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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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Re: Proportion of bonds to shares?

#233874

Postby gadgetmind » July 4th, 2019, 10:17 am

I retired at 54 and am now 56. State pension will arrive at age 67 and we have no DB pensions.

After being a life long equity hog, I went to 40% bonds in SIPPs a couple of years before retirement with 10% in property/infrastructure and the rest in global equities via passive ETFs.

I plan to slowly reduce our bond holdings to closer to 25% as we approach state pension age as the bonds are there to address sequence of returns risk.

We currently also have about 10% in cash, which we'll also reduce as various relatives pay us back house loans, and this will go into equities in ISAs. ISAs have fewer bonds as we don't plan to touch these for at least a decade.

AleisterCrowley
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Re: Proportion of bonds to shares?

#233933

Postby AleisterCrowley » July 4th, 2019, 1:15 pm

"A well-worn adage is to maintain a percentage of stocks equal to 100 minus one’s age – at least as a rule of thumb." (investopedia)

Never quite understood why it's put like that

Wouldn't "Bond percentage equal to your age" be clearer? Obviously the rule fails for centenarians

TUK020
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Re: Proportion of bonds to shares?

#233948

Postby TUK020 » July 4th, 2019, 1:42 pm

AleisterCrowley wrote:"A well-worn adage is to maintain a percentage of stocks equal to 100 minus one’s age – at least as a rule of thumb." (investopedia)

Never quite understood why it's put like that

Wouldn't "Bond percentage equal to your age" be clearer? Obviously the rule fails for centenarians

Or does it mean % (Bonds + Property+ Gold) = age?

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Re: Proportion of bonds to shares?

#233950

Postby AleisterCrowley » July 4th, 2019, 1:46 pm

All the discussions seem to be around equity /bond split, not equity/'other'
I gather the general idea is to de risk a portfolio as one gets older, and adding in property /gold to the 'non-equity' part may increase risk

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Re: Proportion of bonds to shares?

#233960

Postby SalvorHardin » July 4th, 2019, 2:42 pm

One thing about the meme that it’s a good idea for the percentage of fixed interest in your portfolio to be your age is that this arose during the period from the 1950s to 2008 when there was a “reverse yield gap”, where equity yields were greater than fixed interest yields. Before the late 1950s there was a “yield gap”, with equity yields being larger than fixed interest yields to compensate for the higher risk in holding equities (dividends were much more volatile back then). Then George Ross Goobey persuaded the trustees of the Imperial Tobacco pension fund that they should put much more into equities and the yield gap reversed.

https://en.wikipedia.org/wiki/George_Ross_Goobey

Since the financial crisis of 2008-09 the yield gap has returned and equities now yield more than fixed interest. The article below discusses this and has an interesting graph of the S&P500 vs. 10-year US Treasuries.

https://www.newtonim.com/uk-institution ... ing-again/

The 10-year gilt yield is 0.66% as I type this, well below the FTSE100 yield of 4.3%. That’s a huge difference and dividends would have to fall substantially for a 100% equities investor to see their income drop below the 100% fixed interest investor.

https://www.bloomberg.com/quote/GUKG10:IND

https://www.dividenddata.co.uk/dividend ... et=ftse100

Now it’s true that for certainty of income you can’t beat gilts. But the problem is that this security is expensive. £100,000 buys £4,300 of equity income but only £660 of gilt income (I’m simplifying matters because the 0.66% on gilts is a mixture of interest payments and capital losses if held to maturity).

I’m retired, live off my portfolio and am sticking with 96% equities 4% cash. I’m not chasing high yields (1.8% portfolio yield) and I can’t see dividends falling by 63% to put them on par with the current 10-year gilt.

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Re: Proportion of bonds to shares?

#233970

Postby SalvorHardin » July 4th, 2019, 3:20 pm

Oops. Bit of an error in the first sentence of my post above where I mistakenly reversed the reverse yield gap (correction in bold capitals below, in the years of the reverse yield gap fixed interest yields were greater than equity yields).

"One thing about the meme that it’s a good idea for the percentage of fixed interest in your portfolio to be your age is that this arose during the period from the 1950s to 2008 when there was a “reverse yield gap”, where FIXED INTEREST YIELDS WERE GREATER THAN EQUITY YIELDS. Before the late 1950s there was a “yield gap”, with equity yields being larger than fixed interest yields to compensate for the higher risk in holding equities (dividends were much more volatile back then). Then George Ross Goobey persuaded the trustees of the Imperial Tobacco pension fund that they should put much more into equities and the yield gap reversed."

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Re: Proportion of bonds to shares?

#233979

Postby langley59 » July 4th, 2019, 3:47 pm

Its noteworthy that if interest rates continue to fall, even to more extreme negative yields in some currencies, you can make large capital gains from holding long dated bonds, even if this is counter intuitive, due to bond convexity. This article explains this:

https://portfoliocharts.com/2019/05/27/ ... -411826377

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Re: Proportion of bonds to shares?

#233985

Postby scrumpyjack » July 4th, 2019, 4:41 pm

The 'certainty' of income from gilts is only 'certainty' as regards the nominal amount paid, not its purchasing power, which is what really matters, unless you hold index linked gilts.

There are few certainties in financial matters, but in the case of the UK the one certainty at least since before the 2nd world war has been the loss of purchasing power of our currency!

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Re: Proportion of bonds to shares?

#234312

Postby richfool » July 5th, 2019, 8:43 pm

Spotted this article, on Yahoo finance today, which maybe of interest:-
‘Markets make mistakes’: Why bonds may have overreacted on inflation

LONDON (Reuters) - For some anxious investors, bond markets have lost the plot.

With yields across the developed world in free-fall, markets appear to have convinced central banks that only drastic monetary stimulus can prevent inflation expectations from evaporating for a lifetime. But might those markets be reading it wrong?

https://uk.finance.yahoo.com/news/marke ... 16469.html


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