Low cost trackers vs bonds

[bluedonkey]

I've moved some of my cash into a ladder of low coupon short dated gilts to avoid tax (capital gains on gilts are tax free and the coupon is negligible). The yield to maturity was ~4.7%pa when I bought them.

I also recently bought a bond IT. It has a high yield, was and is sitting on a significant discount. I think it could do well going forward as and when interest rates fall. But the majority of my investments are still in equities

How far out did you go, i.e. how long is short?

[Oggy]

Not sure if anyone has really answered my question but to clarify

The "safe haven" comment was not mine. I mentioned it as I wasn't aware of it.
Low cost trackers - fairly self evident I would have thought. Things like Fidelity Index World, Vanguard FTSE dev world ex UK, etc. I realize there are 100s of them, I wasn't attempting to be specific.
Bonds - as stated my preference would be for global ETFs - i.e. VAGP or similar?

Scotia's figures are compelling, but of course they are historical. However they reflect my thinking. As for bonds providing some sort of better protection than equities, then Geoff's comment here is also instructive "The bonds are there to provide protection in an equity crash, which they have done historically. We have recently had the biggest bond crash in history, at a time when equities have been more or less level. Equities normally fall even harder than bonds when interest rates rise, but these have not been normal times"

So, I am still unsure whether bonds would (in general terms) would provide better protection in a future crash, and I remain confident that equities would provide a better return.

[GeoffF100]

So, I am still unsure whether bonds would (in general terms) would provide better protection in a future crash, and I remain confident that equities would provide a better return.

We have not had an equity crash. Bonds have taken an unprecedented hit, but are now yielding much more.

Nobody knows whether equities will provide a better return. If Vanguard is right, it is pretty much a toss of a coin to see which one does best over the next ten years. That is not the point anyway. Bonds are there to smooth returns. It is not much consolation if equities recover from a crash after your death. Bonds provide near certain income. Equities do not.

[Oggy]

Geoff

.....but given we have had a recent bond crash, are bonds therefore just as "risky" - for want of better word - as equities, and therefore the income certainty you mention for bonds may not be as certain as it historically has been?

[daveh]

I've moved some of my cash into a ladder of low coupon short dated gilts to avoid tax (capital gains on gilts are tax free and the coupon is negligible). The yield to maturity was ~4.7%pa when I bought them.

I also recently bought a bond IT. It has a high yield, was and is sitting on a significant discount. I think it could do well going forward as and when interest rates fall. But the majority of my investments are still in equities

How far out did you go, i.e. how long is short?

I went out as far as 31. Bought equal amounts of:

Ticker  YTM
TN24   4.5%
TN25   4.73%
T26     4.49%
TN28   4.31%
TG31   4.2%

The gaps are because I couldn't see a low coupon gilt for those years. They were bought between August and October and the YTMs are for the capital only (I've not accounted for the small coupon payments).

[kempiejon]

....but given we have had a recent bond crash, are bonds therefore just as "risky" - for want of better word - as equities, and therefore the income certainty you mention for bonds may not be as certain as it historically has been?

I believe bonds/gilts bought today if held to maturity do have a known return of coupon and principal. I guess there is the risk of company default with some corporate bonds, there is the risk of societal collapse for government bonds but in general a known return at a known date is more certain than quoted shares and their dividends.
I do not hold much by way of fixed interest and I am banking on equities having the better longer term return but I can see why a short term certainty might exist in FI.

[GeoffF100]

.....but given we have had a recent bond crash, are bonds therefore just as "risky" - for want of better word - as equities, and therefore the income certainty you mention for bonds may not be as certain as it historically has been?

No. What happened recently with bonds was unique. Falls of that magnitude and worse happen frequently for equities. 90% losses are not particularly rare for equities. Bonds prices usually move in the opposite direction to equity prices. Even if shareholders are wiped out, bond holders usually get at least some of their money back, and defaults on government debt are rare.

[Oggy]

Geoff - fair enough. I understand that equities can fall dramatically, but perhaps if I am invested in trackers, drops of such magnitude may be avoided and the risk mitigated. Looking at the FTSE 100 the drop in 2020 was around 30%, back up to original level around 2 years later.

Have to say my tracker portfolio is up around 8% this last week, and historically has done pretty well, so if bonds move the other way you perhaps see my hesitancy. I do however appreciate the likelihood that bonds may well be a more secure bet - but we are still betting...

[AshleyW]

For a retiree in drawdown bonds within a portfolio allow a higher Safe Withdrawal Rate due to the portfolio’s reduced volatility - but at the expense of growth rate which results in a smaller final portfolio value. So a retiree who doesn’t need the maximum income and wishes to leave a substantial inheritance could go for a 100% equity portfolio with a low SWR - providing he has a strong heart to tolerate the market crashes.

[bluedonkey]

How far out did you go, i.e. how long is short?

I went out as far as 31. Bought equal amounts of:

Ticker  YTM
TN24   4.5%
TN25   4.73%
T26     4.49%
TN28   4.31%
TG31   4.2%

The gaps are because I couldn't see a low coupon gilt for those years. They were bought between August and October and the YTMs are for the capital only (I've not accounted for the small coupon payments).

Thanks, interesting.

T26 now 3.94%
TN28 3.65%
TG31 3.62%

You bought at the right time it seems. I'm not going in at those current YTMs. You no doubt now have a capital gain in excess of the YTM you bought at.

Data from https://www.yieldgimp.com/gilt-yields

[Oggy]

Ashley - fair point. Thanks. I suppose I am trying to have my cake and eat it, but then again no harm in trying! Given the diversity of global trackers, the volatility is surely reduced but perhaps not to the same level of stability as bonds. A gradual drip feed into something like VAGP ETF may be the way to go.

[daveh]

I went out as far as 31. Bought equal amounts of:

Ticker  YTM
TN24   4.5%
TN25   4.73%
T26     4.49%
TN28   4.31%
TG31   4.2%

The gaps are because I couldn't see a low coupon gilt for those years. They were bought between August and October and the YTMs are for the capital only (I've not accounted for the small coupon payments).

Thanks, interesting.

T26 now 3.94%
TN28 3.65%
TG31 3.62%

You bought at the right time it seems. I'm not going in at those current YTMs. You no doubt now have a capital gain in excess of the YTM you bought at.

Data from https://www.yieldgimp.com/gilt-yields

Yes I'm showing a 3.2% gain on my original investment. The TN24 will be maturing in January so I will have a decision to make then what to do with the cash returned. It may go into another gilt we'll have to see what's available at the time. The biggest gains have been on TN28 (3.6%) and TG31 (6.9%). TN24 is almost back to par, but that's as expected as there is just a month to go to redemption.

[TallInvestor]

... Given the diversity of global trackers, the volatility is surely reduced but perhaps not to the same level of stability as bonds. ...

True, but maybe not to the extent that you would think. A typical global equity fund portfolio will be at least 60% US based and 34% of the S&P 500 is currently just eight stocks. There are usually less than 200 stocks in total.

Unless you think you know better than the markets (I sometimes think I do and occasionally get it right!), this could still be a good option in the medium / longer term for retirement, and better (imho) than a bond ETF that is virtually guaranteed to give a lower overall return over 10+ years and probably significantly so.

Edited to add that I am assuming you do not intend to buy an annuity in the next 10 years. That would put a different slant on things.

[mrodent]

Regardless of what investment approach you like, I notice that you are with HL and AJ Bell.

And that you have approx. 400k in your SIPP portfolio.

This is a disaster. You should change platform as soon as possible. According to the excellent fund platform comparison page at Mr Monevator, https://monevator.com/compare-uk-cheape ... e-brokers/ , HL charge 0.45% EACH YEAR, and AJ Bell 0.25%, bad enough. Assuming a 50-50 split between the two, that means you're paying £1400 a year just for the dubious privilege of being their customer. At your size of portfolio being "on a percentage" is horrible.

My SIPP is with Interactive Investor. They charge an annual flat-rate of £155, regardless of how much money you have in there. Yes, you have to pay (absolutely tiny) transaction fees. I probably make fewer than 10 transactions each year.

I had to change platforms in the dim distant past. It was a PITA and took several months. But you're throwing lots of money away there by sticking with those percentage-based scam-merchants. Please think about changing.

[kempiejon]

HL charge 0.45% EACH YEAR, and AJ Bell 0.25%, bad enough. Assuming a 50-50 split between the two, that means you're paying £1400 a year just for the dubious privilege of being their customer. At your size of portfolio being "on a percentage" is horrible.

My ISA with AJ Bell is capped at £42 per year. My Pension is with HL and the fee is capped at £200. I see AJB cap pensions at £120 per year.

[swill453]

This is a disaster. You should change platform as soon as possible. According to the excellent fund platform comparison page at Mr Monevator, https://monevator.com/compare-uk-cheape ... e-brokers/ , HL charge 0.45% EACH YEAR, and AJ Bell 0.25%, bad enough.

If you have ETFs, shares, ITs, & bonds with AJ Bell, it's capped at £120 per year. HL is probably similar.

Scott.

[mrodent]

Oops! OK lads, yes it's all there in the Monevator small print. My bad.

In mitigation I think HL (and probably AJ Bell) did have much less capping in the past: they've perhaps been forced to respond to hungrier competitors over recent years.

In fact if that table is still right things don't really make sense now: HL is said to be "0.25%" for portfolios over £250k. I remember that from when I was with them. But the capping would mean that would never be applicable. Puzzlement.

[swill453]

In mitigation I think HL (and probably AJ Bell) did have much less capping in the past: they've perhaps been forced to respond to hungrier competitors over recent years.

I can't give you chapter and verse, but I've had my SIPP with AJBell since 2009 and to my recollection the charges have never been higher than they are today.

Scott.

[midgesgalore]

... In fact if that table is still right things don't really make sense now: HL is said to be "0.25%" for portfolios over £250k. I remember that from when I was with them. But the capping would mean that would never be applicable. Puzzlement.

The percentage fees apply to funds - not anything that trades continuously on the markets.

midgesgalore

[mrodent]

... In fact if that table is still right things don't really make sense now: HL is said to be "0.25%" for portfolios over £250k. I remember that from when I was with them. But the capping would mean that would never be applicable. Puzzlement.

The percentage fees apply to funds - not anything that trades continuously on the markets.

midgesgalore

Then it appears that my point stands. The OP describes having his money (at HL and AJB) in "low cost global tracker funds" (see original post). Not so low cost after HL have grabbed a nice wad out of it. Unless by "funds" he in fact means "ETFs". Which he might.