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Bonds. Why should we bother?

Stocks and Shares ISA , Choosing funds for ISA's, risk factors for funds etc
Investment strategy discussions not dealt with elsewhere.
TUK020
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Bonds. Why should we bother?

#445781

Postby TUK020 » September 28th, 2021, 8:16 am

FT article behind firewall "Bonds. Why should we bother?"
Merryn Somerset Webb on bonds

https://www.ft.com/content/a3940950-705 ... il:content

TUK020
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Re: Bonds. Why should we bother?

#445800

Postby TUK020 » September 28th, 2021, 9:02 am

Quotation to summarise:
"Intellectual apathy is not the only reason why the industry keeps buying bonds. The other is regulatory paralysis"

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Re: Bonds. Why should we bother?

#445840

Postby 1nvest » September 28th, 2021, 11:08 am

Haven't read (no access) the article, however stocks are not guaranteed to see price and/or income pace or exceed inflation and can/have seen significant broadly progressive declines even over 20+ year periods. If one has £50K in cash now that is sufficient to cover the next 5 years of spending, perhaps supplemented with a £20K/year occupational/state pension (£30K/year spending lifestyle), and one wants another £50K of inflation adjusted capital to become available in 5 years time, then a inflation bond priced to a -2% yield requires £55K present day money to pretty much guarantee that.

Fixed/guaranteed income is a preference for some and no other asset provides the same level of assurance. Whilst in the present era that guarantee 'costs' (negative real yields), in other periods real yields are positive ... broadly washes.

If in addition to that £105K of cash/bonds the investor also had £150K in stocks, then after the ten years across which all of cash/bonds had been spent then at around a 4% annualised real return stock value accumulation rate they'd end the 10 years with similar inflation adjusted capital value as at the start. Rather than starting with £150/£105 stock/bonds, near 60/40 stock/bond proportions, ending ten years with 100/0 stock/bonds, that averages 80/20 stock/bonds, some instead prefer to just direct (yearly rebalance) to that 80/20 average stock/bonds ratio - to likely equal/similar effect. US data indicates the differences between 80/20 and 100/0 are just noise of differences.

Yet others prefer gold to bonds. A 50/50 stock/gold barbell is in some ways similar to a 50/50 1 year and 20 year treasury bonds (Gilts) barbell, both combine to a central 'bullet', a 10 year bullet in the case of the 1/20 year bond barbell. Which reflected into the above equates to a 90/10 stock/gold asset allocation - again just noise of differences.

Drawing £5K of inflation adjusted income from £255K of capital/assets is a near 2% SWR (safe withdrawal rate), that is more inclined to be a perpetual withdrawal rate (PWR) i.e. last forever (outlive you and leave a inheritance). Which again for some (who wish to leave to heirs) might be more preferable than the only other relatively safe choice of buying a annuity that tends to leave nowt for heirs.

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Re: Bonds. Why should we bother?

#445858

Postby 1nvest » September 28th, 2021, 11:40 am

As a supplement to my previous posting, consider a investor pondering whether to go with 80/20 stock/10 year gilt or 90/10 stock/gold. Indecisive they might opt for 50/50 of both, 85/10/5 stock/10 year gilt/gold. Instead of the 10 year gilt they might opt for 50/50 cash deposit (or 1 year gilt)/20 year gilt, 85/5/5/5 stock/1 year/20 year/gold.

A Permanent Portfolio comprises 25% each in stocks/1 year/20 year/gold assets, so the above is in effect a 80/20 stock/Permanent Portfolio blend. Most likely one of the assets will be up each year such that for withdrawals you are never (rarely) 'selling low'. Click the 'Assets' tab in this link and near the bottom there's a chart of the individual assets yearly gains/losses.

Maybe 80/5/5/5 VWRL/IGLS/IGLT/SGLN ETF's/funds; Or whatever your preferred stock (FCIT investment trust perhaps), maybe cash deposits in high street bank accounts/bonds, a 25 year gilt that you roll into another 25 year after 10 years (15 years remaining) and perhaps some Britannia gold one ounce coins (free from VAT and no CGT either).

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Re: Bonds. Why should we bother?

#445865

Postby TUK020 » September 28th, 2021, 11:54 am

How do Premium Bonds stack up?

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Re: Bonds. Why should we bother?

#445892

Postby Alaric » September 28th, 2021, 12:39 pm

TUK020 wrote:How do Premium Bonds stack up?


They are usually seen as equivalent to a deposit, capital guaranteed but somewhat variable interest. Those relying on forms of investment drawdown for their living expenses sometimes report that they hold reserves of several months or years of spending in the form of Premium Bonds.

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Re: Bonds. Why should we bother?

#446153

Postby JohnW » September 29th, 2021, 2:42 am

'Webb is a non-executive director of two investment trusts; the Baillie Gifford Shin Nippon Trust and the Montanaro European Smaller Companies Trust.'
TUK020 wrote:Quotation to summarise:
"Intellectual apathy is not the only reason why the industry keeps buying bonds. The other is regulatory paralysis"

In Rice-Davies' words: Well she would say that wouldn't she?

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Re: Bonds. Why should we bother?

#447084

Postby 88V8 » October 1st, 2021, 8:12 pm

1nvest wrote:Yet others prefer gold to bonds.

Gold needs timing?
After all, it pays no coupon, and if one doesn't buy in a dip there may be no net return at all at the notional maturity date.
Meanwhile one has foregone the coupon/divi one could have bought.

Gold miners perhaps a viable analogue?

V8

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Re: Bonds. Why should we bother?

#447088

Postby Lootman » October 1st, 2021, 8:20 pm

A UK FTSE-100 index fund has effectively been a bond for the last 22 years. You get the dividend and that is it.

Of course some individual companies in the FTSE-100 have behaved more like annuities than bonds.

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Re: Bonds. Why should we bother?

#447442

Postby 1nvest » October 3rd, 2021, 11:52 am

88V8 wrote:
1nvest wrote:Yet others prefer gold to bonds.

Gold needs timing?
After all, it pays no coupon, and if one doesn't buy in a dip there may be no net return at all at the notional maturity date.
Meanwhile one has foregone the coupon/divi one could have bought.

Gold miners perhaps a viable analogue?

V8

Not paying a regular income stream can have advantages such as reducing taxation risk. Gold has no counter party risk (unless you hold is via a counter party such as a fund). Blending with other assets and rebalancing is a form of trading, adding during dips, reducing when relatively high.

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