Does a five year fixed rate bond make sense or is it too long?

Bigwheels1111

5 years bonds are great for me, I need an income.

I do not need the money, but a tax free income as a low earner will be nice.

jak22

A 5 year account could make sense if you are after a known income over a long period. At the moment 5% is comparable to what you might get from some dividends.

Timing wise then there's a chance this month's fixes may be better but equally long term fixes may be worse.

It's possible that variable rates will catch up to this rate or even over-take it but then its also possible they might drop back down during those 5 years - so the average amount earned would still better getting 5% from day 1.

dunstonh

5 years bonds are great for me, I need an income.

Using cash savings for income is quite high risk if the funding is for the long term.  For short term it can be ok.

jak22

Why is using cash savings for income high risk? Did you mean that relying solely on cash savings as a source of income is a risky approach in general or that there's some unseen risk in a five year fixed interest bond the o/p is asking about?

refluxer

jak22 said:

Why is using cash savings for income high risk? Did you mean that relying solely on cash savings as a source of income is a risky approach in general or that there's some unseen risk in a five year fixed interest bond the o/p is asking about?

The risk you'll hear people on here talk about (in that context) is the risk of the money being eroded by inflation, which is obviously pretty-much guaranteed as savings accounts rarely keep up with inflation.

If you put a large amount in a 5 year bond but take the interest out for income, you make this situation even worse because the bond will be worth considerably less (in real terms) in 5 years time than it would have been had the interest been added to it and therefore compounded.

At the end of the day, it all depends on what your savings goals are though and every situation is different.

jak22

Ok - as the post wasn't very specific. At the moment it's more of a certainty than a risk - if you want income you lose compounding. I'd imagine people might think ofa risk as an unexpected event like needing the cash at short notice. 

Albermarle

jak22 said:

Ok - as the post wasn't very specific. At the moment it's more of a certainty than a risk - if you want income you lose compounding. I'd imagine people might think ofa risk as an unexpected event like needing the cash at short notice. 

Many new posters on the forum, consider savings accounts to be risk free, whilst thinking investments are risky.
However over a long period, say 10 years, the investments (assuming we are talking about mainstream investments ) would have a very good chance of beating inflation. On the other hand, cash savings are almost certain not to have kept up with inflation.
So cash savings are not risk free, in the context of a long term financial strategy.
This was the point being made, that if you are happy to tie your money up for 5 years ( and then maybe even roll them over into another fixed term ) it would be worth also thinking about alternatives. 

jcontest

Stocks and Bonds are a risk, It's odd how some of you are trying to push the OP towards a risky investment.

Yes you can earn 10-20% in a single year, but you can see your investment drop 10-20% too.  Our S&S investments (no bonds) have not recovered from the recent dip. and are only returning just over 3% PA. 

I like long term bonds, due to tax I would avoid those that only pay out at end of term unless it's a ISA.

There's nothing stopping Stocks or Bonds from becoming worthless, so It's understandable people don't want that risk.

dunstonh

Stocks and Bonds are a risk, It's odd how some of you are trying to push the OP towards a risky investment.

Cash is a risk as well. Especially with income provision.

£100k in cash savings where the interest is taken to live off will have its real terms value eroded by inflation and would be worth around £65k in 10 years time.    But its not only the capital value that has gone down in real terms.  The interest it provides has as well.   It is very common for those using cash to then start needing to draw against the capital as the interest is no longer sufficient.   That in turn produces less interest and a greater draw on capital that spirals until the money runs out.

Risk is not on or off.  It is across a scale.   And every option has risks.

Cash suffers inflation risk and shortfall risk.    Investments have inflation risk, shortfall risk and investment risk but inflation risk and shortfall risk are not as high with the investments as they are with cash.     

Being too low in investment risk can actually increase your overall risk as much as being too high.   In reality, being somewhere between is best.

Yes you can earn 10-20% in a single year, but you can see your investment drop 10-20% too.  Our S&S investments (no bonds) have not recovered from the recent dip. and are only returning just over 3% PA. 

In a typical 5 year period, you have 3 good years, one nothing year and one negative year.  2022 is a negative year but the positive years and the nothing year need to be averaged out with the negative year.     When investing for income, you would use a different strategy than for growth.   It may be a yield strategy or a bucketing strategy.  For example, holding the equivalent of 3 years income in cash, use income units in your investments which pay into that cash.  Meaning there are about 5 years or so of cash available before you need to refloat.   Giving you ample time to smooth out those ups and downs.

There's nothing stopping Stocks or Bonds from becoming worthless, so It's understandable people don't want that risk.

If your stocks or bonds become worthless it will either be because you invested badly or you drew all the money out.  The latter would be the same if you had cash savings.

Many people underestimate the risk of holding too much cash and relying on it for income provision, thinking it is risk-free when in reality, they are taking quite a high risk when all risks are considered.   

Albermarle

Yes you can earn 10-20% in a single year, but you can see your investment drop 10-20% too. 

Many investments can drop a lot more than 10 to 20% in a year, which is why the recommendation is to always think long term when it comes to investing, as the long term trend has always been up. What is important is the average return over 10 to 15 years.

There's nothing stopping Stocks or Bonds from becoming worthless, so It's understandable people don't want that risk.

You are right in that individual shares can become worthless. even some funds that are invested in higher risk sectors/countries can lose a lot of value. However if you stick to mainstream diversified funds, the chance of them becoming worthless is zero. Unless WW3 starts and then you would not be worried about investments so much.

Avoiding investment risk is actually quite risky for your wallet.