Bonds and Misery

masonic

BlisteringBarnacles said:

- Bonds vs cash : I thought bonds are better than cash over long term (say 7 years plus). Also, when equities tank, bonds are supposed to give some ballast - in theory anyway right ?

Sometimes they are. Sometimes not. As it happens, IGLT celebrated its 7th birthday recently, and the birthday cake was iced with "-5.65% total returns since inception". That was a period where cash would have been better. Likewise, if you snapped up a long term fixed savings account at close to 6% last year, you'll be setting the bar quite high for IGLT to deliver more than 34% over that 5 year period. The current average yield to maturity of the portfolio in IGLT is 3.4% and its average maturity is 9 years, so based on what it is holding right now, medium term returns are unlikely to be spectacular. This is reflective of the yield curve being inverted, so that short dated bonds pay a higher return than longer dated bonds, which is not what you want if taking duration risk with a fund like this. That's the explanation for why money market funds (which are largely composed of very short-term debt securities) have been the popular choice of late. At some point the yield curve will normalise and bonds will look more attractive compared to cash and money market funds.

Where bonds can be more useful than cash is when you are looking to smooth volatility, as bonds sometimes go up when equities fall and vice-versa. But it is not a very big effect and doesn't happen every time. Also, you will only be able to harvest returns from the negative correlation if you rebalance at the time - which is less likely when you have separate holdings and have to do so manually. There's an open question as to whether bonds will start to perform like they did in the past now that interest rates have normalised, or if high levels of government borrowing are having an effect that will continue.

The "age in bonds" rule of thumb and variants of it are from a time when an annuity purchase was the done thing. Nowadays there are many options, including remaining invested for another 30+ years in retirement if you are healthy and hang up your suit on the early side. Hence, do what's right for you.

BlisteringBarnacles

Thanks 

Ok then, what kind of investor is a "Lifestrategy 60 fund" with 40% in bonds appropriate for ?

I was thinking of a single fund but did not like the UK bias. I wish Vanguard had a "global" lifestrategy fund. 

Hence I was thinking of :

*) 3 to 4 years emergency expenses in cash/money market

*) Remaining in 60% equities 40% bonds

*) Equities : World tracker fund / ETF

*) Fixed income : Split between  iShares Global Government Bond UCITS ETF USD Accumulating(IGLA) and Vanguard Global Bond Index Fund ACC (or its ETF version).

*) Annually take money out (1 year living cost) and rebalance to my AA. Keep doing this for rest of my life.

Been meaning to do a portfolio review request here or bogleheads but never got around to it.

As of now I have very little bonds. I have around 55% cash, 45% equities. Considering moving equities to 50% and parking 40% in bonds.

Aside from the panic I showed in my first post with the bond fund immediately dropping, is my above strategy such a bad idea during retirement phase ?

I have also watched Rob Berger's videos on this approach (known as Total Asset allocation approach instead of Bucket approach).

Rob Berger videos :

*) "The Bucket Strategy is Flawed--Do this Instead" : https://www.youtube.com/watch?v=fNP62fSLg1U
- with reference to : Michael Kitces' paper : https://www.kitces.com/blog/managing-sequence-of-return-risk-with-bucket-strategies-vs-a-total-return-rebalancing-approach/
*) "A Better 3 Bucket Strategy" : https://www.youtube.com/watch?v=aYMJqnUaaME

Thanks

dunstonh

- Target date/lifestrategy funds : I would have gone for Vanguard Lifestrategy but don't particularly like the UK bias. I wish Vanguard provided a global lifestrategy with no country bias. Then that is the one fund I would choose.

They do.  However, its only available via IFAs.   

The HSBC one is good (thanks) but it is actively managed, am I right ? I prefer passive.  

Both VLS and HSBC have active management decisions but both use underlying passives.
Every investment portfolio or tracker has an active management decision somewhere.   The index they benchmark to is an active decision as you can choose different benchmarks.

You have made an active investment decision by buying IGLA in your investment portfolio.   You have chosen to increase your ratio in USD global govt bonds and select the Acc version.     You don't appear to have any other bond funds.    So, your choice is very active decision.

You cannot avoid active decisions.  You can limit them but they are not avoidable.

masonic

BlisteringBarnacles said:

Thanks 

Ok then, what kind of investor is a "Lifestrategy 60 fund" with 40% in bonds appropriate for ?

I was thinking of a single fund but did not like the UK bias. I wish Vanguard had a "global" lifestrategy fund.

It would be suitable for someone with a balanced risk tolerance and who wants UK bias. There are equivalents without the UK bias. See https://monevator.com/passive-fund-of-funds-the-rivals/

The HSBC Global Strategy funds don't have UK bias and are volatility managed rather than having fixed asset allocations. And cheap also.

BlisteringBarnacles said:

Hence I was thinking of :

*) 3 to 4 years emergency expenses in cash/money market

*) Remaining in 60% equities 40% bonds

*) Equities : World tracker fund / ETF

*) Fixed income : Split between  iShares Global Government Bond UCITS ETF USD Accumulating(IGLA) and Vanguard Global Bond Index Fund ACC (or its ETF version).

*) Annually take money out (1 year living cost) and rebalance to my AA. Keep doing this for rest of my life.

I don't understand why you would want IGLA and Vanguard Global Bond Index Fund / VAGS. The latter is aggregate, which you may or may not like, but there is considerable overlap and both will perform almost identically, as shown in the article you first linked. If you wanted a second bond fund, there are other options, such as inflation linked (you may want direct holdings in index linked gilts to avoid the interest rate risk of a fund). Or a ladder of conventional gilts to match your liabilities. A third option based on the bucket strategy would to be to hold a cautious multi-asset fund, where ~20% equities tends to give a smoother ride and higher returns than 100% bonds.

Personally my plan is to use the bucket strategy in retirement, and that will include a slug of HSBC GS Cautious or whatever is the best option when I get there.

Edit: I've just realised IGLA is the currency unhedged version of the ETF so it will be quite different than the GBP hedged Vanguard fund, or IGLH (which is the GBP-hedged iShares ETF). As the Government bond ETF will be subject to forex effects, it will perversely be more volatile than the Government+corporate bond fund, but as has been discussed elsewhere, that added volatility may reduce correlation with equities further.

Eyeful

Would any of these reads be of interest or use to you?
https://monevator.com/passive-fund-of-funds-the-rivals/
https://www.ii.co.uk/ii-accounts/sipp/sipp-investment-ideas/target-retirement-funds
https://monevator.com/best-global-tracker-funds/

BlisteringBarnacles

masonic said:

I don't understand why you would want IGLA and Vanguard Global Bond Index Fund / VAGS. The latter is aggregate, which you may or may not like, but there is considerable overlap and both will perform almost identically, as shown in the article you first linked.

I thought of both IGLA and VAGS because : Initially I just wanted only government bonds because I had read somewhere that I should take any risks on the Equity side and opt for "quality"/safety on the Bonds, meaning bonds of developed economies. (altho I am not sure about "quality" with debt to gdp and other macro problems but that is another topic). Because in theory, when equity markets tank, there is a "flight to safety" and govt bonds benefit the most. (altho didnt quite happen in 2022 but still ...)  Generally does for US Treasuries. However, as the Occaminvesting article said : we get a little more return with the aggregate bond (most likely because of its corporate bonds part), and as usual I couldnt decide hence thought of splitting 50/50.

My reasons for IGLA (as opposed to say IGLH) are :  
1) I wanted Accumulation units and that is only available in USD not GBP. Again in USD both hedged and unhedged are available.
2) I went with unhedged because of this thread (global nomad : https://www.bogleheads.org/forum/viewtopic.php?t=402837)
3) Why do I need Accumulation units ? Because I planned to hold it in my ISA/SIPP and some day if I ever return to India, India does not tax Accumulation units (India does not yet have a notional dividend concept. ) India does recognize SIPP as tax shelter but does not recognize ISA as tax shelter. But I wont sell. I will sell only to rebalance. But then I will pay income tax (India taxes Accumulation units bond funds sale as income tax)

The HSBC global all-in-one is very tempting, thanks for that. But not sure I want to plonk a huge amount into it. Also it would restrict me to Interactive Investor. Or agree to pay 0.45% to HL. The HSBC fund also has derivatives. I wish Vanguard offered something like that. They are the original indexers and probably have least tracking error.

I will stop the portfolio / asset allocation discussion here. This forum is incredible ! I plan to make a portfolio review request sometime. Hope to get some help.

So long !

GazzaBloom

I have toyed with the bonds funds puzzle for a few years after not holding any and still don't. I decided to accumulate cash instead to go alongside equity index funds.

My conclusion, which feels right for me is that cash (currently earning 5% BOE base rate) is my retirement “risk-off” money alongside my small DB pension. 

Money I want to invest and take risk with goes into equity index funds. I don't really see any point placing “risk” money in bonds funds. If I want risk it's equities, if I want low or no risk it's cash. Simple.

GazzaBloom

Further to the above, if and when I ever do decide to move some of my cash or equities money into bonds funds it will be Vanguards Global Bond Index Fund (VANGRSA), it seems the best choice I can find within my pension platform. It's 75% medium/short duration, high quality bonds and hedged.

leosayer

My approach to bond is to only hold GBP Gilt funds that have an average duration that I am comfortable with, based on my time horizon which is 12 years.

I have enough volatility and currency exposure on my global equity fund holdings, so I don't feel I need corporate bonds, foreign government bonds or currency exposure.

As a result, I currently only hold IGL5: iShares UK Gilts 0-5yr UCITS ETF GBP (Acc) which has an average duration of just over 2 years - a bit less than I'd like.

I'm considering extending the duration and adding index-linked gilts with some allocation to:
- iShares Up to 10 Years Index Linked Gilt Index Fund (avg duration 5.4 yrs) 
- Legal & General All Stocks Gilt Index Trust (avg duration 8.3 yrs)

Bobziz

leosayer said:

My approach to bond is to only hold GBP Gilt funds that have an average duration that I am comfortable with, based on my time horizon which is 12 years.

I have enough volatility and currency exposure on my global equity fund holdings, so I don't feel I need corporate bonds, foreign government bonds or currency exposure.

As a result, I currently only hold IGL5: iShares UK Gilts 0-5yr UCITS ETF GBP (Acc) which has an average duration of just over 2 years - a bit less than I'd like.

I'm considering extending the duration and adding index-linked gilts with some allocation to:
- iShares Up to 10 Years Index Linked Gilt Index Fund (avg duration 5.4 yrs) 
- Legal & General All Stocks Gilt Index Trust (avg duration 8.3 yrs)

Have you considered creating your own single gilt ladder rather than a fund?