Bonds & gilts investments - will their value return at some point or the fall is baked in ?

RNV

Hello,

Looking for knowledge/opinions of forum experts please.

I'm mainly (80% of overall value) in a mixed SW fund (Pension Portfolio 2; proportion of bonds ~15%) via my workplace DC pension. SalSac contributing at the high level (max AA + CF)  currently, so keep on adding more and more bonds  not understanding their expected trend. Have been thinking whether I better divert new contributions somewhere else (more equities) ?

For context, I'm hoping to retire at 55 in 4+ years; current DC value ~340k; aiming at min 500k at 55; no other DC/DB pensions; will buy NI shortfall to allow full SP (expected to be 3 years; checked current forecast).   Recently acquired a relatively high risk tolerance from understanding that I will (hopefully) be invested for a long time after 55 and increasing the risk is my only chance to retire early as the value of my pot is not/will not be high enough to last long with low risk/low return alternatives.

Thanks for your opinions.

Linton

Bonds fell last year because basically (over-simplifying) they were proved to have been over -priced from the 2008 crash until recently or arguably for a longer period.  If interest rates crash bond prices will recover but in my view, barring some major global event,  that is unlikely.  So the underlying bonds in a fund will not recover in price.

However now that interest rates are higher Acc bond funds will increase in value more quickly than previously.  So overall you should see a fairly slow long term recovery.

At their current price bonds now seem to be a reasonable investment if you want to reduce the worries caused by the volatility of equity, which is their role for many investors.

When you have retired and are living off your investments controlling volatility is nore important than during accumulation.  For that I use a bucket approach with 5 years in cash, 5+ years in cautious funds and the rest in 100% equity as in the long term volatility does not matter.  I would not use a general bond fund at all but rather rely on the cautious fund manager  to deal with the problem.  So with 4 years to go to retirement, if you wish to use a bucket approach it could be sensible to start moving in that direction now.

RNV

Thanks @Linton

I slowly but surely coming to a conclusion that I need to start transferring to a SIPP to be opened elsewhere as my workplace pension fund options are very limited and quite expensive.   

This is a big step for me considering a still relative ignorance in the subject of investments.  Definitely need to read more..

As a general strategy, is transferring gradually, in "small" portions better than whole lot in one go (to reduce the impact of staying out of the market for long, fund value falling between sell and buy etc)?

Linton

I agree that if you are planning to drawdown (annuities are looking more of a possibly viable option now) that it makes sense to move your money to a SIPP because of the flexibility and choice of investments.  You may need to anyway if you have an old pension scheme as it may not support drawdown.

However whether you can transfer out parts of your pension at a time without having to leave the scheme depends on the scheme rules so you should check what you are allowed to do.

To avoid possible losses whilst out of the market I think it would be easiest to move your pension into safe investments within your current scheme and then transfer.  It would seem from other threads that transfers from an employers pension scheme can take significant time.

You haven't said the size of your pension pot but given your stated ignorance of investments it may be worth consulting an Independent Financial Advisor to help manage the transfer and to guide you in choosing appropriate investments when you have transferred.

Steve_666_

If the future could be predicted with certainty, we would all be loaded

dunstonh

I slowly but surely coming to a conclusion that I need to start transferring to a SIPP to be opened elsewhere as my workplace pension fund options are very limited and quite expensive.   .
This is a big step for me considering a still relative ignorance in the subject of investments.  Definitely need to read more..

Workplace pensions have investment funds where you really cannot make too many mistakes on other than going too heavy into various investment areas.  e.g. only investing in US equity for example would not be a good idea but it wouldn't be a disaster.

Whereas a SIPP gives you options where you can lose the lot.   They also have options that are far more expensive than your workplace pension.    So, you need to have more knowledge and understanding with a SIPP.   I had someone some years back gloat that they moved to a SIPP that advertised as a low cost SIPP and how they were saving money by doing so.   I finally got to see what they were invested in and the overall charges were double what we would have charged as IFAs.   The person had fallen for the marketing of the SIPP provider and picked investment own-brand options (which were not particularly very good).  That is the sort of risk that would be reduced with knowledge and understanding.

As a general strategy, is transferring gradually, in "small" portions better than whole lot in one go (to reduce the impact of staying out of the market for long, fund value falling between sell and buy etc)?

No.  I have done many thousands of transfers and never once I have I done a partial transfer.  It is rare for people to do partial transfers.    In fact, you really only see it mentioned here by the odd person.    And most providers do not support partial transfers anyway.

You are going to be out of the market on all the money at some point whether its now or later.

Bonds & gilts investments - will their value return at some point or the fall is baked in ?

As mentioned above, they won't be going back to those levels (you can never say never but it would require a restart of quantitative easing).    The unit price excluding income (i.e. inc units) of the gilt funds gives you a good indication of things

The red line is the return including income reinvested.   The blue line is the unit price with income paid out.  You can see that blue line, doesn't deviate much from zero.  That is to be expected.    It should be a pretty long term wavy line within a reasonable band but not going up.  The income is the return.  Not the unit price.  You can see from the credit crunch onwards that the blue line grew above the typical range. 2022 saw that unwind.   There was a small bounce after Liz Truss was removed but the downward period has restarted.       So, we may not be at the bottom yet.

Linton

To add to Dunstonh's post and the graph....

The linear graphs which are normally used to show returns can be very misleading since an investment rising from 0 to by 50%, an increase by a factor of 1.5, appears as large as one rising from 200% to 250%, an increase by a factor of 1.16666.

In an ideal world where interest rates dont move the blue line should be constant at zero since the capital value of a bond would remain at its face value.  However we see that over the past 28 years the capital value did show an increase of more than 50% which has since largely unwound. 

Albermarle

RNV said:

Hello,

Looking for knowledge/opinions of forum experts please.

I'm mainly (80% of overall value) in a mixed SW fund (Pension Portfolio 2; proportion of bonds ~15%) via my workplace DC pension. SalSac contributing at the high level (max AA + CF)  currently, so keep on adding more and more bonds  not understanding their expected trend. Have been thinking whether I better divert new contributions somewhere else (more equities) ?

For context, I'm hoping to retire at 55 in 4+ years; current DC value ~340k; aiming at min 500k at 55; no other DC/DB pensions; will buy NI shortfall to allow full SP (expected to be 3 years; checked current forecast).   Recently acquired a relatively high risk tolerance from understanding that I will (hopefully) be invested for a long time after 55 and increasing the risk is my only chance to retire early as the value of my pot is not/will not be high enough to last long with low risk/low return alternatives.

Thanks for your opinions.

Having an even higher equity % maybe pushing the risk tolerance too far . A 100% equity portfolio could drop up to 40% in a bad crash.

Retiring at 55 means you have to 100% fund yourself for 12 years and then supplement your state pension for maybe another 25 years. Unless you are a relatively low spender it could be a tight squeeze even with £500K.

Scot_39

Bonds because of the way many are traded - are not the simplistic equivalent of say a fixed rate bond at the bank.

A picture of stability many associate with them given their use to underpin annuity rates and pension funds pre maturity.  The old at least notion (if never reality) of a fixed rate gilt  paying its coupon (interest) to maturity then you get initial investment back only then long gone.

The markets now trade many bonds / govt gilts based on pricing relative to years to maturity and coupon rate and the prevailing market rate.

So naively / simplistically.

A bond issued at a higher coupon rate than market rate, acquires transient capital value if rates fall. But that then falls, to match lower market rate, until maturity. But gain can be realised if sold.

A bond issued at a lower coupon rate as rate rise, loses capital value if need to sell, but that recovers to maturity. So the capital rise compensates new holder for lower interest until maturity.

Both still pay out fixed rate and both return to par at maturity if not traded.

Both should give the new buyer market rate return combined.

The market price then determining the balance of coupon return over or below market rate vs capital loss/ gain - so both add in timeto maturity terms to market rate.

You might get 3% over market rate from coupon, but lose 3% valuation. Or 3% under market, but accumulate 3% value etc.

Given bond maturities range from months, 1 yr, 2yr, 10 yr, 30 yr etc - different bonds reflect past / future changes in interest rates differently.

And bond funds will smooth that out by mixing duration and purchase / maturity dates.

So hopefully returning back to market rate with capital security over long term  like pension in later life / annuity in retirement.

But even they are not immune in short term to 3,4 or 5% rate changes in a year - especially to / from emergency rates.

So no easy answers.

JohnWinder

I detected two questions. Q1: ‘will bonds’ fall in value recover?’
This has been asked repeatedly recently. If you search my recent posts you’ll find my and others’ comments nearby dealing with this. What makes it hard to answer supportively is we commonly don’t know what their value was when you bought them. If one bought VGOV fund 10 years ago, it’s down 2% now; bought 3 years ago and it’s down about 30%.

You ought not look at bond values without consideration of yield.  Whatever price you or your manager have to pay to buy them, it is set (by the market) to deliver whatever the current yield is for that type of bond. Whenever you buy into or sell out of a bond fund you have to accept the current yield(s) of its bonds which will be reflected in their prices.  Would you rather be buying bonds now with higher yields, or 2 years ago when yields were lower? No one knows how to accurately guess what bond yields will be in future, so probably forget that there’s a cogent answer to Q1.

I answered it here with both ‘yes’ and ‘no’: https://forums.moneysavingexpert.com/discussion/6366331/gilts-fund/p1

What we do know is that when bond fund values drop because interest rates rose, that with no further dramatic interest rate changes then the fund will make up its value losses and get ahead to where it would have been without the fall, in about the duration of the fund. Investopedia will tell you about ‘duration’. And if interest rates keep on rising, always tending to push the fund’s price down, your value gets back to where it would have been without the rate rise after one duration then the rest is cream. If you’re a long term investor you want bond yields to be high, and the only way to get there from a period of low yields (like a year ago) is for bond prices to fall.
 
Q2: ‘so keep on adding more and more bonds (or) divert new contributions somewhere else (more equities)?’
We, no one, can predict how bond prices and yields will pan out in coming years (you’re 50 y.o, so in the coming 35 years!). That means forget deciding on your asset allocation (how much stocks vs bonds) on such speculation. Choose it based on your risk appetite, need, personal circumstances etc. Ferri and W. Bernstein have both written good books on asset allocation, and Hale’s book is also good.
This is informative on bonds: https://www.bogleheads.org/forum/viewtopic.php?t=360575

A_T

Bonds are intended to be for yield. It's only the 40 years of falling interest rates that saw their value become the attraction - and the birth of bond funds like VGOV which only needed to be held to watch their value rise - yield was almost irrelevant because in effect there was virtually none. I would steer well clear of a bond fund at this moment.

If I was the OP I would consider a bond ladder for at least some of the 500K.

You could buy say 0¼% Treasury Gilt 2025, 1¼% Treasury Gilt 2027, 0 7/8% Treasury Gilt 2029, 0¼% Treasury Gilt 2031, 3¼% Treasury Gilt 2033, 0 5/8% Treasury Gilt 2035

You would lock in the current 3.7% yield. Then as each matured and the principal returned you could decide what to do with the capital.