40-60% Funds Worried

masonic

anonmoose said:

I keep reading articles/forum posts saying that 60/40 is no longer relevant going forward. What has changed? 

There have always been people saying such things, about every single investment strategy that has ever existed. Nothing has changed in that respect.

anonmoose said:

Is it because they think inflation and interest rates will be high for a sustained period? With house prices so high a long period of high interest rates would mean many people are no longer able to keep a roof over their head.  Surely that would be avoided at all costs. 

Indeed, there is a limit on how high interest rates can go before we see a large uptick in people evicted from their homes and losing their jobs. Interest rates aren't going to bring down inflation that is driven by supply-side issues, and people aren't going to stop driving their cars, heating their homes or feeding themselves unless they are unable to afford to do so. If a large number of people are put in that position, it is going to get ugly. Meanwhile, inflation is quite capable of coming down all on its own as prices find their new level.

It amazes me that we are teetering on the edge of recession, with a lot of economic angst on the horizon, yet people seem worried about bonds rather than equities.

bostonerimus

anonmoose said:

Thanks Adindas for the explanation.  Funnily enough I was looking at the S&P 500 a few weeks ago and nearly bought some but was put off by an article saying it will drop much further.  It's not as easy as it looks making investment decisions and I think you are right drip feeding is the way to go.  At least it makes it easier to sleep at night if I am only making small mistakes

Stop reading these articles. Drip feed you money into a diversified portfolio of stocks and bonds. You could do far worse than something like VLS60 if you are investing for retirement. If you want some guaranteed gains then spend less, turn down your thermostat, insulate your home, drive slower or better still ride your bike to work and cook more stuff from scratch rather than buying pre-packaged meals or store made cakes and pies etc. Do a budget and see where the biggest savings can be made.

adindas

bostonerimus said:

adindas said:

Warren Buffett Portfolio asset allocation is as follows:

• 90% is in Equities
  
• Only 10% or less Short-Term Treasury Bonds

Many active hedge-fund managers dislike bonds for obvious reason.

But Buffett isn't investing to fund his retirement. If that's what you are doing then a very high equity allocation is ok if you have sources of income like DB pensions and a cash buffer to insulate you from sequence of returns risk and the volatility inherent in an equity heavy portfolio. Right now my equity portfolio is down by double digits YTD, but I don't have to sell or worry about it as I get my retirement income elsewhere.

I definitely agree with this. But why people need to put money in bond if you could get Saving RSA paying higher or similar yield in a short term, more flexible, you could deploy it to equity anytime you want to.

Let alone investing in LT bond if it is well known that Equity will always beat bonds in the Long Run.

Certainly the idea is to always have cash / regular income such as state pension, income from employment so you are not forced to sell it when the price is falling.

Nowadays you could always sell equity quickly when you need cash. But not selling it when they are currently making a loss.

bostonerimus said:

anonmoose said:

Thanks Adindas for the explanation.  Funnily enough I was looking at the S&P 500 a few weeks ago and nearly bought some but was put off by an article saying it will drop much further.  It's not as easy as it looks making investment decisions and I think you are right drip feeding is the way to go.  At least it makes it easier to sleep at night if I am only making small mistakes

Stop reading these articles. Drip feed you money into a diversified portfolio of stocks and bonds. You could do far worse than something like VLS60 if you are investing for retirement. If you want some guaranteed gains then spend less, turn down your thermostat, insulate your home, drive slower or better still ride your bike to work and cook more stuff from scratch rather than buying pre-packaged meals or store made cakes and pies etc. Do a budget and see where the biggest savings can be made.

I definitely agree with this something to do with the very basic principles in investing is never invest the money that you will need in short term, you can not effort to lose. You will only invest in equity if you have regular income, reasonable enough cash for emergency so you will not be forced to sell your equity at a loss.

Albermarle

It amazes me that we are teetering on the edge of recession, with a lot of economic angst on the horizon, yet people seem worried about bonds rather than equities.

It is probably because inexperienced investors are aware of the volatility of stock markets, and accept to a greater or lesser extent that it will go up and down. It's often mentioned in mainstream news bulletins, in tandem with economic and global news stories.

On the other side, bonds going down by double digit percentages has caught many unawares, and produced some anxiety caused by lack of understanding and reading too many articles about 60:40 is dead etc 

anonmoose

Albermarle said:

It amazes me that we are teetering on the edge of recession, with a lot of economic angst on the horizon, yet people seem worried about bonds rather than equities.

It is probably because inexperienced investors are aware of the volatility of stock markets, and accept to a greater or lesser extent that it will go up and down. It's often mentioned in mainstream news bulletins, in tandem with economic and global news stories.

On the other side, bonds going down by double digit percentages has caught many unawares, and produced some anxiety caused by lack of understanding and reading too many articles about 60:40 is dead etc 

It's exactly this.  I grew up with parents who tried (and often failed) to time the market with individual stocks so understood a little about equity volatility.   However the volatility was coming from the place I wasn't expecting with bonds and blindsided me.  I didn't read up about bonds assuming it was a safe bet as it's sold as the less risky option.  Thankfully it has given me an opportunity to learn more about where I am putting my money and I now have a greater understanding.  

And I already do all the stuff you mention Bostonerimus, this is MSE after all.

Linton

masonic said:

anonmoose said:

I keep reading articles/forum posts saying that 60/40 is no longer relevant going forward. What has changed? 

There have always been people saying such things, about every single investment strategy that has ever existed. Nothing has changed in that respect.

anonmoose said:

Is it because they think inflation and interest rates will be high for a sustained period? With house prices so high a long period of high interest rates would mean many people are no longer able to keep a roof over their head.  Surely that would be avoided at all costs. 

Indeed, there is a limit on how high interest rates can go before we see a large uptick in people evicted from their homes and losing their jobs. Interest rates aren't going to bring down inflation that is driven by supply-side issues, and people aren't going to stop driving their cars, heating their homes or feeding themselves unless they are unable to afford to do so. If a large number of people are put in that position, it is going to get ugly. Meanwhile, inflation is quite capable of coming down all on its own as prices find their new level.

It amazes me that we are teetering on the edge of recession, with a lot of economic angst on the horizon, yet people seem worried about bonds rather than equities.

In the past 6 months the FTSE100 (TR) is up around 8%, Vanguard FTSE All World Index is down 4% and Vanguard UK Gilt Index is down 17%.  

This is not what is supposed to happen - the general objective of holding bonds, particularly gilts, is to provide slow and steady return to dampen equity volatility. 

Iain_For

bostonerimus said:

adindas said:

Warren Buffett Portfolio asset allocation is as follows:

• 90% is in Equities
  
• Only 10% or less Short-Term Treasury Bonds

Many active hedge-fund managers dislike bonds for obvious reason.

But Buffett isn't investing to fund his retirement. If that's what you are doing then a very high equity allocation is ok if you have sources of income like DB pensions and a cash buffer to insulate you from sequence of returns risk and the volatility inherent in an equity heavy portfolio. Right now my equity portfolio is down by double digits YTD, but I don't have to sell or worry about it as I get my retirement income elsewhere.

The nature of Buffet’s investing also means he has the advantage of substantial real physical assets to protect his wealth, something us mere mortals don’t have in owning a small percentage of an ETF! Wealth protection looms larger in retirement than it ever does in growing that wealth in the first place IMHO.

masonic

Linton said:

masonic said:

anonmoose said:

I keep reading articles/forum posts saying that 60/40 is no longer relevant going forward. What has changed? 

There have always been people saying such things, about every single investment strategy that has ever existed. Nothing has changed in that respect.

anonmoose said:

Is it because they think inflation and interest rates will be high for a sustained period? With house prices so high a long period of high interest rates would mean many people are no longer able to keep a roof over their head.  Surely that would be avoided at all costs. 

Indeed, there is a limit on how high interest rates can go before we see a large uptick in people evicted from their homes and losing their jobs. Interest rates aren't going to bring down inflation that is driven by supply-side issues, and people aren't going to stop driving their cars, heating their homes or feeding themselves unless they are unable to afford to do so. If a large number of people are put in that position, it is going to get ugly. Meanwhile, inflation is quite capable of coming down all on its own as prices find their new level.

It amazes me that we are teetering on the edge of recession, with a lot of economic angst on the horizon, yet people seem worried about bonds rather than equities.

In the past 6 months the FTSE100 (TR) is up around 8%, Vanguard FTSE All World Index is down 4% and Vanguard UK Gilt Index is down 17%.  

This is not what is supposed to happen - the general objective of holding bonds, particularly gilts, is to provide slow and steady return to dampen equity volatility. 

It may have been unexpected by those who do not understand bonds, but I don't think I'd agree that it wasn't supposed to happen. Gilt prices are intrinsically tied to interest rate expectations. It is well known that falling interest rates cause gilt prices to rise, rising interest rates would cause gilt prices to fall, and that the longest duration gilts would move the farthest. This is based on simple mathematics and is a function of the yield and number of coupon payments remaining. It is fortunate that multi-asset funds don't tend to use the UK gilt index for all of their bond exposure, as its duration is particularly long and yield is particularly low, so rather than see a loss of 17% from that component, they have probably only seen that part of their portfolio fall 10% or so.

If someone invested a lump sum into a long duration bond fund in the late 2010s or in 2020 with a view to cashing them in around now or within the next few years, then that will prove to be a very unfortunate mistake, but one that has resulted from a poor investment decision. For everyone else, the price is not particularly relevant, and for those who have been holding bonds since before the global financial crisis, it merely represents an unwinding of the capital gains they have enjoyed as income was pulled forward in response to a collapse in interest rates.

Novice investors will be much more familiar with fixed term savings accounts, where they lock in a particular rate at the time of purchase. If interest rates rise in the mean time then they are stuck with low returns for the duration. There is no secondary market for fixed term savers, but if there were, they would have to take a loss on a 5-year fix they took out at 1% if they wanted to sell it on at a time when an equivalent offer now pays nearly 3%. With bonds of the investment type, then you do have the choice to either take the low income stream by holding on to the investment, or take the hit up-front by selling it to someone else. A bond fund will spread that between many individual bonds and roll maturing bonds into new ones, but crudely a fund held for a sufficient length of time behaves like individual bonds held to maturity.

One could use the below chart of the 15 year gilt yield (above) and 10 year US treasury (below) to get a feel for the sort of returns you would lock in when buying and holding to maturity at different times. Things have already improved significantly from where we were in 2020.

This is primarily the reason why bonds have been referred for quite a number of years as 'return free risk', as yields were extremely low, and the spectre of predictable capital losses when interest rates rose dominated any consideration of risk. But there's no disputing that we're at the tail end of a black swan event for bonds, however predictable it was. It is probably comparable in rarity to the worst case 70-80% losses suffered in equity markets once in a lifetime.

adindas

JohnWinder said:

  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,

Food for thought but not sure how to evaluate it, particularly without knowing your risk appetite, investing horizon and liquidity needs. And you can’t be 100% equities if you have enough cash to act as bonds, rather than enough cash to buy the milk tomorrow. Any useful backtesting would need to use 99/1 (equities/cash) or 80/20 etc, whatever yours is.
But, bonds are riskier than cash, and so should have better long term returns. I think they have too. But you’ve gone higher in equities than 60/40, so the returns should be better.
Backtesting on portfoliovisualizer over the last ‘few years’ you said, shows your 90/10 and my 60/40 are not that different in returns, but yours is more volatile and had lower risk adjusted returns. Over the last 50 years you’d have lost out to about 0.5%/year in returns.

To not overcomplicated it, you could do like this. If you invest inVLS100% equity and compared to your cash in Saving/RSA percentage with the VLS. But those saving account will need to be reasonably high interest saving accounts.

Say you have in total of $100K

If you have 80% equity (e.g £80k), 20% (e.g £20k) in savings your risk is quite similar to VLS 80/20 (or even lower)

If you have 60% equity, 40% in saving your risk is quite similar to VLS 60/40 (or even lower)

Some of saving is current paying higher than the bond yields. Your risk is lower as in saving you do not get junk corporate bonds which might be part of of the funds which might not be performing well, during the bear market. Keep in mind corporate bond rating is also dictated by the company performance so AAA rating could easily turn to become CCC if they struggle to pay their debts. Reasonably high interest saving is FSCS guaranteed equivalent to AAA in S&P or Moody rating.

About back testing, you could just need to plot the performance of VLS 100/0, 80/20,  60/40,  40/60, 20/80.

But it is the general truth in the long run equity (in fund percentage) always beat bond. So the larger Bond percentage the lower return you will get.

The exception for those who are investing in individual stocks without good knowledge of how to value stock, fundamental, technical analysis, reading regular news. But here is a different game as this is  a high risk/reward play.

masonic

ChainsawCharlie said:

Is the Vanguard FTSE Global All Cap Index £ Acc, almost the use same as the VLS 100, BUT with smaller UK Bias?

I was thinking of Maybe moving away from the VLS 60/40 then having just FTSE Global All Cap Index £ Acc, and a Vanguard Bond Fund

Then I could rebalance myself between Stocks and Bonds, whilst having less UK bias

All-cap also has exposure to smaller companies. There are a couple of choices of FTSE World trackers (including or excluding emerging markets) that could be chosen if that isn't for you.