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Reducing the Risk level of my Retirement Portfolio

Including Financial Independence and Retiring Early (FIRE)
mickeypops
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Re: Reducing the Risk level of my Retirement Portfolio

#133919

Postby mickeypops » April 22nd, 2018, 2:37 pm

According to Trustnet, there are 37 Fixed Interest Investment Trusts, but some of them are rather specialised and best left to experts I think!

John Baron, in his portfolios, includes the likes of:

New City High Yield
Invesco Perpetual Enhanced Income
TwentyFour Select Monthly Income
Henderson Diversified Income;

All have yields north of 5%, but the buyer has to accept the vagaries of the bid/offer spread, Stamp Duty, NAV premia, and market prices, which is why I decided to use OEICs/UTs for my fixe interest allocation.

Stanley117
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Re: Reducing the Risk level of my Retirement Portfolio

#133943

Postby Stanley117 » April 22nd, 2018, 5:48 pm

mickeypops wrote:According to Trustnet, there are 37 Fixed Interest Investment Trusts, but some of them are rather specialised and best left to experts I think!

John Baron, in his portfolios, includes the likes of:

New City High Yield
Invesco Perpetual Enhanced Income
TwentyFour Select Monthly Income
Henderson Diversified Income;



Thankyou all for your excellent replies !

@mickeypops
Like you have done in the past -I am now thinking that if I transfer my Cash ISA to iweb I could then put my fixed income in there in the form of OEICs. This would also reduce the amount of cash I have earning < 1% as my instant Cash ISA rate is very low. I was wondering what fixed income OEICs do you and other readers use - Geoff100 said he uses Vanguard Global Bond Fund which is hedged to GBP - I will take a look at this ?

With regard to John Baron portfolio Fixed Income choices above - I assume most of these would be classed as 'High Yield' and could behave a bit like equities in an stock market downturn - Do any readers have any experience of these fixed income ITs. ?

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Re: Reducing the Risk level of my Retirement Portfolio

#133959

Postby mickeypops » April 22nd, 2018, 7:15 pm

Hi Stanley

I still look to earn a bit of income from my bond OEICs in my ISA. I invest mostly in Strategic Bond funds in the hope that the managers can steer their funds through the risk of higher interest rates. I’ve got GAM star credit opps, Royal London Sterling Extra Yield, Henderson Fixed Interest Monthly income and TwentyFour Dynamic Bond.

The capital can still see some volatility of course, but I don’t intend to have to sell - only if something unexpected occurs.

MP

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Re: Reducing the Risk level of my Retirement Portfolio

#133989

Postby vrdiver » April 22nd, 2018, 10:35 pm

Hi Stanley,

Mrs VRD and I retired, aged 50, four years ago (ish). We currently have no fixed interest, preference shares or bonds. Our income comes from HYP type portfolios, with a cash buffer, The HYP dividends are more than we spend, so the HYP investment continues to grow.

The plan is that the HYP will (with 25% of the dividends reinvested) grow its yield faster than inflation. The cash buffer (3x annual spend) earns a little bit of interest (or premium bond prize money) but its purpose is to ensure a hiccup in the dividend flow doesn't become a catastrophe.

Since we live off the dividends, we don't really care about the capital values on a day-to-day basis. Provided the dividends meet our income requirements, the capital value fluctuations are just noise. The real enemy is inflation. It's fear of inflation that keeps me in equities and out of fixed interest type investments. If inflation rises, I expect dividends to keep pace, albeit in a rather lumpy progression.

When you look at derisking your investments, ask what the risk is that you want to mitigate? Also ask, what cost is acceptable? I.e. if you were to invest in bonds today, would 30% of your portfolio in bonds provide the protection you want, or would it still be a disaster if your risk materialised? If the risk doesn't, would 30% in bonds be such a large drag on your overall performance that you would consider them "too expensive"?

On the HYP board, there are discussions from time to time about what sort of risks and mitigations a HYP investor should think about. Needless to say, these usually involve a market "crash" in terms of dividend payout, so the mitigation is to have an excess dividend income (so that if it shrinks for a while, you will still have enough income) and a cash buffer (so that if the dividend income shrinks to less than your needs, the cash buffer can be drawn on so as to avoid being a forced seller in a depressed market).
Typical values discussed might be a 25 - 33% excess dividend stream (i.e. spend £3 and save £1, or spend £2 and save £1) and a couple of years of planned expenditure ("salary") held as cash or near-cash.

With your equity portfolio invested in ITs, if the IT is holding back some of its earnings in order to smooth payments through good times and bad, you have a duplication of the mitigations talked about in the previous paragraph. You may like the belt-and-braces, or you may choose to reduce the cash buffer / increase the % of dividend income available to spend (as opposed to reinvest).

Other investors will have different defensive strategies, but with your early retirement and mix of DB and equity exposure, I'd be more worried about inflation than market crashes, as markets recover, inflation rarely reverses.

VRD

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Re: Reducing the Risk level of my Retirement Portfolio

#134050

Postby GeoffF100 » April 23rd, 2018, 9:40 am

Stanley117 wrote:Do you know of any platforms that don't charge a high % fee for OEICs

iWeb does not have any platform fee for holding OEICs. Vanguard charges 1.5% capped at £375, but that is not competitive with iWeb, except for small accounts.

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Re: Reducing the Risk level of my Retirement Portfolio

#134224

Postby Stanley117 » April 23rd, 2018, 6:30 pm

GeoffF100 wrote:I am using the Vanguard Global Bond fund, which is hedged into GBP, but that is an OEIC, and would be far too expensive with your fees.



I could not find the Vanguard Global Bond fund on iweb - I was wondering which platform you use or do you go to Vanguard direct ?
Does this OEIC hold just Global Government Bonds or other types of Bond as well ?

Have you compared the performance with managed Bond funds ?

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Re: Reducing the Risk level of my Retirement Portfolio

#134238

Postby GeoffF100 » April 23rd, 2018, 7:42 pm

The Vanguard Global Bond fund is well hidden on iWeb. You will find it under Vanguard IRE. None of the Vanguard documentation says that it is domiciled in the Irish Republic, it just says EU.

The fund does contain some corporate bonds. The Vanguard data gives the spread of credit ratings of the bonds, but they are mostly of good quality. The duration is not very long either. When I last looked, Vanguard Lifestrategy had half its bond allocation in this fund. The YTM understates the long term return of the fund, because the bonds slide down the yield curve as they mature. You can add about 0.5% to the YTM to give the expected total return, on the assumption that interest rates do not change.

If you have an iWeb account, you can buy gilts directly, which saves on the costs of a bond fund. Gilts have lower risk than the Vanguard Global Bond fund, but probably also a lower return. I have lots of bonds guaranteed by the UK government, so the Vanguard Global Bond fund provides some diversification away from the risk that the UK government will default on its debt.

The costs of the Vanguard fund are bad enough. The costs of managed bond funds are horrible. Managed bond funds will equal the index, on average, before costs. There is no way of picking a managed fund that will do better than average, except by chance.

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Re: Reducing the Risk level of my Retirement Portfolio

#134243

Postby GeoffF100 » April 23rd, 2018, 8:08 pm

You can find information on gilts here:

https://www.fixedincomeinvestor.co.uk/x/bondtable.html

More technical stuff is to be found here:

https://www.dmo.gov.uk/

Stanley117
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Re: Reducing the Risk level of my Retirement Portfolio

#134246

Postby Stanley117 » April 23rd, 2018, 8:31 pm

GeoffF100 wrote:The Vanguard Global Bond fund is well hidden on iWeb. You will find it under Vanguard IRE. None of the Vanguard documentation says that it is domiciled in the Irish Republic, it just says EU.
If you have an iWeb account, you can buy gilts directly, which saves on the costs of a bond fund. Gilts have lower risk than the Vanguard Global Bond fund, but probably also a lower return. I have lots of bonds guaranteed by the UK government, so the Vanguard Global Bond fund provides some diversification away from the risk that the UK government will default on its debt.


Thanks I managed to find 'The Vanguard Global Bond fund' but I was wondering how do you buy GIlts directly on iweb. Can you buy at other Bonds directly on iweb (eg Corporate Bonds) ? Can't see a menu option for these !

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Re: Reducing the Risk level of my Retirement Portfolio

#134254

Postby GeoffF100 » April 23rd, 2018, 9:10 pm

You have to buy bonds on the phone, but you are still charged only £5. I suggest that you contact them via the online chat for information. It is a long time since I bought any bonds with iWeb, but I thought they were in the menu, and you just got a message telling you to ring them if you tried to trade them.

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Re: Reducing the Risk level of my Retirement Portfolio

#135872

Postby Longtermyieldman » April 30th, 2018, 9:04 pm

I think it's a fallacy that more bonds equal less risk. That might have been broadly true in normal times, ie before ZIRP and QE. Now, with the yield curve ticking up, I see bonds as the riskiest asset class available, excepting crypto.

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Re: Reducing the Risk level of my Retirement Portfolio

#135889

Postby GeoffF100 » April 30th, 2018, 9:54 pm

According to Vanguard, the equity risk premium for the UK market, since its inception, has been about 4%. Quite recently, when bond returns were 4%, the expected return from equities was 4% + 3.5% = 7.5%. Bond returns are now about 2%, and Vanguard expects equity returns of 3-5% over the next 10 years, i.e. a central estimate of 4%. Investors have been fleeing safe bonds for riskier assets in the hope of getting decent returns. As a result, the expected returns from riskier assets have fallen by more than the returns of safe assets, but the risk of those riskier assets has not fallen. There are likely to be lean pickings everywhere, starting from here, but that is no cause to jump from the frying pan into the fire.

If you fear rising interest rates, you can buy short dated bonds, but you may be wrong, as they were in Japan. Vanguard Global Bond fund has a medium duration of about 7 years, so its return will soon rise if interest rates go up.

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Re: Reducing the Risk level of my Retirement Portfolio

#135897

Postby GeoffF100 » April 30th, 2018, 10:40 pm

If interest rates rise, bond prices fall, but equity prices fall much harder. Equities are worth the net present value of their future dividends. If interest rates raise, the net present value falls as a result. Company borrowing also becomes more expensive, which reduces the value of future dividends. Equities are certainly not a safe haven from rising interest rates.
Last edited by GeoffF100 on April 30th, 2018, 10:41 pm, edited 1 time in total.

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Re: Reducing the Risk level of my Retirement Portfolio

#135898

Postby IAC2016 » April 30th, 2018, 10:41 pm

GeoffF100 wrote:If you fear rising interest rates, you can buy short dated bonds, but you may be wrong, as they were in Japan. Vanguard Global Bond fund has a medium duration of about 7 years, so its return will soon rise if interest rates go up.


The returns from short dated bond ETFs are less than Cash at present and have more risk. Cash deposits are covered by the FSCS.

Ishares Ultrashort Corp Bond ETF (ERNS) is very stable and behaves like Cash but the total return over the year was 0.5%. Ishares Corp Bond 0-5 ETF fluctuates more but should normally have a higher return (but the year to date total return was 0.5%) . The Short dated Gilt etf (IGLS) (0-5 yr) ETF has had a negative total return over the past year (-1.23%). The intermediate term Vanguard etf (VGov) total return over the past year was (-1.18%). Do you know what the total return of the Vanguard Global Bond Fund over the past year ?

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Re: Reducing the Risk level of my Retirement Portfolio

#135899

Postby GeoffF100 » April 30th, 2018, 10:45 pm

IAC2016 wrote:Do you know what the total return of the Vanguard Global Bond Fund over the past year ?

1.19%.

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Re: Reducing the Risk level of my Retirement Portfolio

#135900

Postby tjh290633 » April 30th, 2018, 10:48 pm

GeoffF100 wrote:If interest rates rise, bond prices fall, but equity prices fall much harder. Equities are worth the net present value of their future dividends. If interest rates raise, the net present value falls as a result. Company borrowing also becomes more expensive, which reduces the value of future dividends. Equities are certainly not a safe haven from rising interest rates.

Once again you miss the point. With equities you have the possibility of your dividends rising with or faster than inflation. No chance with fixed interest securities.

TJH

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Re: Reducing the Risk level of my Retirement Portfolio

#135937

Postby GeoffF100 » May 1st, 2018, 8:24 am

tjh290633 wrote:With equities you have the possibility of your dividends rising with or faster than inflation. No chance with fixed interest securities.

You also have the possibility of your dividends crashing and not recovering in real terms for decades. A mixed portfolio is much more resilient. The income from a mixed portfolio of equities and bonds does have the possibility of an income that rises with inflation. If you want certainty that your income will rise with inflation, buy an index linked annuity, or use index linked bonds.

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Re: Reducing the Risk level of my Retirement Portfolio

#135944

Postby Alaric » May 1st, 2018, 9:03 am

GeoffF100 wrote:Equities are worth the net present value of their future dividends.


That has to be only partly true, else a Company not paying dividends would have a value of zero. As Companies aren't obliged to distribute, it's more the future profits that will be valued. A linkage between equity prices and interest rates is somewhat weak in practice.

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Re: Reducing the Risk level of my Retirement Portfolio

#135947

Postby vrdiver » May 1st, 2018, 9:05 am

GeoffF100 wrote:
tjh290633 wrote:With equities you have the possibility of your dividends rising with or faster than inflation. No chance with fixed interest securities.

You also have the possibility of your dividends crashing and not recovering in real terms for decades. A mixed portfolio is much more resilient. The income from a mixed portfolio of equities and bonds does have the possibility of an income that rises with inflation. If you want certainty that your income will rise with inflation, buy an index linked annuity, or use index linked bonds.

Whilst dividends can and do "crash", I don't think you're comparing apples with apples here!
To compare a HYP, dividend paying investment with an annuity, you need an annuity that will rise with inflation and pay out 100% of income on first death. I'll ignore that a HYP will return the capital.

At age 55 (relevant to me!) the best annuity I can find pays 2.4% and reduces to 1.2% on first death whilst capping increases to 3%. Compared to my HYP paying over 4% and continuing to pay 4% on first death with escalation (lumpily) in line with inflation. Accepting that dividends do crash, keeping a cash reserve and only drawing 3% whilst re-investing the remaining cash gives me an above-inflation growth and a protection against a dividend drought.

How do they (bonds) help me protect my income over a 30 - 50 year timescale? (and possibly eternal timescale if my heirs apply the same philosophy to their inheritance of my HYP.)

VRD
Last edited by vrdiver on May 1st, 2018, 9:16 am, edited 1 time in total.

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Re: Reducing the Risk level of my Retirement Portfolio

#135950

Postby bluedonkey » May 1st, 2018, 9:14 am

V,

Yes this is my issue with high bond allocation. I don't see how that sort of portfolio has any chance of preserving, let alone increasing, inflation-adjusted income. Happy to be educated, though!

BD


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