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Risk vs Reward (Premium Bonds vs Vanguard Global Bond Index)
Risk vs Reward (Premium Bonds vs Vanguard Global Bond Index)
The defensive part of my portfolio (£50k) is held in Vanguards Global Bond Index Fund but I'm considering allocating some to Premium Bonds at an average 1.4% return. With bonds looking poor value, would this be a good strategy?
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- Lemon Slice
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Re: Risk vs Reward (Premium Bonds vs Vanguard Global Bond Index)
Do you, from time to time, rebalance between these "safe" assets and the "risk" assets in your portfolio?
If so, ensure you leave sufficient in liquid "safe" assets to allow you to continue doing this in future.
If so, ensure you leave sufficient in liquid "safe" assets to allow you to continue doing this in future.
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- Lemon Slice
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Re: Risk vs Reward (Premium Bonds vs Vanguard Global Bond Index)
I've not got anywhere near 1.4% on my premium bonds; it's a game of chance. I'm a sucker for punishment though and am thinking about buying more to top up my £23k holding. It's an alternative to my cash holdings but wouldn't sell shares to purchase them.
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- Lemon Half
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Re: Risk vs Reward (Premium Bonds vs Vanguard Global Bond Index)
The return from Premium Bonds is very 'noisy', even with maximum holdings (as a trawl through the PB posts here will show)
You certainly shouldn't 'expect' 1.4% return (£700 on £50k)
You certainly shouldn't 'expect' 1.4% return (£700 on £50k)
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- Lemon Half
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Re: Risk vs Reward (Premium Bonds vs Vanguard Global Bond Index)
moneybagz wrote:The defensive part of my portfolio (£50k) is held in Vanguards Global Bond Index Fund but I'm considering allocating some to Premium Bonds at an average 1.4% return. With bonds looking poor value, would this be a good strategy?
1.4% is the amount in the prize fund, but most people don't win the £1 million pound jackpot prizes, so if you discount that the average return is a bit less, somewhere between 1.2% and 1.3% I think.
NS&I Income Bonds pay 1.15% (taxable).
Both are quite sensible places to put cash in this day and age I think.
Scott.
Re: Risk vs Reward (Premium Bonds vs Vanguard Global Bond Index)
Worth bearing in mind that with premium bonds your capital is not at risk.
With the Global bond fund, it is. If it is the same fund I found, the average duration is 7.3 years. So if interest rates rise by 1%, the capital value of the fund would typically fall by 7.3%. Of course the opposite is true as well and with rates falling over the last decade, that has been a beneficial tailwind.
So it depends what you are looking for from your investment. Premium bonds are inherently less risky.
With the Global bond fund, it is. If it is the same fund I found, the average duration is 7.3 years. So if interest rates rise by 1%, the capital value of the fund would typically fall by 7.3%. Of course the opposite is true as well and with rates falling over the last decade, that has been a beneficial tailwind.
So it depends what you are looking for from your investment. Premium bonds are inherently less risky.
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- Lemon Quarter
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Re: Risk vs Reward (Premium Bonds vs Vanguard Global Bond Index)
Other factors to bear in mind
Premium bonds are in pounds sterling whilst presumably a global bond fund will be exposed to other currencies. That may be good or bad.
The return from premium bonds is not taxable whilst interest on the bonds may be taxable
There are no transaction or management costs with premium bonds but there will be with a global bond fund
you might win a million!
Premium bonds are in pounds sterling whilst presumably a global bond fund will be exposed to other currencies. That may be good or bad.
The return from premium bonds is not taxable whilst interest on the bonds may be taxable
There are no transaction or management costs with premium bonds but there will be with a global bond fund
you might win a million!
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- Lemon Slice
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Re: Risk vs Reward (Premium Bonds vs Vanguard Global Bond Index)
For Premium Bonds, I think the 'return' to consider is the median, ie 50% of holders get more than this, 50% less. Using MoneySavingExpert's PB probability calculator here, and putting in the maximum amounts (£50,000, 5 years) to get as little rounding error as possible, that is £3,250 - which is 1.27%, when compounded.
https://www.moneysavingexpert.com/savin ... alculator/
https://www.moneysavingexpert.com/savin ... alculator/
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- Lemon Half
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Re: Risk vs Reward (Premium Bonds vs Vanguard Global Bond Index)
EthicsGradient wrote:For Premium Bonds, I think the 'return' to consider is the median, ie 50% of holders get more than this, 50% less. Using MoneySavingExpert's PB probability calculator here, and putting in the maximum amounts (£50,000, 5 years) to get as little rounding error as possible, that is £3,250 - which is 1.27%, when compounded.
https://www.moneysavingexpert.com/savin ... alculator/
Might be an error this end but I get to £2,500 over 5 years using the calculator (a straight 1%).
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- Lemon Slice
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Re: Risk vs Reward (Premium Bonds vs Vanguard Global Bond Index)
It's a difficult comparison because of the durations of the choices aren't known.
As a general principle it's good to match the timing of the need to consume your money, with the timing of the investment coming to fruition. Duration matching does that. The Vanguard fund duration is 7 years, but the premium bonds' duration depends on when you win and how much, so I'd say it's unknowable. But interestingly, despite that, the premium bonds don't have price sensitivity to interest rate changes the way the Vanguard fund does.
Secondly, even owning the maximum premium bonds you only own a tiny share of all bonds, so there's likely to be considerable variation in the yield that any individual gets; although monthly rather than yearly draws helps reduce this. With daily draws you might almost guarantee to get 1.4%.
But there might be a way out.
Does any of the defensive part of your portfolio defend against unexpected inflation? If not, maybe you should get some inflation linked bonds. Thus, problem solved.
As a general principle it's good to match the timing of the need to consume your money, with the timing of the investment coming to fruition. Duration matching does that. The Vanguard fund duration is 7 years, but the premium bonds' duration depends on when you win and how much, so I'd say it's unknowable. But interestingly, despite that, the premium bonds don't have price sensitivity to interest rate changes the way the Vanguard fund does.
Secondly, even owning the maximum premium bonds you only own a tiny share of all bonds, so there's likely to be considerable variation in the yield that any individual gets; although monthly rather than yearly draws helps reduce this. With daily draws you might almost guarantee to get 1.4%.
But there might be a way out.
Does any of the defensive part of your portfolio defend against unexpected inflation? If not, maybe you should get some inflation linked bonds. Thus, problem solved.
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- Lemon Quarter
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Re: Risk vs Reward (Premium Bonds vs Vanguard Global Bond Index)
scrumpyjack wrote:Other factors to bear in mind
Premium bonds are in pounds sterling whilst presumably a global bond fund will be exposed to other currencies. That may be good or bad.
The return from premium bonds is not taxable whilst interest on the bonds may be taxable
There are no transaction or management costs with premium bonds but there will be with a global bond fund
you might win a million!
Premium bond prizes (and ISAs) are taxable if you are British and live in Spain.
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- Lemon Slice
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Re: Risk vs Reward (Premium Bonds vs Vanguard Global Bond Index)
PinkDalek wrote:EthicsGradient wrote:For Premium Bonds, I think the 'return' to consider is the median, ie 50% of holders get more than this, 50% less. Using MoneySavingExpert's PB probability calculator here, and putting in the maximum amounts (£50,000, 5 years) to get as little rounding error as possible, that is £3,250 - which is 1.27%, when compounded.
https://www.moneysavingexpert.com/savin ... alculator/
Might be an error this end but I get to £2,500 over 5 years using the calculator (a straight 1%).
I'm using the calculator on the right. While at the moment it's starting each result of £3,250 or under with "you have average luck!...", it's £3,250 that gives me, for £50,000 and 5 years, 49.5% win more than £3,250. For £2,500, it tells me 99.1% get more than that.
The one on the left "for average luck" currently seems to be giving overly-rounded results. For instance, ask "what will I win" over 5 years for £38k, and it says £1,500, which would be 0.8%; for £39k it says £2,500, which would be 1.28%. That £2,500 is what it says for all values between £39k and £50k.
Re: Risk vs Reward (Premium Bonds vs Vanguard Global Bond Index)
One other consideration is that the Government set the payout rate of PB. At present the consensus is the Government is being generous with a prize fund yield of 1.4%. (As already stated average payout is less) CV is helping to shape that thinking. No doubt at some point in the future the rate will become less competitive (although tax free for UK tax residents.) For monies outside and ISA/Pension it is probably worth adding allocation as part an overall spread of safe investments. Esp if you win.
BillG
BillG
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