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Introducing the LemonFools Personal Finance Calculators

Proportion of bonds to shares?

Including Financial Independence and Retiring Early (FIRE)
everhopeful
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Re: Proportion of bonds to shares?

#207929

Postby everhopeful » March 15th, 2019, 3:28 pm

Once again the argument has become a binary one; equities vs bonds. I said in my last post that many bonds, both gilts and corporates, are expensive because inflation is low which clearly recognizes the risk to capital value if interest rates rise. I was born in the 1940s so am no stranger to inflation and over the near 40 years that I have been running my own portfolios have experienced times when fixed interest has offered good value and times when it has offered poor value. But that is no different to equities. All I am suggesting is that rather than ignoring fixed interest completely there are times and circumstances when it is useful. I am 60% in equities and 40% fixed interest at the moment but as some of my individual bonds mature I will probably invest the proceeds in to equities unless the outlook for interest rates changes significantly.

scrumpyjack
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Re: Proportion of bonds to shares?

#207946

Postby scrumpyjack » March 15th, 2019, 4:07 pm

We are not being ‘binary’. Everyone has to make their own choices but it is sensible to make them while recognising all the risks.

The ‘binary’ element is where people say – equities risky – fixed interest much less risky.

They are both risky but the risks are different.

Chacun a son gout as they say!

hiriskpaul
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Re: Proportion of bonds to shares?

#208786

Postby hiriskpaul » March 20th, 2019, 9:02 am

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

To start with I think it worthwhile defining what sort of bonds advisers, etc. are talking about. What they tend to mean are government bonds, perhaps with some top rated corporates. Duration typically low to medium as well, although there is some argument to matching duration with life expectancy. In his wife's retirement portfolio, Warren Buffett proposed 10% in short dated Treasuries, so cash like returns with no credit risk or duration risk. Investing purely in investment grade corporate bonds runs too much risk according to Buffett, etc. High yield bonds are even worse and should really be included in the equity allocation.

Bonds, especially short dated government bonds, are expected to have lower returns than shares, so why invest in them at all? Surely you would expect to get a better return from all in equities? That is absolutely true, the more equities in the portfolio, the higher the expected return. However there is no guarantee the expected return will be delivered. Adding bonds to the portfolio reduces overall portfolio volatility, which is a very good thing to do when in drawdown as it reduces "sequence of return" risk. In a nutshell, adding bonds to the portfolio reduces the chance of getting a very bad outcome.

This article discusses this worst case risk reducton aspect of bonds and finds Buffett's 90/10 portfolio does very well in backtest, although 60/40 did the best.

https://www.investopedia.com/articles/p ... -sound.asp


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