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100% equity

Index tracking funds and ETFs
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.

1nvest
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Re: 100% equity

#393214

Postby 1nvest » March 6th, 2021, 9:44 pm

Long dated treasuries might add no more to or detract no more from portfolio rewards as that of stock. Ponder
this link - where generally the differences are just 'noise' i.e. half in stocks or 25% in each of stock and long dated treasuries broadly yielded similar rewards.

A short and long (20 year) dated barbell of treasuries overall compares to a 10 year bullet. As does a rolling 10 year ladder. With a ladder where each bond is held to maturity then there's no need to mark to market, each years reward is approximately the average of the current and past nine years 10 year yield to maturities. As of last year that was down to around 2% levels and for 2021 it will earn 1.74%. 10% of bonds maturing each year, perhaps 5% of total portfolio value, that will roll into higher (or lower) 10 year maturity yields each year, or that might perhaps buy twice as many shares as a year earlier if stocks drop a lot in price.

For the likes of a Permanent Portfolio, if you hold 25% stock, 50% in a 10 year ladder that's not market to market, 25% gold - then historically that's provided a 4.5% annualised real (modest gains) since 1896 with very few negative years and only very marginally negative when such years did occur (very low risk).
As for holding government bonds right now, it is difficult to see the justification for retail investors.

As you say, not easy to drop high street fixed term bonds into a stocks/shares ISA. Also any amounts 'deposited' are fully protected, even £millions - the state would rather print money or increase taxes rather than allow a default to occur.

A Permanent Portfolio rewarding perhaps 4.5% annualised real with very low year on year downside risks and that holds 50% in Gilts ... or perhaps more in a all-stock alternative that might make more, but could turn around and bite back hard (large potential declines), and IMO writing off bonds/safety in order to speculate isn't perhaps the wisest of choices. What might hit longer dated bonds hard, could hit stocks as equally as hard, if not even harder. Assuming long dated gilts to have only one way to go is comparable to saying the same about stocks.


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