NPH;334500 wrote:Peanuts;334494 wrote:I think the mistake many make with bonds/bond funds is looking in the rear view mirror. No point looking back at the recent low-interest rate era and the damage (rapidly) rising BoE interest rates did to negative yielding bonds in 2022.
With fixed income you have to look at the current and future environment. Today bonds are on real yields and inflation is coming down. US could be an exception (Trump) but certainly in the UK and Europe yields as a general direction are falling. There are caveats like future supple etc but you need to focus on the current yield and how that fits into your portfolio.
So why not just short term cash or MMFs? Because 1/ you lose the benefit of bonds of being able to lock into higher yields for longer, and 2/ you miss the (important) trick of the future capital appreciation of bonds - as yields fall - bond prices increase. And if yields don't fall - then you continue to receive a higher yield - circa 4.5% on the 10yr. That is £4500 per £100k, almost risk free, and you still get to keep your capital (£100k).
Bonds and particularly bond funds are indeed easy tools of a portfolio but I think you still have to pay attention to the current environment in the sense of your age and time horizon. I wouldn't suggest a 20/30yr old to be 40% in bonds, but someone retiring or near retiring today - absolutely.
Importantly: one needs to also assess the current landscape - especially if you are an index investor - like myself. Nearing retirement when the largest country weighting (US) of a global index is above its 10yr average PE poses a considerably higher risk to the near-term future value of an equity heavy portfolio. 2 or 3yrs of short term cash might not be enough whereas something like an intermediate (7-10yr) bond/gilt fund might be the difference between winning and losing.
This perfectly articulates my dilemma. My portfolio is nearly all global funds and therefore very exposed to the US, but I cannot work what to choose that would negatively correlate any long term downturn. Corporate bonds seem more like to track equities? Shot term and long term is easy, but I struggle with 3-10 years.
Corporate bonds and high yield are arguably a waste of time (imo). David Swensen (one of the great institutional investors) did his PhD on corporate bonds, and generally advised against them, being the worst of both worlds – similar risk to equities; the limited return of bonds.
What's difficult to get your head around is that an individual bond pays you a fixed income, then returns your capital, over a fixed term. So you buy a gilt, and you know exactly what you're getting over the next 5, 10 or 20+ years.
When you buy a bond fund, you're getting a portfolio of these. But what you see in the fund's price is all of these overlaid on top of each other, as their prices react to different things going on in the economy (which you don't really need to worry about). So in practice, it's very similar to buying individual bonds, but doesn't look or feel like it. Spending time on Bogleheads forum (where people generally understand investment principles – I would say 'a lot better', but really at all) is a good way to get that grounding.
In my simple portfolios, I buffer my stock market exposure with a mix of:
– cash
– gold
– defensive equity ETFs (US consumer staples, utilities, energy, healthcare, global quality dividend growth)
The simple act of rebalancing these allocations against stocks provides a sort of safety net. Cash is an easy option at the moment.
If I was going to continue to hold some cash, I could add to this (and should do at some point) something like L&G Global Index-linked bonds. This is going behave in that odd way bond funds do, but it's also storing and returning value, over longer periods, so long as bond yields remain positive.
Really, the rule is that you should never invest in anything you don't 100% understand, as otherwise you'll lose faith in investments, depending on what the price does. And that's not typically going to lead to making good decisions.
Also, really, although many here grapple with them, PNL and CGT are doing exactly what you want. And I don't think anyone here (in a million years) could do a better job. Or would even grasp what they're trying to do and why their own solution wouldn't work.