Bonds within an ISA. Some questions.

1404

Hi all,

I've been investing in stocks within an ISA for a few years.  However, I want to de-risk for the time being and be in cash (or a cash-like investment).

I have never dabbled in bonds and don't massively understand how they work.

I am with iWeb.  What I am looking for is a interest/income without risk of capital loss.  

But when I look at the performance of bond offerings they seem to lose money?  I thought the idea is that you get the same amount back, but they pay interest/income along the way?  Perhaps I'm looking at the wrong kinds of bond funds...

wmb194

1404 said:

Hi all,

I've been investing in stocks within an ISA for a few years.  However, I want to de-risk for the time being and be in cash (or a cash-like investment).

I have never dabbled in bonds and don't massively understand how they work.

I am with iWeb.  What I am looking for is a interest/income without risk of capital loss.  

But when I look at the performance of bond offerings they seem to lose money?  I thought the idea is that you get the same amount back, but they pay interest/income along the way?  Perhaps I'm looking at the wrong kinds of bond funds...

If you want absolute certainty without risk of capital loss you need to look at buying gilts directly, not via a fund, and hold them to maturity. iWeb offers them.

Another low risk option would be a short dated money market type fund.

https://www.yieldgimp.com/

Hoenir

1404 said:

But when I look at the performance of bond offerings they seem to lose money? 

In the short term Government bonds will react to news such as interest rates and inflation data instanteously. Providing the purchase price paid is lower than the nominal value of the stock. As the maturity date approaches the value of the bond will rise towards nominal par value. On a broad level short dated gilts are more orientated towards interest rates while longer term ones towards inflation. 

The recent sharp sudden rise in interest rates is likely to be looked back upon as a once in a lifetime event. With the QE era now well and truly past.  

poseidon1

The universe of bonds is very diverse.

In addition to Government gilts there are of course corporate bonds ( stock market listed companies borrowing via stockmarket listed loan notes ). For many years and due to minimum investment levels (£50,000 ) corporate bonds could only be accessed by small retail investors via investment company unit trust funds. These offer retail investors  a blended portfolio of corporate and indeed government bonds on a domestic and global basis, with interest payable thereon, but underlying capital values rising and falling according to the general interest rate environment.

This changed in 2010 when the LSE established the Order Book of Retail Bonds ( ORBS) which enabled companies to offer stockmarket listed bonds at a minimum holding size of £2,000. These are traded daily on the LSE and each ran for  durations of between 3 to 7 years, paying interest thereon and returning investor capital at the end of the term.  These are the investments I selected for my ISA and Sipp since 2014. 

Via these ORBS over the last 8 years,  I have been able to generate interest rates of between 4.5% to 7.75% from a diverse selection of Companies including the likes of Tesco, Paragon Bank, a number of Housing Associations etc, with the return of my original capital on the various redemption dates.  Sadly, availability of new issues has diminished markedly over the past 4 years,  with no sign of any renewed appetite by companies to offer this alternative bond avenue to retail investors, during this current interest rate cycle.

It should also be noted that that  ORBS are considered complex investments by all the major investment platforms  ( HL, ii, A J Bell etc ) and require a certain level of investor sophistication before you are permitted either to buy or subscribe to a new issue. 

InvesterJones

1404 said:

Hi all,

I've been investing in stocks within an ISA for a few years.  However, I want to de-risk for the time being and be in cash (or a cash-like investment).

I have never dabbled in bonds and don't massively understand how they work.

I am with iWeb.  What I am looking for is a interest/income without risk of capital loss.  

But when I look at the performance of bond offerings they seem to lose money?  I thought the idea is that you get the same amount back, but they pay interest/income along the way?  Perhaps I'm looking at the wrong kinds of bond funds...

There is a huge range of bond funds. Many of them do not buy and hold bonds to maturity, but instead trade bonds and rely on the value of them to other investors rather than the face value. As soon as you rely on the value someone else gives you then you're at risk of capital loss, as should be explained in the key information.

When interest rates are steady, the value doesn't change all that much, so they are less volatile in such circumstances. However we've recently not had steady interest rates, therefore bonds have been changing in value (why should I buy an old bond off this fund when I can buy one direct that gives me more return..? so the valuation of old bonds drops).

The most 'cash like' bonds are very short duration ones, as they're less likely to have their values changed by a change in interest rate (the fund will pick up new ones at the new rate quickly) - money market funds are especially designed to be cash-like and may invest in very short term bonds among other things to do so.

valiant24

InvesterJones said:

 Many of them do not buy and hold bonds to maturity ...

Are you aware of any that do?  I might be interested because I like the certainty.

JohnWinder

'An example can illustrate how bond pricing works. Suppose you purchase, at issue, a $1,000 ten year bond yielding a 5% coupon. This entitles you to $50 of annual income. The, suppose that one year later, interest rates have risen to 6% and you wish to liquidate the bond. No rational investor will pay you $1,000 for $50 of income, when they can receive $60 annually for the same $1,000 dollar investment. In this scenario, your 5% bond will have to decrease in market value until its current yield approximately produces a 6% return. ' https://www.bogleheads.org/wiki/Bond_basics

You'll get a good introduction to bonds there, and that para explains why you might not receive at maturity as much as you paid for them, and thus, how to 'work the system' so that you do.

boingy

1404 said:

I have never dabbled in bonds and don't massively understand how they work.

That's a clue that you maybe shouldn't invest in bonds directly. Maybe look at holding a fund that mostly invests in bonds. Stuff like the Vanguard Life Strategy range offers various levels of "bond-ness" up to 80% bonds/20% equities. This is not a recommendation - it's just one that I'm aware of. There are plenty of other options and I'm sure you'd get plenty of suggestion son here if you ask.

The other thing I'd say is that "de-risking for the time being" is another way of saying you are fiddling with a long-term investment, which often results in lower growth. In the long term it's best to stay invested and weather the ups and downs. Equities have been on an upward trend for the last five or six weeks. 

Final point: the only "interest/income without risk of capital loss" is a savings account or cash ISA.

wmb194

boingy said:

1404 said:

I have never dabbled in bonds and don't massively understand how they work.

That's a clue that you maybe shouldn't invest in bonds directly. Maybe look at holding a fund that mostly invests in bonds. Stuff like the Vanguard Life Strategy range offers various levels of "bond-ness" up to 80% bonds/20% equities. This is not a recommendation - it's just one that I'm aware of. There are plenty of other options and I'm sure you'd get plenty of suggestion son here if you ask.

The other thing I'd say is that "de-risking for the time being" is another way of saying you are fiddling with a long-term investment, which often results in lower growth. In the long term it's best to stay invested and weather the ups and downs. Equities have been on an upward trend for the last five or six weeks. 

Final point: the only "interest/income without risk of capital loss" is a savings account or cash ISA.

Index linked bonds are far more complicated but conventional bonds are usually fairly straightforward* once you get your head around them. The problem with bond funds is that you don't have the certainty of a maturity date to work around. Edit: If you want something close to certainty with a bond fund you need to go with one that holds ultra-short durations, like money market type funds.

*Conventional gilts fit this category.

InvesterJones

valiant24 said:

InvesterJones said:

 Many of them do not buy and hold bonds to maturity ...

Are you aware of any that do?  I might be interested because I like the certainty.

Short term money market funds can  do, but check each one to see what else is in there as well as bonds. There's also a range of iBonds ETFs from iShares/blackrock apparently but not sure of their availability.

Johnjdc

valiant24 said:

InvesterJones said:

 Many of them do not buy and hold bonds to maturity ...

Are you aware of any that do?  I might be interested because I like the certainty.

Even if they do, the price will fluctuate unpredictably over time as those bonds become more or less appealing at their face value, relative to the risk-free rate.