New to investing, worried about my 40-60% Funds

[Waspfan]

Thanks Geoff once again for your excellent way of explaining things you can probably see how newcomers like me can think mistakenly that bonds can lose you money, through a basic misunderstanding.

[GeoffF100]

Thanks Geoff once again for your excellent way of explaining things you can probably see how newcomers like me can think mistakenly that bonds can lose you money, through a basic misunderstanding.

Bonds can and do lose you money. In the long run, equities usually do better, but 100% equities is a very bumpy ride. You are worried because bonds have fallen a little. How will you feel when equities fall a lot (which they do regularly)?

[Waspfan]

Well thankyou all so very much for sparing your time and experience with me today, you've all been very patient and understanding, for which I'm most grateful.

I will go away and read up on all your kind input, and report back when I've made a decision.

Thanks folks

[xxd09]

At the risk of overdoing things with one more thought
The money you have in bonds is the money you cannot afford to lose
So -usually youngsters have very few-oldsters (like me-75 years old) have a lot
That’s it from me
xxd09

[Waspfan]

At the risk of overdoing things with one more thought
The money you have in bonds is the money you cannot afford to lose
So -usually youngsters have very few-oldsters (like me-75 years old) have a lot
That’s it from me
xxd09

That makes complete sense to me, thankyou

[PrefInvestor]

Hi Waspfan, Well it’s an investment fact that when interest rates rise bonds and all forms of fixed interest fall in terms of their capital value BUT the regular income that they produce remains unchanged (usually) and when rates fall again bonds and fixed interest will rise in value again recouping their lost value. The outlook for equities can also be pretty uncertain too when interest rates rise. Company profits may fall or even disappear altogether and with them any associated dividends as we saw in 2020 with the pandemic. And the outlook for growth stocks (which often pay no dividends) becomes particularly uncertain.

Against that backdrop how you choose to invest depends a lot on your personal objectives. Many retired people require a guaranteed income from their investments, having some proportion of bonds or other fixed interest investments in your portfolio can be a good way to deliver that. Having an income oriented portfolio is a bit like having an annuity but at a much better rate AND without giving up ALL of the capital.

BUT if you do hold bonds you will almost certainly have to accept a reduction in the capital value of your portfolio, however these paper losses should be recovered once inflation.has fallen and interest rates have reduced to more normal levels (though this might take a very long time). However if your primary objective is capital preservation (Ie not losing too much of your capital) then you won’t want too much fixed interest in your portfolio and should hold a greater weight in equities (either funds, investment trusts or stocks) but carefully chosen for performance in an inflationary environment such as we have ATM.

None of this is easy and the choices to be made are very difficult. I certainly think that you did the right thing dumping your IFA as they typically charge 1-2% of your portfolio per year however their chosen investments perform. Over 10 years that’s a very large sum of money. Doing it yourself you will likely make mistakes but it’s the only way to learn.

I am by nature and inclination an income investor and for many years invested mainly in preference shares (Prefs) which have many of the same characteristics as bonds. I still have quite a number of fixed interest type investments in my portfolio as they are generally less volatile than equities and have good yields which I like. I got out of Prefs completely when I saw the interest rises coming but there will come a time when they will become good investments again, once prices have fallen a bit more, some are starting to become interesting already.

So my message to you is don’t think equities are good and bonds (or more generally fixed interest investments) are bad as that is a gross oversimplification. You need to understand their characteristics and use a mix of them to deliver the financial solution that you want. Do think carefully about what you need from your investments and build yourself a diversified portfolio covering multiple sectors, geographies and currencies and do consider including some fixed income type investments in the mix (necessarily bonds but bond funds, debt, credit and commercial property investments eg REITs for example). That would be my suggestion anyway, but you must choose your own path.

You will have much learning and research to do…..

Good luck

Pref

[Itsallaguess]

Well it’s an investment fact that when interest rates rise bonds and all forms of fixed interest fall in terms of their capital value

As someone with only a passing interest in bonds, via a chunk of Vanguard LifeStrategy 80/20 that I own as part of my overall invested portfolio capital, and having taken an interest in this bond-related thread as it's grown over recent days, am I right in thinking that we might be able to sum up the OP's bond-related issues as -

• Being initially happy with their broad equity and bond allocation.

• Initially thinking that their bond allocation should act as a 'non-correlated asset' when viewed against separately held equity investments.

• Surprised and disappointed to see bond values recently fall even when other broad equity investment values don't go up - generally thinking 'I didn't think bonds worked like that....?'

• Now realise that all of the above largely ignores the separate and large influential factor of interest-rate levels on bond values, and has broadly seen the value of their bonds drop due to recent interest rate rises, rather than because equities have risen.

• The large influence on bond values specifically due to their sensitivity to interest-rate values had not been properly known or considered by the OP initially.

Does that more or less sum up the last couple of pages of more detailed and interesting explanation on this thread?

Cheers,

Itsallaguess

[GeoffF100]

Bonds prices do indeed fall when interest rates rise. Normally, equity prices fall in sympathy (by the same percentage if the equity risk premium remains the same). That has happened (more or less) for a dollar investor. Sterling denominated bonds have done worse than equities with dollar denominated earnings because the pound has fallen.

If equity prices fall sharply, many investors sell them in panic and buy bonds (flight to quality). You will then be glad that you are holding bonds.

[Dod101]

Hi Waspfan, Well it’s an investment fact that when interest rates rise bonds and all forms of fixed interest fall in terms of their capital value BUT the regular income that they produce remains unchanged (usually) and when rates fall again bonds and fixed interest will rise in value again recouping their lost value. The outlook for equities can also be pretty uncertain too when interest rates rise. Company profits may fall or even disappear altogether and with them any associated dividends as we saw in 2020 with the pandemic. And the outlook for growth stocks (which often pay no dividends) becomes particularly uncertain.

Against that backdrop how you choose to invest depends a lot on your personal objectives. Many retired people require a guaranteed income from their investments, having some proportion of bonds or other fixed interest investments in your portfolio can be a good way to deliver that. Having an income oriented portfolio is a bit like having an annuity but at a much better rate AND without giving up ALL of the capital.

BUT if you do hold bonds you will almost certainly have to accept a reduction in the capital value of your portfolio, however these paper losses should be recovered once inflation.has fallen and interest rates have reduced to more normal levels (though this might take a very long time). However if your primary objective is capital preservation (Ie not losing too much of your capital) then you won’t want too much fixed interest in your portfolio and should hold a greater weight in equities (either funds, investment trusts or stocks) but carefully chosen for performance in an inflationary environment such as we have ATM.

None of this is easy and the choices to be made are very difficult. I certainly think that you did the right thing dumping your IFA as they typically charge 1-2% of your portfolio per year however their chosen investments perform. Over 10 years that’s a very large sum of money. Doing it yourself you will likely make mistakes but it’s the only way to learn.

I am by nature and inclination an income investor and for many years invested mainly in preference shares (Prefs) which have many of the same characteristics as bonds. I still have quite a number of fixed interest type investments in my portfolio as they are generally less volatile than equities and have good yields which I like. I got out of Prefs completely when I saw the interest rises coming but there will come a time when they will become good investments again, once prices have fallen a bit more, some are starting to become interesting already.

So my message to you is don’t think equities are good and bonds (or more generally fixed interest investments) are bad as that is a gross oversimplification. You need to understand their characteristics and use a mix of them to deliver the financial solution that you want. Do think carefully about what you need from your investments and build yourself a diversified portfolio covering multiple sectors, geographies and currencies and do consider including some fixed income type investments in the mix (necessarily bonds but bond funds, debt, credit and commercial property investments eg REITs for example). That would be my suggestion anyway, but you must choose your own path.

You will have much learning and research to do…..

Good luck

Pref

I too am an income investor and although I am not into Prefs, I can see their attraction. If I may say so it seems to me that this post is probably as good advice as you are going to get. There is nothing right or wrong about investing, so much depends on individual circumstances and what you feel comfortable with. I am older than xxd09 for instance, and have a very small proportion of bonds in my portfolio (around 5% I think it is). Have had for years and have no intention of changing it. They are four bond funds with decent and fairly steady income. As Geoff indicates, they are dynamic in that individual bonds will mature in a fund to be replaced by other bonds whose pricing and yield will reflect current market conditions. so in a sense they are always being updated.

The balance of my investment assets is in equities apart from my cash reserve, and will stay that way.

So my advice to the OP is to distil the broad message coming from these various posts and then decide what suits him, depending on his requirements, temperament and so on, but do not think that any one point of view is the 'correct' way or necessarily the best.

Dod

[BullDog]

Well it’s an investment fact that when interest rates rise bonds and all forms of fixed interest fall in terms of their capital value

As someone with only a passing interest in bonds, via a chunk of Vanguard LifeStrategy 80/20 that I own as part of my overall invested portfolio capital, and having taken an interest in this bond-related thread as it's grown over recent days, am I right in thinking that we might be able to sum up the OP's bond-related issues as -

• Being initially happy with their broad equity and bond allocation.

• Initially thinking that their bond allocation should act as a 'non-correlated asset' when viewed against separately held equity investments.

• Surprised and disappointed to see bond values recently fall even when other broad equity investment values don't go up - generally thinking 'I didn't think bonds worked like that....?'

• Now realise that all of the above largely ignores the separate and large influential factor of interest-rate levels on bond values, and has broadly seen the value of their bonds drop due to recent interest rate rises, rather than because equities have risen.

• The large influence on bond values specifically due to their sensitivity to interest-rate values had not been properly known or considered by the OP initially.

Does that more or less sum up the last couple of pages of more detailed and interesting explanation on this thread?

Cheers,

Itsallaguess

That's a great summary, one I could imagine the OP buys into. It of course, begs the question "why didn't the adviser explain all that?". After all said and done, isn't that what you pay them for? This thread just amplifies my thinking that financial advisers are about the same level of integrity as used car salesmen and estate agents.

[Urbandreamer]

There are some really good points in this thread, but also many opinions that are not obviously opinions.

For example the capital value of bonds fall when interest rates rise they will rise again when interest rates fall. That the price of equities will perform likewise. It's sort of true of course.

However it ignores the reasons that interest rates rise or fall, the value of money over that period or at the end and any consideration of growth. Equities may fail, but their intent is to create value while bonds (loans) are a zero sum game where money is simply moved from one to another. Bond coupons, the return, however will be paid before any profit is paid to shareholders or even if there is a loss. Standard bonds can really suffer in inflationary periods with the value of the income being eroded as the capital value falls. The argument for equities depends upon the cause of the inflation with equities sometimes doing well in inflationary times, while other times they do badly.

The phrase "tail wagging the dog" has been used with regard to tax. Though in this case we find that there are good monetary reasons to maximize the tax position, can I point out that some may have other reasons than pure financial gain for such actions. For ideological reasons I have always sought to minimize the tax that I pay. Not everyone shares my opinions, but clearly at least I have these motivations.

...back to the subject.

Relax. You have decided to take financial responsibility yourself because your IFA was making the wrong moves on your behalf. Were we to assume that they did so by mistake, you just have to make less mistakes to produce a better result.
I suspect that not a single contributor to this thread could claim to have never lost money, either through a mistake or simply misjudging the future. Why should you expect more of yourself or be more critical of yourself than we are?

On the subject of the future, I'm sorry but unless you want to pay someone else, you are likely to have to review your investments from time to time as today captures up with the future and a new future appears on the horizon. How many predicted the 2021 global shutdown in 2018? For that matter who was predicting the current war in Europe in 2021? I may not like bonds, but looking back there have been decades where the returns beat equities hands down. Such conditions could happen in the future, though I doubt it will happen in the next 10 years. Sadly I'm predicting a difficult decade to come for all investments and increasing my defensive holdings.

Consider correlation. As has been said bonds and "equities" have seemed in lockstep recently. We need to try hard to find assets with little correlation. As an active investor I'm mixing REIT's, Emerging Markets, Biotech and Financials... oh and some bonds. As times have changed I have re-balanced to adjust my risks. For example selling some Scottish Mortgage in 2020 and 2021 when it had risen to an uncomfortable percentage of my portfolio and investing the funds in IT's with a different focus.

Finally, try to have a bit of fun with this investing lark.

[xeny]

So currently the bond elements of my 3 funds seem to be a liability rather than a lifesaver.

I still can't understand why anyone would wish to invest anything which could quite easily be worthless in 7-+0 years time.

Important word there is currently. A portfolio is generally built to perform tolerably in a mix of market conditions, as you can't predict the future. The corollary of this is that at best one or another part of the portfolio will be performing poorly.

[Waspfan]

Hi Waspfan, Well it’s an investment fact that when interest rates rise bonds and all forms of fixed interest fall in terms of their capital value BUT the regular income that they produce remains unchanged (usually) and when rates fall again bonds and fixed interest will rise in value again recouping their lost value. The outlook for equities can also be pretty uncertain too when interest rates rise. Company profits may fall or even disappear altogether and with them any associated dividends as we saw in 2020 with the pandemic. And the outlook for growth stocks (which often pay no dividends) becomes particularly uncertain.

Against that backdrop how you choose to invest depends a lot on your personal objectives. Many retired people require a guaranteed income from their investments, having some proportion of bonds or other fixed interest investments in your portfolio can be a good way to deliver that. Having an income oriented portfolio is a bit like having an annuity but at a much better rate AND without giving up ALL of the capital.

BUT if you do hold bonds you will almost certainly have to accept a reduction in the capital value of your portfolio, however these paper losses should be recovered once inflation.has fallen and interest rates have reduced to more normal levels (though this might take a very long time). However if your primary objective is capital preservation (Ie not losing too much of your capital) then you won’t want too much fixed interest in your portfolio and should hold a greater weight in equities (either funds, investment trusts or stocks) but carefully chosen for performance in an inflationary environment such as we have ATM.

None of this is easy and the choices to be made are very difficult. I certainly think that you did the right thing dumping your IFA as they typically charge 1-2% of your portfolio per year however their chosen investments perform. Over 10 years that’s a very large sum of money. Doing it yourself you will likely make mistakes but it’s the only way to learn.

I am by nature and inclination an income investor and for many years invested mainly in preference shares (Prefs) which have many of the same characteristics as bonds. I still have quite a number of fixed interest type investments in my portfolio as they are generally less volatile than equities and have good yields which I like. I got out of Prefs completely when I saw the interest rises coming but there will come a time when they will become good investments again, once prices have fallen a bit more, some are starting to become interesting already.

So my message to you is don’t think equities are good and bonds (or more generally fixed interest investments) are bad as that is a gross oversimplification. You need to understand their characteristics and use a mix of them to deliver the financial solution that you want. Do think carefully about what you need from your investments and build yourself a diversified portfolio covering multiple sectors, geographies and currencies and do consider including some fixed income type investments in the mix (necessarily bonds but bond funds, debt, credit and commercial property investments eg REITs for example). That would be my suggestion anyway, but you must choose your own path.

You will have much learning and research to do…..

Good luck

Pref

Many thanks for your reply Pref, and indeed to all the others who have posted this site is phenomenal full of really helpful members, every one of you.

That's sounds like an excellent summarised response to my original post, in particular my fear of Bonds in my Vanguard Lifestrategy 60-40% fund.

This statement you made ticked the box for me.

"when interest rates rise bonds and all forms of fixed interest fall in terms of their capital value BUT the regular income that they produce remains unchanged (usually) and when rates fall again bonds and fixed interest will rise in value again recouping their lost value"

Because that was my main area of concern, as before opening this thread, I thought that if you had Bonds in your portfolio and they hit a rock, then that was it, game over, for the bond portion
of my portfolio, and in my case having a portfolio which I don't need to drawdown from for at least 10 years, may mean that the bond area is like a dead part of my portfolio.

But it sounds from what you have discussed in your reply, and indeed others, that the bonds do actually have the ability to update and mend again, over time, and when things pickup again, the rot disappears to some extent, and recovers again.

[Waspfan]

Itsallaguess[/quote]
That's a great summary, one I could imagine the OP buys into. It of course, begs the question "why didn't the adviser explain all that?". After all said and done, isn't that what you pay them for? This thread just amplifies my thinking that financial advisers are about the same level of integrity as used car salesmen and estate agents.[/quote]

I quite agree with all of that

The advisor was pathetic in just about every area

[mc2fool]

Bonds being "almost guaranteed to lose" is an opinion, and not one of "everybody". "Everybody" is the market so, are you of the opinion that the market has got the price of bonds wrong?

Basically it's just what I keep hearing and reading
So if a bond allocation in say a VLS fund is currently losing value does that mean that's the end for that bond, or will the bond allocation start to go up in value again?
I know its a basic newbie question....but I am that Newbie

Methinks you are getting confused between what has happened (fact) and what will happen (opinion). The fact is that, yes, bonds have recently lost value. This is due to the factors others have expounded in this thread.

However, did you keep on hearing and reading that bonds would lose value before they recently did? If you did, then you should look into the track records of those that made those predictions to see how consistent they have been (in a plethora of predictions some are going to be right by just luck). OTOH if you didn't keep on hearing and reading that bonds would lose value before they recently did, then what value do the opinions of those crystal ball gazers have going forward now?

The point is that nobody knows if bonds will lose or gain value going forward and the important point to understand is that the collective global opinion on them is already reflected in their current market price; if the market thought a bond would be worth less tomorrow its price would already be lower today.

[Waspfan]

[/i]


The point is that nobody knows if bonds will lose or gain value going forward and the important point to understand is that the collective global opinion on them is already reflected in their current market price; if the market thought a bond would be worth less tomorrow its price would already be lower today.

So with that said, then bonds will see the same level of risk as equities?

[mc2fool]

The point is that nobody knows if bonds will lose or gain value going forward and the important point to understand is that the collective global opinion on them is already reflected in their current market price; if the market thought a bond would be worth less tomorrow its price would already be lower today.

So with that said, then bonds will see the same level of risk as equities?

Uh? No! I mean, unless you go for really low grade junk bonds, most high grade bonds are zero risk, because you know exactly what the returns to maturity will be when you buy them. The only risks are:

a) if they default (the bonds in VLS 60 look to be mostly govt or very high grade bonds, so very unlikely to default, dunno about your other funds)
b) if you sell out before they mature

If you buy a bond and hold it to maturity, and it doesn't default along the way, you will know up front exactly how much you'll receive at maturity and how much in coupons up until then. Of course, they may go up and down between your purchase and maturity (although not as much as equities), and if you sell before maturity then you'll get whatever the market price is, and that's unpredictable.

[Dod101]

The point is that nobody knows if bonds will lose or gain value going forward and the important point to understand is that the collective global opinion on them is already reflected in their current market price; if the market thought a bond would be worth less tomorrow its price would already be lower today.

So with that said, then bonds will see the same level of risk as equities?

Uh? No! I mean, unless you go for really low grade junk bonds, most high grade bonds are zero risk, because you know exactly what the returns to maturity will be when you buy them. The only risks are:

a) if they default (the bonds in VLS 60 look to be mostly govt or very high grade bonds, so very unlikely to default, dunno about your other funds)
b) if you sell out before they mature

If you buy a bond and hold it to maturity, and it doesn't default along the way, you will know up front exactly how much you'll receive at maturity and how much in coupons up until then. Of course, they may go up and down between your purchase and maturity (although not as much as equities), and if you sell before maturity then you'll get whatever the market price is, and that's unpredictable.

Yes but of course, it may seem obvious, but there is a big difference between buying a bond and buying a bond fund.

Dod

[mc2fool]

Yes but of course, it may seem obvious, but there is a big difference between buying a bond and buying a bond fund.

Indeed, but there are also big differences between different kinds of bond funds. My understanding of the bond component of the VLS funds is that the constituent bonds are all held to maturity.

Hmmm ... as I type that I begin to doubt my understanding ... anyone know if I'm right?

[Urbandreamer]

Yes but of course, it may seem obvious, but there is a big difference between buying a bond and buying a bond fund.

Indeed, but there are also big differences between different kinds of bond funds. My understanding of the bond component of the VLS funds is that the constituent bonds are all held to maturity.

Hmmm ... as I type that I begin to doubt my understanding ... anyone know if I'm right?

As I understand it many bond funds adopt what is called a ladder approach. That is to say that they buy and sell bonds with differing maturity dates to adjust both returns and risk in a rolling manner. This is particularly the case as the yield curve inverts. If you are running a bond fund, why invest in long dated bonds with lower returns than short dated ones with higher returns?

In many ways bonds are just as complicated as equities*, and just as much at risk from political interference. Can anyone argue that QE and high inflation doesn't affect the total return of existing bonds?

As for "did anyone predict a bad time for bonds in advance", the simple answer is yes they did. Now they could have been wrong, in this case they were not. ALL such predictions take the form of "I think this will happen because of XYZ". If XYZ comes to pass then they tend to be right, while if it doesn't then they tend to be wrong.

If you look back a year or two you will find many predicting high inflation. Usually because of QE, though raw material prices were the thing a year ago.. Today you will find many predicting high inflation, because scope to control it is so limited. You will also find predictions about other things. For example that energy companies won't be investing in North sea assets. If true, and I suspect that it will be, then that will affect support companies, though not necessarily the energy companies themselves. It will also likely mean high energy costs for quite some time. Many predictions are just stating the obvious, and at that level tend to come true more often than not.

*Actually I regard bonds as too complicated for me to consider and invest via a fund that will do the complicated stuff for me.