100% equity

[Urbandreamer]

Our attitude to investment issues is very much affected by our life experiences. I was a young man in the ‘70s so saw inflation wiping out the value of money.

I too remember that time. What was the war band yielding while we had double digit inflation? Oh yes 3.5% of face value. Which it continued to yield until the government decided to redeem it in 2014. However to be fair, they did pay that coupon for a long time. Of course the value of that coupon became significantly less over the years, as did the remaining capital once the government decided to redeem them.
https://www.gov.uk/government/news/chan ... d-war-debt

It is worth following the link by the way. Those bonds originally paid 5%, but the government reduced the coupon.

The bond was issued in exchange for 5% War Loan 1929 to 1947, which had been issued in 1917 as part of the unprecedented effort by the government to raise money to pay for the First World War.

I think that I'll take my risks with equities rather than the safety of government bonds.

[scrumpyjack]

Yes and that £100 of War Loan when issued in 1917 would probably have bought you a house in London!
I know a friend of my parents bought 2 houses in Notting Hill for £200 each just after the second world war.
I'll leave bonds to others though who knows, 'This time it will be different'? I don't think so after Rishi has sprayed £450 bn all around.

[Leif]

As for the future, I believe there will be war with China, maybe by 2030, and that will hit markets. We depend heavily on China, so the impact of war will be severe especially given the proximity of Taiwan, Japan, Vietnam etc.

Somewhat off topic but who do you see as going to war with China ?
Smaller countries look unlikely to attack China and although China may try and make its influence felt in the South China Sea and continue to make claims against Taiwan it's unlikely it will push things too far and risk an armed conflict with the West since such a conflict could easily escalate into a nuclear exchange. For similar reasons the major western powers are unlikely to start an armed conflict with China. Of course if there was a miscalculation which escalated into a nuclear conflict between China and the West then we would all have rather more to worry about than the markets.

China is fast becoming an economic superpower and spending heavily on its military. It openly states that it owns Taiwan and the South China Seas. They are using force to scare shipping away from the area, and making regular air incursions into neighbouring countries airspace. Neighbours can’t drill for oil due to Chinese military harassment. The evidence supports expansionist aims. Many consider it highly likely that they will invade Taiwan, and the US military are planning for it. I suspect that will at some point enforce their claims to the South China Seas and sink US ships.

If you want to see what the atmosphere is like in China, look at YouTube videos from CGTN and other CCP stooges. It’s nationalistic propaganda, worthy of Nazi Germany. Read the comments. Statements such as ‘death to whitey’ are not uncommon. The Chinese posters deny that the Tiananmen Square massacre occurred, they say it’s Western lies. Same for Uighur camps, apparently they are schools to help the poor Uighurs improve themselves thanks to the generous CCP. They say they own Taiwan and the South China Seas, and we should not interfere in internal Chinese affairs. I argued with one poster, and he told me China would get revenge against the imperialist West, and destroy it. It’s not just just one person, but most. According to a westerner who lived in China, there are posters in the street saying “Prepare to fight the war”.

China is a controlled state. Question the CCP and you lose your job, or go to prison. Discussion of politics and economics on Chinese social media is banned. Access to Western social media is banned. They are fed a twisted view of the West at school and in the media, again this is like Nazi Germany prior to WW2. That’s why most Germans supported war. The CCP has no opposition.

As for the West and Japan, we are heavily dependent on China. The EU prefers to trade than raise human rights issues.

[GeoffF100]

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.

The can learn about the UK retail corporate bonds that are available here:

https://www.fixedincomeinvestor.co.uk/x ... ?groupid=4

Vanguard and others offer bond trackers:

https://www.vanguardinvestor.co.uk/what ... -products#

[Steveam]

@Leif. I disagree with the thrust of your argument but inappropriate for this board.

[dealtn]

Nominal bonds don't grow, but inflation linked ones can if there's inflation. But that's a whole other chapter for another day.

I'm glad you said "can" and not "will".

Inflation linked bonds can also fall if there's inflation.

[JohnW]

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.)

Sensible to be diversified. How much do you lose? Varies from 0-100%; every company is different. Here's one casualty of the pandemic:
'The only people who would not be placated were the bondholders. They had started out chasing the rainbow-like 8 per cent yield and ended up with 10 cents in the dollar.' That was one of the Virgin group airlines going under last year.

Our attitude to investment issues is very much affected by our life experiences.

Yes, that's a good lesson. Investor sentiment can have an impact on what we do as can financial theory and history in general. Newer readers can be helped by hearing that.

I will never ever hold bonds (apart from ILGs) as my mindset was formed in the days of high inflation.
Personal Assets has been very successful at preserving real asset value by the mix of assets it invests in, so IMO is safer than bonds.

I guess ILG's are inflation linked treasury bonds. And PNL holds nominal bonds, so your dislike of bonds has its limits, as mine does.

I'll leave bonds to others though who knows, 'This time it will be different'? I don't think so after Rishi has sprayed £450 bn all around.

Yes, that sort of spraying is said to be reducing yields on bonds - all bonds, since a reduction on yield on government bonds will force a drop in yield on other bonds because there's only so much premium those latter bond issuers will pay for the extra risk the lender takes. But the spraying may also be causing equity prices to be inflated, perhaps that's why equity prices rose so much last year during the biggest financial crisis across the globe for years. With equity prices way up, future expected returns on equities become way down. Now we have future bond returns looking low as well as equities'. If the difference between those, sometimes called the equity risk premium - what you're paid for taking equity risk over 'risk free' government bonds - is the same now as it was 5 years ago, there's no reason to now be jumping from low return bonds to equities if you weren't 5 years ago. I don't know what the expected returns on equities are now, depends on the P/E ratios I suppose, but keep it in mind.

[JohnW]

Nominal bonds don't grow, but inflation linked ones can if there's inflation. But that's a whole other chapter for another day.

Inflation linked bonds can also fall if there's inflation.

Yes, good point: grow perfectly in line with inflation, but 'fail to maintain purchasing power if their yields are negative'.
Here's the other chapter on August 19th, 2020, 7:23 am: viewtopic.php?f=8&t=24851&p=334095#p334095

[Leif]

@Leif. I disagree with the thrust of your argument but inappropriate for this board.

I responded to a question from someone else. As for China, people can form their own opinions, and I’ve always like Chinese people I’ve worked with, but issues such as China do have relevance to investing. We have had a long run of growth since the 2008 GFC, due in part to globalisation and the growth of China. I think we will see changes, with companies moving manufacturing to Thailand and other places outside China. Also many people hold equity funds investing in China.

I am curious why you disagree with me. I certainly would like to have a more upbeat view, I want my funds to grow!

[scrumpyjack]

I guess ILG's are inflation linked treasury bonds.

Yes, sorry, Index Linked Gilts. I bought quite a lot personally when they were not at a premium and guaranteed a small real return. I eventually sold them.
Unfortunately ILGs have for a long time traded at a premium, so they guarantee a real loss, mainly because pension funds were in effect forced to buy them and there was a limited supply. So the price got bid up.

I haven't really looked at them for nearly 20 years, when I bought quite a lot for a charity I was trustee of.
As I recall the wealth preserver funds have been keener on US government index linkers as they did not trade so far above 'value' as UK ones did.

[Lootman]

The big problem with bonds, longer term, is that they cannot grow. They can only bounce around a mean. Whereas equities can and do grow.

Not everyone seeks growth, some prioritise wealth preservation. Given higher stock volatility and a sequence of stocks halving, halving again and halving yet again ... as occurred during the Wall Street Crash era, and those also drawing a income from a stock heavy portfolio may end up capitulating to consolidate the losses, simply due to fear and seeking to preserve 'what little remained'. Many seem to express confidence that they could stomach high (stock) volatility, but when the crunch occurs their temperament changes. Those more disinterested and that rarely 'look' perhaps have the advantage, but then if so they wouldn't be reading this board.

Groucho Marx earned a fortune and lost much in stocks. Subsequently he opted just to hold bonds and would have been wealthier overall if he'd never held any stocks. That's a much more common outcome than you might believe.

Sure, shares have big falls from time to time. But then that just makes it all the more impressive that long-term they do so well. Every time they go down, they end up going up by even more, and typically within 2 to 3 years.

The only time buying the dips has not worked for shares was if you started around 1929, when shares took 35 years to get ahead again. Perhaps you will argue that will happen again, although that implies another great depression and a third world war.

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. I will take another look at bonds when they yield more than high-quality large-cap shares. Right now even the low-yielding S&P 500 yields more than a 10 year treasury.

And I do not have a lot of passion for making very long term loans to anyone at 1% or 2% a year. I'd rather borrow at those rates and invest in equities. So, how about you lend me a large lump sum on a zero coupon basis, with principal and interest to be repaid in 25 years? If you think that is a better deal for you than me, you would surely do that deal, right?

[Leif]

The only time buying the dips has not worked for shares was if you started around 1929, when shares took 35 years to get ahead again. Perhaps you will argue that will happen again, although that implies another great depression and a third world war.

Are you taking into account total returns, or simply market value? As for WW3, ahh no, I’ve already been told off ...

[1nvest]

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).

Sure, shares have big falls from time to time. But then that just makes it all the more impressive that long-term they do so well. Every time they go down, they end up going up by even more, and typically within 2 to 3 years.

... But not always. For instance one method of withdrawals during retirement (which many specifically invest for) is to draw a initial 4% and uplift that amount each year by inflation as the amount drawn in subsequent years (4% SWR). Using US data (convenience of data availability) - for all stock from a 2000 start date and a few years later and the portfolio value had halved in real terms https://tinyurl.com/otdbften Later still, around a decade into retirement and the portfolio value was down towards 25% of its former value (-75%). But subsequently 'rebounded' to being around -60% down.

Applied to the UK index and the picture is even worse. 2020 having near just 10% of the former start date inflation adjusted portfolio remaining.

Others fared better. TJH accum with 4% SWR applied for instance is just -30% down (as of April 2000) i.e. individuals who beat the index naturally did better. However assumption of beating the index is a big assumption, there's a equal probability of lagging the index.

Much is subject to start date, early year sequence of returns risk is a big risk factor, for many that is not optional/variable, but rather is fixed. If soon after transitioning from accumulation to drawdown the stock market moves unfavourably that can have a massive effect on retirement outcome.

A simple way to massively reduce early year sequence of returns risk is to not fully load into stocks. That can even be on a non rebalanced basis such as starting with 50/50 stock/gold and just letting that run (no rebalancing), and just draw in weighting proportions (£1000 investment, stocks weight 40% at the time a £100 withdrawal is required then take £40 from stocks, £60 from gold). https://tinyurl.com/19llyjul ... for that link, tick the 'inflation adjusted' tickbox in the chart, you might also like to click the 'Allocation Drift' tab to see how the stock and gold proportions varied over time).

Repeat that over different start-dates/dates-ranges and broadly it was safer (still with reasonable rewards) to NOT use a 100% stock asset allocation.

You have to remember that the financial sector is the worlds richest sector and is well apt at extracting other peoples money for itself. Historically stock indexes that are suggested as being representative of the historic 'average' - that are used as a sales pitch - have been repeatedly tweaked/revised. I believe the reality is that the average investor on average underperforms that average by 2%/year (and being a average some will of course have lagged by (in some cases considerably) more). Dow and Jones for instance devised three indexes but today only a revised and best performing index of the three is the one that is commonly used as a 'guide' (Dow Jones Industrial Average). Survivorship bias.

Fundamentally main Indexes are a mathematical based method, revised over time to be 'better'. Beating the index is a common desire/objective however few manage to reliably and consistently do so - typically a small number in reflection of natural probabilities.

[Steveam]

@1nvest: “Much is subject to start date, early year sequence of returns risk is a big risk factor, for many that is not optional/variable, but rather is fixed. If soon after transitioning from accumulation to drawdown the stock market moves unfavourably that can have a massive effect on retirement outcome.”

You are, of course, correct. Most people on here who talk of 100% equities (I’m one) actually hold large cash buffers to get them through down times (I have 4 years cash/cash equivalents plus the deferred state pension). My 100% equities are split a third direct equities, a third ETF trackers (not whole world as I have some regional biases) and a third ITs (themes and active). I’ve been retired 20 years and everything is working fine. So, when I say I’m 100% equities I’m not telling the truth - I’m 100% equities in the context of a large cash buffer, an inflation proofed income when I decide to take it, and an anticipated annual income well in excess of my expenditure.

Context is all in this conversation. I could accept a 50% drop in income forever without impacting my core expenditure (I’d have to cut back on charity donations, perhaps even cut back on a holiday or two).

Best wishes,

Steve

[Leif]

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.

Out of interest, how many years cash reserves do people keep? I have three.

[Urbandreamer]

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.

Out of interest, how many years cash reserves do people keep? I have three.

I wouldn't assume that "sequence risk" means that drawdown "doesn't do so well". It's a worry, but can be modelled. ie try firecalc.
https://www.firecalc.com/

It is of course a serious worry, which is probably why many like a large cash float.

I'm not retired, so can't comment about what I shall do. My attitude may have change when it becomes real. Currently my "rainy day money" consists of the contents of my current account. I'm not a fan of "cash".

I'd be interested in how often people top up their float. It will after all need topping up.

[1nvest]

Cash reserves and/or pension benefits does of course mean that you're not 100% stocks. As does owning your own home where 'rent' is liability matched (imputed), rather than having to rely upon stocks dividends/gains to find/pay rent. Even Buffett doesn't do 100% stock, more often he directs between 60/40 and 80/20 stock and bonds (he tends to hold treasury bills as his preferred 'bond' holding). If you don't have to find £1500/month to pay your rent, and have £1500/month pension income, then combined and valued at a 4% SWR that has a £900,000 value. If you've another £900,000 invested in stocks then that's 50/50 stock/other. If you could liquidate the home and pension to have £1.8M 100% invested into stocks most I believe would suggest that to be a unwise move.

[1nvest]

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.

Out of interest, how many years cash reserves do people keep? I have three.

I prefer the SWR method, a fixed % of initial portfolio value drawn in the first year (commonly a 4% is often suggested as a ballpark figure), and where that amount is uplifted by inflation each year as the amount drawn in subsequent years. A constant inflation adjusted income no matter what. And then hold a asset allocation that is more inclined to support/sustain that (diversified across currencies and assets). Rather than drawing upon that monthly I personally like to lump that into a single trade once/year (plus maybe irregulars if a sudden need for a modest amount of cash arises). So on that basis I guess I hold a average of 6 months of cash reserves. But that could just as easily be a average of a couple of weeks reserves (if drawn monthly).

Over time that SWR % can decline. My former 4% for instance is now more like a 2% rate. Relatively small changes in SWR % can make a huge difference to outcome, where even a small reduction can substantially reduce risk. At a 2% rate risk is very low; At 5% the risk is much more substantial.

[Lootman]

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]

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.