Low cost trackers vs bonds

[Oggy]

I have been reading around a little on the merits - or otherwise - of investing in bonds. Currently I have no real income, I am 59, and much of my pension is tied up in low cost global tracker funds within HL and AJ Bell. Suggestions I have seen range from transferring half the "pot" now into bond funds and then gradually transfer more over, to transferring around 5% every year into bonds, to not transferring anything at all into bonds. The latter approach is based upon the assumptions that the risk of low cost trackers is not much greater than that of investing in bonds, that the tracker returns are likely to be far better, and even if there was a crash, the markets would recover reasonably quickly. The latter may be offset somewhat by having a pot of cash to draw on - say 2 years annual spend.

Thoughts most welcome....

[DrFfybes]

As I see it, 'traditionally' bonds were seen as less volatile than equities, and the idea of moving assets to bonds and cash as you approach retirement was to preserve the value of the pot as you ran up to buying an annuity.

These days all is difference, bonds have recently proven to NOT be a safehaven, although with lower interest rates on the horizon they may yet have their time in the sun again (I bought some IDTG recently at what has turned out so far to be exactly the right moment, probably triggered by a discussion on here).

Also you now have the choice of keeping control over your pot, and this may go one for 30 years or more. Consequently the aims shift slightly, from 'slow and steady returns' to 'long term growth and income' so either keeping the pre-retirement strategy and selling down for income, or moving to higher income investments seem popular aproaches.

Ultimately it is down to you, your attitude to risk, to tinkering, how much impact a market crash would have if all your income depends on your investments, how much headrrom you have for a market downturn, etc. We have reasonalbe DB pension income, so our investments are 'icing on the cake' money and I'm moving towards Global trackers from the odds and sods accumulated over the years.

Paul

[scotia]

I have been reading around a little on the merits - or otherwise - of investing in bonds. Currently I have no real income, I am 59, and much of my pension is tied up in low cost global tracker funds within HL and AJ Bell. Suggestions I have seen range from transferring half the "pot" now into bond funds and then gradually transfer more over, to transferring around 5% every year into bonds, to not transferring anything at all into bonds. The latter approach is based upon the assumptions that the risk of low cost trackers is not much greater than that of investing in bonds, that the tracker returns are likely to be far better, and even if there was a crash, the markets would recover reasonably quickly. The latter may be offset somewhat by having a pot of cash to draw on - say 2 years annual spend.

Thoughts most welcome....

Its a guessing game. Way back when bond rates were at a reasonable level, and didn't fluctuate too much, the advice on approaching your pension age was to gradually switch from equity to bonds to make your terminal sum more assured, and you may have thought about purchasing an annuity. But over the last decade bond rates plummeted, and stayed low, while equity prospered, with ups and downs. Now we are back to reasonable bond rates - say 5-6%, (from 1-2%) so possibly bonds are back in favour. However I'm 79 and staying predominantly with equity. I have adequate cover with cash and a DB pension.
But I repeat - its a guessing game.

[Oggy]

Gents

Thanks for the replies and all understood. I appreciate it is guessing game - isn't it all? - but I was particularly wondering about the risk to one's pot if I remained in low cost global tracker funds - always bearing in mind that the companies contained within those funds are, or at least seem to be, pretty robust - compared with the risk of going into bonds. I am interested in the comment made in the first reply that "bonds have recently proven NOT to be a safe haven" - something I wasn't aware of..

Incidentally my strategy - such as it is - would be to use drawdown as a means of income. I'll know more when I read the "Beyond the 4% rule" book and read more in general.

[Dicky99]

I have been reading around a little on the merits - or otherwise - of investing in bonds. Currently I have no real income, I am 59, and much of my pension is tied up in low cost global tracker funds within HL and AJ Bell. Suggestions I have seen range from transferring half the "pot" now into bond funds and then gradually transfer more over, to transferring around 5% every year into bonds, to not transferring anything at all into bonds. The latter approach is based upon the assumptions that the risk of low cost trackers is not much greater than that of investing in bonds, that the tracker returns are likely to be far better, and even if there was a crash, the markets would recover reasonably quickly. The latter may be offset somewhat by having a pot of cash to draw on - say 2 years annual spend.

Thoughts most welcome....

Have you considered Vanguards Lifestrategy fund? A low cost well diversified fund combining stocks and bonds in a single fund in a ratio of your choosing 80/20, 60/40, 40/60 etc

Hsbc have their similar "balanced fund" and L&G "mixed investment" fund.

There are slight differences in their asset allocations giving scope for having a combination of each.

[Bubblesofearth]

Gents

Thanks for the replies and all understood. I appreciate it is guessing game - isn't it all? - but I was particularly wondering about the risk to one's pot if I remained in low cost global tracker funds - always bearing in mind that the companies contained within those funds are, or at least seem to be, pretty robust - compared with the risk of going into bonds. I am interested in the comment made in the first reply that "bonds have recently proven NOT to be a safe haven" - something I wasn't aware of..

Incidentally my strategy - such as it is - would be to use drawdown as a means of income. I'll know more when I read the "Beyond the 4% rule" book and read more in general.

Personally I'm always scratching my head a bit as to why private investors would buy bonds. If you can get a similar, or better, rate on cash then that strikes me as a better portfolio diversifier. Unlike bonds, cash has zero volatility. The rates available at the moment are not too bad. Even premium bonds offer an average 4.65% tax-free.

I have no bonds but some cash.

BoE

[Oggy]

If I were buying bonds, I think I'd go low cost global tracker ETFs - VAGP or some such. I did dismiss cash in another post, but at least it is secure - isn't it?- and yes there are some half decent rates around.

However, why bother buying bonds if my present equity funds are of a similar risk to bonds? - especially as the returns on those equities are likely to be far higher?

[EthicsGradient]

I have been reading around a little on the merits - or otherwise - of investing in bonds. Currently I have no real income, I am 59, and much of my pension is tied up in low cost global tracker funds within HL and AJ Bell. Suggestions I have seen range from transferring half the "pot" now into bond funds and then gradually transfer more over, to transferring around 5% every year into bonds, to not transferring anything at all into bonds. The latter approach is based upon the assumptions that the risk of low cost trackers is not much greater than that of investing in bonds, that the tracker returns are likely to be far better, and even if there was a crash, the markets would recover reasonably quickly. The latter may be offset somewhat by having a pot of cash to draw on - say 2 years annual spend.

Thoughts most welcome....

Transferring half of your pot at one moment into bonds seems like a risk to me - you'd be betting that now is the right moment for greater return from bonds than equity - trying to time the market. There may be something to be said for a gradual approach like the 5% each year, for a bit.

[DrFfybes]

I am interested in the comment made in the first reply that "bonds have recently proven NOT to be a safe haven" - something I wasn't aware of..

If I were buying bonds, I think I'd go low cost global tracker ETFs - VAGP or some such. I did dismiss cash in another post, but at least it is secure - isn't it?- and yes there are some half decent rates around.

However, why bother buying bonds if my present equity funds are of a similar risk to bonds? - especially as the returns on those equities are likely to be far higher?

Long term, all the historical portfolio modelling tools I've seen indicate equities provide a better return, except for the short periods they don't, and then they can "don't" quite spectacularly.

VAGP is 11% down over 5 years and lost circa 20% between Dec 2021 and about 6 weeks ago, when it started to recover, seemingly as it looked like interest rates were going to fall again. Obviously there is the divi, curently circa 2.3% I sold my bond funds and Lifestrategy stuff about a year ago and moved it into VHYL (also done little). VAGP is up about 5% since early Nov, so perhaps it is time to ride the Bond bus for a while?

Paul

[Oggy]

Transferring half of your pot at one moment into bonds seems like a risk to me - you'd be betting that now is the right moment for greater return from bonds than equity - trying to time the market. There may be something to be said for a gradual approach like the 5% each year, for a bit

The gradual approach appeals to me as it stands a greater chance of smoothing out any price variations, but again, I return to the point of why bother with bonds if the low risk attraction of bonds is no better than that of the trackers, and especially as the return on the trackers is likely to be, and perhaps traditionally has been, far higher.

[GeoffF100]

The title is strange since there are lots of low cost bond trackers. A huge amount of research has been done on this issue, but it typically uses historical data, and the future may not be like to past. Nonetheless, the results of Vanguard's research are embodied in their Target Retirement Funds:

https://www.vanguardinvestor.co.uk/arti ... -date-fund

Their "glide path" has just under 60% equities at retirement, falling steadily to just under 30% equities from age 75 onwards. The assumption is clearly that you are withdrawing money to use as a pension. If you are investing to leave a legacy, the considerations are different. US based, but here is how Vanguard arrives at its glide path:

https://institutional.vanguard.com/insi ... funds.html

[scotia]

I had a look at the Vanguard Life Strategy Funds, which are available in a range of different equity to bond ratios. I have listed below the total Returns over the past 5 years.
Vanguard LS equity 100%, bonds 0% Return 55.2%
Vanguard LS equity 80%, bonds 20% Return 41.2%
Vanguard LS equity 60%, bonds 40% Return 28.2%
Vanguard LS equity 40%, bonds 60% Return 16.2%
Vanguard LS equity 20%, bonds 80% Return 5.9%
The Return has decreased (substantially) with each increase in the bond component
I'm aware that it has been a tough period for bonds, and hopefully they will improve going forward
But I'm mighty gad that I was in equity, whose return exceeded inflation, but bonds did not.
I should probably add that the "bonds" also includes other interest based investments - e.g. gilts

So If I were looking over the next 5 years, I need to guess that there will be increased bond return, and a considerably reduced equity return before I favoured bonds. Is it likely? I'm in the happy position that it does not matter - but I'll be sticking with equity.
(Data from Hargreaves Lansdown)

[GeoffF100]

So If I were looking over the next 5 years, I need to guess that there will be increased bond return, and a considerably reduced equity return before I favoured bonds. Is it likely?

Yes, according to Vanguard:

viewtopic.php?f=55&t=41406

The van guard's model is forecasting 6% p.a. for global equities and 5% p.a. for global bonds over the next ten years. Nobody knows what will actually happen, of course. 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.

[JohnW]

‘The latter approach is based upon the assumptions that the risk of low cost trackers is not much greater than that of investing in bonds, that the tracker returns are likely to be far better, and even if there was a crash, the markets would recover reasonably quickly. The latter may be offset somewhat by having a pot of cash to draw on - say 2 years annual spend.’

Just to put some ‘size’ to those comparisons….
Over the last 40 years the stock market volatility has been about twice that of government bonds, if that’s how you compare risk. In their worst years, stocks were down 40% and bonds 15%. The biggest yearly fall for stocks was 55% for stocks and 23% for bonds. Are the risks ‘not that much greater’? Do you own comparisons at portfoliovisuaizer.
Returns likely far better?
‘. The new historical record shows that over multi-decade periods, sometimes stocks outperformed bonds, sometimes bonds outperformed stocks, and sometimes they performed about the same. More generally, the pattern of asset returns in the modern era, as seen in the Ibbotson SBBI and other datasets that begin in 1926, emerges as distinctly different from what came before. Contrary to Siegel, the pattern of asset returns seen in the 20th century does not generalize to the 19th century. A regime perspective is introduced to make sense of the augmented historical record. It argues that both common stocks and long bonds are risk assets, capable of outperforming or underperforming over any human time horizon’. https://www.bogleheads.org/forum/viewtopic.php?t=384785
You’re 59 years old, how long is your ‘long term’? And look at the Financial Times article from this week cited in that thread: ‘In 2002, Research Affiliates founder Rob Arnott co-authored a paper with Peter Bernstein concluding that the historical average equity risk premium was about half of what most investors believed and stood at only 2.4 percentage points a year. The quantum of stocks’ median outperformance over long-term holding periods is roughly halved again in the new data. And the incidence of equity underperformance over twenty-year holding periods almost triple.’
Finally, reasonably quick recovery after a crash? Over the last 100 years the average time for recovery from a US equity bear market was 7 years, or 10 years for the worst five bears; that is, dividends all reinvested, and recovery to overcome the inflation during the bear period. https://earlyretirementnow.com/2019/10/ ... ar-market/
That’s what biases ‘pro-bond’ thinking.

[monabri]

Gents

Thanks for the replies and all understood. I appreciate it is guessing game - isn't it all? - but I was particularly wondering about the risk to one's pot if I remained in low cost global tracker funds - always bearing in mind that the companies contained within those funds are, or at least seem to be, pretty robust - compared with the risk of going into bonds. I am interested in the comment made in the first reply that "bonds have recently proven NOT to be a safe haven" - something I wasn't aware of..

Incidentally my strategy - such as it is - would be to use drawdown as a means of income. I'll know more when I read the "Beyond the 4% rule" book and read more in general.

I think you need to do more research into "bonds". (especially in light of your 'safe haven ' comment ).

[dealtn]

I am interested in the comment made in the first reply that "bonds have recently proven NOT to be a safe haven" - something I wasn't aware of..

This worries me. Someone considering transferring half of their pension pot with no/little research on the chosen asset class. It doesn't take long to look at a historic chart over a number of time periods.

[bluedonkey]

I started getting interested in short term gilts and I subsequently invested in these. This then led on to considering medium term gilts. Given the recent fall in the medium term yields, it doesn't seem worth moving away from short term gilts or fixed term deposits.

[Dod101]

I think the OP needs to sort out his thoughts and does some research before doing anything. What is he trying to achieve? Is he looking for capital preservation, income, all out growth or, probably like most of us a bit of both?

Even the term 'Low Cost Trackers' can mean a lot of different things and are quite likely to produce a very different outcome to a portfolio of bonds.

If going for bonds, is he going to be picking individual bonds or going for bond funds?

And so on.........

Dod

[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

[monabri]

I am interested in the comment made in the first reply that "bonds have recently proven NOT to be a safe haven" - something I wasn't aware of..

This worries me. Someone considering transferring half of their pension pot with no/little research on the chosen asset class. It doesn't take long to look at a historic chart over a number of time periods.

Exactly. The "safe haven" comment was a red flag.