20% drop in 6 months.

Audaxer

dunstonh said:

its worth noting that equity drops do tend to recover quickly after most negative periods.  However bond drops tend to take much longer.

So if you were to sell some bond funds that had fallen quite a lot in value to buy more equity that had fallen by a similar percentage, you would have a higher percentage of equity and therefore I think it would be said you are increasing your risk level. However as equities are likely to recover much quicker than bonds, just wondering whether it is that much of a risk in the current climate to increase your equity percentage? 

Linton

dunstonh said:

its worth noting that equity drops do tend to recover quickly after most negative periods.  However bond drops tend to take much longer.

The current bond falls represent the unwinding of the unsustainable rises of the previous 40 years.  So barring panic cuts in interest rates by the developed world's state banks I suggest years rather than weeks for a recovery of medium/long dated bond fund price levels to those reached last year.

barnstar2077

pensionpawn said:

tigerspill said:

The question for me is rather than selling a locking in losses, is whether to buy in more.  We have just inherited some money and trying to work out what to do with it (other than blowing it).
I have been considering a half/half split between CGT and PNL.

Have you heard the phrase "never try to catch a falling knife"? I would never buy on the way down however once growth has re-established I may jump in. So I'll never achieve the minimum price with this strategy however it should minimise further negative cost price averaging. However nothing in life is guaranteed they say, besides death and income tax (unless you live in the middle east).

The "strategy" of trying to predict when markets are on the rise again sounds like the very definition of trying to catch a falling knife to me!

Audaxer

Linton said:

dunstonh said:

its worth noting that equity drops do tend to recover quickly after most negative periods.  However bond drops tend to take much longer.

The current bond falls represent the unwinding of the unsustainable rises of the previous 40 years.  So barring panic cuts in interest rates by the developed world's state banks I suggest years rather than weeks for a recovery of medium/long dated bond fund price levels to those reached last year.

Are medium/long dated bonds are likely to fall further, or are the anticipated interest rate rises already priced in?

dunstonh

 suggest years rather than weeks for a recovery of medium/long dated bond fund price levels to those reached last year.

Potentially a decade or more.   The interest rate cycle can be very very slow.       This drop has occurred 10 years later than predicted by many and the bubble was bigger.

Are medium/long dated bonds are likely to fall further, or are the anticipated interest rate rises already priced in?

I have read that the initial drops factored in rates rising to 2.5% but the more aggressive stance from the US means the later drop factored in 3.5%.        If the expectation is that the rate will go higher then expect more drops.     The strong dollar is making the situation worse for the rest of the world.    Most countries are lagging in their attempts to reduce the rate of inflation and my crystal ball thoughts are that it may go higher but predicting this is impossible as so many unknown events can and will occur that can increase or decrease pressure on interest rates.

you can always look backwards to say why something happened but its impossible to predict what will happen.

Linton

Audaxer said:

Linton said:

dunstonh said:

its worth noting that equity drops do tend to recover quickly after most negative periods.  However bond drops tend to take much longer.

The current bond falls represent the unwinding of the unsustainable rises of the previous 40 years.  So barring panic cuts in interest rates by the developed world's state banks I suggest years rather than weeks for a recovery of medium/long dated bond fund price levels to those reached last year.

Are medium/long dated bonds are likely to fall further, or are the anticipated interest rate rises already priced in?

As I see things....

Bond prices cannot simply represent the market's view of the future as they do with equity because once you have bought the bond its total return at maturity is fixed.  The great majority of bond holders are institutions who are pretty much forced buyers and will largely intend to hold to maturity.  They can pass the effect of high or low interest rates onto their customers eg they can change annuity rates or the cost of insurance.  If you are buying at par and selling at maturity you dont care what the bond market does in the meantime.

For equity you are buying into an unknown future value, for non-dividend payers that is all you are doing.  There will be many views as to the future value driven by rational predictions or pure emotion which will be weighed by the market.

Let's take a freshly issued 10 year bond which you buy at par (£100) with an interest rate of 2%.  In 5 year's time its price will be compared with the 5 year bonds the government is then issuing. If interest rate is 2% the bond will remain at £100.  However in a world where bond prices are steadily rising a 5 year old 10-year bond will be less attractive than a new 5 year bond and so will fall below par.  In this way developed world central banks have the power to move the markets, at least to a limited extent. 

If interest rates continue to rise existing bond prices will continue to fall.  The unknown for bond funds is at what point increased reinvested  interest outweighs the falling capital value.