hiriskpaul wrote:dealtn wrote:Advocates of Bond/Fixed Income investing tend not to recognise that whilst equities have had a broadly upwards only direction over the past many (cumulative) years, the same is also true of that alternative asset class. This is generally due to the significant drift lower of interest rates over this period. This trend is not something that can perhaps be relied upon to continue, and with it the near total absence of losses from Fixed Income investing.
By all means use alternatives to equities for diversification purposes, but do so with eyes open to the fact that alternatives might also deliver greater volatility than in the past, and potential capital losses too. With negative real yields, another concept not fully appreciated by everyone, I would hope that those advocating investing, or currently invested in, Fixed Income appreciates the irony of the claims that equities "might" be overvalued.
No, bonds (investment grade bonds) will always provide positive returns to maturity (unless yield at purchase is negative). Over the short term they can of course fluctuate in price, but a very bad year for intermediate dated bonds might mean a drop of 10%, but a very bad year for equities means a drop of 40% or more, with no guarantee of a quick bounce back. A very bad year for equities very often coincides with a very good year for bonds and that is the main investment case for investment grade bonds. They are not bought as a source of return, but for stabilisation/risk reduction.
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Not sure I said anything that required a "No", nothing too controversial in what I said.
Indeed I think you are a little dismissive in your "very bad year for equities..." when such a fall has occurred just once since 1900, in 1974, which was followed by a rise of approx. 140% (depending on your index) in 1975. Granted there is no guarantee of "a quick bounce back", but I made no such claim anyway. Incidentally Gilts also had a negative return in 1974, so I don't hold much stake for your claim that "a very bad year for equities very often coincides with a very good year for bonds" either. By your definition we have witnessed a single "very bad year" for equities, and in that solitary instance it wasn't accompanied by a good year for bonds, let alone a "very good" one.
All I was pointing out, to those who might be persuaded that alternatives to equities are appropriate, is to recognise that such diversification should be considered carefully, and not taken as fact that it is a good thing, and that volatility and equity correlation are not simple, and indeed analysis of the recent past might not be reflective of the likely future, given the recent history of such markets where we have been through a deflationary period, with QE, which may well prove to be a significant outlier to what might be considered normal.
The thinking behind gradually moving from equity to bonds (or cash) as retirement was approached was considered sensible when living in a time of pensions being a savings vehicle to buy an annuity on a single date. Those days are in the past, and whilst equities are no doubt still a volatile investment class, the rigidity of such thinking is diminished.
I am far from dismissing diversification, particularly to any making their "First steps in investing". I am saying that for any in such a position they should question any advice considered as a truism, and in particular when these are based on events of the past, which I believe are of less relevance given where we are now, which looks different to much of the period of market history.