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Minimal risk asset?

Index tracking funds and ETFs
GeoffF100
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Re: Minimal risk asset?

#286656

Postby GeoffF100 » February 25th, 2020, 4:53 pm

Here are two relevant articles:

https://www.morningstar.com/articles/94 ... f-equities

https://monevator.com/how-to-protect-yo ... -a-crisis/

As I have said, nobody knows what is going to happen.

Hariseldon58
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Re: Minimal risk asset?

#286659

Postby Hariseldon58 » February 25th, 2020, 5:10 pm

I noted an earlier reply when the maturity of 20 years was voted for the Vanguard Gilts ETF, the average maturity of a bond fund is misleading, much better to look at the duration. When a bond fund falls in value due to higher interest rates , then the interest or coupons paid can be reinvested at a higher rate and eventually this mechanism restores the value of your fund such that you break even as if interest rates had not risen, this time period is the duration. In addition if interest rates were to rise say 1% on a fund a duration of 12 years then you would expect the value of the fund to fall by 12% ( roughly)

(Last I looked the Vanguard Gilts etf had a duration of around 12 years)

It’s also worth bearing in mind that whilst hedging of foreign bonds is pretty cheap there is an effect on the interest rates paid, ie gilts yield less than US Government Bonds but the effect of hedging is to level the difference between in interest rates related to different currencies. No free lunch !!!!

For the OP at 34 years of age investing for the very long term then a very high proportion of assets could be held as equities, if the investor has the ability to withstand the increased volatility. More of an investor problem than an investor investment problem !

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Re: Minimal risk asset?

#286674

Postby Lynx » February 25th, 2020, 6:28 pm

Hariseldon58 wrote:I noted an earlier reply when the maturity of 20 years was voted for the Vanguard Gilts ETF, the average maturity of a bond fund is misleading, much better to look at the duration. When a bond fund falls in value due to higher interest rates , then the interest or coupons paid can be reinvested at a higher rate and eventually this mechanism restores the value of your fund such that you break even as if interest rates had not risen, this time period is the duration. In addition if interest rates were to rise say 1% on a fund a duration of 12 years then you would expect the value of the fund to fall by 12% ( roughly)

(Last I looked the Vanguard Gilts etf had a duration of around 12 years)

It’s also worth bearing in mind that whilst hedging of foreign bonds is pretty cheap there is an effect on the interest rates paid, ie gilts yield less than US Government Bonds but the effect of hedging is to level the difference between in interest rates related to different currencies. No free lunch !!!!

For the OP at 34 years of age investing for the very long term then a very high proportion of assets could be held as equities, if the investor has the ability to withstand the increased volatility. More of an investor problem than an investor investment problem !


This is very helpful - thank you. Yes I see now that VGOV data shows average maturity 19.4 years and average duration 14.3 years.

I do not quite understand:
When a bond fund falls in value due to higher interest rates , then the interest or coupons paid can be reinvested at a higher rate and eventually this mechanism restores the value of your fund such that you break even as if interest rates had not risen, this time period is the duration.

Could you elaborate on that? Maybe with an example?

Returning to Lars' breakdown:

A) Minimal Risk Asset [UK government bond with maturity matching investor's time horizon]
B) Risky Assets including
B1) World Equity [world equity index or as broad exposure as possible]
B2) Government bonds [diversified, real return-generating government bonds of varying maturities, countries and currencies]
B3) Corporate bonds [broad range of corporate bonds of varying maturities, risk, currency, issuer and geographic area]

How about in terms of trying to map on to the above the following:

A) U.K. Gilt UCITS ETF (VGOV) (this seems to be income - cannot find accumulation counterpart?)
B1) Vanguard FTSE ALL Cap Accumulation
B2 + B3) iShares Core Global Aggregate Bond UCITS ETF (believe this is accumulation)

Does VGOV not have an accumulation version?

GeoffF100
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Re: Minimal risk asset?

#286685

Postby GeoffF100 » February 25th, 2020, 7:28 pm

Hariseldon58 wrote:I noted an earlier reply when the maturity of 20 years was voted for the Vanguard Gilts ETF, the average maturity of a bond fund is misleading, much better to look at the duration. When a bond fund falls in value due to higher interest rates , then the interest or coupons paid can be reinvested at a higher rate and eventually this mechanism restores the value of your fund such that you break even as if interest rates had not risen, this time period is the duration. In addition if interest rates were to rise say 1% on a fund a duration of 12 years then you would expect the value of the fund to fall by 12% ( roughly)

No that is not correct. Bond duration is explained here:

https://www.investopedia.com/terms/d/duration.asp

If you click on the Macaulay duration link, you will see the formula for calculating it.

Hariseldon58 wrote:It’s also worth bearing in mind that whilst hedging of foreign bonds is pretty cheap there is an effect on the interest rates paid, ie gilts yield less than US Government Bonds but the effect of hedging is to level the difference between in interest rates related to different currencies. No free lunch !!!!

That is correct. The opposite is also true. After hedging a German bond paying nothing effectively pays UK rather than German interest rates. Here is an article on bond hedging:

https://www.am.pictet/en/uk/global-arti ... xed-income

Hariseldon58 wrote:For the OP at 34 years of age investing for the very long term then a very high proportion of assets could be held as equities, if the investor has the ability to withstand the increased volatility. More of an investor problem than an investor investment problem !

He not only has a long time for his investments to come good, but also has a relatively small amount of his money invested at the beginning. He can use a high proportion of equites, and use long term bonds without fear of rising interest rates. The Vanguard Target Retirement funds should make appropriate choices here.

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Re: Minimal risk asset?

#286875

Postby Hariseldon58 » February 26th, 2020, 1:15 pm

@lynx

https://www.thestreet.com/topic/46361/duration.html

Perhaps this might help

Duration may seem complex and is frequently misunderstood, when interest rates rise, your existing lower paying bond is less attractive and the market price adjusts accordingly, the duration in years gives you an indication of when you are going to break even. The number as a % a guide to how much the price will fall.

The exact mechanism is not terribly important and you don’t need to know it, just be aware that a long duration bond will have more volatility than a short duration bond.

Matching duration to your cash flow needs or view on whether interest rates will rise or fall.

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Re: Minimal risk asset?

#286889

Postby Hariseldon58 » February 26th, 2020, 2:40 pm

@lynx

If I can make a comment, rather than worry about the details of a minimal risk asset, with your timeframe investing into a SIPP then the 100% equity approach could work out well..

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Re: Minimal risk asset?

#286892

Postby GeoffF100 » February 26th, 2020, 3:09 pm

Hariseldon58 wrote:@lynx

https://www.thestreet.com/topic/46361/duration.html

Perhaps this might help

Duration may seem complex and is frequently misunderstood, when interest rates rise, your existing lower paying bond is less attractive and the market price adjusts accordingly, the duration in years gives you an indication of when you are going to break even. The number as a % a guide to how much the price will fall.

The exact mechanism is not terribly important and you don’t need to know it, just be aware that a long duration bond will have more volatility than a short duration bond.

Matching duration to your cash flow needs or view on whether interest rates will rise or fall.


You wrote:

"When a bond fund falls in value due to higher interest rates , then the interest or coupons paid can be reinvested at a higher rate and eventually this mechanism restores the value of your fund such that you break even as if interest rates had not risen, this time period is the duration."

The duration (more accurately the Macaulay duration) does not depend on a change in interest rates. (The modified duration, in contrast, is the expected change in the bond's price as a result of a change in interest rate.)

Your link is not correct either:

"Duration measures the time it takes to recover half the present value of all future cash flows from the bond. The discount rate for calculating the present value of the cash flows is the bond's yield."

If the bond is zero coupon, the only cash flow received is at maturity, and the duration is the time to maturity of the bond. It is not the time it takes to recover half the present value of all future cash flows.

Here is a much better account:

https://en.wikipedia.org/wiki/Bond_duration

Fig 1 shows the easiest way of visualising duration. It is at the balance point of all the cash flows, if they were all piled up in pound coins when they are paid.

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Re: Minimal risk asset?

#339525

Postby thedukewood » September 10th, 2020, 5:57 pm

An interesting post.
I am increasingly looking to simplify and increasingly convinced by adopting the essence of Lar's approach.
Also struggling a bit to decide on the bond element using ETFs.

Like the original OP considering a mix of gilts and hedged global.
Saw there is now a Vanguard -VAGS which is global hedged and accumulation ( there is a distribution one too) which looks like it could be a good alternative to the ishares ETF. It's out performed in recent times as far as I can see but can't see the reason why it's done so much better when tracking the same index.

Any suggestions on blending the bond funds/ criteria for deciding would be welcome.

Thanks

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Re: Minimal risk asset?

#339528

Postby xxd09 » September 10th, 2020, 6:14 pm

Used the Vanguard Global Bond Index Fund hedged to the Pound (VIGBBD) for many years as my sole Bond section of Portfolio
YTD -4.15% pa
Averaging over 4% over last 10 years
Did/does the job for me
xxd09

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Re: Minimal risk asset?

#339575

Postby 1nvest » September 10th, 2020, 11:54 pm

Used the Vanguard Global Bond Index Fund hedged to the Pound (VIGBBD) for many years

Thanks for that pointer.

Looking at a passive approach of initial 50/50 in VWRP and VIGBBD i.e. global stock and global bonds (£ hedged), both being accumulating and trading in £'s, and since 2010 it looks like the rewards might have been 'satisfactory' (to coin Ben Graham's terminology)

I've based that on the assumption that VWRP which is relatively new would have tracked its benchmark, which typically Vanguard funds tend to do.

Jack Bogle preferred not rebalancing as when he measured that historically 50/50 stock/bond rebalance versus non rebalanced had close to 50/50 cases of winning/not over all 20 year periods since 1896, but when non rebalanced lagged rebalaced it did so only marginally, but when it was better it was significantly better (of the order 0.5% lag versus 2% to 3% lead). In the above table, since 2010 50/50 non rebalanced would have ended 2019 with around 70/30 stock/bond weightings.

2018 looks a bit odd when compared to Vanguard LifeStrategy 60/40, which lost around -3% that year, whilst the above portfolio gained +10%.

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Re: Minimal risk asset?

#339637

Postby xxd09 » September 11th, 2020, 10:35 am

I use Vanguard Global Equities Index Tracker ex UK plus Vanguard FTSE AllShare Index Tracker for the equities part of my portfolio
Never really had to rebalance once my Asset Allocation was set (This changed slightly as I got older)
Adding funds during Accumulation phase restored balance -if out of kilter
Same in Deaccumulation -withdrawals restored balance-if required
Both Accumulation and Deaccumulation were once a year operations ie could be rebalancing once a year-never actually happened
xxd09 (aged 75 retd 18 years)

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Re: Minimal risk asset?

#339642

Postby 1nvest » September 11th, 2020, 10:52 am

Found some data going back a little further https://www.bogleheads.org/w/index.php? ... iew_mobile and for initial 50/50 Global stock/£ hedged global bonds, non rebalanced ...
Image

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Re: Minimal risk asset?

#339644

Postby xxd09 » September 11th, 2020, 11:04 am

That looks right
I am a conservative voter so was never more than 40/60 equities/bonds
Now been at 30/70 for a long time
Never took more than 3.5 to 3.8% from the Portfolio
Seemed to work for me
Cheap, simple to understand
Who knows gluing forward?
xxd09

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Re: Minimal risk asset?

#339645

Postby 1nvest » September 11th, 2020, 11:10 am

I'm about to retire (at age 60), lump sum from a occupational pension soon. I quite like that 50/50 non-rebalanced as per Jack Bogle style as sequence of returns risk is greatest in earlier years (if the day after you lump into a stock heavy portfolio stocks dived then that could be critical). If you've held for a number of years and seen stocks double, but then lose a third, then that's far less critical. 50/50 initial dilutes down that early years sequence of return risk. Not rebalancing saves on costs, and if you draw in the proportions at the time then its just scaled rather than 'rebalanced'. £100,000 portfolio, drawing £4,000 when stocks are 60%, bonds are 40% then take £2400 from stock, £1600 from bonds.

Risk exposure tends to increase, for instance in my previous post how 50/50 transitioned over to around 70/30, but that also tends to see rewards being enhanced, which would also tend to leave a higher value and more appropriate asset allocation portfolio for younger heirs.

Global bonds hedged to £ is more a £ holding, whilst global stocks is more a 'gold' like holding (foreign currencies), so there's a degree of £/foreign currencies risk diversification. I guess as the weightings drift and you perhaps end up holding more foreign currency exposure (stock weighting rises relative to bonds), then some of the stock exposure should be moved over to £ based holdings (FT All Share/whatever) to keep £/foreign currency exposures more balanced/neutral.

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Re: Minimal risk asset?

#339657

Postby xxd09 » September 11th, 2020, 12:05 pm

A market drop at retirement is a disaster if you are unprepared
You need to have 2-3 years living expenses in cash equivalents or cash itself so that if the worst comes the worst you can live off your cash savings while your portfolio recovers -equities especially
If you don’t have enough saved to cover this eventuality then don’t retire yet!
Might be a role for ŷour tax free lump sum which will be cash
You should always have at least 2 years cash to ride out downturns-they occur regularly!
xxd09

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Re: Minimal risk asset?

#339769

Postby TopOfDaMornin » September 11th, 2020, 8:52 pm

xxd09 wrote:A market drop at retirement is a disaster if you are unprepared
You need to have 2-3 years living expenses in cash equivalents or cash itself so that if the worst comes the worst you can live off your cash savings while your portfolio recovers -equities especially
If you don’t have enough saved to cover this eventuality then don’t retire yet!
Might be a role for ŷour tax free lump sum which will be cash
You should always have at least 2 years cash to ride out downturns-they occur regularly!
xxd09



I fully agree with you.

The more I learn about investing the more I am coming to believe in the 3 product portfolio approach: global shares, global bonds and 2 or 3 years cash buffer. Or one of a Vanguard Lifestrategy products with a cash buffer. I am undecided about the percentage that should be in bonds.

I wish I did this 15 years ago rather than just invest in HYP shares.

To answer the Ops original question, my limited understanding is that a global bond index fund hedged to the Pound does the job.


TDM

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Re: Minimal risk asset?

#339798

Postby xxd09 » September 11th, 2020, 11:42 pm

Re percentage in bonds
It’s personal
I saved enough so am 30/65/5 -equities/bonds/cash
Your age in bonds minus 10 is a rough guide
It has been noticed that over the years a 60/40 portfolio produced the same as 40/60 one which is reassuring
One portfolio is more volatile than the other-ie increased equities more volatility
Pays your money and takes your choice
xxd09

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Re: Minimal risk asset?

#339800

Postby 1nvest » September 12th, 2020, 12:50 am

For me the occupational pension + state pension combined is 'enough', or rather will be in around 7 years time when in receipt of both. Plan is to put aside the equivalent of 7 years of £9K state pension amounts into 'cash' (£63K) out of the soon to be paid occupational lump sum for drawdown over the 7 years, to supplement that occupational pension (that starts at age 60) - as though receiving both occupational and state pensions from age 60. There's surplus occupational lump sum still available after that to further expand a modest/large amount of other liquid assets/capital.

If you have enough already sourced (home is also owned, so no rent to find/pay), then the rest can be pretty much invested however you like. Warren Buffett suggest going 90/10 stock/cash (T-Bills) to maximise potential rewards, Jack Boggle despite having low 7 digit wealth and modest spending opted for a more conservative 50/50 stock/bond type asset allocation. Minimal risk is such a subjective thing. In the context of the OP perhaps a Harry Browne Permanent Portfolio might be considered as being appropriate for the 20% minimal risk holdings.

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Re: Minimal risk asset?

#339825

Postby veeCodger1 » September 12th, 2020, 10:02 am

xxd09 wrote:Used the Vanguard Global Bond Index Fund hedged to the Pound (VIGBBD) for many years as my sole Bond section of Portfolio
YTD -4.15% pa
Averaging over 4% over last 10 years
Did/does the job for me
xxd09


If you don't mind me asking, where you ever tempted to try the HYP approach instead of capital drawdown? Your approach does seem more simple.

VC

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Re: Minimal risk asset?

#339830

Postby xxd09 » September 12th, 2020, 10:30 am

I knew about the HYP setup.I was a great fan of Motley Fool
By that stage in my investing career been through Insurance companies-remember Equitable Life,single share PEPs,unit trusts and finally investment trusts
HYP struck me as more of the same -even more complicated gambling relying on dividends
My last investment ie investment trusts turned out to be expensive pseudo closet index trackers
John Bogles books had just been read-just buy the total market in equities and bonds and hold forever
Cheap,simple and easy to understand
Never looked back
xxd09


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