Getting rid of bonds: would that be a silly thing to do?

Thrugelmir wrote: »

What performance are you expecting. The return on bonds is primarily the income generated and reinvestment there of. They provide your portfolio with diversity.

Ding Ding Ding. Agreed.

I think people are hoping for price appreciation on their bond funds. That probably isn't going to happen like it did over the last 30 years simply because of interest rates. So we are back to the original idea of bonds; interest earners that dampen the volatility of a portfolio and that isn't a bad thing.

kidmugsy wrote: »

At the moment cash looks more attractive to me. Have you looked at the gilt yield curves lately?

https://markets.ft.com/data/bonds

Yes cash is good......a bit of guaranteed interest in a saving account should be in most people's portfolio. I have that and then a fund with some intermediate government and investment grade corporate bonds which has a 3% yield which I expect to go up. Of course if that happens the price will fall, but I will continue to reinvest the income and eventually will do ok and probably better than keeping the money in cash for 10 years.

I ditched all my bonds 4 or 5 years ago, and very happy I did so. Having a volatile portfolio doesn't bother me though, but it's actually not as volatile as I was expecting.

My overall strategy can be summed up as "the best defense is a good offense" and I pick funds which might be considered high risk, but at the same time which I think are likely to perform well in the future as well as offering some degree of diversification if possible. I believe growing the portfolio as aggressively as possible initially, is not as risky as many might think. Perhaps at in the first few months it might be, but if it works over the first few years, then compounding starts to take over, and increases the "safety buffer".

That safety buffer (taking profits when something has done well), is then reinvested to further diversify, and to lock in profits. Rebalancing like this is an essential part of my strategy.

I also hold significant cash and buy in the dips. It's about two and a half years since I implemented this strategy, and so far it seems to be working fine. I'm continually pulling away from the AFI example portfolios in terms of growth/performance, and even in the dips, the downs are not much worse than those of the AFI aggressive portfolio.

I'm overweight funds which I think are likely to do well over the long term, which includes biotechnology, Japan, and technology, as well as having a significant holding in commodities (oil companies mostly).

I also like to focus on small caps, which have been doing quite well over recent months, and most are growth funds, although there is some value style investing incorporated, though not as much as I'd like, but there are not many specialist value funds out there.

My aim is to double my portfolio value in 5-10 years (although I will likely still be invested after at least another 15-20), but I also take about 3% per year as income, without holding much of my portfolio as funds which pay dividends. Holding cash helps, in numerous ways.

Of course, such a portfolio could make significant paper losses if things take a turn for the worse, but I'm in it for the long term, so I'm not overly worried, and along with the other built in measures, I'm confident I could weather a significant storm.

It's probably a more extreme example of a 100% equities portfolio than you were looking for, but I think it shows that it can work for some people. Probably not for everyone though!

With such a portfolio I think you have to monitor everything closely, as well as know what you are doing (at least I think I do!). With such a hands on approach, it's more of a hybrid investing/trading strategy, although the focus is on the long term, but the short term can also impact the long term significantly.

I'd also say, beware of buying small caps right now. Since they have done well recently, there is a danger that they may come down from where they are now. Personally, I'd wait for a dip to buy, but I wouldn't be limiting myself to just small caps, so there is less chance my cash will sit there doing nothing for a long time.

gif1 wrote: »

I am 45, investing 1000 monthly in a 75% (global) equity /25% (strategic) bond, active portfolio. As it seems that bonds are going nowhere I am considering replacing that entire 25% with an equity global small-cap fund (small-cap are not currently catered for in my allocation).

Good plan considering your age but now isn't really a good time for that change.

We're late in the global economic cycle. The end is when small caps tend to do particularly badly. Better time to be thinking of reducing small caps than increasing them.

In many equity markets the cyclically adjusted price/earnings level is at values which imply a lower than normal or for the US negative return over the next fifteen years. A better time to be selling than buying equities.

Bonds aren't a great place to be during periods of increasing interest rates because this tends to cause capital value declines. Defensive bond funds with low average maturities and cash are the place to be to manage that effect.

Overall the plan is a good one but for the moment cutting the equities for bonds with short average duration looks like better positioning.

There's a catch, though. That's probabilities and nothing prevents an equity bull market from continuing for another five years. In which case positioning which looks good could turn out not to be the one with the best outcome this time.