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Proportion of bonds to shares?

Including Financial Independence and Retiring Early (FIRE)
Gilgongo
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Proportion of bonds to shares?

#207428

Postby Gilgongo » March 13th, 2019, 2:20 pm

I know various investment advisers talk about having anything between 15-50% bonds in a retirement portfolio, but what to people on this boards have in reality? I'm 52 and have only about 2% of mine in a corporate bond ETF (ISXF) since 2013, which hasn't done too badly.

I'm thinking that for my age 2% is too low, and I should probably move some of my equity investments into bonds over time. I'm thinking of sticking with ETFs for that though.

G

EssDeeAitch
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Re: Proportion of bonds to shares?

#207431

Postby EssDeeAitch » March 13th, 2019, 2:38 pm

Gilgongo wrote:I know various investment advisers talk about having anything between 15-50% bonds in a retirement portfolio, but what to people on this boards have in reality? I'm 52 and have only about 2% of mine in a corporate bond ETF (ISXF) since 2013, which hasn't done too badly.

I'm thinking that for my age 2% is too low, and I should probably move some of my equity investments into bonds over time. I'm thinking of sticking with ETFs for that though.

G


I am retired and have 25% in bonds. I raised a topic on bonds last week which you can look at for a few points viewtopic.php?f=52&t=16683.
If I were 52 and planning on working until normal retirement age with monthly savings/pension contributions, then I would not be particularly bothered about investing in bonds.

No doubt there will be others with a different view so in the end, it will be down to you and what you feel comfortable with. But you have plenty of time to do some thorough research into the matter.

tjh290633
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Re: Proportion of bonds to shares?

#207438

Postby tjh290633 » March 13th, 2019, 3:13 pm

I am approaching 86 and have no fixed interest securities, and never have. I am 100% in equities.

TJH

everhopeful
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Re: Proportion of bonds to shares?

#207453

Postby everhopeful » March 13th, 2019, 3:54 pm

As I have said in other posts I have a mix of fixed interest holdings including ETFs, individual bonds, strategic bond funds and trusts and prefs. I have bought nearly all of these when valuations were lower than now so have enjoyed a capital gain as well as the income. This is one of the reasons for investing in bonds if you can time the purchase when capital values are likely to rise. This is no different from trying to buy equities when one thinks growth is in the offing. There is also the reliable income which in the case of individual bonds held to maturity is predictable (barring default).
I do not think that any formula for allocating part of a portfolio to fixed interest depending on one's age is sensible. It is much better to invest where the opportunities seem good and to take into account one's need for income and one's attitude to risk. At the moment many of the bonds are expensive and I would not purchase them but depending on risk appetite there is still good income to be had from the likes of REA Prefs and Raven Property Prefs. In short IMHO it is much better to invest because one likes the investment rather than to satisfy some arbitrary formula based on one's age.

scrumpyjack
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Re: Proportion of bonds to shares?

#207466

Postby scrumpyjack » March 13th, 2019, 4:30 pm

I’m well into retirement and have no fixed interest and never have had (apart from holding index linked gilts for a while in the 1980s)
It's all equities and cash (apart from the house)

It really depends on how you see the risks. The risk in fixed interest is inflation and having seen what that did to the real value of any cash denominated asset in my lifetime (and my parents) I have a permanent aversion to that risk. Perhaps risk is like beauty - it only exists in the eye of the beholder - but personally I have found a widespread of equities a lot less risky than bonds

Gilgongo
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Re: Proportion of bonds to shares?

#207469

Postby Gilgongo » March 13th, 2019, 4:39 pm

Thanks all for the insights. Glad I'm not an outlier in being almost exclusively in shares.

Looks like I'll mull the bond question for a while before I go further.

G

xxd09
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Re: Proportion of bonds to shares?

#207479

Postby xxd09 » March 13th, 2019, 5:35 pm

Been retired 15 years
Made my pile
65%in a Bonds -indexed linked Vanguard Global Bond Fund (hedged to pound)
Does it for me and I sleep at night!
xxd09

SalvorHardin
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Re: Proportion of bonds to shares?

#207487

Postby SalvorHardin » March 13th, 2019, 6:21 pm

Retired at 39, now 55, live off my portfolio which is currently 95% shares and won't get any pension except for the basic state pension.

Fortunately I don't need to chase high yields to provide sufficient income (1.5% is more than enough), keep several years living costs in cash to smooth things over in times of dividend cuts, and take the view that inflation is a bigger threat to my real income than dividend volatility.

I learned a valuable lesson in the early 1970s when I saw how much damage inflation did to my pocket money. So I choose shares over fixed interest (I have never bought a fixed interest investment).

If I needed a higher yield, or was 10 to 15 years older, I might consider bonds for say 20% of my portfolio.

dspp
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Re: Proportion of bonds to shares?

#207504

Postby dspp » March 13th, 2019, 7:37 pm

Gilgongo wrote:I know various investment advisers talk about having anything between 15-50% bonds in a retirement portfolio, but what to people on this boards have in reality? I'm 52 and have only about 2% of mine in a corporate bond ETF (ISXF) since 2013, which hasn't done too badly.

I'm thinking that for my age 2% is too low, and I should probably move some of my equity investments into bonds over time. I'm thinking of sticking with ETFs for that though.

G


Back in the 70s and 80s one of my grandmothers went down the bonds route in pursuit of the safety she was assured would result*. She got absolutely wiped out by inflation. In her case she was saved from penury by being wiped out by cancer which was fortunate as she had never knowingly worked in her life and so had nothing else to fall back on. In contrast another grandmother who worked hard all of her life saved assiduously, invested wisely in equities, and retired for a very well-deserved long time with no financial pressures.

I am unsure of what is a 'best' allocation as all the efficient capital allocation models I read skip lightly over the real case of the individual investor in the 10-20 year time frame when one cannot rely on macroeconomics being "more of the same".

In my case (PP, see PP portfolio annuals) and a close friend (FF, see same) who are both working towards retirement, currently take the view that our income from (self) employment, plus our income from property (lodgers etc), plus our pensions, collectively form a sufficiently secure income-stream that we do not need to take on the additional risk of an asset class that we do not at this point understand sufficiently well to form a view, in addition to the equities whic hwe think we understand the risk of**. We both expect to have to revisit that in (say) 5-years time at which point we will have to put the relevant effort in.

I'm not sure that necessarily helps you, but you are asking what others are actually doing, hence my three vignettes. I have gone through and recc'd the contributions of everybody else as they are equally thoughtful and none are wrong.

regards,
dspp


* For those with a long memory some of the bonds were packaged and sold by the Allied Dunbar lot (https://en.wikipedia.org/wiki/Allied_Dunbar), but not all. Be very careful who you go to for advice was the lesson I learnt from watching that episode as a young child. I also remember doing the sums (very briefly) as a teenager before telling my mother not to waste her money on lawyers on a mis-selling case. The reality was that grandmother would have bitten off the hand of any salesman who would have promised her an extra whatever. It just happened to be the Allied Dunbar ones who found her first. She was her own worst enemy, though as I say death saved her from experiencing the consequences.

** I know what bonds are, so can do the first-order thinking. But I do not know at all enough about how market sentiment etc respond so cannot do the second and third order stuff which I think are important over the cycle. In contrast I know enough to think about these issues in equities. At least I think I do .........

Hariseldon58
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Re: Proportion of bonds to shares?

#207553

Postby Hariseldon58 » March 13th, 2019, 10:18 pm

The purpose of investing is not to simply optimize returns and make yourself rich. The purpose is to not die poor.


Bernstein, William. Rational Expectations: Asset Allocation for Investing Adults

I have been in the minimal cash/bonds maximum equities camp, however... age 60, retired 12 years, standard living costs around 1.4% of the portfolio each year and state pensions to come to us in the fullness of time. We will spend on cruising over the winter periods and that has a cost.

Do I need to take 98% equity risk clearly not, I rather think that perhaps 10% bonds is sensible, the reduction in the portfolio return is minimal and the reserve of multiple years of expenditure is "reassuring", in fact 100% bonds would probably work too !

dspp
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Re: Proportion of bonds to shares?

#207601

Postby dspp » March 14th, 2019, 9:17 am

Hariseldon58 wrote:
The purpose of investing is not to simply optimize returns and make yourself rich. The purpose is to not die poor.


Bernstein, William. Rational Expectations: Asset Allocation for Investing Adults

I have been in the minimal cash/bonds maximum equities camp, however... age 60, retired 12 years, standard living costs around 1.4% of the portfolio each year and state pensions to come to us in the fullness of time. We will spend on cruising over the winter periods and that has a cost.

Do I need to take 98% equity risk clearly not, I rather think that perhaps 10% bonds is sensible, the reduction in the portfolio return is minimal and the reserve of multiple years of expenditure is "reassuring", in fact 100% bonds would probably work too !


Thank you. Cross posted to the Books thread
viewtopic.php?f=88&p=207599#p207599

regards, dspp

Alaric
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Re: Proportion of bonds to shares?

#207605

Postby Alaric » March 14th, 2019, 9:27 am

dspp wrote:* For those with a long memory some of the bonds were packaged and sold by the Allied Dunbar lot (https://en.wikipedia.org/wiki/Allied_Dunbar), but not all.


Surely what Allied Dunbar call a "Bond" was essentially an OEIC/Unit Trust with higher charges under a life assurance wrapper ?

The Bonds in the title are presumably Corporate and Sovereign Bonds, in other words fixed interest debt issued by Companies and Governments.

dspp
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Re: Proportion of bonds to shares?

#207607

Postby dspp » March 14th, 2019, 9:41 am

Alaric wrote:
dspp wrote:* For those with a long memory some of the bonds were packaged and sold by the Allied Dunbar lot (https://en.wikipedia.org/wiki/Allied_Dunbar), but not all.


Surely what Allied Dunbar call a "Bond" was essentially an OEIC/Unit Trust with higher charges under a life assurance wrapper ?

The Bonds in the title are presumably Corporate and Sovereign Bonds, in other words fixed interest debt issued by Companies and Governments.


Correct. The Allied Dunbar element is a mild distraction.

- dspp

scrumpyjack
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Re: Proportion of bonds to shares?

#207608

Postby scrumpyjack » March 14th, 2019, 9:41 am

Yes, I recall their nickname was 'Allied Crowbar'!

gbjbaanb
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Re: Proportion of bonds to shares?

#207687

Postby gbjbaanb » March 14th, 2019, 3:01 pm

IIRC the reason to increase bond allocation towards retirement was because you were forced to buy an annuity. The last thing anyone wanted was to see equities drop on the run up to retirement day.

Today 2 things have changed: you no longer need to buy annuities, and can slowly drawdown instead. As a result equities aren't as risky as they were.

The other thing is QE that has broken the old idea as bonds being a safe but boring haven. They are as volatile as equities these days thanks to so much gov cash sloshing around in them. The only thing they have going for them really is the income.

SDN123
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Re: Proportion of bonds to shares?

#207747

Postby SDN123 » March 14th, 2019, 8:27 pm

In response to the OP:

I’m still saving and my job means that my retirement age is probably not within my control. The only “defined benefit” type income I will get is the state pension (likely many years after I’ve “retired”).

My “use” for fixed interest is flexible along the following lines...

- while I’m accumulating how big a drop in my net worth can i tolerate without giving up. It’s hard to say as I wasn’t saving seriously through 2008/9 and have yet to “live the experience”. But I know a 50% drop in next worth would really hurt me and probably make me make bad decisions. After thought experiments and some research I’ve landed on 25% high quality bonds for now.

- when I’m “drawing income” and assuming I do not work at all, I see three scenarios...

— my net worth is huge, E.g. I can live well off 1 or 2 % of net worth per annum. In this scenario I expect to hold little or no fixed interest.

— my net worth is small, E.g. I need 5% or higher return to cover the basics. In this scenario I need maximum income and, although I’d struggle to sleep and night, I’d probably hold little or no fixed interest.

— anywhere between the two scenarios above... I’d want some fixed interest to dampen the highs and lows.

Notes:
- if I was looking to maximise how much I pass on the the next generation my “high worth” answer might be different

SDN123
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Re: Proportion of bonds to shares?

#207749

Postby SDN123 » March 14th, 2019, 8:30 pm

In response to the OP:

I’m still saving and my job means that my retirement age is probably not within my control. The only “defined benefit” type income I will get is the state pension (likely many years after I’ve “retired”).

My “use” for fixed interest is flexible along the following lines...

- I ask myself while I’m accumulating how big a drop in my net worth can i tolerate without giving up? It’s hard to say as I wasn’t saving seriously through 2008/9 and have yet to “live the experience”. But I know a 50% drop in next worth would really hurt me and probably make me make bad decisions. After thought experiments and some research I’ve landed on 25% high quality bonds for now.

- when I’m “drawing income” and assuming I do not work at all, I see three scenarios...

— my net worth is huge, E.g. I can live well off 1 or 2 % of net worth per annum. In this scenario I expect to hold little or no fixed interest.

— my net worth is small, E.g. I need 5% or higher return to cover the basics. In this scenario I need maximum income and, although I’d struggle to sleep and night, I’d probably hold little or no fixed interest.

— anywhere between the two scenarios above... I’d want some fixed interest to dampen the highs and lows.

Notes:
- if I was looking to maximise how much I pass on the the next my “high worth” answer might be different.
- above by fixed interest I mean cash, cash-like or bonds
- if I had a large defined benefits pension I would defined hold very little fixed interest

Hope that helps your thinking!

SDN

everhopeful
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Re: Proportion of bonds to shares?

#207795

Postby everhopeful » March 15th, 2019, 8:25 am

gbjbaanb wrote:IIRC the reason to increase bond allocation towards retirement was because you were forced to buy an annuity. The last thing anyone wanted was to see equities drop on the run up to retirement day.

Today 2 things have changed: you no longer need to buy annuities, and can slowly drawdown instead. As a result equities aren't as risky as they were.

The other thing is QE that has broken the old idea as bonds being a safe but boring haven. They are as volatile as equities these days thanks to so much gov cash sloshing around in them. The only thing they have going for them really is the income.


There is a lot of not very informed comment on the subject of fixed interest. QE dramatically increased the capital value of many fixed interest instruments by decreasing interest rates. This made them expensive but that is not the same as volatile. It is still possible to buy a corporate bond from a decent company with a yield to maturity even for short dated bonds which comfortably beats a cash deposit. If held to maturity and barring default this is an entirely predictable return. I do not disagree with those who want to hold all their portfolio in equities but the idea that fixed interest has no place in a portfolio at all is narrow and suggest a lack of understanding of how it works.

scrumpyjack
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Re: Proportion of bonds to shares?

#207806

Postby scrumpyjack » March 15th, 2019, 9:11 am

It is of course true that a secure short dated gilt is much like a cash deposit that may return a slightly higher yield. Longer term maturities (over 10 years) are a very different proposition as they are significantly at risk from inflation. Since Thatcher brought to heel the high inflation the country had in the seventies, interest rates dropped commensurately with inflation and then continued to drop due to quantitative easing etc. That could all be reversed over the next decade or two if left wing governments come to power and repeat the mistakes of Labour in the seventies. This is entirely possible.

Advocates of fixed interest rarely mention the inflation risk but it is significant. It wiped out many peoples assets in the period post war to the late eighties. It is still doing so but more slowly. It would take 100p now to buy what 3p bought when I was a young man!

tjh290633
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Re: Proportion of bonds to shares?

#207826

Postby tjh290633 » March 15th, 2019, 10:02 am

In my childhood, 1.5d would buy the Daily Telegraph. Today it costs £2, or 480d in old money.

When I joined the drinking classes, a pint cost about a shilling. Now it can be about a fiver

When I started driving, petrol was 4 shillings a gallon. Now it is over £5.

No doubt others have different yardsticks. War Loan continued to pay 3% until it was finally retired. A different matter for equities, certain ITs having increased their dividend every year for up to 50 years.

TJH


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