I don't get it with Index Linkers

[1nvest]

I used cash in the prior post as the partner to INXG however under the current climate where cash interest isn't matching/comparing to inflation then something like a shorter dated index linked gilt fund would be more appropriate INXG partner holding. Couldn't find a ETF version for such, but this is a less than 5 year (shorter term) index linked gilt offering ...

GB00BG0QNY41
LUAC
Legal & General All Stocks Index Linked Gilt Index Trust C Class Accumulation (0P000102LW.L)

Or you could opt to buy a individual index linked gilt, maybe with 1 year to maturity remaining.

[1nvest]

An alternative viewpoint is that bonds should be held to duration match spending over a shorter time frame after which there is very high likelihood that equities will outperform significantly. The stats suggest that is 10 - 15 years.

That delivers certainty of cash irrespective of the shorter term volatility of equities. Whilst optimising outperformance probability.

The equity:bond split becomes an output, but will be more like 80:20 for a younger person, but tending towards 10:90 once one hits 70.

If a 65 year old retiree drops 60% into a 15 year index linked gilt ladder to cover 4% inflation adjusted SWR for those years, to age 80 (assuming ILG's yield 0% real), then even if the residual 40% were also dropped into a single ILG that matured in 15 years time then likely that 40% inflation adjusted maturity amount would buy a reasonable annuity income at age 80 (as annuity payout rates increase with age/reduced life-expectancy). Yes maybe a high likelihood of stocks having accumulated more over the 15 years, but also a risk of stocks having relatively lost out to a 4.5% yielding inflation bond.

US long dated TIPS are recently yielding 4.53% (LTPZ) whilst short dated (STIP) are yielding 4.65%. At those levels a actual ladder, or 'synthetic' non-rolled ladder 15 year using funds as outlined in earlier posts, has the potential to yield a even higher 15th year residual value - buy even more of a annuity. Inflation and interest rate immunised. With stocks there's the sequence of returns risk of getting to the end of 15 years when the ladder (or fund based version of such) is all-spent, and maybe seeing stocks halve or more in value after a relatively poor 15 year accumulation outcome - is exposed to interest rate/inflation risks.

If a newly retired had say £7000 of state pension, £7000 of occupational pension, a £21K/year spending lifestyle such that dropping £210K into a index linked ladder + annuity from age 80 might match that, then that income becomes pretty much lifetime guaranteed. With their income requirements met, anything above that £210K might be invested however they liked, superfluous to main objective, could be all-stock or anything, and if large enough might equate to holding 90/10 stock/bonds at age 70 or 80+.

For those in twilight where their human capital may be low, greater certainty is better than maybe's. Even if there's a high probability of a alternative 'better' option actually coming to fruition, they may have no desire or need to take on the risk of potentially enduring the exceptional bad case outcome. Enough safe (fixed) income (ILG's/annuities) to match base income objectives (ideally alongside index linked state and occupational pensions) - and job done. Speculate (stocks/whatever) with the rest however as may amuse/occupy you. Many of the retired on TLF appear to have more than enough. House paid off, state and occupational pension values that cover their base spending needs, such that 100% stocks is fine.

[JohnW]

I don’t quite follow, partly as I’ve lost track of what length of retirement spending your INXG/cash holding was meant to cover. But I don’t have to follow it, as you seem to be all over it.
For interest, here’s a subsequent discussion, more recent than the 2015 you cited: https://www.bogleheads.org/forum/viewtopic.php?t=318412, along the same lines.

[wanderer]

I am not familiar with bonds or gilts. But I am interested in preserving wealth against inflation

If I look at the following page on HL's website:

https://www.hl.co.uk/shares/corporate-bonds-gilts/bond-prices/uk-index-linked-gilts

I see Treasury March 2024 0.125% Trading at 98.09

Does that mean that if I bought that gilt and held to maturity then, subject to bid/offer spread and dealing costs etc, I would get back 100 in March 2024 for every 98.09 invested today plus or minus any changes in inflation between now and then?

Or would it be plus or minus any inflation expectations between now and then?

Or is it all more complicated than that? (I'm guessing so, and am struggling to understand how I can hedge myself against inflation for the next few years?)

[mc2fool]

I am not familiar with bonds or gilts. But I am interested in preserving wealth against inflation

If I look at the following page on HL's website:

https://www.hl.co.uk/shares/corporate-bonds-gilts/bond-prices/uk-index-linked-gilts

I see Treasury March 2024 0.125% Trading at 98.09

Does that mean that if I bought that gilt and held to maturity then, subject to bid/offer spread and dealing costs etc, I would get back 100 in March 2024 for every 98.09 invested today plus or minus any changes in inflation between now and then?

Or would it be plus or minus any inflation expectations between now and then?

Or is it all more complicated than that? (I'm guessing so, and am struggling to understand how I can hedge myself against inflation for the next few years?)

The 98.09 (which is the mid-price) is the clean price, i.e. without inflation adjustment to date or accrued interest for the next coupon.

If you sign up to TradeWeb, at https://reports.tradeweb.com/account/login/, you can get the "dirty" price, which is what you'll actually pay (or close to, as it's also a mid-price). Note that the closing prices become available at noon the following workday, so the prices you'll see currently are Thursday's close.

The current dirty mid price for that gilt is 150.928482. I assume (without looking it up) that this one has a 3 month lag, so in March 2024 the initial 100 will be indexed up to the December 2023 index value, which is what you'll get back (plus the final coupon).

[Yieldy]

yieldgimp.com includes index linked calculations and gives an idea of the Net Price (after indexation and accrued are applied). Currently around 150.91.

[BondSquared]

Not sure if it's already been mentioned in this very long thread, but the key to understanding linkers is real yield (i.e. excess yield over and above the inflation return you're receiving), in addition to everything that's already been mentioned.

Chances are you bought the linkers at negative or flattish real yields, but real yields have (finally) turned positive and are now >1% for some linkers (e.g. UKTI 51). That rise in real yield means your historic investment is down (you'd rather have bought today, cheaper, at higher real yields), but makes it a more attractive entry point for new investment today. Same principle/dynamics as fixed rate bonds with nominal yields, just with real yields.

[dealtn]

Not sure if it's already been mentioned in this very long thread, but the key to understanding linkers is real yield (i.e. excess yield over and above the inflation return you're receiving), in addition to everything that's already been mentioned.

Chances are you bought the linkers at negative or flattish real yields, but real yields have (finally) turned positive and are now >1% for some linkers (e.g. UKTI 51). That rise in real yield means your historic investment is down (you'd rather have bought today, cheaper, at higher real yields), but makes it a more attractive entry point for new investment today. Same principle/dynamics as fixed rate bonds with nominal yields, just with real yields.

The key to investing in linkers ( and most other assets) is to understand its price (and some cases yield) and assessing that market determined price against your "better" understood price, and reap the profit from its transition from the former to the latter. That can happen in linkers whether the market price is both below and above real zero yield.

However that value is often better outed when real yields are positive ( for long term strategies). As an investment strategy you could never run in the real world (pun intended) I wish I was given a pound every time I met someone who claimed linkers provided capital protection but had no understanding of negative real yields.

[ToffeeMan]

Carrying on from mcfools correct explanation of the 2024 Linkers, i'd say it will do exactly what you want in terms of protecting yourself against inflation if you hold to maturity.

You will buy 98p * the Inflation Index factor now and get back 100p * the Inflation index factor at maturity plus a small coupon (presumably 6 monthly at 0.0625% up to and including maturity fate for a 0.125% pa coupon).

This effectively means you will get circa Inflation + 2% in tax free capital gain (don't forget gilts are exempt from UK capital gains)
plus a small amount of income which is tax at margin UK income tax rate.

Buying individual gilt or index linked gilts and holding to maturity is a far more certain way to generate a known return, rather than buying these gilt funds / ETFs, where bonds are constantly being replaced and term extended and returns may be nothing like you expected.

But I appreciate it is a little more scary buying the individual bonds, there is a bid offer spread and dealing charge, you may have to deal over the phone and the prices are changing continuously meaning you have to make a quick decision to an impatient dealer to buy or sell at a price that maybe slightly different that you expected. The way linkers are priced online at practically all brokers (ex the inflation factor) is also unhelpful, particualrly when you ring up and are quoted a completely different price (including inflation). But it is all fair.

I am trying to persuade my father and law to consider them instead of him holding over half his wealth in savings accounts yielding 3-4% which are then taxed, but it is an uphill battle; even as an actuary and investment professional.

Good luck!