I'm going to buy some bonds - am I insane?

[farwide]

I think I've decided to buy into a bond fund for the first time. Am I insane?

Context: FIRE'd, 40-ish, with 60% equities / 35% cash / 5% gold. I never liked the look of bonds, which so far has been wise. My equity allocation is too low, but that's another chapter.

Proposal: Go from 35% cash, to 25% cash / 10% VAGP (Vanguard Global bond fund), maybe higher.

Thinking:

- As with all int/long bond funds, VAGP is looking increasingly beat up. 9.3% down nominal since mid-2020, much worse after inflation of course. YTM is about 2.5%.
- With the recent falls, I hope that there will be some element of hedging that will actually work again when equities take their inevitable tumble.
- I hope this will have a beneficial effect on my SWR too via a smoothing effect.
- Simple diversification away from just cash.
- I don't pretend to be able to time the bond market, but cheaper prices with higher yields has to be a better time to get in than a few months ago.

So, go on. Tear me to shreds. What am I missing, aside from simply the point that I'm changing about my portfolio mid-flow which I accept is not best practice. I would be very much keeping the bonds for the long long term though.

[MrFoolish]

I'm not a bond expert but I've seen some credible investment videos which suggest they reduce investment volatility. They give you something to live off or sell if your investments hit a badly timed downturn. So you trim your long-term expected return but you get a smoother, more predictable ride. And it mitigates against the worst case scenarios of the 4% rule.

It definitely isn't insane. I guess it comes down to your risk appetite and what helps you sleep at night.

Personally, I hold some corporate bonds via the fund SLXX. It pays a regular dividend and I've no complaints with it. I prefer it to cash, especially at the moment.

[DrFfybes]

If it was me I'd cash in the Gold and use that to buy Equities or a Vanguard bond/equity mix fund, AND switch some cash.

Even the recent Gold rises (10% since Xmas, 15% in a year) will have made less than 1% difference to your net wealth, and if you really want it as a hedge against an equity crash it needs to be 30% or so.

And whilst Gold might have had a good 12 months, VEVE Developed World fund is also up 13% in the same period, plus a 1.2% divi. I've been stocking up on VEVE and BRKB, as a 'total return' approach.

Paul

[Alaric]

Personally, I hold some corporate bonds via the fund SLXX. It pays a regular dividend and I've no complaints with it. I prefer it to cash, especially at the moment.

It was noted that the bonds in SLXX have some years to maturity. What this is likely yo mean is that if interest rates rise to get somewhere near current price inflation, expect bond prices to fall. which will take SLXX with them.
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I agree though that in recent years, parking money in SLXX has been one of the few mays of seeing a savings return outside of holding astronomical amounts pf cash. It's a way of untilising the £ 1000 allowance.

[farwide]

Thanks guys,

@MrFoolish, yes a smoother more predictable ride sounds good to me.

@Paul, I didn't want to bog down my post, but I'm certainly also going to be going further into equities also (as I should have done many years ago, sigh). Re: gold, I have it as a nod towards a risk parity approach (though I can't stomach the full 20% frankly), and though I appreciate the long term return is low, I think it's proven it's worth to me in how it's responded to this current crisis. Coming back to the first point, it has a nice smoothing effect so I quite like it. You are right though, the exposure should be higher to have a more meaningful effect.

Long term, my aim is to get to something like 70/15/10/5 Equities/bonds/cash/gold.

[xxd09]

Just a practical note from a 75 year old 18 years retired
Made my pile
Asset Allocation is 30/65/5-equities/bonds/cash
One bond fund only -Vanguard Global Bond Index Fund hedged to the Pound
Held this portfolio for many years
The bond funds main function is to reduce portfolio volatility
As a secondary function there is some growth
Worked for me but size of savings pot,withdrawal rate required are very personal
xxd09

[Walkeia]

to me this makes complete sense. It is an idea I have toyed with recently but instead of buying bonds/gold over the past 9 month I decided to reduce margin and mortgages which I felt was the best investment I could find at that time.

I think you acknowledge this but my bigger question surrounds why you felt it necessary to run with 35% cash balance which seems very high; but as you say - for another time.

[farwide]

to me this makes complete sense. It is an idea I have toyed with recently but instead of buying bonds/gold over the past 9 month I decided to reduce margin and mortgages which I felt was the best investment I could find at that time.

I think you acknowledge this but my bigger question surrounds why you felt it necessary to run with 35% cash balance which seems very high; but as you say - for another time.

I actually had even higher than that until recently, as I only bought gold last Summer. Why? Well there's no 'good' reason, but the honest answer is that I took a weird path in my life where I left the office in my early 30's to go and travel in about 2015, which involved selling my house. I had no idea at that point whether I was returning to the office, travelling for ages, or maybe even buying somewhere abroad if I could carve out a new life.

So in my mind that high % wasn't my defensive portfolio, it was my money that would otherwise be my house. Meanwhile, in my and of course every pundits wisdom at the time markets were considered 'super-high', so I thought it prudent not to go to crazy.

As it turned out, I never did go back to the office, and sort of scraped together a little more and now have FIRE'd in a lean kind of way. Wife and I have yet to ever stop travelling (though we've slowed).

Time went by, markets continued their crazy ascent and meanwhile I didn't particularly feel pressure as inflation seemed very low. I was also dabbling quite heavily in P2P investing. I actually did very well at this despite the horror stories as I treated it almost like a job. Though I'd have still been better off with a high % equity portfolio.

Fast forward to day and there's no end in sight to our plans, and despite all of the above our portfolio has done well. We're very frugal, we still have had 50%+ equities working hard for us, I never sold and only bought more in early 2020, and we have a little freelance income too.

The recent high inflation, which is even higher in the country I'm in now (you can pretty much guarantee your shop will be higher each week) has shaken me into action. I can now viscerally feel my cash pile being eaten away.

So, there you go, that's my story. My investing goal is to now strike a balance between growth and defensiveness. I do still have to be somewhat careful, bearing in mind our still hopefully long time horizon and our lack of bricks and mortar. Nonetheless, I should invest more in equities, and diversify my diversifiers (hence the bonds..).

[tjh290633]

I think I've decided to buy into a bond fund for the first time. Am I insane?

Probably. Interest rates are rising so anything with fixed interest is likely to fall. Personally I have never bought gilts for myself, only for my late mother-in-law, and then I only bought them below par value at a time when rates were 13-15%.

I think that, at the moment, they are certain to lose value. Whatever you do is a gamble of some sort, but that bet is a no-no. I am virtually 100% in equities and have been for many years, apart from a cash reserve. The choice is yours.

TJH

[farwide]

I think I've decided to buy into a bond fund for the first time. Am I insane?

Probably. Interest rates are rising so anything with fixed interest is likely to fall. Personally I have never bought gilts for myself, only for my late mother-in-law, and then I only bought them below par value at a time when rates were 13-15%.

I think that, at the moment, they are certain to lose value. Whatever you do is a gamble of some sort, but that bet is a no-no. I am virtually 100% in equities and have been for many years, apart from a cash reserve. The choice is yours.

TJH

From my reading, the bigger concern is continued persistent inflation. If it was purely an interest rate concern, then the YTM %'s just increase, so providing you hold for the long-term you make it back anyway as yields rise when bonds drop. Besides which, bonds have already seen a pretty historic drop so have arguably priced that in already:

https://awealthofcommonsense.com/2022/0 ... look-like/

The above said, I think there's nothing wrong with being all in on equities. I would be so myself if I was still earning anything significant and could arguably still do. However, if already FIRE'd, why continue to play the game if you've won already?

[GoSeigen]

I think I've decided to buy into a bond fund for the first time. Am I insane?

Probably. Interest rates are rising so anything with fixed interest is likely to fall. Personally I have never bought gilts for myself, only for my late mother-in-law, and then I only bought them below par value at a time when rates were 13-15%.

I think that, at the moment, they are certain to lose value. Whatever you do is a gamble of some sort, but that bet is a no-no. I am virtually 100% in equities and have been for many years, apart from a cash reserve. The choice is yours.

TJH

From my reading, the bigger concern is continued persistent inflation. If it was purely an interest rate concern, then the YTM %'s just increase, so providing you hold for the long-term you make it back anyway as yields rise when bonds drop. Besides which, bonds have already seen a pretty historic drop so have arguably priced that in already:

https://awealthofcommonsense.com/2022/0 ... look-like/

The above said, I think there's nothing wrong with being all in on equities. I would be so myself if I was still earning anything significant and could arguably still do. However, if already FIRE'd, why continue to play the game if you've won already?

100% correct farwide, and a very good article linked to as well. Your idea to buy some bonds is sound as long as you remember your caveat about inflation, and also remember that the best time to buy is when it is scary/difficult to do so. If you think it's a no-brainer for you at the moment I'd caution that it might be too early. That said, it helps to get a bit of skin in the game before you are terrified as otherwise you may never buy at all! Also, time is your friend so don't rush.

GS

[Lootman]

100% correct farwide, and a very good article linked to as well. Your idea to buy some bonds is sound as long as you remember your caveat about inflation, and also remember that the best time to buy is when it is scary/difficult to do so. If you think it's a no-brainer for you at the moment I'd caution that it might be too early. That said, it helps to get a bit of skin in the game before you are terrified as otherwise you may never buy at all! Also, time is your friend so don't rush.

Good advice about when to buy bonds. But it doesn't address the broader issue of whether to buy bonds. Bonds had an unprecedented 40 year bull run due to deflation and declining interest rates. That is clearly now in reverse.

So yeah, some people did make some money in bonds. But more due to luck and a historical accident, than any genius on their part. Just ask investors in bonds from 1960 to 1980, if any are still alive, which might be the problem.

[GoSeigen]

Fortunately it seems the OP understands perfectly well that this is not the 1970s.

GS

[Lootman]

Fortunately it seems the OP understands perfectly well that this is not the 1970s.

Although the validity of his view might not be evident for a few decades, as it was in the 1970s. And he did ask "Am I insane?"

Frankly I think you need your head examined to buy bonds right now, except as a short-term trading play.

[xxd09]

There’s a lot of insanity about!
It’s the times we’re living in!
xxd09

[Gan020]

About 70% of my portfolio is is bonds/debt. The rest is mostly in renewable energy funds.

I accept that inflation will mean negative returns in real terms.

However, holding cash would result in even larger negative returns.

I believe equities are going to fall over the next "few years" or maybe longer as I see lower personal disposable income in real terms hurting economies.


Or to be it another way. Governments and central banks have been propping up economies for 2 decades now with almost constant monetary and fiscal stimulus. We have now reached the point where this is no longer possible and we have to suffer the pain we should have suffered in the first place. I point to Chacellors's statement on the cost of government debt rising to £80b this year from £20b last year. Governement's have borrowed too much and are totally reliant on a strong economy to raise tax to get themselves out of this mess. Just before the pandemic government expenditure was £890b. That means government spending per person on debt has risen from aorund £298 per person to £1,119. If you look at that based on those that contribute to the tax system it doesn't look too clever.

[xxd09]

There was a study on equity/bond portfolio returns I read somewhere-Vanguard possibly -that showed over the long term there was not a lot of difference in returns between a 70/30 equity/bond portfolio right through to a 30/70 one
It is down to ones personal ability to take risk and amount saved etc etc
Decide your Asset Allocation as what ever suits you personally and staying with it seems to work!
xxd09

[absolutezero]

What are bonds going to give you that cash* doesn't?

*Cash = anything cash like - cash, bank deposit, savings accounts, Premium Bonds etc

[Hariseldon58]

There was a study on equity/bond portfolio returns I read somewhere-Vanguard possibly -that showed over the long term there was not a lot of difference in returns between a 70/30 equity/bond portfolio right through to a 30/70 one
It is down to ones personal ability to take risk and amount saved etc etc
Decide your Asset Allocation as what ever suits you personally and staying with it seems to work!
xxd09

With respect equities have a much higher return than bonds over an extended period. Bonds have had a pretty good run over the last 40 years, a period of declining interest rates that have flattered Bond returns.

I did find this article about 30:70 vs 70:30 https://www.brandonrenfro.com/asset-allocation-for-retirement/ going forward who knows…

[xxd09]

Thanks for finding that article
I found it rather too late but had made my pile so it could have been bigger but as a personal thing I have been able to sleep at night and stay the course through any stock market shenanigans
It worked out OK for me
xxd09