LifeStrategy 20% Accumulation

masonic

Qyburn said:

Linton said:

A 15% fall is pretty small compared with the falls VLS80 could be capable of.  Even VLS40 could have a 20% fall in a bad but not unprecedented crash.  

As far as I can see VLS20, VLS80 and even VLS100 fell by pretty much the same amount during 2022, around 16%.  Same for HSBC where "cautious" lost about the same as "adventurous".

That's right. It was a once in a lifetime black swan fall for bonds at the same time as a relatively minor crash for equities.

You cannot assume different asset classes will experience their worst outcomes at the same time. Usually this is not the case, which is a reason to be diversified.

It would also be incredibly naive to use 2022 as an example of the loss potential of equities - they can fall much further than they did last year.

Worth also noting that long term bond holders have just seen an adjustment to their sequence of returns due to interest rates changing. It will gradually reverse as the fund holdings move towards maturity, thereby returning to approximately the YTM they secured when they made their investment. With other assets, there is no such assurance.

DennisTenus

masonic said:

Qyburn said:

Linton said:

A 15% fall is pretty small compared with the falls VLS80 could be capable of.  Even VLS40 could have a 20% fall in a bad but not unprecedented crash.  

As far as I can see VLS20, VLS80 and even VLS100 fell by pretty much the same amount during 2022, around 16%.  Same for HSBC where "cautious" lost about the same as "adventurous".

That's right. It was a once in a lifetime black swan fall for bonds at the same time as a relatively minor crash for equities.

You cannot assume different asset classes will experience their worst outcomes at the same time. Usually this is not the case, which is a reason to be diversified.

It would also be incredibly naive to use 2022 as an example of the loss potential of equities - they can fall much further than they did last year.

Worth also noting that long term bond holders have just seen an adjustment to their sequence of returns due to interest rates changing. It will gradually reverse as the fund holdings move towards maturity, thereby returning to approximately the YTM they secured when they made their investment. With other assets, there is no such assurance.

So are you saying bonds will always eventually make the return they secured when they made the investment?

Linton

DennisTenus said:

masonic said:

Qyburn said:

Linton said:

A 15% fall is pretty small compared with the falls VLS80 could be capable of.  Even VLS40 could have a 20% fall in a bad but not unprecedented crash.  

As far as I can see VLS20, VLS80 and even VLS100 fell by pretty much the same amount during 2022, around 16%.  Same for HSBC where "cautious" lost about the same as "adventurous".

That's right. It was a once in a lifetime black swan fall for bonds at the same time as a relatively minor crash for equities.

You cannot assume different asset classes will experience their worst outcomes at the same time. Usually this is not the case, which is a reason to be diversified.

It would also be incredibly naive to use 2022 as an example of the loss potential of equities - they can fall much further than they did last year.

Worth also noting that long term bond holders have just seen an adjustment to their sequence of returns due to interest rates changing. It will gradually reverse as the fund holdings move towards maturity, thereby returning to approximately the YTM they secured when they made their investment. With other assets, there is no such assurance.

So are you saying bonds will always eventually make the return they secured when they made the investment?

Yes if you hold the bond to maturity. However prior to maturity the capital value could be greater or less than when you bought.  If you are holding a bond fund with a significant amount of long or medium term underlying bonds when you sell most will be some way from maturity.  So the variability in capital value could outweigh whatever interest your earned in the meantime. 

masonic

DennisTenus said:

masonic said:

Qyburn said:

Linton said:

A 15% fall is pretty small compared with the falls VLS80 could be capable of.  Even VLS40 could have a 20% fall in a bad but not unprecedented crash.  

As far as I can see VLS20, VLS80 and even VLS100 fell by pretty much the same amount during 2022, around 16%.  Same for HSBC where "cautious" lost about the same as "adventurous".

That's right. It was a once in a lifetime black swan fall for bonds at the same time as a relatively minor crash for equities.

You cannot assume different asset classes will experience their worst outcomes at the same time. Usually this is not the case, which is a reason to be diversified.

It would also be incredibly naive to use 2022 as an example of the loss potential of equities - they can fall much further than they did last year.

Worth also noting that long term bond holders have just seen an adjustment to their sequence of returns due to interest rates changing. It will gradually reverse as the fund holdings move towards maturity, thereby returning to approximately the YTM they secured when they made their investment. With other assets, there is no such assurance.

So are you saying bonds will always eventually make the return they secured when they made the investment?

Yes, provided we are talking about government bonds from countries with the highest credit ratings, otherwise there is a small risk of default. That isn't what has happened recently.

Over the long term, there isn't any difference in returns between the three following scenarios:

1) Buy at a high, lock in a low yield, get a stable price and yield to maturity

2) Buy at a high, start off with a low yield, see a loss of capital and corresponding higher yield to maturity

3) Buy at a high, start off with a low yield, see a capital gain and corresponding even lower yield to maturity.

The market recently delivered us an extreme version of option 2 after years of option 3.

In a bond fund, there will be lots of constituents all moving in broadly similar ways, but differing according to how long they have until maturity. Maturing bonds will continually be replaced with new ones, but now these are valued more reasonably, so bonds are set to return to being rather boring generators of interest distributions.

The important point is that all bonds in a fund will now be priced to generate a yield to maturity in line with today's interest rate expectations.