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Introducing the LemonFools Personal Finance Calculators

Reducing the Risk level of my Retirement Portfolio

Including Financial Independence and Retiring Early (FIRE)
Stanley117
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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 ?

GeoffF100
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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.

GeoffF100
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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.

Longtermyieldman
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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.

IAC2016
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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%.

tjh290633
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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.

bluedonkey
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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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Re: Reducing the Risk level of my Retirement Portfolio

#135961

Postby GeoffF100 » May 1st, 2018, 10:09 am

vrdiver wrote: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.)

You can buy a 100% spouse's pension, if that is what you want:

https://www.pensionsandannuities.co.uk/ ... uities.htm

You can also buy index linked annuities that do not cap increases. You can also leave an index linked capital sum on death, if that is what you want. Another index linked bond investment would do the trick. Nonetheless, certainty is expensive, particularly at the present time.

Keeping a cash reserve is, in principle, the same as keeping a percentage in bonds. However, bonds pay more interest than cash. Long dated government bonds also tend to rise in value during a stock market crash, whereas cash does not.

With equities, you have no certainty that the capital or dividends will rise with inflation. Bonds pay income and provide a capital reserve when the stock market falls. Bonds also allow more equities to be bought when the their dividends and capital values fall.

Certainty is expensive, and risk reduction comes at a price. If you are happy to see the capital value of your life savings fall to a quarter of their original value, and not recover in your lifetime, then by all means hold 100% equities. That will maximise your expected return, but the return that you will actually get is very uncertain, and it could be very bad.

GeoffF100
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Re: Reducing the Risk level of my Retirement Portfolio

#135962

Postby GeoffF100 » May 1st, 2018, 10:18 am

bluedonkey wrote:I don't see how that sort of portfolio has any chance of preserving, let alone increasing, inflation-adjusted income

Here are the results of Vanguard's back testing for the US markets from 1926-2016:

https://www.vanguard.com/us/insights/sa ... llocations

For 100% equities, the annualised total return was 10.2%, with a fall of 43.1% in the worst year.

For 60% equities, the annualised return was 8.7% with a fall of 26.6% in the worst year.

It is up to you to choose the risk level that you find acceptable.

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Re: Reducing the Risk level of my Retirement Portfolio

#135971

Postby bluedonkey » May 1st, 2018, 10:40 am

Geoff,

It seems to me that you end up paying a high price for, in effect, insuring against a repeat of the Great Depression.

BD

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Re: Reducing the Risk level of my Retirement Portfolio

#135980

Postby tjh290633 » May 1st, 2018, 11:35 am

GeoffF100 wrote:
bluedonkey wrote:I don't see how that sort of portfolio has any chance of preserving, let alone increasing, inflation-adjusted income

Here are the results of Vanguard's back testing for the US markets from 1926-2016:

https://www.vanguard.com/us/insights/sa ... llocations

For 100% equities, the annualised total return was 10.2%, with a fall of 43.1% in the worst year.

For 60% equities, the annualised return was 8.7% with a fall of 26.6% in the worst year.

It is up to you to choose the risk level that you find acceptable.

And what was the effect on the distributions in those years?

TJH

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Re: Reducing the Risk level of my Retirement Portfolio

#135989

Postby GeoffF100 » May 1st, 2018, 12:15 pm

tjh290633 wrote:And what was the effect on the distributions in those years?

Those numbers are harder to find, because nobody cares very much. Total return is all that matters to most people.


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