Retirement planning - are bond funds better than cash??
Discussion
I've never invested in a bond fund - only equities and that has worked well for me.
I've never really considered them until now that I notice global bond index funds have dropped c.6% this year.
My plan in the run up to retirement (<5 years from now) was to build cash to cover 2-3 years of income needs and in extreme circumstances (of a market crash), take my DB pension early which on its own would cover a reasonable standard of living.
Do I even need bonds?
I've never really considered them until now that I notice global bond index funds have dropped c.6% this year.
My plan in the run up to retirement (<5 years from now) was to build cash to cover 2-3 years of income needs and in extreme circumstances (of a market crash), take my DB pension early which on its own would cover a reasonable standard of living.
Do I even need bonds?
Bonds are effectively loans (from corporate or governments) that are paying the bond holder interest. For 'safe' bonds, the interest rates are usually relatively low but there is less risk of losing your investment. However, as interest rates rise, bond values decrease because the amount above and beyond base rates that the bonds are paying reduces. [it is likely that the general trend in inflation and interest rates rising is causing the reduction in bond fund prices, as both of these factors make the yield lower]
Bonds are normally something that you would increase your exposure to as you near retirement, as they are 'safer and steadier' than equities which can have larger short term fluctuations. Of course, nothing is absolute.
Bonds are normally something that you would increase your exposure to as you near retirement, as they are 'safer and steadier' than equities which can have larger short term fluctuations. Of course, nothing is absolute.
LeoSayer said:
Do I even need bonds?
1. What returns do you need in retirement to avoid running out of money? Can this be delivered by a portfolio containing less than 100% equities?2. If you do decide not to include bonds (or similar), are you as happy as you can be that you will not be tempted to sell if we have a protracted period of volatility such as happened in ~2008.
Answer these questions and you will answer your original question.
CharlesElliott said:
Bonds are normally something that you would increase your exposure to as you near retirement, as they are 'safer and steadier' than equities which can have larger short term fluctuations.
If planning on purchasing an annuity, agreed, but if planning on drawdown, I don't see why your asset allocation would necessarily change.Bit left field, but related to the OP's question.
Has anyone/does anyone borrow against their portfolio to either live off for a period or to reinvest?
Asking as am hearing over and over that 'the bond market and old style 60/40 split' is over and done, given the paltry returns stacked against inflation ( not just the cooked inflation numbers but real day/day living).
Seems viable to hold 1 yr or so in cash and leave the rest in equities and then if need be, take a loan. Obvs a SIPP/ISA cant have a charge against them, but presumably they can be factored into ones 'asset wealth'?
Has anyone/does anyone borrow against their portfolio to either live off for a period or to reinvest?
Asking as am hearing over and over that 'the bond market and old style 60/40 split' is over and done, given the paltry returns stacked against inflation ( not just the cooked inflation numbers but real day/day living).
Seems viable to hold 1 yr or so in cash and leave the rest in equities and then if need be, take a loan. Obvs a SIPP/ISA cant have a charge against them, but presumably they can be factored into ones 'asset wealth'?
greengreenwood7 said:
Asking as am hearing over and over that 'the bond market and old style 60/40 split' is over and done, given the paltry returns stacked against inflation ( not just the cooked inflation numbers but real day/day living).
Would be useful to understand how the 60/40 model is "broken"The strength of the covenant for your DB scheme (i.e. how well-funded it is and how secure the sponsoring employer is) really should be taken into consideration when considering how/where to invest other savings. I’ve got reasonable service and continue to accrue in a well-funded, well-backed private sector scheme. I mentally account for that as if it were a significant holding in bonds. Means I take more equity risk than I might otherwise (I’m 47).
But I monitor and make my own assessment of the strength of the DB promise annually.
But I monitor and make my own assessment of the strength of the DB promise annually.
Derek Chevalier said:
1. What returns do you need in retirement to avoid running out of money? Can this be delivered by a portfolio containing less than 100% equities?
2. If you do decide not to include bonds (or similar), are you as happy as you can be that you will not be tempted to sell if we have a protracted period of volatility such as happened in ~2008.
Answer these questions and you will answer your original question.
Thanks Derek, great questions.2. If you do decide not to include bonds (or similar), are you as happy as you can be that you will not be tempted to sell if we have a protracted period of volatility such as happened in ~2008.
Answer these questions and you will answer your original question.
1. Keeping pace with inflation will do it, so yes 100% equity not essential. This is mainly because the drawdown will only be over a relatively short period from age 55 to 66 thanks to final salary schemes and state pensions.
2. I need to get the spreadsheets out to check but I suspect the answer will be no, implying that some kind of low risk assets like bonds need to be included.
Abdul Abulbul Amir said:
Derek Chevalier said:
If planning on purchasing an annuity, agreed, but if planning on drawdown, I don't see why your asset allocation would necessarily change.
Agreed, but when drawing down you may want the next couple of years draw downs as bonds.Derek Chevalier said:
But given that most people are going to be uncomfortable with a 100% equity portfolio irrespective of where they are on their investing/life journey, my point remains, I don't necessarily see the need for a dramatic shift in asset allocation at retirement (in a non-annuity scenario)
I think youd want a lower equity mix when you get closer to and into drawdown. For example, at 46, I'm happy with a LS100, however, at 60 I'd want to got to a LS60. At 70, I'd be looking at LS40.I think Derek's case would be that relatively few clients are comfortable in 100% equities and I'm going to guess that where most (obviously not all) people end up having gone through any sort of risk profile is not in 100% equities.
Behaviourally for many it's perhaps better to be in LS80 or LS60 (just to use a single range to make a point) and hopefully they'll stay the course over the long term rather than be in LS100 until the s
t hits the fan and panic sell then sit in cash waiting to buy back in then rinse and repeat ad infinitum.
Behaviourally for many it's perhaps better to be in LS80 or LS60 (just to use a single range to make a point) and hopefully they'll stay the course over the long term rather than be in LS100 until the s
t hits the fan and panic sell then sit in cash waiting to buy back in then rinse and repeat ad infinitum.Abdul Abulbul Amir said:
Derek Chevalier said:
But given that most people are going to be uncomfortable with a 100% equity portfolio irrespective of where they are on their investing/life journey, my point remains, I don't necessarily see the need for a dramatic shift in asset allocation at retirement (in a non-annuity scenario)
I think youd want a lower equity mix when you get closer to and into drawdown. For example, at 46, I'm happy with a LS100, however, at 60 I'd want to got to a LS60. At 70, I'd be looking at LS40.https://www.riskprofiling.com/blog/October-2015/to...
The asset allocation you choose is determined by 2 things:
1. How much risk you need to take (given that equities have historically given better inflation protection than bonds over long timeframes)
2. How much risk you are happy taking.
Given that many have the desire to achieve financial independence as soon as possible, #2 is typically going to be the limiting factor, they will construct a portfolio that aligns with how much risk they are happy taking, and based on the above research, this won't typically change much over time.
bhstewie said:
hstewie said: I think Derek's case would be that relatively few clients are comfortable in 100% equities and I'm going to guess that where most (obviously not all) people end up having gone through any sort of risk profile is not in 100% equities.
Behaviourally for many it's perhaps better to be in LS80 or LS60 (just to use a single range to make a point) and hopefully they'll stay the course over the long term rather than be in LS100 until the st hits the fan and panic sell then sit in cash waiting to buy back in then rinse and repeat ad infinitum.
Yep, spot on.Behaviourally for many it's perhaps better to be in LS80 or LS60 (just to use a single range to make a point) and hopefully they'll stay the course over the long term rather than be in LS100 until the s
t hits the fan and panic sell then sit in cash waiting to buy back in then rinse and repeat ad infinitum.Derek Chevalier said:
For most people, financial risk tolerance doesn't change too much with age
https://www.riskprofiling.com/blog/October-2015/to...
The asset allocation you choose is determined by 2 things:
1. How much risk you need to take (given that equities have historically given better inflation protection than bonds over long timeframes)
2. How much risk you are happy taking.
Given that many have the desire to achieve financial independence as soon as possible, #2 is typically going to be the limiting factor, they will construct a portfolio that aligns with how much risk they are happy taking, and based on the above research, this won't typically change much over time.
Depends on what you mean by risk. To me it's the amount of volatility within a given time period. If you have a longer time period you can tolerate a greater level of volatility. https://www.riskprofiling.com/blog/October-2015/to...
The asset allocation you choose is determined by 2 things:
1. How much risk you need to take (given that equities have historically given better inflation protection than bonds over long timeframes)
2. How much risk you are happy taking.
Given that many have the desire to achieve financial independence as soon as possible, #2 is typically going to be the limiting factor, they will construct a portfolio that aligns with how much risk they are happy taking, and based on the above research, this won't typically change much over time.
Derek Chevalier said:
Yep, spot on.
Out of curiosity if 100 clients walk through your door roughly how many usually walk out with a suggestion that 100% equities is the best/right allocation for them?I would have thought very low yet my experience of online forums is that a crazy amount of people seem to be in 100% equities and usually the ones you'd think of as at the frothier end of the spectrum.
Abdul Abulbul Amir said:
Derek Chevalier said:
For most people, financial risk tolerance doesn't change too much with age
https://www.riskprofiling.com/blog/October-2015/to...
The asset allocation you choose is determined by 2 things:
1. How much risk you need to take (given that equities have historically given better inflation protection than bonds over long timeframes)
2. How much risk you are happy taking.
Given that many have the desire to achieve financial independence as soon as possible, #2 is typically going to be the limiting factor, they will construct a portfolio that aligns with how much risk they are happy taking, and based on the above research, this won't typically change much over time.
Depends on what you mean by risk. To me it's the amount of volatility within a given time period. If you have a longer time period you can tolerate a greater level of volatility. https://www.riskprofiling.com/blog/October-2015/to...
The asset allocation you choose is determined by 2 things:
1. How much risk you need to take (given that equities have historically given better inflation protection than bonds over long timeframes)
2. How much risk you are happy taking.
Given that many have the desire to achieve financial independence as soon as possible, #2 is typically going to be the limiting factor, they will construct a portfolio that aligns with how much risk they are happy taking, and based on the above research, this won't typically change much over time.
I don't see how time period impacts this particular topic (e.g why would 10 years be any different to 40?) - this being a different discussion to whether it's wise or not to buy equities with a sub 5 year investment horizon (for example).
Derek Chevalier said:
I don't see how time period impacts this particular topic (e.g why would 10 years be any different to 40?) - this being a different discussion to whether it's wise or not to buy equities with a sub 5 year investment horizon (for example).
I was originally replying to your post. Re drawdown. Gassing Station | Finance | Top of Page | What's New | My Stuff