Peanuts;334631 wrote:DIY Investing;334515 wrote:
Bonds have simply gone from offering return free risk to offering very slim returns in exchange for still quite some considerable risk.
You have to look at interest rates vs yields on bonds
in the current environment, not in the past environment. Inflation is coming down and particularly in the UK the chance of inflation increasing substantially is a relatively slim risk. A repeat of the 2022 bond crisis is highly unlikely from this point today. So buying (almost) risk-free bonds/gilts or bond/gilt funds on real yields whilst equity valuations (particularly US) are above their long term average = future returns on equity (particularly US / Global index?) is likely much lower makes sense from a diversification point and also a safety net. Risk? Yes - always a degree of risk, but I don't see "considerable" risk in an intermediate bond/gilt fund from here on.
And eta - everybody's circumstances are different but I am trying to address the question asked by the OP - "
I am newly in early-ish retirement so my timeframe is still 20 years +, and understand having 2-3 years in MM or very short term bonds to avoid selling in a down year, but beyond that...?
All thoughts much appreciated!"
Well UK inflation is predicted to rise to 3.7% this year, not fall. Even the Keynesian doves at the BoE are predicting that, which could mean that itâs the best case scenario. But even with inflation at 2.5%, bond yields at 4.5% is pretty normal. Typically, returns for bonds have been modelled at inflation + 2%. In other words, even if inflation remains steady and close to target, yields likely wonât fall much. Youâd need some sort of severe deflationary shock. Those, whilst certainly not impossible, are actually pretty uncommon.
Looking at the current environment and basing decisions on that is the riskiest thing you can do. Doing that is what had people buying SMT at over 1500 and EWI at over 400., and ridiculously priced, worthless dot com stocks in the 90s.
You have to consider
all possible future environments. To do that, you have to look at the past, and not just s few years or even decades of it either. The whole idea that bonds were âsafeâ for retirees was itself predicated on recency bias because of the bond bull market that started back in about â81.
Bond bull markets and bond bear markets usually last multiple decades, and bull markets usually start with yields close to or above double digits (and many percentage pionts above inflation), not at 4.5-5% with inflation running at 2.5-3%.
And 2022 wasnât the only time bonds proved to be a terrible investment. From the end of the Great Depression all the way to 1981, bonds were widely considered âcertificates of confiscationâ. Because, again, bond market cycles usually last a long long time.
There is a safeish way for the OP to use some bonds for retirement spending over the next 5-10 years - a Gilt/Index Linked Gilt ladder. That means buying a series of gilts of different durations held directly to mature roughly every year or so. You get your money back, at least in Sterling terms, as each matures, and any volatility as regards the bond market value in the mean time is irrelevant.
But you canât really get that with bond funds.
As regards other kinds of bonds with higher yieldsâŚ.wellâŚ.lets just say the only time Iâve experienced any permanent loss of capital whatsoever is when dabbling in high yield (junk) credit.