Bonds vs Equities

Albermarle

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!

Despite what you see on this forum, holding 100% equities is not commonplace, and not recommended by IFA's for the majority of their clients AIUI.
The main reason seems to be that most people can not stomach the volatility and maybe even panic and pull out in scary market drop. I presume this also why pension default funds are never 100% equities.
So whilst it might be rational to hold 100% equities in many cases, emotionally a less volatile strategy is preferred. Hence one reason for the popularity of 60/40.

GazzaBloom

Linton said:

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.

Agreed. I have been 100% equities in my DC pension for a long while but with a planned early retirement starting to come into focus I will start accumulating as cash (or a MMF) from next year until I get to around 3 years/15% of portfolio as cash/MMF, for this very reason, to soften the volatility and have the comfort of a portion of "risk-off" during early retirement until the state pensions kick in. I expect that over time, unless I hit a bad sequence of returns over a prolonged period at the start of retirement , to increase the "risk-off" element from 15% over time to 20-25% but envisage that I will always have a healthy allocation to equities.

My pension provider has confirmed that cash deposits will accrue BOE base rate interest, so 5% return will be welcome for practically zero risk, and doesn't really make it worth buying a money market fund or a bonds fund. If and when the interest rates start to fall I will look at it again and may switch the cash to bonds. 

dunstonh

Despite what you see on this forum, holding 100% equities is not commonplace, and not recommended by IFA's for the majority of their clients AIUI.

Correct. 
In the past, we used to use more 100% equities, particularly on long term regular contributions.    However, with online access and quarterly statements now typical, you have the problem of investor behaviour.   i.e.  in the past, what they didn't see didn't worry them and they didn't do silly things because of their lack of knowledge.     However, it is far more common nowadays for inexperienced investors to panic at tiny losses and often they go on to make silly decisions, such as stopping the regular during the very period that it is best to be paying in, or moving to cash/deposit funds.  So, transparency and ease of access to valuations is the first issue.

A second issue is the ombudsman.  Consumer protection is good, but it sometimes lacks common sense.   i.e. if you have a scenario where you had someone at 100% equities, and they moved to 100% deposit after a crash, the FOS would be inclined to uphold a complaint as the person wasn't suitable for 100% equities in the first place.  Even if they were financially and it was the sensible thing to do (i.e. young, saving monthly to retirement).

So, advisers don't just have to think about what is best financially, they have to consider the capacity for loss and the investor behaviour.  And that tends to see an allocation to fixed interest securities/STMM.

BTW, there is no age rule regarding fixed interest securities/equity ratio.  That is an opinion not a rule.  It certainly doesn't exist in UK financial services.     With nearly 30 years of experience, I can tell you that most investors remain at the same risk level or drop one notch on the scale when they hit retirement.   Although noting the above comments that they would unlikely to have been 100% equities to begin with.

aroominyork

If you believe that higher risk assets provide the highest returns over time, you might want the maximum amount invested in high risk assets in a way which reduces - to the level you feel comfortable with - the risk of selling an asset during a downturn. Some people do this by having three 'buckets'; for example, one or two years' expenditure needs in cash, then a number of years in bonds, and the rest in equities. At the beginning of each year you either sell an asset which has not made a loss (however you calculate that), eg equities, and if they are down then bonds, and if they are down then cash; or you take the money from anywhere and then rebalance, for example to a 70%/20%/10% portfolio. I am approaching drawdown in the next few years and am structuring my portfolio along these lines. Lots has been written about this approach and I think it is a sensible starting point which you can depart from based on your circumstances and preferences.

eskbanker

sevenhills said:
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!

Perhaps a bit pedantic, but Google says no such thing - it's a tech company.

Its search engine may deliver results including an unrelated analyst or company saying that though....

Audaxer

Linton said:

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.

I would say buying a low cost, globally diversified multi asset fund containing bonds, at a risk/volatility level you are comfortable with, is a rational approach, especially for inexperienced investors.

jimjames

Linton said:

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.

Although if you have income producing funds in your portfolio especially those that have maintained their dividends over decades then I suspect it might be less of an issue if the market drops as your income is less linked to the current market price. I maybe should have added that the portfolio composition may well change at retirement even if it remains 100% equities.

markym3

Bond funds involved in government debt have performed very badly over the last year and a half. I'm down circa 30% on my Global Fixed Income fund, primarily due to the government debt element. Not exactly low risk

m_c_s

No-one here has experienced a 90% decline in their portfolio and then not recovering for 22 years. 
If this were to occur at the start of ones retirement with a 100% equity (or high equity %) portfolio there is a high probability that you would not live long enough see your portfolio recover just back to it's pre-crash value. And most likely you would have suffered an awful retirement. Extreme case yes but none the less a realistic one.

Prism

markym3 said:

Bond funds involved in government debt have performed very badly over the last year and a half. I'm down circa 30% on my Global Fixed Income fund, primarily due to the government debt element. Not exactly low risk

What is often ignored is the different level of risk involved in different bond funds, mostly down to the duration of those bonds.

A pretty standard global government bond fund (IGLH) dropped by 14% in 2022. Poor performance but not especially damaging over the longer term - especially after years of good performance.