New to investing, worried about my 40-60% Funds

[Waspfan]

Hi folks,

I am new to investing my IFA setup 3 funds detailed below, and was wondering if you could hopefully put my mind at rest please
I had to part company with my IFA, but thats another story.


I am recently retired and currently living off cash.

My Sipp portfolio is to be kept untouched for another 10 years maybe longer if both my wife and have state pensions coming in (Both alive to take them) so if one of us passes, then that's one state pension less.

I have 3 funds in my SIPP portfolio which are 40-60% and arecausing me concern.

Liontrust MA Passive Interm Passive S Acc
£9,325 invested ( Currently down by 4.48% since January)

Royal London Sustainable Div C Acc
£9,312 Invested
( Currently down by 9.27% since January)

Vanguard Lifestrategy 60%
£17,060 Invested ( Currently down by 1.88% since January)

I am really worried about the bonds part of the investment in each of the above funds.

Whilst I am not entirely blaming bonds for the performance to date of these funds, It has got me thinking with what I am seeing and hearing of late, that bonds over the next 10 years are not going to provide adequate returns.

£92,000 is my portfolio size pre losses &
When I calculate my 40% of the above 3 funds with Bonds this totals £14,278 invested in the total bond element of my portfolio.

I am truly worried about the future of Bonds in the above 3 funds in my portfolio.

This whole portfolio is for our future fall back cash and wont be required for at least 10 years.

I am hoping someone with way more knowledge than me can offer me some reassurance about bonds in the above funds please.

Thanks

[GeoffF100]

Bonds cannot be expected to give a decent return over the next ten years. Bonds are there to reduce your loss if the equities crash, not to make money. The pound has been falling against the dollar recently. As a result (unhedged) equities have fallen less in sterling terms than in dollar terms. Bond allocations are usually either in your own currency, or hedged into your own currency. They have not benefited from the falling pound. The falling pound is bad news, but it flatters the return of equities.

People buy risk investments in the hope of a better return, but that is not guaranteed. You can get burned. If you use an IFA, your returns will be reduced by their fees, which compound up over time. If you lose money that is your problem, not theirs.

[Waspfan]

Thanks for your reply Geoff.

What I am struggling to understand here is this,

Having my money invested in bonds seems to be losing money and dragging my 60-40 funds down, so by losing value they are not protecting me like maybe they would before inflation, and interest rate rises occurred.

So currently the bond elements of my 3 funds seem to be a liability rather than a lifesaver.

[NotSure]

So currently the bond elements of my 3 funds seem to be a liability rather than a lifesaver.

Your funds are down by considerably less than say a 100% equity global tracker, YTD?

[tjh290633]

Interest rates are rising, so bond prices tend to fall in sympathy. You are learning a hard lesson.

TJH

[Waspfan]

Interest rates are rising, so bond prices tend to fall in sympathy. You are learning a hard lesson.

TJH

So what lesson is it please.....not to invest?

[Hariseldon58]

The bond component of your portfolio is a relatively small % of the total, I wouldn’t panic unduly.

It’s likely with a 10 year timeline that the duration of your bond funds is less than 10 years, you will ultimately benefit from rising interest rates, bond interest payments and maturing bonds are reinvested at higher rates of interest now in the market.

Here is a link https://investor.vanguard.com/investor-resources-education/news/the-dynamics-of-bond-duration-and-rising-rates it’s from Vanguard in the US but the principles are the same.

Some individuals would be comfortable with a 100% equity approach over a 10 year period, but not all. The market goes up and down a lot and occasionally goes down a lot, the good news is it tends to bounce back but that can take years. You need to have a portfolio that is diversified and at a risk level that you understand and can live with.

Many on this forum have lived through multiple heavy markets falls of 40% or more and have held their nerve, it can be uncomfortable.

There are investment trusts that specialise in protecting capital, preserving wealth whilst still providing decent returns, eg Capital Gearing Trust, Ruffer and Personal Assets Trust, take a look at them and see what their portfolios look like.

TJH has a very long equity return experience and you can see his equity portfolio returns on these forums, have been very good over decades. You can see he has come out great over time but there are down periods.

I retired in 2007 and relied on investments for living costs ( still awaiting pensions now) I experienced a period of 40/50% losses within a year or so of retiring, uncomfortable but it came back and I have far more now then in 2007 and a much higher real income. I retired with an almost entirely equity portfolio, it worked but with hindsight I would have held more bonds/cash, that would have worked too and made things more comfortable.

We may well face a major change in markets going forward as asset valuations are high for both stocks and bonds, there is a lot of doom and gloom with talk of stagflation, over 10 years things will probably work out fine provided you are confident in your portfolio allocation, understand it and the possible ups and downs and won’t sell in a panic.

Perhaps you might give full details of your portfolio and you may get some helpful comments.

[Urbandreamer]

I agree with those who say "don't panic".

What lessen to learn? Well that NOTHING is "safe" or "risk free".

I'm not a fan of bonds, but even so I have some. I'm well aware that in the current conditions it's likely that they may just lose value slowly. I feel that it's something that you just have to be aware of and configure your portfolio to meet your risk profile.

I will be entitled to a full state pension and will start to receive that and a small DB pension in 6 years. I can consider those as "bond like" guaranteed income. This means that I can hold less bonds and still achieve my desired risk profile.

You shouldn't regard your 40-60 funds in isolation. I hold a 100% bond fund, which I expect will lose against inflation. It's a small part of a larger portfolio so the options are a percentage of bonds or no bonds. As you can tell, I'm not a passive investor and prefer to mix global index trackers, bond funds, IT's etc rather than buy a single product.

Here is a thought process for you on the "bond like" thought. Take your guaranteed income and multiply by 20. Now divide by 4 and multiply by 6. Were your portfolio to consist entirely of that value in equities. You would then be in roughly the same situation as the theoretical someone with a 40-60 portfolio returning 4% who lived in a country without state pension or DB pensions who had to replace them with bonds. Where does the 40-60 and 4% "rule" come from? What is the logic behind it? I'm not expecting an answer, but for people to try and produce an answer for themselves.

Of course there is debate about 40-60 or 60-40 or all ratios. Statistically with a fixed pot a larger equity component is needed to last longer.

[GeoffF100]

Thanks for your reply Geoff.

What I am struggling to understand here is this,

Having my money invested in bonds seems to be losing money and dragging my 60-40 funds down, so by losing value they are not protecting me like maybe they would before inflation, and interest rate rises occurred.

So currently the bond elements of my 3 funds seem to be a liability rather than a lifesaver.

Your bonds HAVE been more of a liability than a lifesaver. We do not know what will happen in the future. In theory, future expected interest rate rises are already priced in. Bonds will only fall further if future interest rises have been underestimated. Equity prices could suddenly crash to a fraction of their current value.

Equities usually beat bonds over a long time period, but that does not always happen.

[GeoffF100]

So currently the bond elements of my 3 funds seem to be a liability rather than a lifesaver.

Your funds are down by considerably less than say a 100% equity global tracker, YTD?

A 100% equity global tracker (e.g. VWRL) is up over one year. A global bond tracker (e.g. VAGP) is well down.

The bond element of my portfolio is almost entirely savings accounts and RPI index linked, so I have not been hit hard. I can invest like that. Vanguard cannot invest $ trillions like that.

[BullDog]

I am not familiar with any of those funds. Good idea getting rid of the IFA and taking control yourself. The losses to date look nothing more than market noise in the overall scheme of things on a 10 year timescale. I would be tempted to do nothing until you have done more research and developed a proper plan. I have never owned anything with bonds or bonds directly. Never seen the need to.

At the present time then, in your shoes, I would do nothing until I knew exactly what I thought I could do better.

[DrFfybes]

So what lesson is it please.....not to invest?

Lots of sensible advice on here, as always, and "Don't Panic" in large friendly letters is the message to hear. You are in the game for 10 years, you just need to be patient.

And that is probably the hardest thing to learn about investments.

You picked an unusually 'active' time to invest. When some of the largest companies in the world can fluctuate 10% in a couple of days based on the odd tweet (or in some cases the odd Twitter) then things are unusually volatile. I topped up Berkshire Hathaway in Feb, and watched it soar 10% in a week before I watched it falling back and wished I'd used up my CGT allowance and paid for the central heating with the profits. I'll just have to wait a while for it to repeat the feat.

Bonds ARE supposed to protect you in a downturn, but that downturn has been compounded by a war and rising interest rates. Many of us are in a similar position. I have VAGP and Vanguard lifestyle that I am slowly moving into VEVE, which is a global tracker of developed countries and covers circa 90% of the market.

Picking a couple of comments, both apparently opposing, but actually just highlight the market over slightly different timeframes. You say you invested at Xmas?

Your funds are down by considerably less than say a 100% equity global tracker, YTD?

A 100% equity global tracker (e.g. VWRL) is up over one year. A global bond tracker (e.g. VAGP) is well down.

On the HL website you can look at performance,,, the below links are for a Global Tracker and a Global Bond Fund...
https://www.hl.co.uk/shares/shares-sear ... are-charts
Global Equities..over 12 months up 4% plus dividends of about 1.2%, however since Xmas (year to date) down 7% , but had you invested in Jan 2021 you'd have been up 12%.
VAGP global bonds shows that they have unfortunately dropped sharply since Xmas... fairly flat until the end of last year and down 10% year to date.
https://www.hl.co.uk/shares/shares-sear ... are-charts

As mentioned, bonds tend to move in the opposite direction to interest rates, historically rates have been dropping, but once they hit zero, there is generally only one direction they can go in.

As a final lesson, I should add a note to myself to add here. On monday stop procrastinating, end the denial, admit I made a mistake, take the hit and ditch the rest of my Bond funds for Equities. Although deep down inside, I suspect selling the bonds and holding more cash for a few months might be more sensible.

Paul

Paul

[GeoffF100]

As mentioned, bonds tend to move in the opposite direction to interest rates, historically rates have been dropping, but once they hit zero, there is generally only one direction they can go in.

Interest rates can and do go negative. Before this happened, savings accounts guaranteed by the FSCS were paying more than government bonds with the same maturity. Vanguard cannot use them. You cannot use them in a low cost SIPP. An IFA is no going to use them, because it would be too much work. A ladder of 5 year savings accounts has duration of about 2.5 years. Index linked bond funds are sensitive to interest rates, but you can hold index linked gilts directly.

[GeoffF100]

There are investment trusts that specialise in protecting capital, preserving wealth whilst still providing decent returns, eg Capital Gearing Trust, Ruffer and Personal Assets Trust, take a look at them and see what their portfolios look like.

You can directly hold (most of) the investments that these funds hold, and eliminate their costs. Unfortunately, there are times when all main stream investments lose money, and diverting from the mainstream can be even worse. There is no law that says the world will always get richer, or even stand still. World wars destroy wealth. Climate change will destroy wealth.

[xxd09]

Perhaps some more advice or information for balance
Bonds are mainly to reduce the volatility of your portfolio-they usually drop much less than equities in a downturn
Secondarily they can produce a return though much less than equities
Equities provide your growth but are very volatile-100% allocation is too much for most people
So you pays your money and makes your choice
eg I am 75 many years retired with a reasonably sized pot and am 33/62/5 -equities/bonds/cash-been this way for many years through many downturns
A 3.5% withdrawal rate is sustainable
For me a conservative portfolio like this let’s me sleep at night
I suggest you sit tight for the next few months if not a year -(nothing in your investments are wildly out of kilter)- and do some reading-Monevator.com is a good source of info
You will face more downturns in your investing career-the first one is the most traumatic!-also that’s the one you learn most from!
xxd09

[GeoffF100]

A 3.5% withdrawal rate is sustainable.

You hope. An index linked annuity is much safer. It is best not to be buying it now though.

[Gerry557]

Looking at short time frames doesn't help much except to make you worry or feel chuffed. Second different investments have their time in the spotlight at different times.

I would be unduly concerned and think bigger picture.

Bonds were expected to drop as interest rates rise but what was your initial purpose for holding them? Is it still valid?

If you are still adding cash to investments you get more bonds for that cash. Eventually they will come back in fashion again.

[GeoffF100]

Eventually they will come back in fashion again.

Interest rates might come back down again. More to the point, the OP has already taken the hit of them going up. The could go higher, but then again they might not. Welcome to investing.

[Howard]

Having invested over many years and several cycles and given your comments above, I would suggest you ensure you are not paying fees to an IFA. Particularly if you have parted company with them. (ie check that you are not still paying an ongoing commission for past advice). These fees will definitely reduce your income and net worth in the future. And as you suggest, your own judgement is probably better for you in the long term rather than accepting the choice of an IFA who may be influenced by the income he or she may earn from the advice given.

I once did a rough calculation of the current net value of the fees I avoided paying by deciding to make my own investing decisions. The result was surprisingly large in £ terms! And it's pretty evident to me that the investing decisions I made personally have produced better returns than the suggestions made by IFAs consulted in the past.

regards

Howard

PS Your portfolio performance doesn't seem too bad to me given your objectives and the current investing climate.

[Hariseldon58]

There are investment trusts that specialise in protecting capital, preserving wealth whilst still providing decent returns, eg Capital Gearing Trust, Ruffer and Personal Assets Trust, take a look at them and see what their portfolios look like.

You can directly hold (most of) the investments that these funds hold, and eliminate their costs. Unfortunately, there are times when all main stream investments lose money, and diverting from the mainstream can be even worse. There is no law that says the world will always get richer, or even stand still. World wars destroy wealth. Climate change will destroy wealth.

Direct holdings will reduce the cost and the premiums but more difficult for smaller holdings. I like the approach of the wealth preservers for part of my portfolio and already do as you suggest. I presently hold a lot of TIPs and are putting together a buy list of REITs and alternatives to further diversify my portfolio from a largely equity/bond portfolio.I do hold an industrial property that has provided a good yield over the last 30 years.

I concern myself more about providing for future spending then pure growth, as you say the future is uncertain.