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At retirement 70% in bonds seems high

hiriskpaul
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Re: At retirement 70% in bonds seems high

#439119

Postby hiriskpaul » September 2nd, 2021, 12:21 am

AWOL wrote:It's a reminder that bonds can also have significant drawdowns and also sometimes fall at the same time as bonds. Generally though, gilts are pretty pedestrian but everything in investing has risk. There's a risk that I am pointing out the surprising drawdowns can bonds can have and this could be followed by equities tanking and bonds rallying. You never know however I think 70% in bonds at a time of negative real returns may be lower volatility but risking real losses. Maybe try nudging up your equity:bond ratio a little and see how you get on.

The huge gilt drawdowns in the chart were at times when the average gilt duration was very long due to all the undated War Loan, etc. Duration is nowhere near as long now, but still long enough to cause significant losses, especially with the low yields we have now which makes gilts more sensitive to yield changes than they would be if yields were higher.

I share your concerns about gilt yields rallying at the same time as equities falling. That is exactly what happened in the early 1970s and in 1994. VGOV currently has an average duration of 13.8 years with an effective YTM of only 0.7%, so not much potential upside unless gilts fell to negative yields, which could happen of course. For private investors there is a better alternative for safe assets IMHO in FSCS protected deposits. Instant access accounts with yields similar to VGOV, but with a correlation to equities guaranteed not to move far from zero in a bear market, unlike with gilts. 1 year deposits are available with yields around 1.4%, so better expected returns than gilts with lower risk.

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Re: At retirement 70% in bonds seems high

#439136

Postby AWOL » September 2nd, 2021, 6:49 am

hiriskpaul wrote:
AWOL wrote:It's a reminder that bonds can also have significant drawdowns and also sometimes fall at the same time as bonds. Generally though, gilts are pretty pedestrian but everything in investing has risk. There's a risk that I am pointing out the surprising drawdowns can bonds can have and this could be followed by equities tanking and bonds rallying. You never know however I think 70% in bonds at a time of negative real returns may be lower volatility but risking real losses. Maybe try nudging up your equity:bond ratio a little and see how you get on.

The huge gilt drawdowns in the chart were at times when the average gilt duration was very long due to all the undated War Loan, etc. Duration is nowhere near as long now, but still long enough to cause significant losses, especially with the low yields we have now which makes gilts more sensitive to yield changes than they would be if yields were higher.

I share your concerns about gilt yields rallying at the same time as equities falling. That is exactly what happened in the early 1970s and in 1994. VGOV currently has an average duration of 13.8 years with an effective YTM of only 0.7%, so not much potential upside unless gilts fell to negative yields, which could happen of course. For private investors there is a better alternative for safe assets IMHO in FSCS protected deposits. Instant access accounts with yields similar to VGOV, but with a correlation to equities guaranteed not to move far from zero in a bear market, unlike with gilts. 1 year deposits are available with yields around 1.4%, so better expected returns than gilts with lower risk.


Strangely enough I am toying with the idea of holding more cash for diversification given that the outlook for bonds is so poor. This has given me the nudge to discover what I can find beyond premium bonds for cash or pseudo-cash. I have a small gold holding but I am not interested in going beyond 5% as it's volatile and I am not a dragon. In the OPs case though the question is "how to balance bond risk" whereas I am moving in the opposite direction as I cannot stomach bonds in this environment.


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