40-60% Funds Worried

JohnWinder

backing a 3 legged horse in the grand national, 

That part of you is correct, about the three legged horse. Another part of you should be saying such a horse  would reduce my risk.

One useful way to think of risk is as the uncertainty of an investment earning its average rate of return. Stocks average much better than bonds over the long term, but being riskier, there is more uncertainty of their return in your timeframe or mine. 

A savings account has little risk, so you know it won’t exceed or fall short of its anticipated return. Bonds on the other hand should have a better return, but there’ll be a wider range of end outcomes for you or me because towards the end of our investing period they might get a kick up from deflation or interest rate changes, or a kick down similarly. Stocks by contrast should have an even better return, but with so much annual or 2 yearly volatility you could see a dramatic boost to their ‘final for you’ value, or a fall of 50% - bonds don’t do that.

So risk being uncertainty of final return is about shooting the lights out as much as it is about falling well short of your spending needs; but it’s only the latter that matters to us.

Over 10 year, stocks that return 6%/year (commonly done) will increase your wealth by 92% if you also contribute 1% of the initial amount, year after year (not much). But a 40% drop during the months of year 11 will see you finish up with a return of about 5% more than your total contributions. You put in £110, and finished with £115. That’s the risk with stocks. They don’t get safer with longer periods, they get more hazardous in terms of how much you can lose.  Your bond fund only has to return 0.5%/year with the same contributions to reach £115; that should be easy since it’ll likely return more and bonds don’t exhibit the wide annual rises/falls that stocks do.

Stocks are risky(er) and that can have lifestyle (eating cat food) consequences if your finances are a bit marginal.

JohnWinder

 but once the bonds go down in value in a multi asset fund, is that it, or do they have the possibility to recover and even gain again?

I know you won’t need to ask that again after you look at a chart of the long term performance of a few bond funds!

masonic

ChainsawCharlie said:

Albermarle said:

ChainsawCharlie said:

My predicament at present is this.
I really do want a set it and forget portfolio, where I can chuck all my sipp fund into one global tracker, and leave it.

If say I was to throw everything at say a vanguard VLS 60 then part of me says well 60% will be ok as it is going into equities which will may grow over 10 years...surely, but its that 40% going into bonds that concerns me, in similar measures as backing a 3 legged horse in the grand national, in 10 years time 60% equity makes it to the finishing post, but the 40% bonds, has nowpossibly dragged down the fund 

I have modified your post above. In 10 years anything can happen.

Thanks  point taken, but once the bonds go down in value in a multi asset fund, is that it, or do they have the possibility to recover and even gain again?

Both a government bond and a company share may fluctuate in value - the share more steeply and to a greater extent than a bond. The difference between a government bond and a share is that a share can go to zero and never recover, while a bond will always be repaid in full at the end of its term. If you have confidence in the long term outcome of a basket of shares, then I fail to see your concern about a basket of government bonds going down and not recovering.

masonic

ChainsawCharlie said:

masonic said:

ChainsawCharlie said:

Albermarle said:

ChainsawCharlie said:

My predicament at present is this.
I really do want a set it and forget portfolio, where I can chuck all my sipp fund into one global tracker, and leave it.

If say I was to throw everything at say a vanguard VLS 60 then part of me says well 60% will be ok as it is going into equities which will may grow over 10 years...surely, but its that 40% going into bonds that concerns me, in similar measures as backing a 3 legged horse in the grand national, in 10 years time 60% equity makes it to the finishing post, but the 40% bonds, has nowpossibly dragged down the fund 

I have modified your post above. In 10 years anything can happen.

Thanks  point taken, but once the bonds go down in value in a multi asset fund, is that it, or do they have the possibility to recover and even gain again?

Both a government bond and a company share may fluctuate in value - the share more steeply and to a greater extent than a bond. The difference between a government bond and a share is that a share can go to zero and never recover, while a bond will always be repaid in full at the end of its term. If you have confidence in the long term outcome of a basket of shares, then I fail to see your concern about a basket of government bonds going down and not recovering.

Thanks, so when you say the bond is repaid, how does the bond get paid at the end of the term in a multi asset basket of funds please, so let's say I move away from a multi asset fund in 10 years time for example, and the bonds maturity date is 11 years  what happens then? Also there are lots of bonds all maturing at different times too.

I know.....I'm thick :-(

As a bond approaches maturity, its value moves ever closer to the £100 par price. If it is just a year away from maturity, then it won't be far from that price. In a fund, bonds are continually maturing and being replaced by newly issued ones. The bonds that replace the maturing ones will be based on current rates and will tend to trade close to par initially if they have had their coupon rate set appropriately. The bond will pay a fixed return over its lifetime. It can trade at a discount or premium at different times, so as to pull forward some of its income stream, or push it back, before it finally matures at par with all of its income paid. If you trade bonds, then you could end up buying them at a higher price than you sell them and have an unpredictable outcome. If you buy and hold to maturity, then your return is known. If you hold a bond fund for its average maturity, then gains and losses will tend to even out over the cycle and you will normally get a similar outcome as if you held individual bonds to maturity.

cheerfulcat

To make it really simple, imagine that you loaned me £100. You know that I’m a good risk so you offer me an interest rate close to base rate - say that’s 5% ( you would charge me more if I had a history of defaulting! ). 

I give you an IOU which says that I’ll pay back £100 in 10 years’ time and £5 every year until then. At this point the IOU is valued at £100, and you could sell it for that amount. The buyer would get the £5 annually and the £100 at the end, you’d get £100 now.

Over the next 10 years bank base rates will move up and down - the price of the IOU will move with those rates - if someone with £100 to invest can get 10% on an IOU issued today, they are not going to settle for 5%; the price of the IOU you own will drop until the £5 interest payment represents 10% of the capital. In other words, the IOU can only be sold for £50 now. But I am still a good credit risk, and still solvent, so at the end of 10 years you’ll present me with the IOU and I’ll give you £100.

If you were so inclined ( say you ran an IOU fund ) you might even take my £5 annual payments and lend them back to me at the current rate of 10%.

This is only a broad illustration but might aid understanding?

bostonerimus

ChainsawCharlie said:

bostonerimus said:

ChainsawCharlie said:

My predicament at present is this.
I really do want a set it and forget portfolio, where I can chuck all my sipp fund into one global tracker, and leave it.

If say I was to throw everything at say a vanguard VLS 60 then part of me says well 60% will be ok as it is going into equities which will grow over 10 years...surely, but its that 40% going into bonds that concerns me, in similar measures as backing a 3 legged horse in the grand national, in 10 years time 60% equity makes it to the finishing post, but the 40% bonds, has now dragged down the fund 

I admire your optimism. Think of it like this: you have a highly strung horse with 4 legs that could fall at Valentine's or a 3 legged horse that is very steady and climbs over Valentine's and makes it to the finish. Once again you are prioritizing potential returns and ignoring risk. You want to maximize the possibility of success rather than the potential size of your pot and to do that your finances should be diversified with cash, bonds, stock, a house, maybe an annuity at some point, sensible insurance cover etc.

Thanks, maybe I didnt explain properly, what I mean is, I'm aware Bonds aren't  going to be there to actually make money as such, although it would be nice, but what I don't want them to do is lose me money if I can help it, what worries me is, I started the investment in January when interest rates were low and inflation a little lower, and thought the rot was now set for the bond part of my fund, and because I bought when rates were lower and inflation was lower, I now had a dead horse bond.....or a 3 legged one :-)

Time will be your friend. You were perfectly plain in your explanation of your concerns. Now I hope you can take the collective wisdom of this thread about being patient and staying diversified to manage your portfolio. The bottom line is that 100% equities is risky and it raises the possibility of miserable failure above the possibility of that with a more cautious asset allocation. Let's forget about steeplechasing and rather think about Goldie Locks - you don't want too much of things, you want it "just right".

ChainsawCharlie

Cheers @cheerfulcat, thats a really good explanation, made really clear, and yes @bostonerimus.

Just one final question, to assist my understanding then I'm done.

Let's take one of my Multi Asset Funds
The worst performing one so far

Royal London Sustainable Div C Acc

Its.currently 9.2% down in value, I guess this loss will be all equity at this stage, but if its due to bonds, is that because the value for now on some of the bonds have devalued because there are now bonds with better coupon rates?
Thanks for your patience 

masonic

ChainsawCharlie said:

Royal London Sustainable Div C Acc

That fund looks pretty opaque to me. It lists the top 10 holdings, which as far as I can see are all shares. It does not state what type of fixed interest investments it is holding. Could be mostly corporate bonds, which are not like the government bonds we've been discussing. It seems to be quite a bit higher in risk than the average fund in its 40-60% equities Morningstar category and 20-60% equities IA sector.

ChainsawCharlie

masonic said:

ChainsawCharlie said:

Royal London Sustainable Div C Acc

That fund looks pretty opaque to me. It lists the top 10 holdings, which as far as I can see are all shares. It does not state what type of fixed interest investments it is holding. Could be mostly corporate bonds, which are not like the government bonds we've been discussing. It seems to be quite a bit higher in risk than the average fund in its 40-60% equities category.

Thanks, yes I did notice something like around 70% corporate bonds, they seemed to be reasonable quality aaa bbb etc
Thanks

masonic

ChainsawCharlie said:

masonic said:

ChainsawCharlie said:

Royal London Sustainable Div C Acc

That fund looks pretty opaque to me. It lists the top 10 holdings, which as far as I can see are all shares. It does not state what type of fixed interest investments it is holding. Could be mostly corporate bonds, which are not like the government bonds we've been discussing. It seems to be quite a bit higher in risk than the average fund in its 40-60% equities category.

Thanks, yes I did notice something like around 70% corporate bonds, they seemed to be reasonable quality aaa bbb etc
Thanks

Yes, that would explain it. Worth bearing in mind BBB is just above junk bond status. Not the sort of thing that holds up well in a recession.