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What's the point of bond funds?
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Peanuts
Posted: 16 February 2025 17:17:43(UTC)
#76

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L.P.;334690 wrote:


Edit… just noticed that you compared a 60/40 fund with one that is 100% equities and in investment terms, over a very short timeframe.
I don’t really have anything more to add the thread.


Difficult isn't it. I fear whatever we say to the OP he still won't see the point of bonds, diversification and the safety net they can offer. He/she needs to ignore what happened in 2022 and focus on the present.
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L.P. on 16/02/2025(UTC)
L.P.
Posted: 16 February 2025 17:22:02(UTC)
#77

Joined: 14/07/2023(UTC)
Posts: 670
Peanuts;334697 wrote:
L.P.;334690 wrote:


Edit… just noticed that you compared a 60/40 fund with one that is 100% equities and in investment terms, over a very short timeframe.
I don’t really have anything more to add the thread.


Difficult isn't it. I fear whatever we say to the OP he still won't see the point of bonds, diversification and the safety net they can offer. He/she needs to ignore what happened in 2022 and focus on the present.


It really is!
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DIY Investing
Posted: 16 February 2025 17:34:50(UTC)
#41

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NPH;334656 wrote:


Thank you for such a detailed reply. I share your concerns about inflation re-spiking, interest rates staying higher for longer and the new dawn for bonds being another false one.after a couple of years of disappointment. Several posters have recommended the gilt ladder for mid-term spending, but there have been very few clear calls for a 3-10 year horizon outside of this. I remain unconvinced outside of 2-3 years of short term protection.


It seems like your question is effectively, is a ‘3 bucket’ strategy worth it and is there anything suitable to out there to put into the second bucket. The second bucket being the mid term bucket, the one that consists of those less growthy, hopefully less volatile investments that offer more than cash in exchange for some volatility but not pure equity-like volatility.

TBH, bucket 2 is a lot more of a head scratcher these days than it once was. The good news is the evidence suggests that this isn’t an optimal strategy anyway; and Monte Carlo simulations suggest that actually the more you hold in equities, the less likely you are to run out of money in retirement, despite the increased volatility.

However, I get that it isn’t all about being optimal and that psychology comes into it a lot. Having an intermediate bucket of investments that are beating inflation but not tanking 25-30% every few years may well offer peace of mind.

Christine Benz of Morningstar talks about the 3 bucket strategy a lot. She seems to talk about bond funds with some equity funds focused on mature large cap companies that pay a dividend for that intermediate term bucket. For me, the latter might be reasonable, the former not so much.

PNL and its OEIC equivalent, Troy Trojan, get a lot of love on here and for good reason. Out of everyone trying to offer some positive real return without getting investors wrecked over the medium to long term, these guys are pretty much the undisputed world champions! So that is something you could put in that Intermediate bucket. But going all in on one trust, fund for bucket two might not be wise. Managers change, approaches change…..you never know.

CGT is worth a shout but it’s more of an alternative than it is an out and out steady as she goes safety first trust.

For me, RICA is a different beast. Much more hedgefundy. It has a tendency to take on more risk. It’s definitely a very alternative strategy that it employs but I’m not sure it’s for everyone and I’m not sure it’s a bucket 2 candidate.

There are other multi-asset funds out there. BlackRock MyMap 4 hasn’t been too bad. It uses passives, but there seems to be at least some effort to manage duration risk when it comes to the bond allocation. It’s been more volatile than PNL, but it hasn’t been terrible, it’s a reasonable bucket 2 candidate IMO.

You could always create your own bucket 2 portfolio. The Golden Butterfly portfolio could work. Easy to build yourself with 5 ETFs/ETCs, and it has a fantastic long term record. It consists of 20% large cap stocks, 20% small cap stocks, 20% gold, 20% short dated treasuries, 20% long dated treasuries. Its worst drawdown was, like bonds, 2022. According to portfolio visualizer, it pulled back 18.93% compared to 14.45% for Intermediate US treasuries, and 25.35% for global bonds. The goods news is that, unlike bonds, it’s already more than recovered. Even with that 20% allocation to long treasuries. Intermediate treasuries and global bonds are both still down.

5 Year Annualised Returns:

Golden Butterfly 5.53%
Intermediate treasuries. -0.40%
Global Bonds. -1.76%

10 year returns read virtually the same. Bonds just tip into positive territory over that time, Golden butterfly still comfortably over 5%.
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Aminatidi on 16/02/2025(UTC), Jesse M on 16/02/2025(UTC), Robin B on 16/02/2025(UTC), dlp6666 on 17/02/2025(UTC)
ben ski
Posted: 16 February 2025 17:38:19(UTC)
#74

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NPH;334682 wrote:
L.P.;334676 wrote:
NPH;334562 wrote:
ben ski;334554 wrote:
smg8;334548 wrote:
[quote=NPH;334545]
Despite what this forum will have you believe, options beyond just CGT, PNL and RICA do exist 😆


But what disappointed me is the standard multi-asset funds all failed to spot the one thing they should've done for investors: shorten duration when bonds became unsustainably and pointlessly expensive.

Why were they buying 30 year bonds, that would return nothing, for their clients?

That Vanguard will mess around with stock market exposures, based on value (generally a bad idea), but not bonds (where you actually know the return you're getting), was inconsistent and illogical, and really made you think of people looking at charts and textbooks, with no real understanding of what they're doing.



This is my issue with multi-asset funds. I would expect lower returns over time vs all equity, but they seem to have done a poor job of downside protection (looking at Vanguard 80/20 vs 60/40 in 2018 and 2022 for instance).


If you really think that there is anything out there that can guarantee not to have a down year or two from time to time then you are going to struggle.

This is the reason why you would have 2-3 years worth of cash/gilts/mmf’s etc.

Lifestrategy 60 (60/40) has still done over 7% annualised over the last 7 years (taking into account “2018 and 2022”) so not sure what you issue is with “multi-asset funds”.
In my opinion this is exactly the type of thing you should be invested in.

For disclosure, my largest holdings (and eventually my only holdings) are:
Lifestrategy 60
HSBC Global Strategy Balanced (60/40ish)
CGT (building up PNL).
Then I have at least three years of short dated gilts/mmf’s and cash.
Pushing 60 and retired with no more money being added to the pot so this is it…. no recovery possible from any bouts of bullish over-exuberance (or mistakes).

A standard 60/40 multi asset fund has never really taken longer than 32-33 months to recover its previous peaks even after a serious crash or multi year bear market (74-82 for example) hence “2-3 years” cash etc.

There is nothing here not to like.


I would hope I've been clear that I hold 2-3 years of MM and short duration bonds for the inevitable downturn. If you're happy with your 60/40 after that, that's fine. However, it delivered half the returns of VLS100 over 5 years and in 2022 the 60/40 actually dropped more. In 2018 the 60/40 was down 3%, the 100% 5%. according to Citywire, so only marginal difference. Unless I'm missing something, the bond element has severely dragged returns and not offered much downside protection.
I don't have an issue with anything, but with 2-3 years protection in place, I'm struggling to see the point. I Guess it's just whatever helps us sleep at night.


Part of the problem is bonds had become very expensive by 2014, and by 2018, really weren't worth owning. 'Expensive' means they were hardly returning anything in income. So over the past 10 years, the writing was on the wall: they could get more expensive, but they'd return next to nothing.

If you go back to 2000, bonds were much cheaper than stocks. So from 2000, you did much better if you owned more bonds and less in stocks. Bonds were going to throw off up to 6%, risk-free, while stocks were set to return about 2%, with plenty of risk.

However, bonds generally will be a drag on returns, because they're a very safe investment. So the price you pay for certainty in your portfolio will generally be a lower return. But stocks can also be very poor returning investments over 10-20 years. So by diversifying and rebalancing, one thing you do get is a higher return per unit of risk you take. So 60:40 can do okay in 3 out of 4 market conditions, where stocks alone might only do okay in 1 or 2. But looking back over specific points in history can only tell you what happened then.
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4 users thanked ben ski for this post.
Peanuts on 16/02/2025(UTC), Robin B on 16/02/2025(UTC), Guest on 17/02/2025(UTC), dlp6666 on 17/02/2025(UTC)
SF100
Posted: 16 February 2025 17:44:37(UTC)
#88

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Aminatidi;334684 wrote:
I think 2022 was a very unique year in the way bonds and equities both dropped significantly at the same time.

The word unprecedented is overused but I think this is pretty unprecedented in recent years.

The issue wasn't simply "bonds" as you could have held certain bonds or funds where you'd barely have noticed and there are multi-asset funds where you would barely have noticed.

you may be in danger of over-using the word unprecedented....
the post-year-2000 era is where negative correlation phenomena was prevalent.
I believe DIY mentioned this upthread, so kudos to him.

https://www.nl.vanguard/...rrelation-eu-en-pro.pdf


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Aminatidi on 16/02/2025(UTC)
Aminatidi
Posted: 16 February 2025 17:51:39(UTC)
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I think it was the degree of the drop wasn't it?

Heavy US bias to this but the 3rd worst pretty much in history for a 60/40 etc. so not too surprising it's left a bad taste for people who aren't used to it.
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6 users thanked Aminatidi for this post.
ravedeath on 16/02/2025(UTC), SF100 on 16/02/2025(UTC), Harry Trout on 16/02/2025(UTC), Peanuts on 16/02/2025(UTC), Jesse M on 16/02/2025(UTC), Robin B on 16/02/2025(UTC)
DIY Investing
Posted: 16 February 2025 19:45:12(UTC)
#96

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Aminatidi;334706 wrote:
I think it was the degree of the drop wasn't it?

Heavy US bias to this but the 3rd worst pretty much in history for a 60/40 etc. so not too surprising it's left a bad taste for people who aren't used to it.



I think the main issue with the 60:40 in 2022 wasn’t that it crashed 18%. That, in itself, is fine…..just as long as a 100% equity portfolio crashed 40-45% at the same time. The issue with the 60:40 in 2022 was that bonds didn’t do anything to protect on the downside, and then just slowed the recovery there after. Basically, it stopped working.
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6 users thanked DIY Investing for this post.
Newbie on 16/02/2025(UTC), Jay P on 16/02/2025(UTC), Jesse M on 16/02/2025(UTC), Robin B on 16/02/2025(UTC), Aminatidi on 17/02/2025(UTC), dlp6666 on 17/02/2025(UTC)
Newbie
Posted: 16 February 2025 20:00:12(UTC)
#97

Joined: 31/01/2012(UTC)
Posts: 3,816
DIY Investing;334724 wrote:
Aminatidi;334706 wrote:
I think it was the degree of the drop wasn't it?

Heavy US bias to this but the 3rd worst pretty much in history for a 60/40 etc. so not too surprising it's left a bad taste for people who aren't used to it.



I think the main issue with the 60:40 in 2022 wasn’t that it crashed 18%. That, in itself, is fine…..just as long as a 100% equity portfolio crashed 40-45% at the same time. The issue with the 60:40 in 2022 was that bonds didn’t do anything to protect on the downside, and then just slowed the recovery there after. Basically, it stopped working.

One thing which is being forgotten is that like equities Bonds have also enjoyed a good bull run overall for the last 40-50 years. It is just that they have been overshadowed by equities that one forgets that during the high interest rates and inflationary periods a lot of long term bonds were also issued which had a longer timeframe to play out and continue ticking upwards. This is in contrast to equities which are very much priced and repriced within a couple of minutes.

What we are entering now is a period where the low rate bonds are maturing and any replacements are not going to be as per the days of 15% interest rates, nor are we going to see hyper-inflation (though I do worry that it will be high). To top it all off, access to finance and credit is a lot wider for companies and a lot of deals with convertible equity are taking place and the emergence of PE into the mainstream pushes bonds a notch higher in the risk spectrum.

There is also a danger that like the GFC where retail mortgages were packaged, we are now seeing a lot of REIT and PE lending being packaged and swirled around (this imo makes a strong case for PE and actives for now)

So one needs to look at other alternatives for diversification and stability than bonds alone..
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L.P.
Posted: 16 February 2025 20:27:17(UTC)
#42

Joined: 14/07/2023(UTC)
Posts: 670
DIY Investing;334701 wrote:
NPH;334656 wrote:


Thank you for such a detailed reply. I share your concerns about inflation re-spiking, interest rates staying higher for longer and the new dawn for bonds being another false one.after a couple of years of disappointment. Several posters have recommended the gilt ladder for mid-term spending, but there have been very few clear calls for a 3-10 year horizon outside of this. I remain unconvinced outside of 2-3 years of short term protection.


It seems like your question is effectively, is a ‘3 bucket’ strategy worth it and is there anything suitable to out there to put into the second bucket. The second bucket being the mid term bucket, the one that consists of those less growthy, hopefully less volatile investments that offer more than cash in exchange for some volatility but not pure equity-like volatility.

TBH, bucket 2 is a lot more of a head scratcher these days than it once was. The good news is the evidence suggests that this isn’t an optimal strategy anyway; and Monte Carlo simulations suggest that actually the more you hold in equities, the less likely you are to run out of money in retirement, despite the increased volatility.

However, I get that it isn’t all about being optimal and that psychology comes into it a lot. Having an intermediate bucket of investments that are beating inflation but not tanking 25-30% every few years may well offer peace of mind.

Christine Benz of Morningstar talks about the 3 bucket strategy a lot. She seems to talk about bond funds with some equity funds focused on mature large cap companies that pay a dividend for that intermediate term bucket. For me, the latter might be reasonable, the former not so much.

PNL and its OEIC equivalent, Troy Trojan, get a lot of love on here and for good reason. Out of everyone trying to offer some positive real return without getting investors wrecked over the medium to long term, these guys are pretty much the undisputed world champions! So that is something you could put in that Intermediate bucket. But going all in on one trust, fund for bucket two might not be wise. Managers change, approaches change…..you never know.

CGT is worth a shout but it’s more of an alternative than it is an out and out steady as she goes safety first trust.

For me, RICA is a different beast. Much more hedgefundy. It has a tendency to take on more risk. It’s definitely a very alternative strategy that it employs but I’m not sure it’s for everyone and I’m not sure it’s a bucket 2 candidate.

There are other multi-asset funds out there. BlackRock MyMap 4 hasn’t been too bad. It uses passives, but there seems to be at least some effort to manage duration risk when it comes to the bond allocation. It’s been more volatile than PNL, but it hasn’t been terrible, it’s a reasonable bucket 2 candidate IMO.

You could always create your own bucket 2 portfolio. The Golden Butterfly portfolio could work. Easy to build yourself with 5 ETFs/ETCs, and it has a fantastic long term record. It consists of 20% large cap stocks, 20% small cap stocks, 20% gold, 20% short dated treasuries, 20% long dated treasuries. Its worst drawdown was, like bonds, 2022. According to portfolio visualizer, it pulled back 18.93% compared to 14.45% for Intermediate US treasuries, and 25.35% for global bonds. The goods news is that, unlike bonds, it’s already more than recovered. Even with that 20% allocation to long treasuries. Intermediate treasuries and global bonds are both still down.

5 Year Annualised Returns:

Golden Butterfly 5.53%
Intermediate treasuries. -0.40%
Global Bonds. -1.76%

10 year returns read virtually the same. Bonds just tip into positive territory over that time, Golden butterfly still comfortably over 5%.





A “Golden” what?

How about a straight forward mixed asset fund such as the ones mentioned up thread;
L60 5 year annualised returns = 5%
Or
HSBC Global Strategy Balanced 5year annualised returns = 5.9%
(10 year returns = 6.5% & 7.2%)
No fancy ‘Golden’ names… just straight forward and cheap without the “Golden” nonsense!

Other providers with similar costs and returns available.
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Newbie on 16/02/2025(UTC), Guest on 17/02/2025(UTC)
DIY Investing
Posted: 16 February 2025 20:49:19(UTC)
#43

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L.P.;334734 wrote:
DIY Investing;334701 wrote:
NPH;334656 wrote:


Thank you for such a detailed reply. I share your concerns about inflation re-spiking, interest rates staying higher for longer and the new dawn for bonds being another false one.after a couple of years of disappointment. Several posters have recommended the gilt ladder for mid-term spending, but there have been very few clear calls for a 3-10 year horizon outside of this. I remain unconvinced outside of 2-3 years of short term protection.


It seems like your question is effectively, is a ‘3 bucket’ strategy worth it and is there anything suitable to out there to put into the second bucket. The second bucket being the mid term bucket, the one that consists of those less growthy, hopefully less volatile investments that offer more than cash in exchange for some volatility but not pure equity-like volatility.

TBH, bucket 2 is a lot more of a head scratcher these days than it once was. The good news is the evidence suggests that this isn’t an optimal strategy anyway; and Monte Carlo simulations suggest that actually the more you hold in equities, the less likely you are to run out of money in retirement, despite the increased volatility.

However, I get that it isn’t all about being optimal and that psychology comes into it a lot. Having an intermediate bucket of investments that are beating inflation but not tanking 25-30% every few years may well offer peace of mind.

Christine Benz of Morningstar talks about the 3 bucket strategy a lot. She seems to talk about bond funds with some equity funds focused on mature large cap companies that pay a dividend for that intermediate term bucket. For me, the latter might be reasonable, the former not so much.

PNL and its OEIC equivalent, Troy Trojan, get a lot of love on here and for good reason. Out of everyone trying to offer some positive real return without getting investors wrecked over the medium to long term, these guys are pretty much the undisputed world champions! So that is something you could put in that Intermediate bucket. But going all in on one trust, fund for bucket two might not be wise. Managers change, approaches change…..you never know.

CGT is worth a shout but it’s more of an alternative than it is an out and out steady as she goes safety first trust.

For me, RICA is a different beast. Much more hedgefundy. It has a tendency to take on more risk. It’s definitely a very alternative strategy that it employs but I’m not sure it’s for everyone and I’m not sure it’s a bucket 2 candidate.

There are other multi-asset funds out there. BlackRock MyMap 4 hasn’t been too bad. It uses passives, but there seems to be at least some effort to manage duration risk when it comes to the bond allocation. It’s been more volatile than PNL, but it hasn’t been terrible, it’s a reasonable bucket 2 candidate IMO.

You could always create your own bucket 2 portfolio. The Golden Butterfly portfolio could work. Easy to build yourself with 5 ETFs/ETCs, and it has a fantastic long term record. It consists of 20% large cap stocks, 20% small cap stocks, 20% gold, 20% short dated treasuries, 20% long dated treasuries. Its worst drawdown was, like bonds, 2022. According to portfolio visualizer, it pulled back 18.93% compared to 14.45% for Intermediate US treasuries, and 25.35% for global bonds. The goods news is that, unlike bonds, it’s already more than recovered. Even with that 20% allocation to long treasuries. Intermediate treasuries and global bonds are both still down.

5 Year Annualised Returns:

Golden Butterfly 5.53%
Intermediate treasuries. -0.40%
Global Bonds. -1.76%

10 year returns read virtually the same. Bonds just tip into positive territory over that time, Golden butterfly still comfortably over 5%.





A “Golden” what?

How about a straight forward mixed asset fund such as the ones mentioned up thread;
L60 5 year annualised returns = 5%
Or
HSBC Global Strategy Balanced 5year annualised returns = 5.9%
(10 year returns = 6.5% & 7.2%)
No fancy ‘Golden’ names… just straight forward and cheap without the “Golden” nonsense!

Other providers with similar costs and returns available.




Because, aside from PNL, they don’t work as well. And a late 20th century style stocks and bonds PF isn’t diversified enough.

It’s called that because, like PNL, it has a significant gold allocation, making it more of a genuine all weather wealth preserver because it has something for all scenarios: growth+inflation, stagflation, growth+deflation, recession+deflation.

It’s very simple to construct, consisting of just 5 ETFs with an equal weighting to each. Ongoing charges should be sub 0.15%, much cheaper than anything mentioned above. Can be held on a free platform with a rebalance button that you can hit once a year.

It’s hardly outrageously complex! Not really worth dismissing because of the overly grandiose name!
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