Bond Funds & what to do about 'em

Bimbly

In January 2019, I started putting some of my pension contributions into bond funds as part of a gradual de-risking strategy. I later decided this was not what I wanted to do as I'm also paying into a DB pension and I already had some low risk assets. So I stopped paying into bonds in March 2021 and let them sit there because, I figured, some bonds were not such a bad thing.

They are currently worth about 5% of my 68k pot (2.5% UK gilts, 2.4% corporate bonds).

Well, of course, their value has dropped. My UK gilts are worth 18% less than I paid for them, and the corporate bonds 11% loss. (That's an all time loss, as this is what Aviva displays to users, not a year by year up and down).

My instinct is to kind of leave them alone and allow them to pick up while they do their job of being an alternative to equities. And yet, I rather wish they weren't part of my portfolio.

I don't even know if they're likely to pick up after quantum easing et al. Even before this drop, they didn't really do much - I seem to recall they were worth about £100 more than I paid for them. Selling them to buy equities will crystallise the loss and that feels uncomfortable. Yet, if equity prices aren't too bad, I could accept the loss, buy equities and - in theory - by the time the bond funds pick up, the equities could have picked up even more. Drip feeding from the bond funds into an equity fund is an option I'm more inclined towards.

No crystal ball, obviously, but I wonder what's the general feeling on the future of bonds, particularly with regard to their value at the time I purchased them.

At the moment, Aviva pays interest on cash at the Bank of England base rate (with no charges, as far as I can work out), so that money actually might be better off in cash earning 3% if I wanted a low risk option (albeit, much lower than inflation).

This comes as I discover that my Aviva work scheme has finally introduced an all global index tracker as a possible investment (previously, they only had world ex-uk, uk & emerging markets separately). So this is what I'm likely to use in the future. It's BlackRock MSCI World Index (Non-Hedged) - there's also a hedged version. I wish this had been there before. For an individual without a fortune, one fund is a lot easier to manage - but that's for another post.

Marcon

'Diversifying your assets' remains a pretty sound approach, depending on your attitude to risk, particularly where someone is making decisions without professional advice (i.e. the majority of people). If the bonds are only 5% of your portfolio - around £3,400 -  it's probably not worth getting too fussed about what you do or don't do with them. As you say, why crystallise the loss?

JohnWinder

Perhaps have a read of this article on bonds, recently written: https://www.evidenceinvestor.com/should-you-still-invest-in-bonds/

Albermarle

Those funds should have improved recently, and hopefully this will continue, albeit pretty slowly.

Linton

Sadly I do not see gilt bond funds recovering in the short/medium term as the falls represent paying back excess capital gain returns during the period of very low interest rates. However that is water under the bridge.  From now on, in my view,  they should perform the derisking/diversification role rather better than before.

Corporate bonds are rather different, but tbh I do not see them as being of much benefit to the long term investor drip feeding contributions in the accumulation phase as they provide less diversification/derisking from equity than gilts.  You may as well put the money into equity.

However, from the size of your pension pot I assume you are some way from retirement so why do you need bonds at all?  Only 5% of the total is not going to make much difference anyway.

[Deleted User]

My instinct is to kind of leave them alone and allow them to pick up while they do their job of being an alternative to equities. And yet, I rather wish they weren't part of my portfolio.

You answered your own question.

Like you said, people are psychologically averse to “crystallizing losses”.  Our brains are wired to expect patterns.  Hence the logic: “if something performed badly, it will do well next, so keep it”.  In general markets do move up but that says nothing about how long it would take for bonds to recover and if it may happen next year or outside our lifetime.

The actual stock market is a “random walk”. It does not know about patterns people expect to see.  Aversion to “crystallizing losses” is based on faulty logic.  

Portfolio should be based on your situation and asset allocation needs. Regardless of how the bonds performed, if you have a large DB and don’t need bonds then get rid of them. 

dunstonh

Sadly I do not see gilt bond funds recovering in the short/medium term as the falls represent paying back excess capital gain returns during the period of very low interest rates. However that is water under the bridge.  From now on, in my view,  they should perform the derisking/diversification role rather better than before.

I don't see them recovering either as the unit price (excluding income) is now back to where it should be.  The effects of QE have effectively unwound and brought the prices back to where they "should" be.

Going forward, the unit price will return to being more wavy line over the interest rate/inflation cycle but yield being the primary bit of the return.

snowlaser

Annuity prices tend to move in line with bond yields, so if you plan to take your pension pot by buying an annuity there is some logic to keeping the bonds because - whether they do well OR badly the annuity you get with them will be the same either way.

As to whether bonds will do well or badly over the next few years...that is just pure speculation.  You can make cases either way.