Discussion
As with DibblyDobbler I've read of bonds being a "worry".
How I understand it is that with UK Government bonds you want index linking to ensure you don't lose money, beyond that the risk is that the UK government doesn't pay which seems massively unlikely.
There are good quality corporate and other bonds where presumably if you use funds you diversify massively.
I get that if you go and buy a bunch of junk bonds that's a massive gamble but I'm confused how people seem to be talking down UK government backed bonds and other good quality bonds for what's supposed to be the "safer" part of a portfolio
How I understand it is that with UK Government bonds you want index linking to ensure you don't lose money, beyond that the risk is that the UK government doesn't pay which seems massively unlikely.
There are good quality corporate and other bonds where presumably if you use funds you diversify massively.
I get that if you go and buy a bunch of junk bonds that's a massive gamble but I'm confused how people seem to be talking down UK government backed bonds and other good quality bonds for what's supposed to be the "safer" part of a portfolio
I'm not a finance expert (but this is ph so my opinion is better than any experts, right?)
One point is that bond pricing is in relation to return rather than nominal price. Bonds give a return which is fixed at issue and after that the price of the bond in the market seems to be driven by the return. So when interest rates are 1% and a bond gives a 2% return the price of the bond goes up until the effective return is 1% (with some discount for risk). So what you see is that bond prices are higher in times of low interest rates.
Given the expectation that interest rates will rise, I would expect bond prices to fall.
That might prompt someone who knows to tell us
One point is that bond pricing is in relation to return rather than nominal price. Bonds give a return which is fixed at issue and after that the price of the bond in the market seems to be driven by the return. So when interest rates are 1% and a bond gives a 2% return the price of the bond goes up until the effective return is 1% (with some discount for risk). So what you see is that bond prices are higher in times of low interest rates.
Given the expectation that interest rates will rise, I would expect bond prices to fall.
That might prompt someone who knows to tell us
b
hstewie said:
hstewie said: As with DibblyDobbler I've read of bonds being a "worry".
How I understand it is that with UK Government bonds you want index linking to ensure you don't lose money, beyond that the risk is that the UK government doesn't pay which seems massively unlikely.
There are good quality corporate and other bonds where presumably if you use funds you diversify massively.
I get that if you go and buy a bunch of junk bonds that's a massive gamble but I'm confused how people seem to be talking down UK government backed bonds and other good quality bonds for what's supposed to be the "safer" part of a portfolio
It depends if you are talking about buying a bond / portfolio of bonds and holding them to maturity (in which case default risk and reinvestment risk on your coupons are the areas you need to worry about).How I understand it is that with UK Government bonds you want index linking to ensure you don't lose money, beyond that the risk is that the UK government doesn't pay which seems massively unlikely.
There are good quality corporate and other bonds where presumably if you use funds you diversify massively.
I get that if you go and buy a bunch of junk bonds that's a massive gamble but I'm confused how people seem to be talking down UK government backed bonds and other good quality bonds for what's supposed to be the "safer" part of a portfolio
What people are probably referring to are corporate bond funds (or buying and selling corporate bonds prior to maturity), where there are material risks of interest rates rising (or credit spreads increasing), reducing the value of those bonds. Obviously the default risk and reinvestment risk still apply.
Thank you both 
Sidicks as you suggested I'm definitely referring to funds.
So a couple of examples:
iShares is UK government backed and linked against inflation.
Presume with the corporate bond fund you're basically into the credit worthiness of the companies?
Am I overthinking it or have I truly missed something obvious?
Sidicks as you suggested I'm definitely referring to funds.
So a couple of examples:
- iShares Index Linked Gilt Index Fund - https://www.blackrock.com/uk/individual/products/2...
- Baillie Gifford Corporate Bond - https://www.bailliegifford.com/en/uk/individual-in...
iShares is UK government backed and linked against inflation.
Presume with the corporate bond fund you're basically into the credit worthiness of the companies?
Am I overthinking it or have I truly missed something obvious?
bhstewie said:
hstewie said: Thank you both
Sidicks as you suggested I'm definitely referring to funds.
So a couple of examples:
iShares is UK government backed and linked against inflation.
Presume with the corporate bond fund you're basically into the credit worthiness of the companies?
Am I overthinking it or have I truly missed something obvious?
As explained above - the value of the IL government bond fund will fall if interest rates go up and/or inflation falls and/or the credit worthiness of the government deteriorates. The value of the corporate bond fund will fall if interest rates go up and/or inflation increases and/or the credit worthiness of the corporate bond issuer deteriorates.Sidicks as you suggested I'm definitely referring to funds.
So a couple of examples:
- iShares Index Linked Gilt Index Fund - https://www.blackrock.com/uk/individual/products/2...
- Baillie Gifford Corporate Bond - https://www.bailliegifford.com/en/uk/individual-in...
iShares is UK government backed and linked against inflation.
Presume with the corporate bond fund you're basically into the credit worthiness of the companies?
Am I overthinking it or have I truly missed something obvious?
"Bond" is a term that covers many things (Government borrowing, corporate borrowing, fixed term deposits, NS&I products, some structured products, investment bonds, with-profits bonds, distribution bond, and probably more).
The 'bonds' I believe you are referring to are the debt issues of governments and companies, either held directly or within a fund mandated to manage such bonds.
The best way of considering them is the literal use of the word 'bond' as in "my word is my bond". That is to say a promise that is only as good as the person/entity making it.
UK Government Bonds (like most government bonds, also known as Gilts, or Gilt Edged Securities) have been very expensive for some time now, and despite the doubling of base rate remain very expensive. By expensive you could say they were too pricey 3 years ago, but I wish I had bought more!
AAA rated corporate bonds (debt issued by strongly rated companies) can still offer great value.
Lower rated corporate bonds can be a mine field where there is a lot of money to be made (or lost) selling these bonds well before maturity.
Mini-Bonds should be avoided at all costs. These are debt notes issued by companies with no real trading history, yet are now commonly listed on recognised stock exchanges (the Irish exchange is the current favourite). They pay introducer fees which can be very high and are currently completely legal.
All other types of bonds are simply packaged investment products that happen to have the word 'bond' in their name.
Sorry, in smy summary above I have lost track of the OP's actual question! I'll post this and then revisit.
The 'bonds' I believe you are referring to are the debt issues of governments and companies, either held directly or within a fund mandated to manage such bonds.
The best way of considering them is the literal use of the word 'bond' as in "my word is my bond". That is to say a promise that is only as good as the person/entity making it.
UK Government Bonds (like most government bonds, also known as Gilts, or Gilt Edged Securities) have been very expensive for some time now, and despite the doubling of base rate remain very expensive. By expensive you could say they were too pricey 3 years ago, but I wish I had bought more!
AAA rated corporate bonds (debt issued by strongly rated companies) can still offer great value.
Lower rated corporate bonds can be a mine field where there is a lot of money to be made (or lost) selling these bonds well before maturity.
Mini-Bonds should be avoided at all costs. These are debt notes issued by companies with no real trading history, yet are now commonly listed on recognised stock exchanges (the Irish exchange is the current favourite). They pay introducer fees which can be very high and are currently completely legal.
All other types of bonds are simply packaged investment products that happen to have the word 'bond' in their name.
Sorry, in smy summary above I have lost track of the OP's actual question! I'll post this and then revisit.
sidicks said:
As explained above - the value of the IL government bond fund will fall if interest rates go up and/or inflation falls and/or the credit worthiness of the government deteriorates. The value of the corporate bond fund will fall if interest rates go up and/or inflation increases and/or the credit worthiness of the corporate bond issuer deteriorates.
Thank you Amazing how with all the reading I've done that single paragraph has nailed it.
bhstewie said:
hstewie said: What are the real world risks given nothing is risk free?
iShares is UK government backed and linked against inflation.
Presume with the corporate bond fund you're basically into the credit worthiness of the companies?
Am I overthinking it or have I truly missed something obvious?
Remember that the government bonds are government backed, not the fund. Although you've referenced funds from two well known providers, there is always a risk in any investment fund. By using a fund manager you are introducing another entity and another layer of risk (and costs).iShares is UK government backed and linked against inflation.
Presume with the corporate bond fund you're basically into the credit worthiness of the companies?
Am I overthinking it or have I truly missed something obvious?
Its always worth reading the detail of a funds approach. They always 'aim to replicate' the performance of some index, but you should always check what they actually do - especially is there any hedging or leverage. (and which measure of inflation applies anyway?)
TooLateForAName said:
Remember that the government bonds are government backed, not the fund. Although you've referenced funds from two well known providers, there is always a risk in any investment fund. By using a fund manager you are introducing another entity and another layer of risk (and costs).
There is minimal manager default risk in a unit-linked product as funds are held in separate vehicles, not directly linked to the investment manager.iShares products are basically index replicators, so there is minimal manager (alpha) risk.
iShares is owned by Blackrock, one of the world's largest investment managers.
Investing in an iShares product is much cheaper than trying to do the index replication yourself.
TooLateForAName said:
Its always worth reading the detail of a funds approach. They always 'aim to replicate' the performance of some index, but you should always check what they actually do - especially is there any hedging or leverage. (and which measure of inflation applies anyway?)
There is minimal leverage in the basic iShares products. Index-linked gilts are linked to RPI.The BaillieGifford fund is not designed to 'replicate the performance of an index', it is designed to outperform that index by taken positions relative to that index. It should be noted that this fund also has a benchmark of 30% high yield ('junk') bonds, so is somewhat riskier than many corporate and funds.
What sort of 'hedging' are you referring to? The BG fund has European bonds hedged back to GBP to mitigate FX risk.
Edited by sidicks on Sunday 28th January 17:10
If interest rates rise is it still a probability that the BG fund price will drop? Or will the manager not adjust the holdings in the fund to try to improve things? Just curious.
I have mainly (80%) equity funds in my ISA/SIPP and 20% bond funds. Because you're meant to, y'see. Now I'm starting to wonder if the bond funds are worthwhile and whether I shouldn't just go all-in for equity. But I'm going to resist the temptation to tinker.
I assume the conventional wisdom that bonds are a good safe harbour if equities drop still holds good? If so, why? Equity prices don't have a correlation with a drop in interest rates? Or do they?
I have mainly (80%) equity funds in my ISA/SIPP and 20% bond funds. Because you're meant to, y'see. Now I'm starting to wonder if the bond funds are worthwhile and whether I shouldn't just go all-in for equity. But I'm going to resist the temptation to tinker.
I assume the conventional wisdom that bonds are a good safe harbour if equities drop still holds good? If so, why? Equity prices don't have a correlation with a drop in interest rates? Or do they?
RichS said:
If interest rates rise is it still a probability that the BG fund price will drop?
The key issue is the size and timing of any interest rate rises compared to what has already been reflected in market prices.RichS said:
Or will the manager not adjust the holdings in the fund to try to improve things? Just curious.
If the fund manager believes that interest rates will rise faster / more than the market, then they can reduce the impact by being short ‘duration’ I.e. holiding bonds with a lower sensitivity to interest rates than the benchmark.The benchmark is key here - the manager is trying to outperform the bond index benchmark, so if the bond benchmark falls in value (following an interest rate rise) then realistically in this scenario, the manager is seeking to achieve a lower fall, rather than necessarily make money.
RichS said:
I assume the conventional wisdom that bonds are a good safe harbour if equities drop still holds good? If so, why? Equity prices don't have a correlation with a drop in interest rates? Or do they?
It depends what is the trigger for equity falls. Also, the premise that bonds are a safe harbour when equities drop (all other things being equal) is really about government bonds. Investment grade corporate bonds and certainly high yield bonds may also be sensitive to economic factors that affect equities, so if credit spreads rise in this scenario, these bonds could reduce in value.So whilst I'm being cautious not to ask "what should I do?" too directly, I would be interested what people are looking at for the "safe" part of a portfolio?
Everything I read says do a equity/fixed split but when government bond returns sound so risky is it a wise option to just not do any government bonds?
Everything I read says do a equity/fixed split but when government bond returns sound so risky is it a wise option to just not do any government bonds?
bhstewie said:
hstewie said: So whilst I'm being cautious not to ask "what should I do?" too directly, I would be interested what people are looking at for the "safe" part of a portfolio?
Why is your investment horizon?If you are sure you don’t need the money for 5+ years (and if you are likely to make further contributions in the meantime), I’d not be trying to time the market and just accept that if it falls in the interim, I’ll be buying more units at a lower price.
bhstewie said:
hstewie said: Everything I read says do a equity/fixed split but when government bond returns sound so risky is it a wise option to just not do any government bonds?
It depends what risks you are worried about and over what time horizon. Again, you need to differentiate between buying bonds (and holding to maturity) and investing in bond funds.You could simply buy a (say) 2-year government bond, in which case you know exactly what return you will get over the period (next to zero!) but you will protect your capital.
Edited by sidicks on Tuesday 30th January 11:39
bhstewie said:
hstewie said: 100% bond funds.
Timeline should be 10-15 years plus as the intention is to build this portfolio up i.e. enough pure cash in the bank enough to survive any crisis so it's more about "bottle" than logic
100% equities then, otherwise you’re trying to time the market as to when to increase / reduce risk. But you might choose to focus on mainstream developed markets rather than emerging markets and / or the riskier stocks within those markets, if you want a lower risk profile.Timeline should be 10-15 years plus as the intention is to build this portfolio up i.e. enough pure cash in the bank enough to survive any crisis so it's more about "bottle" than logic
Edited by sidicks on Tuesday 30th January 12:34
sidicks said:
100% equities then, otherwise you’re trying to time the market as to when to increase / reduce risk. But you might choose to focus on mainstream developed markets rather than emerging markets and / or the riskier stocks within those markets, if you want a lower risk profile.
My (sort of) ongoing plan was to throw 50% in a world tracker then have the other 50% in something that's pitched more as "income" but get the accumulation units so it all goes back in.Edited by sidicks on Tuesday 30th January 12:34
I think that way I can get some risk but hopefully some stability too albeit at the loss of some return - regardless of the logic I can't guarantee I wouldn't panic if I woke up one morning and found it was 2008 all over again.
I also plan on throwing the odd £5k into something like Fundsmith/Lindsell Train but more as a "punt" than as part of an ongoing plan if that makes sense?
I'd be interested why you've said 100% equities - presume simply because I have pure cash to ride out most storms? Most guides online have come back at around 60-80% equities as suggested number but of course different people have different methodologies.
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