GeoffF100 wrote:scrumpyjack wrote:If index linked gilts were offering a positive real return, however small, i would hold some of those for security (and did a few decades ago), but otherwise I prefer to keep a number of years expenditure in cash (incl. premium bonds and cash deposits) but no fixed interest. I think there is a high risk of higher rates and inflation which could devastate long dated bonds and the return on short dated ones is so low you might as well hold cash.
I prefer to hold the lower risk element of my portfolio in stocks like RCP which have a good record of avoiding most of the downside of bear markets.
Partly I think it is a question of how substantial your assets are and so how exposed you would be in a market fall, and also your evaluation of what the risks are. Monetary assets have very substantial risks in real terms which are often overlooked by financial advisers who did not live through the '70s (or live in Zimbabwe or Venezuela more recently!).
You favour keeping a number of years in cash. It is not clear how much cash/bonds you wish to hold as a percentage.
Why not short dated bonds where you will generally get more interest? Why not riskier bonds (that are still much less risky than equities) where you get even more interest?
Unlike in the '70s, Zimbabwe or Venezuela, we have an independent central bank. It is their job to control inflation by setting interest rates. That could be overridden. Our present Prime Minister shows signs of wanting to be a dictator, but I expect that there would be warning of such drastic action.
In the short term, equities are hit harder than bonds by high inflation. The bonds are there to provide income when the dividends are slashed and the capital value has tanked. Later on, the maturing bonds are replaced by bonds paying more interest and the equities recover. That is the theory anyway.
I’m not sure the cash percentage on its own is meaningful. To take an extreme example what percentage would you suggest Bill Gates should keep in cash? So the cash reserve will depend on the individuals risk tolerance, extent of wealth, level of guaranteed income, future plans for spending, for gifting etc etc. I don’t think a one size fits all percentage makes sense.
Given that interest rates are so trivial and that I would pay a high rate of tax on any interest, I really can’t be bothered with short dated bonds. I’m happy to leave the max in premium bonds, and the rest of the cash in bank deposits. I do find the Hargreaves Lansdown Active Savings facility useful.
Possibly it would be advisable to put a chunk of the cash into a more reliable currency than GBP (eg Swiss Francs). Inflation in the UK once hit 27% in my memory so whilst in theory we have an independent central bank, I wouldn’t bet the farm on its reliability. Andrew Bailey does not inspire confidence and I dread to think who Corbyn might have put in charge!
As for equities being harder hit it depends entirely what the individual company does. Eg if you had shares in a company that mainly invested in US indexed linked bonds, its shares would do well! An equity is simply a wrapper for the activities of the individual business.