John123ab wrote:I don't see the point of bonds unless you are a company holding them especially after last year. Surely you can replace the bond element with blue chip FTSE100 companies and/or long standing quality investment trusts for as much safety but better returns?
The point of bonds is that 80-90% of the time they are inversely correlated with equities during a correction. However occasionally they are not. This isn't a new discovery, it's the way it has always been although because they usually are inversely correlated journalists and others often simplify the situation to "are inversely correlated" or "zig when equities zag" misleading the man on the Clapham omnibus.
Why is that important? Well during accumulation reducing volatility to a level that the investor can stomach (their "risk tolerance") stops people trading as it's in their interest to leave their investments alone and ride out volatility as they will otherwise sell when it hurts most. However many people can and if they are truly strong willed (i.e. don't think they are but go weak at the knees when things fall more than 20%) should hold little or no bonds during accumulation until they are close to spending their investments.
For those in drawdown, sequence of returns risk means that volatility can be very harmful to ones financial health so a chunky exposure to bonds will increase the safe/sustainable withdrawal rate. The precise allocation will vary depending on life expectancy and bequest intentions. There is a big difference between what makes sense for someone who doesn't want to be the richest man in the cemetery and someone who wishes to provide for loved ones particularly when they have vulnerable loved ones like a disabled child.
Equities are not very good diversifiers for equities. Some diversification is needed within equity but diminishing returns kick in long before you get to holding MSCI All-World.
Personally I moved into cash before yields started rising and moved back into bonds when Liz Truss and Kwasi were getting high on power although this goes against my passive philosophy. Now I am prepared to weather the storm as nobody knows when crash protection will be needed.