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100% equity

Index tracking funds and ETFs
Lootman
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Re: 100% equity

#388423

Postby Lootman » February 21st, 2021, 2:30 pm

1nvest wrote:
Bonds have been a beneficiary of 40 years of declining inflation and interest rates. It is really hard to see how the next 40 years will work for bonds, but my guess is that it will be more like the 1960s and 1970s, which were a disaster for bonds and the investors who relied on them.

20 year constant maturity bonds using US data for the run up from 2.5% yields to 14% yields resulted in a 60% (multi-year) GAIN. Not great, but equally such yield transition wasn't good for stocks either. Following such a transition holding bonds where many were bought at relatively long maturity and high yields they rewarded handsomely. In including bonds as part of a portfolio such purchases were more inclined to actually occur, in contrast to leaving it to 'timing' (manual).

A 60% return in 20 years would not work for me. I would not starve but my quality of life would be much worse.

I agree that a withdrawal rate of 4% a year is desirable and should be sustainable. Equities have been giving about twice that for so long now (about 100 years) that you would need a compelling reason to think that will change. And if that compelling reason is high inflation then that is bad for bonds, and shares can still grow at least in nominal terms.

Now I am not 100% in equities in the sense that I have cash (which you could view as short-dated bonds), a couple of properties, and three pensions when I finally decide to start taking them. But in terms of disposable funds after those then, yes, 100% in equities (although only a fairly small amount in UK shares as the FTSE-100 has basically done nothing in 22 years now, other than throw off barely-covered dividends).

Now, if I were convinced that shares were going to crash then I'd adjust the shares/cash mix. But bond yields would have to go up a lot for me to consider them as anything other than a short-term trading vehicle. I might still prefer 5% a year on savings accounts.

scrumpyjack
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Re: 100% equity

#388432

Postby scrumpyjack » February 21st, 2021, 2:50 pm

1nvest wrote:20 year constant maturity bonds using US data for the run up from 2.5% yields to 14% yields resulted in a 60% (multi-year) GAIN.


Since the turn of the century cumulative inflation as measured by the RPI has been 77% and that is before tax. So a 60% 'gain' is actually a loss in real terms even before tax, if not in a tax free wrapper.

It is also arguable that RPI understates real inflation for some people, but that's another story!

I'll stick with equities, though perhaps 100% is a bit misleading as we own our house with no mortgage and keep a cash buffer of many years spending, plus there's the state pension.

JohnW
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Re: 100% equity

#388528

Postby JohnW » February 21st, 2021, 8:10 pm

Leif wrote:I assume drawdown doesn’t do so well because it includes taking money out during downturns. As said above, the way to avoid that is to have enough cash to cover say three years living costs, and stop selling shares during a crash until the market has bounced back.

It’d be interesting to see a proper comparison of the two scenarios.

https://earlyretirementnow.com/2017/05/ ... turn-risk/

hiriskpaul
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Re: 100% equity

#388978

Postby hiriskpaul » February 22nd, 2021, 11:54 pm

MrFoolish wrote:
JohnW wrote:High quality corporate bonds can be a good choice (as can low ones), but they won't return as much as low quality ones although more than government bonds. But to imagine that you're getting a better product with a corporate bond than a government bond, if you can also hold equities in any proportion you like, is something that I can't understand.


I always understood that holders of corporate bonds are closer to the front of the queue than shareholders when a company goes bust. DAK what typically happens - how much of a loss would a corporate bond holder have to endure? (I don't buy single company corporates, only funds, but I'm interested in the principle.)

As for government bonds, can anyone recommend a low cost vehicle, preferably something compatible with a share dealing ISA? What sort of yield could I expect? Thanks.

You are absolutely right, bonds are closer to the front of the queue. They can often survive and subsequently thrive whilst ordinary shareholders lose their shirts. During the financial crisis those of us with less blinkered vision than "ordinary shares only" did exceptionally well buying distressed bank bonds and preference shares - massively better than those who pounced on the ordinary shares. My first purchase of B&B subordinated bonds turned into 10 baggers, whilst the ordinary shares became worthless. Northern Rock subs and Co-op Bank senior unsecured bonds similarly survived the burning of ordinary shareholders. No RBS or Lloyds bondholder lost a penny (so long as they didn't sell), but the ordinary shareholders are yet to see the prices they paid in 2007. Tesco didn't go bust, but Tesco bonds did far better over the period I held them than the ordinary shares did. Bond are not foolproof of course and can certainly be wiped out, but I cannot recall any instance where bondholders were wiped out ahead of ordinary shareholders.

hiriskpaul
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Re: 100% equity

#388990

Postby hiriskpaul » February 23rd, 2021, 1:00 am

As for holding government bonds right now, it is difficult to see the justification for retail investors. Cash in the form of FSCS protected deposits, unavailable to institutions, offer much better risk/reward despite the low rates. And I am saying that as a very long term holder of long duration US Treasuries, which I only sold out of last year.

For smoothing portfolio returns, cash is typically not as good as government bonds, which often (but not always) rise when equity markets crash, but cash is still pretty good. For short term, say < 7 years liability matching, FSCS protected cash is way ahead of government bonds, so long as you shop around. eg Marcus has just restarted offering instant access accounts paying 0.5% - not great, but much more than short term government bonds.

That does cause difficulties for SIPPs and ISAs, for which the return on cash is usually zero and for which the FSCS position is cloudy, although cash ISAs are available at derisory rates. My way round it now is to load up on risk in the SIPPs/ISAs with equities (I still hold a fair amount in hand-picked high yield bonds/prefs) and hold cash outside. If you must hold bonds in SIPPS/ISAs for diversification, I would go with low cost short dated government bond ETFs/tracker funds and perhaps some short dated investment grade corporate ETFs/tracker funds if you are feeling lucky. The returns will not be good, but the chances of large losses remote.

I would not go anywhere near any actively managed IT/fund calling itself a "Wealth Preserver", "Absolute Return fund" or any similar nonsense. You cannot buck the markets when it comes to low risk. If you want low risk, you have to accept low return. Anyone offering a fund that says otherwise is a charlatan. There are strategies that look like they are working, giving an above average absolute return 9 times out of 10, but run the risk of significant losses 1 time in 10. This is not low risk, it just means the fund managers have not yet rolled the 1. Returns on short dated investment grade paper are now so low that any active management fees will totally swamp returns, so avoid so-called "Strategic" bond funds as well. Because of the high fees, they cannot possibly make a return without dialing up the risk.


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