Multi Asset 60/40

JohnWinder

Tell us how you think they work, such that they never recover.

dunstonh

Neversurrender said:

ivormonee said:

The concept of 60/40, or indeed any other combination, is in reference to incorporating diversification in a portfolio. For the majority of time in the past, equities and bonds were not that closely correlated. I don't have statistics to hand but genereally equities and bonds didn't always move in the same direction or, if they did, they were by different magnitudes. The idea was always that having a mix of both meant that if one went the wrong way, the other wouldn't, or not by as much, thereby smoothing out returns over time.

In the low interest environment that we've had the correlation between the two increased significantly. So when equities went one way, bonds tended to follow, and vice versa. In the high inflation environment, both have taken a knock. The relative "de-risk" of bonds has failed to hold water; their volatility has increased making them, in theory, a riskier investment.

Taking the argument a step further. If we were to strip out equities entirely and leave our portfolio comprising solely of bonds,or vice versa, what we would be doing is decoupling the diversification elements of our portfolio. We'd be gambling one way or the other which, as in any gambling, could be to our great advantage or disadvantage. That then takes us back to the question of what is best. The answer would have to be that our aim is to smooth out returns over the longer term (which means different timeframes for different people). In order to do this we should stick to our asset allocation.

So whilst, this year, bonds have so far provided poor returns relative to equities on a risk adjusted basis, taking them out would leave a portfolio more exposed to overall risk. If an investor's risk profile was around the 60/40 mark last year then it's likely to remain the same now. I wouldn't be looking to change my asset allocation because of shorter term volatility of one type of asset; that is the whole point of the mix. Some will go down more than others at certain times and there will be other times when they will do better.

I don't like to make any predictions about inflation, interest rates, the world economy or any other factors as that then leads me down the route of market timing which hopefully some of us will have come to realise is a bit of a mug's game. It's what traders do, and the majority of them lose money (but some seem to do very well but I'll leave you to speculate on why that may be). So, if we are to avoid market timing, essentially stripping out the noise, then for the average investor the jist would boil down to deciding an asset allocation strategy and sticking to it through thick and thin, letting the built-in diversification do its job over the longer term.

Thanks very much for your detailed reply, it all makes great sense.

I guess what is worrying me the most is with all the talk of bond performance of late, I was worried that once the bonds in my funds drop, they will never recover, due to the way bonds work.

Performance has happened already.   We don't know what will happen next.

I very much doubt that unit prices on income units will recover to what they were.  We are pretty much back to 1990s unit pricing now and its unlikely that we will see the a drop back to where they were between 2008 and 2021 in our lifetimes. You cannot rule it out but that period gave the lowest rates in 300 years.

However, income yield is now higher.  So, that will go someway to compensate in time.  

Neversurrender

JohnWinder said:

Tell us how you think they work, such that they never recover.

Well I have all my bonds as part of mixed asset funds, HSBC global strategy, VLS 60 for isa's

VLS 80 for SIPP

I have seen these funds drop in value considerably, since I invested in them in Mid January this year, and I keep hearing how bonds are losing heavily due to the interest rate, it concerns me as I dont know if they will go up in value again, in a similar way to the equities in those funds.

OldMusicGuy

Neversurrender said:

Well I have all my bonds as part of mixed asset funds, HSBC global strategy, VLS 60 for isa's

VLS 80 for SIPP

I have seen these funds drop in value considerably, since I invested in them in Mid January this year, and I keep hearing how bonds are losing heavily due to the interest rate, it concerns me as I dont know if they will go up in value again, in a similar way to the equities in those funds.

You might find this article helpful: https://monevator.com/rising-bond-yields-what-happens-to-bonds-when-interest-rates-rise/

I hold HSBC and VLS multi asset funds. I was planning to move to shorter dated bond funds in January but never got round to it. I'm sticking with my current holdings now, accepting I really need to give the bond elements time to recover (which I can do). 

JohnWinder

Thanks. I think I get it, and if you understood it as I do I don’t think you’d worry. Hope I’m right; someone will come along, with gusto, if I’m not.

It’s easiest to picture if you imagine your VLS 60 as two funds, an equity and a bond fund. Let’s try that, and see if what follows applies to the real VLS60.

Your bond fund lost value as interest rates rose. As time passes the bonds in that fund will mature (and the bond fund get £100 for each one) and be replaced by new bonds which now give a higher interest payment (and also cost £100). Don’t you think that’s a win for you; you ditch a poor yielding bond and get a higher yielding one? In the fullness of time, the higher interest payments from those new bonds, which keeps getting reinvested into the fund increases the value of your fund, until the time comes when the current loses from rising interest rates are fully compensated for by this process. From that point on you’re into ‘win’ not ‘lose’ territory with your bond fund. Does that count as ‘going up in value’ as you described it?

Now VLS60: are the new higher bond interest payments going back into the bond fund part of VLS60, or are they going to buy cheap equities because equities have fallen so much that it has drifted to VLS58? I have no idea, but I don’t think it changes the way bond holders benefit from rising interest rates IF THEY HOLD THE BONDS LONG ENOUGH.

Neversurrender

@OldMusicGuy for your input

 And @JohnWinder for your perfect explanation,  after reading all of the above I feel reassured now.

It will be approx 10 years or more before I will be anywhere close to needing any of the investments.

Thankyou :-)

Linton

JohnWinder said:

Thanks. I think I get it, and if you understood it as I do I don’t think you’d worry. Hope I’m right; someone will come along, with gusto, if I’m not.

It’s easiest to picture if you imagine your VLS 60 as two funds, an equity and a bond fund. Let’s try that, and see if what follows applies to the real VLS60.

Your bond fund lost value as interest rates rose. As time passes the bonds in that fund will mature (and the bond fund get £100 for each one) and be replaced by new bonds which now give a higher interest payment (and also cost £100). Don’t you think that’s a win for you; you ditch a poor yielding bond and get a higher yielding one? In the fullness of time, the higher interest payments from those new bonds, which keeps getting reinvested into the fund increases the value of your fund, until the time comes when the current loses from rising interest rates are fully compensated for by this process. From that point on you’re into ‘win’ not ‘lose’ territory with your bond fund. Does that count as ‘going up in value’ as you described it?

Now VLS60: are the new higher bond interest payments going back into the bond fund part of VLS60, or are they going to buy cheap equities because equities have fallen so much that it has drifted to VLS58? I have no idea, but I don’t think it changes the way bond holders benefit from rising interest rates IF THEY HOLD THE BONDS LONG ENOUGH.

 
The "long enough" could be a quite a long time.  If the average time to maturity is say 12 years it will take very roughly that time before half the bonds are replaced.

Neversurrender

The "long enough" could be a quite a long time.  If the average time to maturity is say 12 years it will take very roughly that time before half the bonds are replaced.

I guess in a typical fund consisting of a pool of bond investments, bonds are being bought and maturing all the time

JohnWinder

Half the bonds replaced? Perhaps, but that doesn’t tell me anything about how well the fund will have recovered or how close it is to changing from ‘lose’ to ‘win’. Is there any simple maths for that?
In the meantime, we can talk about bond fund ‘duration’. A fund with a duration of 10 years will take about 10 years to get back up to the level it would have been if the interest rate had not changed, but it will take much less than this to get back up to the level it was at when the interest rate increased. If the bonds in the fund have a maturity of 10 years, then the duration is less than 10 years; the duration is the pound weighted average time it takes to get your principal back. So if interest rates are very low, you get very little back compared to your principal until right up to the day the principal is returned, so duration is close to maturity. But for higher paying bonds, a lot money comes back to you well before maturity date, thus pulling forward the ‘effective day’ that you get an amount equal to your principal back.

Linton

Neversurrender said:

The "long enough" could be a quite a long time.  If the average time to maturity is say 12 years it will take very roughly that time before half the bonds are replaced.

I guess in a typical fund consisting of a pool of bond investments, bonds are being bought and maturing all the time

Most bonds wont be maturing for a number of years.. For some it will be decades.