Bonds vs Equities

older_and_no_wiser

Be very careful with managed bond funds. I have a workmate who told our pension platform provider ([cough] HL) that he was a low risk investor and he wanted guidance on where to invest his pension contributions. They put him into an 80% bond allocation with some HL Managed Strategy fund charging around 1.4% annual fee which has tanked over the last 2 years. He has zero knowledge of investments/funds and just took their advice without any research etc.

older_and_no_wiser

jimjames said:

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

How old are you (if you don't mind me asking!) and are you in retirement yet or planning to retire soon?

I'm a around 3ish years from retirement (coming up to 55) and have around 90% of my investment portfolio in equity. However, I do keep around 2 years of living expenses in cash (well as high interest paying instant access savings) and plan to do that in retirement too. I really don't understand bonds, yields etc despite many attempts at trying with podcasts and YouTube videos! I'm happy with the volatility of equities as even a 50% crash wouldn't cause me a problem.

I have a large proportion of my pension portfolio in the HSBC Global Strategy Dynamic multi-asset fund. I trust that to use the bond allocation where they see fit. It's performed pretty well through the turmoil of the last 3 years while I've had it.

coastline

m_c_s said:

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.

Extreme I agree , but you've got to consider where these moves came from in a short space of time. Guessing the 1929 crash ? Look how far it moved from around 1925 , up around 400% ? Huge. You can actually see the 1987 crash on the chart up 50% in a year then down again .

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Japan traded on multiples never heard of. P/E of 50 versus 12 in the USA.

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Bonds v Equities well I'd go STMMFunds in place of bonds considering todays rates are 5% ( yes things can change) . There's not much volatility to worry about either. A very cautious and simple portfolio of 70% STMMF and 30% global equity tracker( increase exposure as you wish). 
So 70% with yield of 5% and 30% with yield around 2%.Say 4% yield PA in total. If the market crashed 50% your tracker would be down 15% at worst so not too bad. Could even increase equity exposure at that point to take advantage. Say 60/40. Sounds like there really is some very cautious investors out there.                                                                                                                                                   
Bond yields today can be compared to the1960's in a way where they came from very low yields of around 2% then rising. FED rates were kept above inflation as much as possible. Red above Blue.

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If you set this to July 1999 to present day showing STMMF and UK RPI there's a similar relationship as the previous chart. All goes wrong of course after the 2008 GFCrash ( looks like a one off really ) . So we have no volatility as with bonds and a bit of protection from inflation ( could well be next year ? )

Chart Tool | Trustnet

markym3

Prism said:

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.

Well...that a Blackrock/Aviva fund. Fund split is 50:50 UK international. Risk level 4/7. It certainly seems to have performed worse than many. UK gilts in particular have been hammered, that's also reflected in the transfer value of my final salary pension halving since January 2022. 

I've had a look at a variety of global bond funds which have shown much less of a decline in the last 18 months, 5 year performance is flat at best. 

I had considered upping exposure to bonds in anticipation of inflation coming down but wary after this. 

Andreg

Bonds are subject to short term price volatility due to interest rate risk, but in the long term provide a more stable income than equities.  Equities carry a risk premium that is likely (in theory!) to lead to higher returns than bonds over any time period.  If you are planning to buy an annuity, then gradually investing in bonds makes some sense as it hedges against changes in annuity prices, effectively allowing you to lock in annuity income ahead of retirement.

Linton

Audaxer said:

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.

I would say in its defence that this is the least worst option available to inexperienced investors or those without objectives..  But that does not make it the best for achieving your objectives, whatever those objectives may be.  Look for example at the recent large losses for bond fund holders who should not, rationally,  have been investing in those long term bonds that suffered most severely in the first place, but did so purely because that was the default option.

Audaxer

jimjames said:

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.

That's true. I'm retired and have an income portfolio which includes some of the 'dividend hero' ITs. It isn't 100% equities as it also includes a couple of bond funds. I have been wondering recently if I really need the bond funds, and whether I should sell them and put the proceeds into the equity income ITs. I've not decided yet but think I'd be okay with the increased volatility.

GazzaBloom

Audaxer said:

jimjames said:

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.

That's true. I'm retired and have an income portfolio which includes some of the 'dividend hero' ITs. It isn't 100% equities as it also includes a couple of bond funds. I have been wondering recently if I really need the bond funds, and whether I should sell them and put the proceeds into the equity income ITs. I've not decided yet but think I'd be okay with the increased volatility.

But if you look at capital + divs taken is that any different to selling off some capital from an index fund? The total value has to be the same if divs are just a distribution of a company's profits rather than them being retained. Divs are just forced on you and reduce the stocks capital value, selling an index is no different except you choose when to take the "dividend".

Or am I mistaken?

Linton

GazzaBloom said:

Audaxer said:

jimjames said:

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.

That's true. I'm retired and have an income portfolio which includes some of the 'dividend hero' ITs. It isn't 100% equities as it also includes a couple of bond funds. I have been wondering recently if I really need the bond funds, and whether I should sell them and put the proceeds into the equity income ITs. I've not decided yet but think I'd be okay with the increased volatility.

But if you look at capital + divs taken is that any different to selling off some capital from an index fund? The total value has to be the same if divs are just a distribution of a company's profits rather than them being retained. Divs are just forced on you and reduce the stocks capital value, selling an index is no different except you choose when to take the "dividend".

Or am I mistaken?

I believe you are mistaken because the type of companies that pay good dividends are different in kind to those that aim for high growth. For evidence see what happened in the tech boom and crash around 2001. Whilst the global indexes were collapsing Woodford’s high income funds continued as if nothing had happened to provide good returns.

Also receiving dividends is a different experience for the investor to having to extract money from a collection of predominantly growth funds. The income investor receives a pretty stable ongoing income without any need to continual decisions on what to sell just to maintain your  day to day expenditure. Dividends are much less volatile than capital values. With income investing you can simply ignore capital value volatility.

From my experience the best answer is both dividends and sake of capital. Use dividends for ongoing income to a significant extent like an annuity and use sale of capital for one-off major expenditure and as part of strategic management.

Prism

Linton said: I believe you are mistaken because the type of companies that pay good dividends are different in kind to those that aim for high growth. For evidence see what happened in the tech boom and crash around 2001. Whilst the global indexes were collapsing Woodford’s high income funds continued as if nothing had happened to provide good returns.

Those investment trusts muddy the water though. Some do invest in high dividend payers but many other do not and invest in the same mix of companies that other funds use. They can constuct their own dividends by selling capital or holding actual dividends back and reinvesting them to sell later. Any investor can achieve the same themselves by selling capital and combining with a dividend if required.