Cash v bonds in multi-asset funds now rates are half decent?

[bitchstewie]

I have a fair amount in multi-asset funds that are fairly bond heavy.

Meanwhile my Vanguard account is just a straight mix of cash and FTSE Global All Cap.

Vanguard typically seem to pay BoE rate minus their platform fee and the first 0.2% of interest on cash.

So if I put £1000 in LifeStrategy 60 right now I'm 60% in equities and 40% in bonds.

If I put £600 in FTSE Global All Cap and left £400 in cash I'm 60% in equities but have £400 earning a very safe 3.2% or so rather than hoping that bonds do what they're supposed to do.

Wondered if anyone else is thinking of doing anything similar?

[Phooey]

I really don't understand bonds enough so don't own them, plus I've been groomed into the mindset that equity over the long-term returns more than bonds..

Currently in our Vanguard accounts (me and missus) we are approx 75-80% equity (mainly All-Cap, additional bit of VUSA (that I bought on a rainy day), bit of VMID), and the remainder in cash. Still have the regular monthly DD going in and buying All-Cap in missus's acc and VWRL in mine. The cash is from end-of-year top-ups / lump sums which I have been slowly buying extra equity on the dips. However, I really think the bottom is still to come, so am happy that the cash is sitting still and earning the VG 3-ish percent for now.

[Derek Chevalier]

bhstewie said:

I have a fair amount in multi-asset funds that are fairly bond heavy.

Meanwhile my Vanguard account is just a straight mix of cash and FTSE Global All Cap.

Vanguard typically seem to pay BoE rate minus their platform fee and the first 0.2% of interest on cash.

So if I put £1000 in LifeStrategy 60 right now I'm 60% in equities and 40% in bonds.

If I put £600 in FTSE Global All Cap and left £400 in cash I'm 60% in equities but have £400 earning a very safe 3.2% or so rather than hoping that bonds do what they're supposed to do.

Wondered if anyone else is thinking of doing anything similar?

I think it's worth asking why you hold bonds at all.

For many, it's to act as a buffer when the equity markets get hammered (think global recession) and central banks cut rates and/or investors flock to safe assets. Bonds tend to behave very favourably during these times - cash obviously won't do that.

A couple of points to consider:

1. Bonds have better future returns than they did a year ago
2. Short duration, high-quality bond funds have fallen less (-5%) than global equities (-9%) YTD, but being shorter duration, they may not rise in value as much as longer-duration bonds in the scenario outlined above.

[Derek Chevalier]

Phooey said:

plus I've been groomed into the mindset that equity over the long-term returns more than bonds..

Some recent research has questioned that belief (covered in the excellent Rational Reminder podcast)

https://rationalreminder.ca/podcast/211

" I think that the formal view that stocks are superior to bonds for long-term investors or even less risky for long-term investors was formalized and popularized in Jeremy Siegel's 1994 book, the first edition of his book. It's currently on the fifth edition, I think. I've got that one, the 2014 edition. Stocks for the Long Run is the title of the book."

"And so what McQuarrie does in this paper is corrects the data, Siegel's data. So he goes to Siegel's data sources and parses through them and corrects some errors like survivorship bias. He talks about things like failed railways and canals being excluded from the data. There's one large bank that made up an enormous portion of the stock index at one point in time that was excluded completely. It was a bank that failed or had its price decline substantially. That was not included in the index."

"On the bond data, they were using bond returns inferred from yields, I believe, as opposed to actual observed bond returns. So he goes and collects all of the actual data. The paper's kind of a triumph of the digitization of historical records. It's one of the things what McQuarrie mentions is that these data just weren't available previously. And he is also very careful to say that none of this is a knock on Jeremy Siegel who had pioneering work on these topics. It's a knock really on the availability of the current quality of data when he published his work originally."

"But using the updated and corrected data, McQuarrie finds only a 68% win rate for US stocks over bonds at a 30 year horizon and is a big knock against the Stocks for the Long Run concept where the longer you hold, the higher probability of success gets."

"At the 50 year horizon, he finds the same 68% win rate."

[BorkBorkBork]

Sticking cash into fixed rate bonds for the next twelve months at 4%+ has zero risk and those returns are probably better than you’ll do on anything else in the next 12 months. That’s where the sensible money is going.

Equities look like a huge risk for 2023, and possibly beyond.

[Derek Chevalier]

BorkBorkBork said:

That’s where the sensible money is going.

Depends how you define "sensible money", but most sensible people I know create a financial plan, build an investment engine to deliver that plan and don't tinker/market time/change asset allocation unless their personal circumstances change.

[Sheepshanks]

Be careful what you're looking at - I think OP is talking about bonds being held in funds. A chunk of my pension is in one of those, as I could retire at any time now so it was supposed to just sit there and bobble along.

However it plunged quite dramtically in value this year. That that is very unusual, almost unheard of, isn't much comfort to me.

It has come back a long way though - to such an extent that I now wish I'd put everything into it at its low point!

[Phooey]

Derek Chevalier said:

1. Bonds have better future returns than they did a year ago

That is a good point. I watched or read something recently that said similar, and that there could be a good argument for some of the VG Lifestrategy funds today..

[VR99]

Phooey said:

Derek Chevalier said:

1. Bonds have better future returns than they did a year ago

That is a good point. I watched or read something recently that said similar, and that there could be a good argument for some of the VG Lifestrategy funds today..

Ive been mulling over the same, ISA is currently 100% FTSE Global All CAP, the relatively high UK allocation in the VLS range is less of an issue for me at present and my thinking is the VLS 80 specifically would add some Bonds into the mix (I am currently 100% Equities across all investments)...however I am 41 so given my timeframe to retirement maybe I just do nothing......

[BorkBorkBork]

Derek Chevalier said:

BorkBorkBork said:

That’s where the sensible money is going.

Depends how you define "sensible money", but most sensible people I know create a financial plan, build an investment engine to deliver that plan and don't tinker/market time/change asset allocation unless their personal circumstances change.

That’s true, if the status quo is maintained. And those ‘sensible’ people you mention are more like sensible sheep. The prevailing ‘wisdom’ is to dollar average regardless of what the market is doing, because history suggests equities always win. Unless you invested in Japanese equities in the 90’s of course.

Now we have QT rather than QE, I just wonder what the future holds for global equities, not only in the short term, but also over the next decade or so. I know you’ll shove history down my throat again, but some caution is warranted at the moment. The S&P has shed 20% YTD and the NASDAQ over 30%. Will they bounce back? I know a lot of people are hoping they will.

[Derek Chevalier]

BorkBorkBork said:

because history suggests equities always win

Depends over what time period and what you are comparing against

BorkBorkBork said:

Unless you invested in Japanese equities in the 90’s of course

This highlights the importance of

a). Diversification, in terms of:

1. Geography (how have global equities performed since then?)
2. Asset classes (ditto Japenese bonds?)
3. Sources of equity returns (ditto value premium in Japan?)

b. Valuations

There is a link between valuations and future returns (see the value premium).

if you hold a highly valued and concentrated portfolio, history shows us that the downsides can be brutal. Mr Sheep with his SheePortfolio is insulated to a certain degree from this

BorkBorkBork said:

The S&P has shed 20% YTD and the NASDAQ over 30%. Will they bounce back? I know a lot of people are hoping they will.

The S&P is down around 8.5% YTD in GBP, broadly in line with global equities. That's surely noise?
Not sure of the relevance of the NASDAQ to a globally diversified portfolio?
As an aside, developed market small cap value is broadly flat YTD.

[Panamax]

Anyone who wants bonds should consider buying them NOW. You can get up to 6.5% yield from investment grade bonds which, OK, is negative to current inflation but should look pretty nice in a couple of years' time if/when inflation drops back towards the 2% target.

Other than to deal with foreseeable cash needs there's little reason to hold bonds. Over any 10 year period equities have historically performed better.

[Derek Chevalier]

Panamax said:

Over any 10 year period equities have historically performed better.

See my earlier post

[Jawls]

I agree with Derek that it’s all about where things fit into your investment plan. If bonds had a place in the plan 2 years ago, they probably still have a place now (assuming the plan is the same).

I don’t hold bonds, but I’m in my thirties. When I get closer to crystallization, I suspect bonds will form part of one of my buckets. And I don’t see cash as competing with bonds. It’s got a different role in the plan.

[ooid]

Bonds (from stable governments) are "risk free assets" so they work well in the portfolio to adjust your chosen risk. It is also about timing, so if you might need your money in the near future, bonds make sense as they are essentially nearly zero chance of going kaput (unlike meta or Netflix )

When you put 60% Equities, 40% bonds, your equity risk has been balanced by bonds.
But when you put 60% in equities, and 40% in cash (3.2% return?), looks like you are trying to balance the whole equity risk by cash - which is not technically a risk free asset-

[Jawls]

ooid said:

Bonds (from stable governments) are "risk free assets" so they work well in the portfolio to adjust your chosen risk. It is also about timing, so if you might need your money in the near future, bonds make sense as they are essentially nearly zero chance of going kaput (unlike meta or Netflix )

When you put 60% Equities, 40% bonds, your equity risk has been balanced by bonds.
But when you put 60% in equities, and 40% in cash (3.2% return?), looks like you are trying to balance the whole equity risk by cash - which is not technically a risk free asset-

Anyone who has held a bond fund of anything other than ultra short duration bonds this year, will tell you they’re not risk free.

Could hold individual bonds til maturity I guess.

[bitchstewie]

Jawls said:

Anyone who has held a bond fund of anything other than ultra short duration bonds this year, will tell you they’re not risk free.

Could hold individual bonds til maturity I guess.

Kind of my point

Inflation aside £100 cash in the bank will be £100 cash in the bank in a years time (plus interest) whilst a bond might be...