with all the coverage of impending market crashes, what are you doing?

mark5

For my main ISA I was invested in VWRP 100%, I am now VWRP 70% and VUKG 30%. I had felt the UK stock market was undervalued for a long time and holds more traditional companies than US etc. 

Some might say I am UK heavy but I feel more comfortable, I’ve been hearing about this crash for 3/4 years now no doubt it will happen but will prices fall to the levels of 3/4 years ago? 

Alexland

mark5 said:

I’ve been hearing about this crash for 3/4 years now no doubt it will happen but will prices fall to the levels of 3/4 years ago? 

Maybe - the more valuations get stretched the bigger the downside risk.

Market euphoria is sucking people into overpaying - it's not sustainable and likely to affect future returns.

https://www.multpl.com/s-p-500-pe-ratio

As investors we are fortunate that since the bond market crash there are now other other good assets to invest in providing guaranteed above inflation returns so there's only a low or no cost to being diversified. I can't see the sense in being 100% equites anymore it's looking like a high risk for a marginally better or even perhaps worse return at least in the medium term.

Cus

Which bonds guarantee above inflation returns? I though bond pricing was inherently based on interest rate predictions 

Alexland

Cus said:

Which bonds guarantee above inflation returns? I though bond pricing was inherently based on interest rate predictions 

Inflation linked gilts eg TR50 current yielding 2.1% pa above inflation if held until redemption in 2050.
Obviously it could fluctuate in price in the meantime. 
https://www.dividenddata.co.uk/gilts.py?ticker=TR50

Cus

Alexland said:

Cus said:

Which bonds guarantee above inflation returns? I though bond pricing was inherently based on interest rate predictions 

Inflation linked gilts eg TR50 current yielding 2.1% pa above inflation if held until redemption in 2050.
Obviously it could fluctuate in price in the meantime. 
https://www.dividenddata.co.uk/gilts.py?ticker=TR50

Don't you have to pay the dirty price of 132 to own this, and at redemption you only get 100? So that loss is the equivalent of the 2.1% above inflation you get now till then?

Edit: doesn't it say yield of 2.13%? Isn't that just the same rate as current inflation?

Alexland

Cus said:

Don't you have to pay the dirty price of 132 to own this, and at redemption you only get 100? So that loss is the equivalent of the 2.1% above inflation you get now till then?

Edit: doesn't it say yield of 2.13%? Isn't that just the same rate as current inflation?

You pay the dirty price of £132 now and at redemption get £100 multiplied by the Index Ratio currently 1.9 as there has been 90% inflation since it was issued in 2009 so it's currently worth £190 on redemption.

The clean price of £69 will head towards £100 on redemption not that it matters but basically it's currently trading for around 30% less than it's worth so the 2.1% comes from the 0.5% coupon (which is based on the £190 so over 0.7% on the £132 you paid) and the over 1% pa return to what it's worth at the end.

Plus every year the Index Ratio and therefore redemption and coupon increase with inflation.

It took a while to get my head around it but seems like a good deal to me.

At least good enough not to see the point being 100% equities at current valuations.

Cus

Thanks, confusing. What I can't get my instinct around is that what I think you are saying is that if I buy it today, someone is selling me that gilt with a guarantee that I will beat inflation no matter what happens if I hold till 2050. What's in it for the seller? Surely there must be a 'guess of the future inflation rate' so that if you think it's less overall than what the market thinks today then you win, otherwise you lose?  

Alexland

Cus said:

Thanks, confusing. What I can't get my instinct around is that what I think you are saying is that if I buy it today, someone is selling me that gilt with a guarantee that I will beat inflation no matter what happens if I hold till 2050. What's in it for the seller? Surely there must be a 'guess of the future inflation rate' so that if you think it's less overall than what the market thinks today then you win, otherwise you lose?  

One man's trash is another's treasure. Yes if inflation is below expectations you could have done better with a conventional bond and the market prices of IL gilt valuations may stay supressed for a while (which might be useful if reinvesting coupons). The research I have seen suggests conventional bonds only tend to deliver around 1% above inflation long term possibly because inflation is more likely to exceed expectations than not.

Cus

Thanks for replying. I can appreciate that due to the many years of unusually low interest rates, those who purchased at those times who thought that rates would rise quicker than what was expected at that time, are sitting on paper profit. So maybe some will cash out. But I can't see the guarantee that you will beat inflation more than any other bond product is valid sorry. Yes perhaps on average the bond market delivers 1% more than inflation (I don't know as we have had a 40 year bond bull market until recently, I guess as a trade off against the people guaranteeing a inflation loss with cash accounts). I guess I just don't believe in free lunches 😁

Alexland

Cus said:

Thanks for replying. I can appreciate that due to the many years of unusually low interest rates, those who purchased at those times who thought that rates would rise quicker than what was expected at that time, are sitting on paper profit. So maybe some will cash out.

I've lost you. The bond investors who purchased during the low interest rate period are sitting on losses. For example the clean price of TR50 was up to £232 a few years ago (locking in a negative real yield) and has now crashed to just £69.

Cus said:

But I can't see the guarantee that you will beat inflation more than any other bond product is valid sorry. 

The guarantee is just that you will beat inflation if bought at current prices and held to maturity. I am not saying it's guaranteed to beat a conventional bond which is still likely to beat inflation but not guaranteed by how much or if at all which kinda makes it uncertain to plan around. My point in relation to this thread is there are other compelling things worth investing in not just equities as was the case a few years ago.