Newby Fixed Term Bond buyer

[raybarrow]

Hi FOlks,

Saw in a previous post about Harry Browne Permanent Portfolio. Basically 25% Cash, 25% Shares, 25% Bonds, 25% Gold. Googled similar things for UK and older people (73) and suggestions are somthing like 0%-20% Cash, 40%-60% Bonds, 30%-50% Shares depending on your risk vs comfort ratio.

I never had any bonds and after a recent inheritance I checked my ratios 53% Cash 47% Shares 0% Bonds. I am well ISA'd and with the pending sale of parent's house will be ridiculously over the top with cash. I have a compnay pension and state pension, Mrs B, aka Brown Owl, is in a similar position cash/shares/ISA wise. She has a company pension and gets her state pension early 2023. House is owned, children left home so barring disaster no major outgoings.

Is buying Bonds 'just' a matter of finding a rate/term you like, with a 'reputable' company or are there pitfalls I have never even considered. How does a 1 year Fixed term Bond differ from a 1 year Fixed term Notice account with a bank, apart from breaching the £85K FSCS limit?

I currently use Fidelity Investments and Interactive Investor (legacy from Selftrade and EQI) for my investments.

Any help, suggestions will be welcome,
Ray.

[Itsallaguess]

I never had any bonds and after a recent inheritance I checked my ratios 53% Cash 47% Shares 0% Bonds.

I am well ISA'd and with the pending sale of parent's house will be ridiculously over the top with cash.

I have a company pension and state pension, Mrs B, aka Brown Owl, is in a similar position cash/shares/ISA wise. She has a company pension and gets her state pension early 2023. House is owned, children left home so barring disaster no major outgoings.

Is buying Bonds 'just' a matter of finding a rate/term you like, with a 'reputable' company or are there pitfalls I have never even considered.

How does a 1 year Fixed term Bond differ from a 1 year Fixed term Notice account with a bank, apart from breaching the £85K FSCS limit?

I'm sure you'll get some great replies regarding the potential for targeted bond options, but just a couple of things to perhaps consider around the edges of this particular topic -

1. There is a good argument for considering company and state pensions as being 'bond like' to a large degree, given what might be considered such reliable and hopefully growing 'non-investment income streams', so it might be worth re-checking 'your ratios' with that in mind, or at least what those 'ratios' might look like if and when those 'bond like' pension-related income streams actually kick off, and perhaps consider that there's a risk of over-egging any additional 'bond requirements' if you don't take those existing 'bond like allocations' into account for your particular circumstances...

2. Perhaps consider that in addition to the above, there are cheap and simple ways to gain 'bond exposure' without necessarily explicitly buying 'a bond fund', and you might want to think about an alternative method of going via one of the Vanguard 'LifeStrategy' funds, which offer a variety of levels of equity/bond investment ratios, depending on your particular requirements -

How a LifeStrategy fund works -

Each LifeStrategy fund has a different mix of shares (also known as equities) and bonds.

Shares typically give you a higher return over the long run, but are riskier. Whereas bonds are more stable but offer lower potential returns. Having a mix of both helps balance risk and reward.



Source - https://www.vanguardinvestor.co.uk/investing-explained/what-are-lifestrategy-funds

These 'LifeStrategy' options might not necessarily be the 'cheapest' way of gaining some bond exposure, but as someone who's owned a lump of their 80% option outside of my more normal income-oriented investments, I've been very happy with their performance over a number of years, and I do like the simplicity of their 'one stop shop' approach to this particular bond-allocation issue.

Cheers,

Itsallaguess

[Alaric]

Is buying Bonds 'just' a matter of finding a rate/term you like, with a 'reputable' company or are there pitfalls I have never even considered. How does a 1 year Fixed term Bond differ from a 1 year Fixed term Notice account with a bank, apart from breaching the £85K FSCS limit?

Check your understanding of the term "Bond". It has at lesst two meanings. In the x% Bonds context, that's usually a reference to Fixed Interest Securities. That's where the buyer is purchasing a stream of income with a capital repayment at the end.

[JohnW]

Is buying Bonds 'just' a matter of ....How does a 1 year Fixed term Bond differ from a 1 year Fixed term Notice account with a bank

As one can buy bonds at any time, one can sell them at any time. When you 'deposit' in a fixed term notice account, you can't sell it to anyone else. That's quite a difference.
You're on the right track. There are a few decent bond books out there: Thau wrote one; Swedroe another. Your local librarian being an information literacy expert could guide you to find other sources of reliable information, including other books. Then, or at the same time, you might want something on 'asset allocation'. Then you're good to go.

[GoSeigen]

Hi FOlks,

Saw in a previous post about Harry Browne Permanent Portfolio. Basically 25% Cash, 25% Shares, 25% Bonds, 25% Gold. Googled similar things for UK and older people (73) and suggestions are somthing like 0%-20% Cash, 40%-60% Bonds, 30%-50% Shares depending on your risk vs comfort ratio.

I never had any bonds and after a recent inheritance I checked my ratios 53% Cash 47% Shares 0% Bonds. I am well ISA'd and with the pending sale of parent's house will be ridiculously over the top with cash. I have a compnay pension and state pension, Mrs B, aka Brown Owl, is in a similar position cash/shares/ISA wise. She has a company pension and gets her state pension early 2023. House is owned, children left home so barring disaster no major outgoings.

Is buying Bonds 'just' a matter of finding a rate/term you like, with a 'reputable' company or are there pitfalls I have never even considered. How does a 1 year Fixed term Bond differ from a 1 year Fixed term Notice account with a bank, apart from breaching the £85K FSCS limit?

I currently use Fidelity Investments and Interactive Investor (legacy from Selftrade and EQI) for my investments.

Any help, suggestions will be welcome,
Ray.

Welcome to the bonds board, Ray. You've been upfront about the fact that bonds are quite new to you. However you have a decent proportion of shares in your portfolio and bonds are far less scary and much simpler to understand than shares so you should be fine!

First a quick note about the meaning of the word "bond". There are several distinct but related meanings but two are important for the purposes of your question:

1. You referred to "a one-year Fixed-Term Bond". The usual meaning of this is that it refers to a type of product marketed by high-street banks to their customers. Typically the product would lock in your funds for a fixed period of years at a fixed rate of interest, often with the option of accessing your capital early with the penalty of loss of interest (or similar). Interest rates tend to be slightly higher than instant-access accounts but are nothing special. This sort of product is not what this board is about and also is probably not the proper subject of your query. If you do want to know about them it's probably best to go to the Bank Accounts Savings & ISAs board.

2. You also wrote about recommendations of holding "25% Bonds" (or similar) in a balanced portfolio. The meaning of bonds here is quite different. These bonds are a type of listed security analogous to shares. Rather than being a bank account or product, which makes you a depositor of a banking institution, these bonds are a type of debt taken on by the issuer of the bond. Basically the [UK] government (in the case of "gilts"/gilt-edged bonds), or some company ("corporate bonds"), wishes to borrow money from investors; a standard contract (the "terms" of the bonds) is drawn up listing the term of the bonds, their annual interest rate("the coupon") their repayment/"par" price and other details; the bonds are offered to the public and institutions and they are then listed on an exchange. Thereafter the bonds can be traded on the exchange at whatever price the market feels appropriate, exactly like shares. The main differences between shares and bonds are:
-shares are not usually issued by governments!
-corporate bond terms usually compel the issuer to pay a fixed rate of interest; share dividends are at the discretion of the board
-bonds do not entitle their owner to a share of company profits (they are not "equity" securities) whereas ordinary shares do
-bond holders are entitled to being paid in advance of ordinary shareholders (their asset is "senior" to shares)
-bonds, being debt, are subject to a completely separate area of law; in addition to the terms of the contract, bondholders are protected by statute law to a far greater extent than shareholders, e.g. bondholders may issue bankruptcy proceedings for non-payment of interest or capital ("default").

Hopefully you were vaguely aware of the above already. It would be a good idea to do a bit of basic reading about how bonds are valued so that you understand what yield is and its relation to price and factors that affect the yield: issuer, inflation, interest rates, credit risk etc.

As for the practical aspects of buying bonds... It may be nice to know that bonds have suffered something of a crash this year and are arguably better value than they have been for some time. When you buy the process is quite similar to shares, in that the bonds have their own ticker and you get a quote and purchase them through the usual brokers. Their prices can be found on most sites that publish share prices. Interest payments are credited automatically, like share dividends, and when the bonds mature you receive the par value in your account on the maturity date. Like shares the skill/enjoyment is in selecting the bonds and/or right time to buy them. Your main choices will be between government and less or more risky corporate bonds; the tenor (time to maturity) of the bonds you'll buy, whether particular features of their terms are important, and whether the price constitutes good value.

Listed bonds are what this board is about. Posters will be happy to help with any questions I'm sure.

Just in passing, I note itsallaguess's suggestion of buying funds, which is a fair simplifying option -- at the cost of much of your profit. I see no reason not to follow the great tradition of The Motley Fool in rejecting the expensive products of the Wise and doing your own research with the aim of educating yourself, keeping more of your hard-earned and having fun at the same time.

Good luck.

GS

[Wuffle]

If this is a 'what do I do with the cash outside my ISA?' type discussion, then the interest allowance is only a grand last time I looked and it sounds like your personal allowances are already used up.

W.

[raybarrow]

Hi Folks,

Looks like I have a bit more reading to do. That's what I like about this board, someone else has been there, done it and is willing to share. GS's explanation took me back to my Commerce and Economics GCEs way back in the day and way back in my mind. All about companies, shares, preference shares, debentures etc. A lot of that forgotten stuff needs to be resurrected. I didn't realise that Bonds could also be like Shares with different rules and conditions.
I agree Funds have a 'buy and forget it' appeal but at a cost. Maybe worth a look before I start to loose my grip on reality.
Wuffle - I'm not yet at the £1K interest free limit, but very close and with the parent's house sale looming over the horizeon and interest rates increasing I suspect it won't be long. I'd been holding off the years ISA deposit but I think I ought to move on it fairly soon.
Itsallaguess - good point about the pensions. I hadn't put them in the equation. They are good company 'old style' pensions (Ex nationalised industry and local authority) so increase nicely each year.
In summary I need to rethink and research and then come back.
Thanks again for all the comments,
Ray.