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Cash or Bonds (for Income Reserve)

Including Financial Independence and Retiring Early (FIRE)
Darka
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Cash or Bonds (for Income Reserve)

#409743

Postby Darka » May 6th, 2021, 9:27 am

I currently plan to keep my income reserve as cash, probably in premium bonds.

However, I can't help thinking that I could do a little better by investing in a bond etf, such as some of Vanguards USD corporate bond funds, e.g.

USD Corporate 1-3 Year Bond UCITS ETF (VUSC)
USD Corporate Bond UCITS ETF (VUCP)

They are low-ish risk (3-4 out of 7) and seem to have done ok over the last 5 years with a much greater return than interest/premium bonds.
Obviously I would keep some of the reserve as cash.

Has anyone else considered this or is indeed taking this approach?

PhaseThree

Re: Cash or Bonds (for Income Reserve)

#409750

Postby PhaseThree » May 6th, 2021, 9:51 am

Whether you think bonds are a good idea will depend on your view on interests rates in the near to mid term.
While interest rates remain at their currently low rates (or even go down further) then bonds could be a good buy Vs cash.
If however interest rates rise then your bond holding is likely to devalue to reflect this.

Personally I think interest rates are likely to rise, this makes bonds too risky for me to hold as my FIRE cash reserve.
I went the premium bond route.

Darka
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Re: Cash or Bonds (for Income Reserve)

#409754

Postby Darka » May 6th, 2021, 10:04 am

PhaseThree wrote:Whether you think bonds are a good idea will depend on your view on interests rates in the near to mid term.
While interest rates remain at their currently low rates (or even go down further) then bonds could be a good buy Vs cash.
If however interest rates rise then your bond holding is likely to devalue to reflect this.

Personally I think interest rates are likely to rise, this makes bonds too risky for me to hold as my FIRE cash reserve.
I went the premium bond route.


Good point, the reserve should be invested risk free so premium bonds would seem the safer bet.

xxd09
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Re: Cash or Bonds (for Income Reserve)

#409758

Postby xxd09 » May 6th, 2021, 10:13 am

Corporate bonds are very equity like in behaviour ie more growth but more risk
Personally I keep 2 years living expenses in cash
The bulk of the portfolio is in a Vanguard Global Bond Index Tracker Fund hedged to the Pound (VIGBBD) as I have a large enough savings pot and do not need to take risks
4% increase in NAV over the last 9 years-will this continue?
Is it different this time?
Who knows
Vanguard does include a few Corporate bonds in this fund but mostly Government bonds
Done the job for me so far
Cheap simple and easy to understand
xxd09

1nvest
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Re: Cash or Bonds (for Income Reserve)

#409805

Postby 1nvest » May 6th, 2021, 1:57 pm

Low interest rates/inflation, negative real yields are suggestive of relatively high valuations/prices. States printing money to buy their own bonds drives demand and hence keeps prices high/yields low. Historically that has been preparatory for inflation rising whilst interest rates are kept low - that can accumulate over a handful of years to 50% real (after inflation) losses. Cash, bonds, stocks can all lose at the same time primarily due to inflation and suppressed interest rates/yields. One option is Inflation Bonds, (Index Linked Gilts). When valuations are low you can typically buy £10,000/whatever of inflation adjusted income at a discount, perhaps for £8000 present day money. At current high valuations its the opposite and £10,000 of inflation adjusted income in 10 years might cost £12,500 of present day money. A ladder of inflation bonds spanning 1 to 10 years of £10K/year (£100K total) might collectively cost £112K of present day money, the equivalent of a 11% cost/loss, which in contrast to possible conventional bonds/cash/stock losses could be a substantially smaller loss.

PS I've approximated the above based on a present day -2.5% real yields type figure and very rough/quick mental calculations.

AshleyW
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Re: Cash or Bonds (for Income Reserve)

#409829

Postby AshleyW » May 6th, 2021, 3:41 pm

Depends very much on how you are holding your portfolio - if everything is in tax sheltered vehicles such as ISAs and SIPPs then you do have to keep a cash reserve outside of these vehicles but this “external” money could be part of the fixed income part of your portfolio as you are unlikely to be concerned about cgt or income tax on this money (if cgt is a concern you could hold gilts directly rather than through an ETF as they would be cgt exempt) I would split this between accessible cash to cover expenses such as a boiler replacement or major car expense, and conventional gilts which could quickly be sold in the case of a major expense) I don’t believe corporate bonds should play any part in a portfolio - bonds are there to reduce portfolio volatility and only government bonds can do this.

You will gather that I’m not a believer in holding several years expenses in cash - just keep a chunk of your fixed income outside of tax wrappers. One of the big downsides of going all in with a multi asset fund such as Vanguard’s LifeStrategy - you can’t access the fixed income element of the portfolio.


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