bogleeuro wrote: ↑
Fri Oct 18, 2019 11:11 am
Thank you for the replies, most appreciated.
Regarding the bonds - so I'm taking it that there isn't really a solution to this problem, except reduce the withdrawal % and wait to see if things improve?
Yes. But beware Japan. It's been waiting to improve for 20+ years. If you look at European economy & demographics there are a lot of similarities to Japan. The Italian banking system looks for example a lot like the Japanese one in the 1990s. However to be fair there has been no giant debt bubble in most countries.
One thing that does confuse me and I'm sure it's something stupidly basic:
Vanguard Euro Government Bond Index Fund Investor EUR Accumulation YTD 9.25% - what's happening here if everything has a negative yield?
https://www.morningstar.es/es/funds/sna ... 4SGN&tab=1
I tried the portfolio with only Global Bonds and the results were worse since 2012 (I know this time frame is nothing..) but I had imagined it would be better, again because of the negative yield bonds in Europe.
Global bonds hedged into Euros will have similar returns to a Eurozone bond fund of similar credit risk. Global bonds unhedged probably outperformed by quite a fair bit due to weakness of the Euro.
YTD performance has nothing to do with yield. If interest rates fall, then bond prices go up (and bond yields fall), no matter what happens (assuming no credit risk issues).
There's 2 components to returns from a bond. One is the coupon, usually fixed, usually paid either once or twice a year. For example a UK gilt (govt bond) will typically pay a 2% coupon, so £100 of face value of the bond will pay £1 twice a year at legally defined dates (gilts pay semi annually, German govt bonds pay once a year).
The other though is the price you pay, knowing that you get $100 or £100 or EUR 100 back at the maturity date. And that can be a positive return (capital gain) if you pay less than $100, and a negative return if you pay more than $100.
A negative Yield to Maturity just means that say you paid $115 for a 1% coupon bond, due in 5 years. Your total outlay is $115. Your total receipts will be 5 x $1 coupons over time, plus $100 face value/ par value/ redemption value at maturity date. Thus $105 is less than $115, so your Yield To Maturity is negative. How much it is negative in per cent per annum is something called the internal rate of return (in other contexts) and is usually worked out by trial and error by the computer.
Now if the yield to maturity on a bond moves from +5% Yield to -5% Yield , for example, the price will have gone up a lot. For a new buyer of that bond that's an issue because say the bond price went from 95 to 115. Then you are going to buy in at 115 but you know you only get back 100 at redemption/ maturity. So you are going to lose 15.
But for someone who already owned that bond at 95, they have pocketed a $20 capital gain *plus* whatever coupon the bond was paying over that time period.
So if you already own the bond fund, you profited from the fall in interest rates. The +9.6%. As markets have become aware that the Eurozone is teetering on the edge of recession, expectations of interest rates have fallen, thus bond prices moved up.
But going forward, you might get say 2 EUR per 100 EUR of face value of bonds in coupons (if that is the average coupon on the bonds in the fund), but you cannot expect much price appreciation. Indeed your total return could well be negative (if the yield is now negative).
It's a rough estimate that the future return of a bond is going to be its Yield To Maturity, because lots of things can happen on the way. But the YTM calculation, which takes into account both the coupons the bond will pay (normally fixed), the time left to maturity, and the price paid (a discount or premium to the $100 face value of the bond, which is what the bond will redeem at ie $100), is as best as you can get.
If you buy a German 10 year bond right now, and yield is -1.0%, then you can expect on average a return pa of -1% over the next 10 years.
Inflation linked bonds are somewhat weirder, because both your coupon and redemption value are indexed to inflation. A negative real yield means something slightly different - but the implications in terms of reducing capital are the same.
glorat wrote: ↑
Fri Oct 18, 2019 9:30 am
To make a serious point of this, it seems a bit complex to try to cover the whole world with multiple funds when you can do the same with 1 or maybe 2 low cost funds. One is at risk of missing something (like Canada) or accidentally tilting. At minimum, pick a global index (e.g. MSCI World) and mirror it (e.g https://www.msci.com/world
). Unless you really were deliberately constructing your own weightings...
No, the only reason was the reduced TER than say using 'Vanguard FTSE All-World UCITS ETF USD Acc', I did a quick calculation and it was about €8k/year saving I think. But I agree, I don't want to make it more complex than it needs to be and I definitely don't want to miss out anything (Canada!), I had just seen this mix in a few places and copied it..
I also got better results using this 5 fund approach to equity than using the iShares World & Emerging back tested since 2012 (101% vs 93%) but again, I know this a very short period of time.
So I will update the equity so as not to miss anything:
Code: Select all
[54%] World: iShares Core MSCI World UCITS ETF USD (Acc) (EUR) IE00B4L5Y983 - 0.20%
[6%] Emerging: iShares Core MSCI EM IMI UCITS ETF USD (Acc) (EUR) IE00BKM4GZ66 - 0.18%
The reason for mentioning Brexit - Old Mutual said that I can no longer have the GB LifeStrategy in a no deal situation and that's what started the ball rolling on looking for alternatives. Though, back testing to 2012 my 'new' portfolio with ishares equity does worse (93% vs 115%) and LS60 is less volatile apparently.. not sure why, maybe the UK tilt on LS60 has been favorable over this time? I wanted to recreate a Euro version but maybe I should just stick with LS60 (if I can, thank you Brexit).
OK so Brexit is only an administrative inconvenience? Hard to believe it will become impossible to buy UCITS VI compliant funds - they will just get a listing on a European exchange.
I would not worry about Canada, much. 40% of the index is 5 banks + some smaller financials. Another 40% is natural resources companies, mostly oil & gas. Having it/ not having it is not going to be a major source of diversification.