind the bond (funds’) duration(s) and your spending timeframe. You’ll know as much as the rest of us then.

Fair point but I won't be alive in 60 years! I will look it more closely at the end of the year, that's when I start building the cash/bonds part of my pension.

If I do start buying a bonds fund that leads me to drawdown conundrums and rebalancing. Do you sell stock or bonds when they are both down to top up the short term cash or a bit of both?

Audaxer

GazzaBloom said:

JohnWinder said:

….many bonds funds I look at are down a lot more than my 100% stock fund.  

I think it’s reasonable to think that 5.4 months of the behaviour of stocks compared to bonds would give you a lot less sense of what the future might be like than comparing their behaviour over 60 years. So try that. Then compare cash returns with bond returns, keeping in mind the bond (funds’) duration(s) and your spending timeframe. You’ll know as much as the rest of us then.

Fair point but I won't be alive in 60 years! I will look it more closely at the end of the year, that's when I start building the cash/bonds part of my pension.

If I do start buying a bonds fund that leads me to drawdown conundrums and rebalancing. Do you sell stock or bonds when they are both down to top up the short term cash or a bit of both?

I think the more straightforward way would be to rebalance back to your original portfolio weightings, including cash, maybe once a year. So if you hold 60% stock, 20% bonds and 20% cash, ideally you should always rebalance back to these percentages.

However it is easier said than done as I am retired and wary about buying more bonds at present. Most of my bonds are in multi asset funds and although I am concerned about the bonds element, I intend to leave them alone, as the funds themselves are rebalanced without my input.

masonic

GazzaBloom said:

JohnWinder said:

….many bonds funds I look at are down a lot more than my 100% stock fund.  

I think it’s reasonable to think that 5.4 months of the behaviour of stocks compared to bonds would give you a lot less sense of what the future might be like than comparing their behaviour over 60 years. So try that. Then compare cash returns with bond returns, keeping in mind the bond (funds’) duration(s) and your spending timeframe. You’ll know as much as the rest of us then.

Fair point but I won't be alive in 60 years! I will look it more closely at the end of the year, that's when I start building the cash/bonds part of my pension.

If I do start buying a bonds fund that leads me to drawdown conundrums and rebalancing. Do you sell stock or bonds when they are both down to top up the short term cash or a bit of both?

It is my intention to tilt away from actively managed wealth preservation funds to bonds at some stage, but I am not quite there yet. I'll be keeping an eye on the predictions for the Fed interest rate hikes for the rest of the year and into 2023, and how bond yields compare. Plus whether the inflation story plays out as anticipated. Of course if things go badly and monetary policy is reversed, I may miss out on a low risk bounce, but I can live with that having avoided the recent pain.

I think for your drawdown question, if equities and bonds have fallen by comparable amounts (meaning equities really won't have fallen very far) it would make sense to pull from the equities and maintain your lower risk holdings. If equities fall much further than bonds, then pull down the bonds until you've rebalanced, if things get really bad or go on for a long period of time, that's where the cash saves you from crystallising big losses, at least for a while.

JohnWinder

  Fair point but I won't be alive in 60 years! I will look it more closely at the end of the year, that's when I start building the cash/bonds part of my pension.

A good plan, but I don’t think you’ll get any more help from a year’s worth of bond/stock data than 5.4 month’s worth or 60.6 year’s worth. Their correlations may have changed a bit, but they’re constantly changing. Their returns may have changed but it won’t indicate what future returns will be. Bonds will continue to be contracts to pay interest and return capital, and stocks will continue to distribute distributions to holders. Investors will continue to ask for a risk premium be paid to them for holding stocks instead of bonds, paying less for them given the riskiness of return compared to bonds, and thus increasing their anticipated return. Life will go on in the investing world as it has, except fees might keep falling if we keep the pressure up to push them down.

P933alilli

Linton said:

Collyflower1 said:

Ive just been having a casual scan through the thread as i'm in VLS60. I'm wondering if i have the right/wrong end of the stick. If the bonds part, ie.40% earns a yield of 3.1% per year will that show up as interest sometime in the future? As previously discussed unless a major world disaster unfolds then whatever the amount held in bonds, 40% of the portfolio , thats what you'll get back as the bonds mature in c.9-12 years time....plus 3.1% per annum interest (potentially?) And is this interest compounded? Then hopefully if the market performs, then Bob's your uncle? 

The problem is the asset value.  If you bought the bonds when they were issued and cashed in at maturity you would be right.  However if you buy into a bond fund the one thing that is guaranteed is that you wont be doing either. So if you bought a  6% bond recently it could have cost you perhaps £185 so you are only getting 100/185 X 6= 3.2% on your investment and you will have a  85/185=46%  capital loss should you cash in at maturity.

 Thanks Linton, so when i bought VLS60 in january its a lottery regarding when the bonds were issued and how long they have left until maturity? I just looked on bonds as the safe part of the portfolio! Is the £185 value a recent valuation on any particular bond group or just an example? Do the valuations change daily as for shares?
    46% capital loss seems excessive, can it be recouped...if so, how? On maturity, does any money invested go towards the new bond issues set at £100 so that it becomes dependent on how much is invested , when the money is paid in , the asset value, how long left before maturity etc? 

masonic

Collyflower1 said:

Linton said:

Collyflower1 said:

Ive just been having a casual scan through the thread as i'm in VLS60. I'm wondering if i have the right/wrong end of the stick. If the bonds part, ie.40% earns a yield of 3.1% per year will that show up as interest sometime in the future? As previously discussed unless a major world disaster unfolds then whatever the amount held in bonds, 40% of the portfolio , thats what you'll get back as the bonds mature in c.9-12 years time....plus 3.1% per annum interest (potentially?) And is this interest compounded? Then hopefully if the market performs, then Bob's your uncle? 

The problem is the asset value.  If you bought the bonds when they were issued and cashed in at maturity you would be right.  However if you buy into a bond fund the one thing that is guaranteed is that you wont be doing either. So if you bought a  6% bond recently it could have cost you perhaps £185 so you are only getting 100/185 X 6= 3.2% on your investment and you will have a  85/185=46%  capital loss should you cash in at maturity.

 Thanks Linton, so when i bought VLS60 in january its a lottery regarding when the bonds were issued and how long they have left until maturity? I just looked on bonds as the safe part of the portfolio! Is the £185 value a recent valuation on any particular bond group or just an example? Do the valuations change daily as for shares?
    46% capital loss seems excessive, can it be recouped...if so, how? On maturity, does any money invested go towards the new bond issues set at £100 so that it becomes dependent on how much is invested , when the money is paid in , the asset value, how long left before maturity etc? 

At the point you buy into the fund, you'll be buying all of the bonds it holds at their current valuation. The valuations change in the same way as shares, but in the case of bonds the future income stream is known precisely, so the price is driven by what the market perceived as a fair return. This is based mainly on interest rates, but also other factors, such as what is happening with riskier assets. The fund is continuously replacing maturing bonds with new(ish) issues, which will generally be bought at close to face value. Each bond in the fund will give a known fixed return.

Over the lifetime of the bond, the price and yield will fluctuate, but the total return over the whole lifetime of the bond will not. If you buy and hold a bond fund over the long term, then the fluctuations in price just represent a conversion of income to capital and vice versa. When the price falls, the yield increases, so the income you receive stays the same.

The capital loss/gain is locked in at the time you buy the bonds, and bond funds will publish a YTM value which indicates what overall return you would get if the current portfolio was allowed to run to maturity, which takes any capital loss/gain into account. So, for example (figures are taken from bond indexes in general and not specifically VLS bond holdings), if you bought in January with a YTM of 0.8% and an effective duration of about 10 years, so it approximates to locking in a fixed rate of 0.8% for 10 years. Interest rates are now rising rapidly, the yield is up at around 2% and the price is a little over 10% lower. Effectively some capital is being used to supplement the yield for those holding the bonds today. If you sell, you take a capital loss and you forfeit the enhanced yield. If you hold, it makes very little difference to the situation vs when you bought the fund. Of course buying an investment with a long term 0.8% return in the first place was perhaps not a great deal, hence there was a lot of discussion before interest rates started rising about bonds being return-free risk.

Linton

Collyflower1 said:

Linton said:

Collyflower1 said:

Ive just been having a casual scan through the thread as i'm in VLS60. I'm wondering if i have the right/wrong end of the stick. If the bonds part, ie.40% earns a yield of 3.1% per year will that show up as interest sometime in the future? As previously discussed unless a major world disaster unfolds then whatever the amount held in bonds, 40% of the portfolio , thats what you'll get back as the bonds mature in c.9-12 years time....plus 3.1% per annum interest (potentially?) And is this interest compounded? Then hopefully if the market performs, then Bob's your uncle? 

The problem is the asset value.  If you bought the bonds when they were issued and cashed in at maturity you would be right.  However if you buy into a bond fund the one thing that is guaranteed is that you wont be doing either. So if you bought a  6% bond recently it could have cost you perhaps £185 so you are only getting 100/185 X 6= 3.2% on your investment and you will have a  85/185=46%  capital loss should you cash in at maturity.

 Thanks Linton, so when i bought VLS60 in january its a lottery regarding when the bonds were issued and how long they have left until maturity? I just looked on bonds as the safe part of the portfolio! Is the £185 value a recent valuation on any particular bond group or just an example? Do the valuations change daily as for shares?
    46% capital loss seems excessive, can it be recouped...if so, how? On maturity, does any money invested go towards the new bond issues set at £100 so that it becomes dependent on how much is invested , when the money is paid in , the asset value, how long left before maturity etc? 

Let me give you an example of how it works.  The calculation is over-simplistic so the numbers are not correct but it gives you the idea.

Suppose a year ago you had bought a £100 20-year UK gilt it would have an interest rate of about 0.5% ie you would expect to get your £100 back in 20 years time plus 20X0.005X£100 over the next 20 years:  Total=£110.

Today if you bought a 20 year gilt it would return approx 2.5%.  That would get you £100 +20 X 0.025X100=£1.50 in 20 years time.

If you had to sell last years bond today how much would someone pay for it?  Well, that someone could buy a new one for £100 with £150 back after 20 years.  Your old bond would only give them £10 in interest so you would have to provide the buyer with an extra £40 return (ignoring the interest that has actually been paid).  So you could only sell your bond for £60 making a 40% capital loss, otherwise the potential buyer would be better off buying a new bond.

Of course 1 year old 20 year bonds would only be a very small part of your VLS60 bond holdings.  A shorter duration one would reduce the effect of the increase in interest rates as would a bond bought when interest rates were higher.

If you didnt sell the bond but waited until maturity in 20 years time you would make no capital loss but would have failed to get the then going rate of interest you would have received from the later bond.

P933alilli

Thanks for the replies, i think i understand some of it! So when i buy my fund  what my return will be is dependent on the YTM and that is factored in at the beginning? But because , in funds, the bonds are being sold and bought each year continually to maintain the average duration of the bonds in the fund there is a risk when interest rates rise that the new bond price wont be held long enough to offset any loss made on earlier bonds?  
   My VLS60 will probably be held for c.10 years. I started drip feeding initially, £500 per month, and then i put a lump sum in just before the new tax year cut off in April to use last years allowance. I'm back to drip feeding each month now. I'm wondering if i'll get c.3% YTM or would it probably have been lower in january? Its probably not worth worrying about. I'm reading generally, however, that its better to keep bonds as a hedge against falls in equities. Ive also read about a certain 2x funds duration - 1 rule which will allow you to earn the YTM in a worse case scenario. I'm not sure if this can be applied to the VLS funds, more to specific bond funds?
 Alternatively if i have 70-75% money in fixed rate cash accounts would it be better to have bought VLS100 for a ten year punt?

masonic

Collyflower1 said:

Thanks for the replies, i think i understand some of it! So when i buy my fund  what my return will be is dependent on the YTM and that is factored in at the beginning? But because , in funds, the bonds are being sold and bought each year continually to maintain the average duration of the bonds in the fund there is a risk when interest rates rise that the new bond price wont be held long enough to offset any loss made on earlier bonds?  
   My VLS60 will probably be held for c.10 years. I started drip feeding initially, £500 per month, and then i put a lump sum in just before the new tax year cut off in April to use last years allowance. I'm back to drip feeding each month now. I'm wondering if i'll get c.3% YTM or would it probably have been lower in january? Its probably not worth worrying about. I'm reading generally, however, that its better to keep bonds as a hedge against falls in equities. Ive also read about a certain 2x funds duration - 1 rule which will allow you to earn the YTM in a worse case scenario. I'm not sure if this can be applied to the VLS funds, more to specific bond funds?
 Alternatively if i have 70-75% money in fixed rate cash accounts would it be better to have bought VLS100 for a ten year punt?

You would have got considerably less than a 3% YTM in January, but anything more you buy now will be around that level. Cash and VLS100 would have been a better option then (to be switched into bonds when rates stabilise), but it is much harder to call now. If things go bad in the economy, rates may have to come back down and there will be a bounce in bond prices. Unless rates have to go higher than already planned, then what is coming is largely priced in, and the worst part of the rate hike cycle was those initial hikes that picked interest rates up off the floor.

VLS uses a few different underlying bond funds, so it is those that would need to be analysed.