Bonds vs Equities

sevenhills

This is what a friend said "Given my age most of my investments are now in bonds as opposed to equities".

I have never invested in bonds, still very much saving equities in a SIPP. Assuming what he said is good advice, at what age should we be investing in bonds, at least more than 50%? I don't know how old my friend is, maybe 65.

Gary1984

I've heard of a rule of thumb that bonds % should = 100 - Age.  Not one I agree with as I personally have no issue with the volatility of 100% Equities probably until I get into my 60s.

The answer will be different for everyone and will be more to do with risk appetite than anything else. I think a lot more people will be considering a sizeable bond holding now though than has been the case for the last decade or so.

dlevene

Gary1984 said:

I've heard of a rule of thumb that bonds % should = 100 - Age.  Not one I agree with as I personally have no issue with the volatility of 100% Equities probably until I get into my 60s.

The answer will be different for everyone and will be more to do with risk appetite than anything else. I think a lot more people will be considering a sizeable bond holding now though than has been the case for the last decade or so.

Equities = 100 - age, surely?

Gary1984

Ah, yes you're quite right. So Equities decrease as you get older.

billy2shots

I'm far from an expert but I believe the traditional move into bonds from equities,  is a hangover from buying annuities. 

The last thing you want is your portfolio to tank just before you cash in. So the move into 'safer' holdings was seen as important. 

As more and more people will now be relying on a DC pension to fund a potential long retirement,  the traditional way of thinking needs to be reviewed.

For me personally,  heading into a 40 year retirement on a 60/40 equities/ bond split is less comfortable than an 80/20 or even more aggressive portfolio. 

InvesterJones

The other reason to hold bonds, besides annuities as per above, is to reduce volatility - i.e. if you have a shorter time frame in which you need to withdraw your investments then you can't afford to leave them in highly volatile assets which have a longer time to revert to mean. This also gives rise to an age-based asset allocation.

See this video for an explanation and illustration of time scales for different asset allocations: https://www.youtube.com/watch?v=2dz_tgTQedQ

Linton

 To buy bonds I believe you should have some requirement for which bonds are the right answer. Choosing to put x% of your wealth into bonds because that level “feels” right, is recommended by some guru, or comes from a formula based on your age is poor investing.

Your reason for buying bonds should determine which bonds you should buy. Simply buying a broad lbond index fund by default is not a rational approach.

Possible reasons for buying x% bonds include..
 - you want to spend that sum of money at some point in the future and do not want an equity crash in the meantime to prevent this.
 - to sleep at night you need that level of security.
 - you need the guaranteed income
 - you have sufficient money to meet your future needs and are willing to forego the possible extra return from equity to help protect it

In my case looking at non-equity investment in that way I have ended up with roughly a 60/40 overall split though none of the bonds are held in index funds. As my requirements are probably different to yours, you could well come up with a different result.

jimjames

100% equity here and has been for the last 25+ years. I don't see that changing anytime soon.

Linton

jimjames said:

100% equity here and has been for the last 25+ years. I don't see that changing anytime soon.

Yes, it  all depends on your requirements. When you are looking purely at the long term and do not need your investments to maintain your current standard of living 100% equity could well be right for you. However as you approach and pass retirement age with limited guaranteed income long term returns are likely to decrease in importance as you focus more on how you manage your finances in the meantime.

sevenhills

Linton said:

Yes, it  all depends on your requirements. When you are looking purely at the long term and do not need your investments to maintain your current standard of living 100% equity could well be right for you. However as you approach and pass retirement age with limited guaranteed income long term returns are likely to decrease in importance as you focus more on how you manage your finances in the meantime.

This is what Google says - Over the last 123 years, global equities have provided an annualized real USD return of 5.0% versus 1.7% for bonds. That is a big difference!

Linton

sevenhills said:

Linton said:

Yes, it  all depends on your requirements. When you are looking purely at the long term and do not need your investments to maintain your current standard of living 100% equity could well be right for you. However as you approach and pass retirement age with limited guaranteed income long term returns are likely to decrease in importance as you focus more on how you manage your finances in the meantime.

This is what Google says - Over the last 123 years, global equities have provided an annualized real USD return of 5.0% versus 1.7% for bonds. That is a big difference!

Given none of us will benefit from investment periods of 123 years managing shorter term worst case scenarios may be more important than long term averages. You have to deal with actual events some of which will almost certainly be difficult. You don’t get a second chance to balance the probabilities.