Bonds as part of a retirement portfolio?
Discussion
My wife and I are planning to retire next year aged 53 & 55.
At the moment we hold almost all our investments in a global equity tracker ETF across SIPPs and ISAs. Around 18 months expenditure currently held as cash, but I intend to increase this and roll it forward at 2-3 years during retirement.
My question is, should I be investing in bonds? We'll be drawing down our pensions, not buying an annuity, so our investment timeframe is (hopefully!) around 30 years. Just to add, we both have small final salary pensions (aged 60 & 65) and state pensions to come later. Would adding bonds now offer much in the way of added security?
If bonds are a sensible way forward any suggestions for a suitably diversified ETF? ETF as it minimises the platform fees on Hargreaves Lansdown.
At the moment we hold almost all our investments in a global equity tracker ETF across SIPPs and ISAs. Around 18 months expenditure currently held as cash, but I intend to increase this and roll it forward at 2-3 years during retirement.
My question is, should I be investing in bonds? We'll be drawing down our pensions, not buying an annuity, so our investment timeframe is (hopefully!) around 30 years. Just to add, we both have small final salary pensions (aged 60 & 65) and state pensions to come later. Would adding bonds now offer much in the way of added security?
If bonds are a sensible way forward any suggestions for a suitably diversified ETF? ETF as it minimises the platform fees on Hargreaves Lansdown.
The answer depends on whether your savings can meet your financial plans and goals during periods of extreme markets moves ie. sequence of returns risk.
Will you be able to cope financially and emotionally with the volatility of equity markets without panic selling or drastically reducing your spending? For example, will you still retire next year if equity markets drop 40% by the end of this year and didn't recover quickly like they did during 2020? Bonds can help reduce that volatility.
My wife and I are in a similar situation to you and for the past 18 months have directed pension contributions to cash funds (eg. Vanguard Sterling Short-Term Money Market) and and short term gilt index funds (iShares UK Gilt 0-5 Year) only. Before that I never looked at bonds because yields were so low.
Currently our investments are at around 23% cash/bonds and 77% equities and I'll be comfortable maintaining that level so if equity markets crash then I might end up selling bonds and buying equities cheap to rebalance.
Will you be able to cope financially and emotionally with the volatility of equity markets without panic selling or drastically reducing your spending? For example, will you still retire next year if equity markets drop 40% by the end of this year and didn't recover quickly like they did during 2020? Bonds can help reduce that volatility.
My wife and I are in a similar situation to you and for the past 18 months have directed pension contributions to cash funds (eg. Vanguard Sterling Short-Term Money Market) and and short term gilt index funds (iShares UK Gilt 0-5 Year) only. Before that I never looked at bonds because yields were so low.
Currently our investments are at around 23% cash/bonds and 77% equities and I'll be comfortable maintaining that level so if equity markets crash then I might end up selling bonds and buying equities cheap to rebalance.
It's a good question as to whether we'd still retire if there was a market crash. I'm pretty sure we would as the cash buffer gives us options. Also, with age on our side we're both open to picking up ad hoc work along the way to smooth things out. For example my wife has the option of working as holiday cover in her current role and I'm happy to do seasonal work and the odd other thing I've got lined up. Any work will be around our plans for the fun stuff! We are though seeing this as retirement as I don't want to continue the 'day job' for any longer.
I'm comfortable with the risk of holding equities and can cope with this emotionally having seen several dips over the last 15 years. So, do bonds bring anything new to the party given I'm drawing down over decades? Looking at the iShares UK Gilt 0-5 Year performance it's down 4.4% over 3 years and 4.6% over 5 years. The last year has seen a 3% increase in value. Dividend of 2.85%? HL pay 4.55% interest on cash in a drawdown account.
The figures stack up to hold bonds over cash looking at the example above, but the 3 and 5 year performance is poor. The risk vs reward doesn't look anywhere near as compelling as equities over the same period. With the crystal ball out is the feeling that bond yields will recover as interest rates go down?
I'm comfortable with the risk of holding equities and can cope with this emotionally having seen several dips over the last 15 years. So, do bonds bring anything new to the party given I'm drawing down over decades? Looking at the iShares UK Gilt 0-5 Year performance it's down 4.4% over 3 years and 4.6% over 5 years. The last year has seen a 3% increase in value. Dividend of 2.85%? HL pay 4.55% interest on cash in a drawdown account.
The figures stack up to hold bonds over cash looking at the example above, but the 3 and 5 year performance is poor. The risk vs reward doesn't look anywhere near as compelling as equities over the same period. With the crystal ball out is the feeling that bond yields will recover as interest rates go down?
The poor 3-5 year performance reflects the time in 2022 when interest rates moved away from near zero. If interest rates go back to near zero then cash savings rates would drop instantly whereas bond fund prices would increase. This difference makes me comfortable holding a mix of bonds and cash.
Holding bonds and cash was done with a fairly precise view of when we would use the funds - from age 55 to 70. After that I expect our spending will drop and we'll have state and DB pensions coming in.
Of course, equities are almost certain to give a higher return over long period but I don't have that long - only 15 years.
I don't particularly want to work 'just another year' should investments drop significantly particularly as I feel we already have enough saved so we have no need to take too much risk.
Holding bonds and cash was done with a fairly precise view of when we would use the funds - from age 55 to 70. After that I expect our spending will drop and we'll have state and DB pensions coming in.
Of course, equities are almost certain to give a higher return over long period but I don't have that long - only 15 years.
I don't particularly want to work 'just another year' should investments drop significantly particularly as I feel we already have enough saved so we have no need to take too much risk.
Your DB and SP are fixed income (albeit not until later) which is what your Bonds give you in a portfolio.
As you allude, the issue is your portfolio from now until then.
It adds to the complexity, but some people prefer to hold their bonds directly, as you’re guaranteed to get your par value back at maturity. Funds are a little different.
It’s a difficult question to answer - Monevator has some good articles on drawdown / allocation thru retirement, might provide some insight.
As you allude, the issue is your portfolio from now until then.
It adds to the complexity, but some people prefer to hold their bonds directly, as you’re guaranteed to get your par value back at maturity. Funds are a little different.
It’s a difficult question to answer - Monevator has some good articles on drawdown / allocation thru retirement, might provide some insight.
thekingisdead said:
It adds to the complexity, but some people prefer to hold their bonds directly, as you’re guaranteed to get your par value back at maturity. Funds are a little different.
The bond fund part of my pension got hammered - well, one fund did and the other (thankfully) just bobbled along. I thought I understood bonds but once they're in a fund then it seems all sorts of things can go on. At its simplest level, if bond prices drop and the fund has to sell some bonds at low prices because people pull their money out, then the fund is never going to get back to its previous levels.
Sheepshanks said:
The bond fund part of my pension got hammered - well, one fund did and the other (thankfully) just bobbled along.
I thought I understood bonds but once they're in a fund then it seems all sorts of things can go on. At its simplest level, if bond prices drop and the fund has to sell some bonds at low prices because people pull their money out, then the fund is never going to get back to its previous levels.
That's not the case. Aside from trading fees which are not material, people adding and removing money from a fund makes no difference to the fund's price or performance. Fund accounting and unit pricing sees to that. I thought I understood bonds but once they're in a fund then it seems all sorts of things can go on. At its simplest level, if bond prices drop and the fund has to sell some bonds at low prices because people pull their money out, then the fund is never going to get back to its previous levels.
When you buy a bond (not inflation linked) you know exactly what your cashflows will be until maturity. You don't get that with a bond fund because they generally target a duration range eg. 10 years which means they need to sell and buy bonds regularly to maintain that.
Edited by LeoSayer on Wednesday 19th June 18:06
LeoSayer said:
Sheepshanks said:
The bond fund part of my pension got hammered - well, one fund did and the other (thankfully) just bobbled along.
I thought I understood bonds but once they're in a fund then it seems all sorts of things can go on. At its simplest level, if bond prices drop and the fund has to sell some bonds at low prices because people pull their money out, then the fund is never going to get back to its previous levels.
That's not the case. Aside from trading fees which are not material, people adding and removing money from a fund makes no difference to the fund's price or performance. Fund accounting and unit pricing sees to that. I thought I understood bonds but once they're in a fund then it seems all sorts of things can go on. At its simplest level, if bond prices drop and the fund has to sell some bonds at low prices because people pull their money out, then the fund is never going to get back to its previous levels.
When you buy a bond (not inflation linked) you know exactly what your cashflows will be until maturity. You don't get that with a bond fund because they generally target a duration range eg. 10 years which means they need to sell and buy bonds regularly to maintain that.
The fund I held that was most affected (an Aviva one) was pretty small, and it was steadily dropping in total value. The other fund I had was 10x the size and that was much steadier.
LeoSayer said:
Sheepshanks said:
The bond fund part of my pension got hammered - well, one fund did and the other (thankfully) just bobbled along.
I thought I understood bonds but once they're in a fund then it seems all sorts of things can go on. At its simplest level, if bond prices drop and the fund has to sell some bonds at low prices because people pull their money out, then the fund is never going to get back to its previous levels.
That's not the case. Aside from trading fees which are not material, people adding and removing money from a fund makes no difference to the fund's price or performance. Fund accounting and unit pricing sees to that. I thought I understood bonds but once they're in a fund then it seems all sorts of things can go on. At its simplest level, if bond prices drop and the fund has to sell some bonds at low prices because people pull their money out, then the fund is never going to get back to its previous levels.
When you buy a bond (not inflation linked) you know exactly what your cashflows will be until maturity. You don't get that with a bond fund because they generally target a duration range eg. 10 years which means they need to sell and buy bonds regularly to maintain that.
Edited by LeoSayer on Wednesday 19th June 18:06
By holding the individual bond you have the *option* of holding to maturity and getting the face value back
Sheepshanks said:
LeoSayer said:
Sheepshanks said:
The bond fund part of my pension got hammered - well, one fund did and the other (thankfully) just bobbled along.
I thought I understood bonds but once they're in a fund then it seems all sorts of things can go on. At its simplest level, if bond prices drop and the fund has to sell some bonds at low prices because people pull their money out, then the fund is never going to get back to its previous levels.
That's not the case. Aside from trading fees which are not material, people adding and removing money from a fund makes no difference to the fund's price or performance. Fund accounting and unit pricing sees to that. I thought I understood bonds but once they're in a fund then it seems all sorts of things can go on. At its simplest level, if bond prices drop and the fund has to sell some bonds at low prices because people pull their money out, then the fund is never going to get back to its previous levels.
When you buy a bond (not inflation linked) you know exactly what your cashflows will be until maturity. You don't get that with a bond fund because they generally target a duration range eg. 10 years which means they need to sell and buy bonds regularly to maintain that.
The fund I held that was most affected (an Aviva one) was pretty small, and it was steadily dropping in total value. The other fund I had was 10x the size and that was much steadier.
This is the whole point of unit pricing - to ensure that the price and performance of the fund is not affected by people adding and removing their fund investment.
I would suggest that the reason why one of your funds performed differently to the other is nothing to do with fund size but instead due to different investment objectives eg/ average duration etc.
Some interesting points from people that know (or at least appear to know) a lot more about the workings of bonds and bond funds than I’ve ever managed to understand! My takeaway is that, for now at least, I’ll continue with a mix of cash to cover 2-3 years of expenses and the balance invested in equities. I’ll keep an eye on the situation and if interest rates should drop further or faster than expected (held again today) I can reassess.
One thing I have learnt, both here and from reading up on the subject previously, I don’t understand the subject sufficiently to make an informed decision about buying individual bonds and gilts. If I do switch medium term investments from equities I’ll use a fund or a blended product like Vanguard Lifestrategy.
One thing I have learnt, both here and from reading up on the subject previously, I don’t understand the subject sufficiently to make an informed decision about buying individual bonds and gilts. If I do switch medium term investments from equities I’ll use a fund or a blended product like Vanguard Lifestrategy.
Bond are really simple things once you manage to find a clear explanation. The problem really is just getting hold of a clear explanation. A couple of the ideas expressed in this thread about the value of your investment being undermined by other people trading out of a fund, or the fund being rebalanced to track a benchmark are simply wrong. In other countries it is perfectly normal for private investors to use bonds as an alternative to a long term savings account with a bank and I guess that gets them to dip a toe in the water and they may then go on to invest in riskier bonds (that therefore offer greater reward).
You can make bond investments as safe or as a risky as you like, but generally a private investor chooses them if they want to hold a chunk of capital in a low risk asset that will generate a predictable income stream that gives you some diversification from just holding shares. If you need that sort of profile in your portfolio it is definitely worth finding out about bonds.
You can make bond investments as safe or as a risky as you like, but generally a private investor chooses them if they want to hold a chunk of capital in a low risk asset that will generate a predictable income stream that gives you some diversification from just holding shares. If you need that sort of profile in your portfolio it is definitely worth finding out about bonds.
ATG said:
Bond are really simple things once you manage to find a clear explanation. The problem really is just getting hold of a clear explanation. A couple of the ideas expressed in this thread about the value of your investment being undermined by other people trading out of a fund, or the fund being rebalanced to track a benchmark are simply wrong. In other countries it is perfectly normal for private investors to use bonds as an alternative to a long term savings account with a bank and I guess that gets them to dip a toe in the water and they may then go on to invest in riskier bonds (that therefore offer greater reward).
You can make bond investments as safe or as a risky as you like, but generally a private investor chooses them if they want to hold a chunk of capital in a low risk asset that will generate a predictable income stream that gives you some diversification from just holding shares. If you need that sort of profile in your portfolio it is definitely worth finding out about bonds.
Perhaps what is being conflated here is 1. Holding a bond to maturity and it's YTM vs a fund manager crystallising a loss, say a change in asset allocation (change in duration?). No different to an equity where the stock is sold for a loss. It's gone with no chance of recovery in that asset. Therefore the concept of YTM won't apply. two identical bonds, one held personally and one in a fund. Two potentially different outcomes. High redemptions could also have the same effect by virtue of the need to raise cash at undesirable times.You can make bond investments as safe or as a risky as you like, but generally a private investor chooses them if they want to hold a chunk of capital in a low risk asset that will generate a predictable income stream that gives you some diversification from just holding shares. If you need that sort of profile in your portfolio it is definitely worth finding out about bonds.
Also feels worth pointing out that risk and volatility aren't the same thing.
You could hold a Government Bond that is bulletproof in terms of the Government are never going to default on it.
In that sense it's risk free.
But on the way there the capital value can still pretty much halve in the right circumstances.
You could hold a Government Bond that is bulletproof in terms of the Government are never going to default on it.
In that sense it's risk free.
But on the way there the capital value can still pretty much halve in the right circumstances.
IMPCbC said:
Perhaps what is being conflated here is 1. Holding a bond to maturity and it's YTM vs a fund manager crystallising a loss, say a change in asset allocation (change in duration?). No different to an equity where the stock is sold for a loss. It's gone with no chance of recovery in that asset. Therefore the concept of YTM won't apply. two identical bonds, one held personally and one in a fund. Two potentially different outcomes. High redemptions could also have the same effect by virtue of the need to raise cash at undesirable times.
Do you have an example of this?Fund managers are obliged manage liquidity to ensure that fund unitholders aren't disadvantaged by redemptions from other unitholders. When they get this wrong it's normally big news eg. Woodford.
Usually redemptions can be managed by rebalancing the fund as I mentioned earlier however if the fund holds illiquid instruments then the manager may need to suspend redemptions until assets can be sold in an orderly manner as is often seen with property funds.
Did Gilt fund suspend redemptions during the sell off in 2022? I can't recall.
I am just making the point that a Bond, particularly long duration, will be highly sensitive to rates. Say the price falls significantly from higher yields(this did happen in 22/23 but the purchaser chooses to hold until maturity, it's just a timing issue and no losses will be reported.
What you say regarding fund units and redemptions is correct. Simple example, 2 units holds $200($100/unit) bond which falls to $100 ($50 unit). One holder bails and the FM sells half , leave 1 unit valued at $50. If that bond is held to maturity, the holder receives their $100 back and the interest.
What I was suggesting is if the FM thinks yields will rise even further and sells the entire holding, locking in that loss(realised), there is no scope for recovery. There is also a scenario where large redemptions across the 'industry' drive wholesale selling and when there is a demand supply imbalance the price falls even more. Leverage too.
Bonds are useful for annuity portfolio's, big insurers and the like. Individual investors, I'm not a fan if I'm honest. And they are not well understood by the individual that is actually seeking safety.
What you say regarding fund units and redemptions is correct. Simple example, 2 units holds $200($100/unit) bond which falls to $100 ($50 unit). One holder bails and the FM sells half , leave 1 unit valued at $50. If that bond is held to maturity, the holder receives their $100 back and the interest.
What I was suggesting is if the FM thinks yields will rise even further and sells the entire holding, locking in that loss(realised), there is no scope for recovery. There is also a scenario where large redemptions across the 'industry' drive wholesale selling and when there is a demand supply imbalance the price falls even more. Leverage too.
Bonds are useful for annuity portfolio's, big insurers and the like. Individual investors, I'm not a fan if I'm honest. And they are not well understood by the individual that is actually seeking safety.
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