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Peanuts;336280 wrote:ben ski;336274 wrote:I think as a rule, obviously, you have to know enough about an asset class that you could be a guest speaker at Yale on it, before it's wise to invest.
The classic pattern here is people will convince you you need something, then it'll have an up, down or sideways 5 years, and general consensus will be "Wish I hadn't listened to that!"
Inflation-linked bonds are basically bonds, but you're calculating your returns in real terms, rather than nominal. So you buy at 1.5%, and you will make 1.5% after inflation. The problem with the Vanguard fund is an effective average duration around 15 years. A lot of the long-dated bonds that make up that index are bought by insurers and endowments, with long-term liabilities to match. So I don't know that that duration makes the most sense for a retirement investor. You can effectively reduce its duration by having say 10% in that fund, and 10% in a short-duration gilt fund or MMF, and rebalancing. But this is where you have to know a bit of theory. In principle, I'd say having your bonds split 50:50 inflation-linked and nominal makes good sense. (Personally, I don't actually like or hold bonds – I prefer cash, gold and defensive equities, but I let CGT and PNL make active decisions on IL bonds.)
Thanks Ben. Valid point on knowing enough about an asset class before investing in it. One reason why I’ve never thought IL bonds matter too much is LifeStrategy20 only having approx 5-6% of them in it. I need to spend a bit of time reading up on them I think part of the issue is that things that happen with rates and inflation tend to play out over really long periods. Rates and inflation have spent the best part of 40 years just doing one thing. So you really need a lot of market history to get a good range of things happening – and index-linked gilts have only been around since about 1996. We know how they'd have behaved in the 1970s, but you can't backtest unless you have simulated data. So most backtests that use IL bonds won't really tell you anything useful about them. And a lot of financial advisors and advisor platforms don't think like that – and will just use 20 years of data, not really thinking about changes in economic regime. So I'd say IL bonds appeal more to people who focus on the macro and theory side of investing. One thing I'd say about LifeStrategy is, at least by all the theory and backtesting I can draw on, their bond allocation doesn't seem particularly optimal. It's just a bit of everything.
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