#517703
Postby 1nvest » July 27th, 2022, 4:54 pm
Consider a Gilt holding of a 10 year ladder, equal amounts initially loaded into each of 1, 2, 3, ... 10 year Gilts and as each Gilt matures you roll the proceeds into another 10 year Gilt.
Now modify that to be 50/50 with stocks and where instead you roll 5% of the total portfolio value into a new 10 year Gilt as each Gilt matures.
Volatility tends to cluster, large/fast gains also often have large/fast declines around them. 10 years of great portfolio gains might be accompanied by another 10 years of low/flat rewards.
After a great decade, relatively high portfolio value, relatively more capital is rolled into a 10 year gilt. If the next 10 years are flat, then at the end of that you have a 'above average' maturing Gilt to in part compensate. From there, whilst relatively less is rolled into the next 10 year Gilt at that time, so also are portfolio gains likely to be higher over that subsequent 10 years following the relatively poor 10 years portfolio outcome. In effect a sort of time-shift diversification that helps smooth down overall portfolio value volatility.
To the end of 2021 portfolio gains have been 'above average', so in effect you have more capital being rolled into a 10 year Gilt paying a lower yield compared to if prior gains had been lower and having had less to roll into a 10 year Gilt paying a higher yield.
You could alternatively on the assumption that a 10 year Gilt purchase being a bad choice look to redirect that rungs capital elsewhere, but that then becomes predictive, a deviation away from 'staying the course', that might work out better, could be worse. Should you sell (not roll) and speculate elsewhere? Well you'll only know if you should or shouldn't have done so in later years. It' a 50/50 guess. Whatever alternative you might opt to invest in instead could do better, could do worse. The common mantra is not to bother and to instead just stay the course.
Yet others might assume that you can easily do better than the equivalent of a guaranteed (nominal) return of capital and 2.5%/year (recent 10 year yields) cash deposit. Perhaps suggesting a stock paying 4% dividends instead - however if you swap out some/all of that fixed/assured return of capital over the next decade for 5% in xyz stock shares then that could end up with all of that capital having been lost. Buying a index of stocks is less risky, but could still see a decade of deflation resulting in both share prices and dividends collapsing below levels where fixed income worked out better.