Resetting my investment portfolio - unsure of what bond fund to use

losthere

I am in the process of setting up by isa portfolio for this tax year and I need to understand what Bond fund I need.

 Currently I have 100% equities - a single world tracker - but I would like to add a bond fund or two to increase diversification and as protection incase of a stock market crash. I have come to investing late - early 40s - and i don't want to take excessive risk if possible.

I have been looking at Bonds but there are so many options, I was thinking of having a strategic bond fund but I have discovered these vary from those focused on corporate bonds to those focused on government debt to those focused on high yield bonds, and all of these have performed very poorly over the past 5 years, mainly because of the increasing interest rates. Also i am finding it hard to understand the underlying portfolio which each fund as Trustnet and Morningstar won't have all of the details. 

I was considering creating my own bond fund; 70% UK Government Debt (Vanguard Gov Fund); 15% High Yield Bond Fund & 15% corporate bond fund. 

Is there a suitable bond fund that I can just buy each month and not have to stress too much about it?

dunstonh

I have been looking at Bonds but there are so many options

Its a bit like equities, in the variations you get there.   i.e. some equities are higher risk than others. And some fixed interest securities are higher risk than others.

 I was thinking of having a strategic bond fund but I have discovered these vary from those focused on corporate bonds to those focused on government debt to those focused on high yield bonds, and all of these have performed very poorly over the past 5 years, mainly because of the increasing interest rates. 

All fixed interest securities have done poorly over the last 5 years as the effects of QE from the credit crunch unwound.   But you are not investing for the previous 5 years.  You are investing going forward.

I was considering creating my own bond fund; 70% UK Government Debt (Vanguard Gov Fund); 15% High Yield Bond Fund & 15% corporate bond fund. 

Most HYB funds are as high risk as equities.    So, that wont reduce your risk.  Corporate bond funds are lower risk than HYB but higher than gilts.  The Vanguard Government Bond fund is a more volatile gilt fund compared to others available.  

JohnWinder

What you choose can be simple or a bunch of funds; here are some thoughts towards simple.

As you move away from government to corporate and high yield bonds you are moving in the direction of stocks: higher risk and higher likely return. That means you can entirely skip the corporates and high yield by just holding more stocks. Portfoliovisualizer will allow you to back-test various proportions of government/corporate bonds to see how to get a 70/30 stock/gov bond mix with corporates; it might be 60/40 corporates for example, to result in the same long term risk/return profile. Someone has even done it for you: https://www.bogleheads.org/forum/viewtopic.php?t=383298 

Sticking to government bonds, will it be UK only or multi-country? That consideration is mostly about whether UK will default on its bonds (unlikely). But a Japanese investor only holding Jp government bonds is stuck with zero yield on intermediate bonds because that’s the policy of the Bank of Japan; while other Jp investors holding global government bonds can get 2 or 3%. You choose.

All bonds have some of their yield as some protection against anticipated inflation. But unexpected inflation like we’re now having permanently destroys some of the value of nominal bonds. You need linkers to protect against that, then you remove inflation as a risk to you. You choose.

Lastly, you need to give some consideration to bond fund duration or average time to maturity as a surrogate. The longer it is, the more volatile the price will be in response to interest rate changes (as we saw in the last year or two) but the more return you might get long term. Have a look at the yield curve now to see how much better the return on 15 year bonds is compared to 5 year bonds: https://www.bankofengland.co.uk/statistics/yield-curves. But If you need to cash out most or all of your bond funds in xz years, you can be heart broken by holding a bond fund with a maturity of xz+10 years if interest rates rise in xz-2 years. Here’s some stuff on that: https://www.bogleheads.org/forum/viewtopic.php?t=360575 

Finally, active or index tracking? Safe bonds are a lot to do with ‘return of money’ rather than ‘return on money’, so low yield means don’t give up too much on higher fees for active management because it’s hard to recover the extra cost. But some indexes turn out to comprise long duration bonds; if that doesn’t suit you, keep looking.

‘i am finding it hard to understand the underlying portfolio which each fund as Trustnet and Morningstar won't have all of the details. 

Vanguard list all 400 bonds in one of their funds. You’re looking in the wrong places.

https://www.vanguardinvestor.co.uk/investments/vanguard-uk-short-term-investment-grade-bond-index-fund-gbp-acc/portfolio-data 

GeoffTF

What is your timescale? Do you prefer an OEIC or an ETF?

Vanguard Global Bond Index Fund provides maximum diversification without taking too much risk. VAGP is the ETF equivalent.

losthere

Hello,
I don't have a timescale. I am in early 40s and would like to keep on investing for atleast another 15 years and then hopefully maybe start using some of the income.
I prefer OEIC and I would like to buy regularly rather than make a one of payment.

GeoffTF

The two funds that I mentioned are appropriate for about 8 years plus. You can make regular investments in both OEICs and ETFs. A good strategy is to invest each month in whichever is below your target percentage, equities or bonds. One equity fund and one bond fund is enough. Alternatively, you can buy something like Vanguard LifeStrategy that has both equities and bonds.

Alexland

losthere said:

Hello,
I don't have a timescale. I am in early 40s and would like to keep on investing for atleast another 15 years and then hopefully maybe start using some of the income.

I'm a similar age and like you am 100% equities on my long term investments. Even now with 15 years ahead there's an argument that you could just use equities and ride out any 50%+ crashes that occur during which time the reinvested distributions and ongoing contributions would be buying more fund units at lower valuations so it should work out fine but yes there's an efficient frontier where a say 80/20 portfolio if rebalanced could on average generate a similar return for less volatility so for that I would go for quality bonds without currency risk.

If you think of your account as a LIFO queue rather than a FIFO queue then the contributions you make closer to your withdrawal date would be withdrawn first (by which time maybe you would have switched them into buying safer assets) and these existing contributions could be invested for the next 25-50 years so you can afford to accept some market volatility on them.