UK investors: what are you doing for fixed income?

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steve321
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UK investors: what are you doing for fixed income?

Post by steve321 »

We had some saving at NS&I which is supposed to be very safe. Now interest rates have dropped and they are close to zero. So we are considering other options; however, in order to get only slighly higher interest rates at some banks you need to leave your money there for one or 2 years. So if interest rates were to rise in the mean time, this would not have been a good plan. Gilts seem quite risky for the same reason.
So I was wondering what people are doing for fixed income.
Last edited by steve321 on Mon Apr 05, 2021 12:19 pm, edited 1 time in total.
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Re: UK investors: what are you doing fo fixed income?

Post by minimalistmarc »

steve321 wrote: Mon Apr 05, 2021 6:02 am We had some saving at NS&I which is supposed to be very safe. Now interest rates have dropped and they are close to zero. So we are considering other options; however, in order to get only slighly higher interest rates at some banks you need to leave your money there for one or 2 years. So if interest rates were to rise in the mean time, this would not have been a good plan. Gilts seem quite risky for the same reason.
So I was wondering what people are doing for fixed income.
I’m assuming you’ve used your premium bond allocations?
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Re: UK investors: what are you doing fo fixed income?

Post by steve321 »

minimalistmarc wrote: Mon Apr 05, 2021 6:27 am
steve321 wrote: Mon Apr 05, 2021 6:02 am We had some saving at NS&I which is supposed to be very safe. Now interest rates have dropped and they are close to zero. So we are considering other options; however, in order to get only slighly higher interest rates at some banks you need to leave your money there for one or 2 years. So if interest rates were to rise in the mean time, this would not have been a good plan. Gilts seem quite risky for the same reason.
So I was wondering what people are doing for fixed income.
I’m assuming you’ve used your premium bond allocations?
We haven't bought them in the past but indeed it looks like a good idea now, since having your money safe and with a 1% annual prize fund rate looks like a good bet. Besides you can withraw the money at all times I uderstand.
So yes the question would be how to invest one's money (the fixed income part) after one has used their premium bond allocations.
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minimalistmarc
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Re: UK investors: what are you doing fo fixed income?

Post by minimalistmarc »

steve321 wrote: Mon Apr 05, 2021 6:37 am
minimalistmarc wrote: Mon Apr 05, 2021 6:27 am
steve321 wrote: Mon Apr 05, 2021 6:02 am We had some saving at NS&I which is supposed to be very safe. Now interest rates have dropped and they are close to zero. So we are considering other options; however, in order to get only slighly higher interest rates at some banks you need to leave your money there for one or 2 years. So if interest rates were to rise in the mean time, this would not have been a good plan. Gilts seem quite risky for the same reason.
So I was wondering what people are doing for fixed income.
I’m assuming you’ve used your premium bond allocations?
We haven't bought them in the past but indeed it looks like a good idea now, since having your money safe and with a 1% annual prize fund rate looks like a good bet. Besides you can withraw the money at all times I uderstand.
So yes the question would be how to invest one's money (the fixed income part) after one has used their premium bond allocations.
It’s a tough one. I think you just have to accept that the fixed income part is there as a volatility dampener rather than to give any returns. If the stock market crashes you could always move it into equities if you feel like it.

I think nationwide might have some premium bond equivalent account.

https://www.moneydashboard.com/blog/ns- ... ternatives
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Re: UK investors: what are you doing fo fixed income?

Post by steve321 »

minimalistmarc wrote: Mon Apr 05, 2021 7:03 am
steve321 wrote: Mon Apr 05, 2021 6:37 am
minimalistmarc wrote: Mon Apr 05, 2021 6:27 am
steve321 wrote: Mon Apr 05, 2021 6:02 am We had some saving at NS&I which is supposed to be very safe. Now interest rates have dropped and they are close to zero. So we are considering other options; however, in order to get only slighly higher interest rates at some banks you need to leave your money there for one or 2 years. So if interest rates were to rise in the mean time, this would not have been a good plan. Gilts seem quite risky for the same reason.
So I was wondering what people are doing for fixed income.
I’m assuming you’ve used your premium bond allocations?
We haven't bought them in the past but indeed it looks like a good idea now, since having your money safe and with a 1% annual prize fund rate looks like a good bet. Besides you can withraw the money at all times I uderstand.
So yes the question would be how to invest one's money (the fixed income part) after one has used their premium bond allocations.
It’s a tough one. I think you just have to accept that the fixed income part is there as a volatility dampener rather than to give any returns. If the stock market crashes you could always move it into equities if you feel like it.

I think nationwide might have some premium bond equivalent account.

https://www.moneydashboard.com/blog/ns- ... ternatives
Thanks. When you say volatility dampener do you mean that it might be a good idea to have gilts or some bond fund, since they hopefully would go up in value if the stockbmarket crashes? Because apart from that reason, I don't see why I should take duration risk with say 10y gilts for negative real returns.
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Re: UK investors: what are you doing fo fixed income?

Post by Valuethinker »

steve321 wrote: Mon Apr 05, 2021 7:21 am
minimalistmarc wrote: Mon Apr 05, 2021 7:03 am
steve321 wrote: Mon Apr 05, 2021 6:37 am
minimalistmarc wrote: Mon Apr 05, 2021 6:27 am
steve321 wrote: Mon Apr 05, 2021 6:02 am We had some saving at NS&I which is supposed to be very safe. Now interest rates have dropped and they are close to zero. So we are considering other options; however, in order to get only slighly higher interest rates at some banks you need to leave your money there for one or 2 years. So if interest rates were to rise in the mean time, this would not have been a good plan. Gilts seem quite risky for the same reason.
So I was wondering what people are doing for fixed income.
I’m assuming you’ve used your premium bond allocations?
We haven't bought them in the past but indeed it looks like a good idea now, since having your money safe and with a 1% annual prize fund rate looks like a good bet. Besides you can withraw the money at all times I uderstand.
So yes the question would be how to invest one's money (the fixed income part) after one has used their premium bond allocations.
It’s a tough one. I think you just have to accept that the fixed income part is there as a volatility dampener rather than to give any returns. If the stock market crashes you could always move it into equities if you feel like it.

I think nationwide might have some premium bond equivalent account.

https://www.moneydashboard.com/blog/ns- ... ternatives
Thanks. When you say volatility dampener do you mean that it might be a good idea to have gilts or some bond fund, since they hopefully would go up in value if the stockbmarket crashes? Because apart from that reason, I don't see why I should take duration risk with say 10y gilts for negative real returns.
More realistically, in a bear market, they might not go down by much, and might hold their value.

Depends what causes the bear market.

I am holding ST Gilts funds in some locations, as there are no bank deposit-like alternatives in an ISA.

Near zero return is better than a negative return.
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Re: UK investors: what are you doing fo fixed income?

Post by steve321 »

Valuethinker wrote: Mon Apr 05, 2021 8:09 am
steve321 wrote: Mon Apr 05, 2021 7:21 am
minimalistmarc wrote: Mon Apr 05, 2021 7:03 am
steve321 wrote: Mon Apr 05, 2021 6:37 am
minimalistmarc wrote: Mon Apr 05, 2021 6:27 am

I’m assuming you’ve used your premium bond allocations?
We haven't bought them in the past but indeed it looks like a good idea now, since having your money safe and with a 1% annual prize fund rate looks like a good bet. Besides you can withraw the money at all times I uderstand.
So yes the question would be how to invest one's money (the fixed income part) after one has used their premium bond allocations.
It’s a tough one. I think you just have to accept that the fixed income part is there as a volatility dampener rather than to give any returns. If the stock market crashes you could always move it into equities if you feel like it.

I think nationwide might have some premium bond equivalent account.

https://www.moneydashboard.com/blog/ns- ... ternatives
Thanks. When you say volatility dampener do you mean that it might be a good idea to have gilts or some bond fund, since they hopefully would go up in value if the stockbmarket crashes? Because apart from that reason, I don't see why I should take duration risk with say 10y gilts for negative real returns.
More realistically, in a bear market, they might not go down by much, and might hold their value.

Depends what causes the bear market.

I am holding ST Gilts funds in some locations, as there are no bank deposit-like alternatives in an ISA.

Near zero return is better than a negative return.
IGLS appears to have lost money since last July, even accounting for dividends. Probably best ot hold cash, particlarly if like you say gilts might lose value too in a bear market.
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Re: UK investors: what are you doing fo fixed income?

Post by minimalistmarc »

steve321 wrote: Mon Apr 05, 2021 7:21 am
minimalistmarc wrote: Mon Apr 05, 2021 7:03 am
steve321 wrote: Mon Apr 05, 2021 6:37 am
minimalistmarc wrote: Mon Apr 05, 2021 6:27 am
steve321 wrote: Mon Apr 05, 2021 6:02 am We had some saving at NS&I which is supposed to be very safe. Now interest rates have dropped and they are close to zero. So we are considering other options; however, in order to get only slighly higher interest rates at some banks you need to leave your money there for one or 2 years. So if interest rates were to rise in the mean time, this would not have been a good plan. Gilts seem quite risky for the same reason.
So I was wondering what people are doing for fixed income.
I’m assuming you’ve used your premium bond allocations?
We haven't bought them in the past but indeed it looks like a good idea now, since having your money safe and with a 1% annual prize fund rate looks like a good bet. Besides you can withraw the money at all times I uderstand.
So yes the question would be how to invest one's money (the fixed income part) after one has used their premium bond allocations.
It’s a tough one. I think you just have to accept that the fixed income part is there as a volatility dampener rather than to give any returns. If the stock market crashes you could always move it into equities if you feel like it.

I think nationwide might have some premium bond equivalent account.

https://www.moneydashboard.com/blog/ns- ... ternatives
Thanks. When you say volatility dampener do you mean that it might be a good idea to have gilts or some bond fund, since they hopefully would go up in value if the stockbmarket crashes? Because apart from that reason, I don't see why I should take duration risk with say 10y gilts for negative real returns.
Yes, that’s what I mean. I’m 100% equities but in a very good DB pension so don’t feel any need for bonds. If I wasn’t in the DB pension I would probably hold 10 - 20% in a global bond ETF like VAGP
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Re: UK investors: what are you doing fo fixed income?

Post by steve321 »

minimalistmarc wrote: Mon Apr 05, 2021 9:52 am
Yes, that’s what I mean. I’m 100% equities but in a very good DB pension so don’t feel any need for bonds. If I wasn’t in the DB pension I would probably hold 10 - 20% in a global bond ETF like VAGP
All right, thanks. A global bond ETF is indeed an alternative to gilts; you'd have foreign currency exposure but that can work either way I suppose.
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Re: UK investors: what are you doing fo fixed income?

Post by galeno »

FI = 90% VAGU (USD-hedged world bonds) + 10% USD cash.
KISS & STC.
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Re: UK investors: what are you doing for fixed income?

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steve321 wrote: Mon Apr 05, 2021 6:02 am We had some saving at NS&I which is supposed to be very safe. Now interest rates have dropped and they are close to zero. So we are considering other options; however, in order to get only slighly higher interest rates at some banks you need to leave your money there for one or 2 years. So if interest rates were to rise in the mean time, this would not have been a good plan. Gilts seem quite risky for the same reason.
So I was wondering what people are doing for fixed income.
50% iShares SGIL unhedged global inflation-linked bonds

50% iShares SGLO unhedged global govt (G7 nations) bonds

Quite similar indexes & both intermediate duration, except one is inflation-linked. And I barbell bonds 50-50 with gold, that's my risk-off position and it's the best I can come up with.
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Re: UK investors: what are you doing for fixed income?

Post by steve321 »

Forester wrote: Mon Apr 05, 2021 12:55 pm And I barbell bonds 50-50 with gold, that's my risk-off position and it's the best I can come up with.
Sounds interesting, thanks. I suppose gold would likely help if there's inflation, which is not good for bonds, and vice-versa.
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Re: UK investors: what are you doing for fixed income?

Post by steve321 »

Forester wrote: Mon Apr 05, 2021 12:55 pm =
50% iShares SGIL unhedged global inflation-linked bonds

50% iShares SGLO unhedged global govt (G7 nations) bonds
Why did you go for unhedged as opposed to hedged funds? Do you believe that there's a higher chance of GBP depreciating vs other currencies as opposed to the other way round? Otherwise, unless you buy a lot of imported goods, my understanding is that it might be better to hedge(?)
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Re: UK investors: what are you doing for fixed income?

Post by Forester »

steve321 wrote: Mon Apr 05, 2021 1:46 pm
Forester wrote: Mon Apr 05, 2021 12:55 pm =
50% iShares SGIL unhedged global inflation-linked bonds

50% iShares SGLO unhedged global govt (G7 nations) bonds
Why did you go for unhedged as opposed to hedged funds? Do you believe that there's a higher chance of GBP depreciating vs other currencies as opposed to the other way round? Otherwise, unless you buy a lot of imported goods, my understanding is that it might be better to hedge(?)
I recall reading arguments for and against, I'm not sure that it matters too much. Vanguard VAGP is hedged and cheaper at 0.10%, perhaps I should use it instead of SGLO.
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Re: UK investors: what are you doing for fixed income?

Post by jg12345 »

Just for awareness you could use CDs, although they're not available within SIPP/ISA

Obviously because returns are pretty terrible but as someone else said 0 is better than nothing.

In this case is 0.6% before tax is better than nothing for 12 months CDs (maybe a bit more for 24 months)
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Re: UK investors: what are you doing for fixed income?

Post by Valuethinker »

steve321 wrote: Mon Apr 05, 2021 1:46 pm
Forester wrote: Mon Apr 05, 2021 12:55 pm =
50% iShares SGIL unhedged global inflation-linked bonds

50% iShares SGLO unhedged global govt (G7 nations) bonds
Why did you go for unhedged as opposed to hedged funds? Do you believe that there's a higher chance of GBP depreciating vs other currencies as opposed to the other way round? Otherwise, unless you buy a lot of imported goods, my understanding is that it might be better to hedge(?)
We hold it here, along w bulk of investment theory, that currency risk is a risk investors are not compensated for.

A foreign currency bond fund (ie unhedged) is primarily an investment in currency speculation because that will matter far far more to returns than any difference in bond yields.

Accordingly most people here use hedged bond funds. And unhedged equity funds.

The situation is a little different if you are resident in a small very open economy like the UK. The gains from international diversification are perhaps larger than for a US investor.

To get to a lower target percentage of foreign currency exposure, besides gbp hedged bond funds, one can use currency hedged equity funds.

I have explained in other threads what it is about the gilt index that makes it uniquely risky even against a gbp hedged global govt bond fund. It is the very long duration of the gilt index, which is unique.
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Re: UK investors: what are you doing for fixed income?

Post by Valuethinker »

Forester wrote: Mon Apr 05, 2021 5:55 pm
steve321 wrote: Mon Apr 05, 2021 1:46 pm
Forester wrote: Mon Apr 05, 2021 12:55 pm =
50% iShares SGIL unhedged global inflation-linked bonds

50% iShares SGLO unhedged global govt (G7 nations) bonds
Why did you go for unhedged as opposed to hedged funds? Do you believe that there's a higher chance of GBP depreciating vs other currencies as opposed to the other way round? Otherwise, unless you buy a lot of imported goods, my understanding is that it might be better to hedge(?)
I recall reading arguments for and against, I'm not sure that it matters too much. Vanguard VAGP is hedged and cheaper at 0.10%, perhaps I should use it instead of SGLO.
David Swensen takes you through why holding the inflation linked bonds of other currencies is not generally a good idea. One should read his personal investing book in any case.
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Re: UK investors: what are you doing for fixed income?

Post by steve321 »

Valuethinker wrote: Tue Apr 06, 2021 3:47 am
steve321 wrote: Mon Apr 05, 2021 1:46 pm
Forester wrote: Mon Apr 05, 2021 12:55 pm =
50% iShares SGIL unhedged global inflation-linked bonds

50% iShares SGLO unhedged global govt (G7 nations) bonds
Why did you go for unhedged as opposed to hedged funds? Do you believe that there's a higher chance of GBP depreciating vs other currencies as opposed to the other way round? Otherwise, unless you buy a lot of imported goods, my understanding is that it might be better to hedge(?)
We hold it here, along w bulk of investment theory, that currency risk is a risk investors are not compensated for.

A foreign currency bond fund (ie unhedged) is primarily an investment in currency speculation because that will matter far far more to returns than any difference in bond yields.

Accordingly most people here use hedged bond funds. And unhedged equity funds.

The situation is a little different if you are resident in a small very open economy like the UK. The gains from international diversification are perhaps larger than for a US investor.

To get to a lower target percentage of foreign currency exposure, besides gbp hedged bond funds, one can use currency hedged equity funds.

I have explained in other threads what it is about the gilt index that makes it uniquely risky even against a gbp hedged global govt bond fund. It is the very long duration of the gilt index, which is unique.
Yes I got that; however I once heard Larry Swedroe saying that currency risk works both ways. There's risk also in having too many investments in your own currency. If your own currency depreciates and you are buying imported goods, then you would have been better off having investments in foreign currencies.
In practice I haven't worked out how we spend in goods and services which are priced in foreign currencies. I suppose cars would be an example.
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Re: UK investors: what are you doing for fixed income?

Post by xxd091 »

Retd 17 years and made a big enough pile
65% of portfolio is Vanguard Global Bond Index Fund hedged to the Pound-been for many years
It’s main job is to reduce volatility in the portfolio which it has done successfully
The NAV has increased at over 4% pa which has been a bonus
Done the “ fixed income “ part of the portfolio for me
xxd091
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Re: UK investors: what are you doing for fixed income?

Post by steve321 »

xxd091 wrote: Tue Apr 06, 2021 5:33 am Retd 17 years and made a big enough pile
65% of portfolio is Vanguard Global Bond Index Fund hedged to the Pound-been for many years
It’s main job is to reduce volatility in the portfolio which it has done successfully
The NAV has increased at over 4% pa which has been a bonus
Done the “ fixed income “ part of the portfolio for me
xxd091
sounds like a good plan if your aim is to reduce volatility. How often do you rebalance? e.g. do you sell bonds to you buy stocks when they crash like they did last year?
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Re: UK investors: what are you doing for fixed income?

Post by steve321 »

xxd091 wrote: Tue Apr 06, 2021 5:33 am Retd 17 years and made a big enough pile
65% of portfolio is Vanguard Global Bond Index Fund hedged to the Pound-been for many years
It’s main job is to reduce volatility in the portfolio which it has done successfully
The NAV has increased at over 4% pa which has been a bonus
Done the “ fixed income “ part of the portfolio for me
xxd091
actually just looked VAGP up. It actually went down in March 2020 at the same time as stocks, so not sure whether it's a good volatility dampener after all.
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Re: UK investors: what are you doing for fixed income?

Post by Valuethinker »

steve321 wrote: Tue Apr 06, 2021 5:53 am
xxd091 wrote: Tue Apr 06, 2021 5:33 am Retd 17 years and made a big enough pile
65% of portfolio is Vanguard Global Bond Index Fund hedged to the Pound-been for many years
It’s main job is to reduce volatility in the portfolio which it has done successfully
The NAV has increased at over 4% pa which has been a bonus
Done the “ fixed income “ part of the portfolio for me
xxd091
actually just looked VAGP up. It actually went down in March 2020 at the same time as stocks, so not sure whether it's a good volatility dampener after all.
I can't remember where it was posted, here, but in at least 40% of instances, when stock market moved down so did US Treasury bond market.

As Nisiprius points out, there is a big difference as to magnitude. As we saw in March 2020.
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Re: UK investors: what are you doing for fixed income?

Post by Tourne »

steve321 wrote: Tue Apr 06, 2021 5:53 am
actually just looked VAGP up. It actually went down in March 2020 at the same time as stocks, so not sure whether it's a good volatility dampener after all.
Yes, VAGP went down in March 2020, as did most other bond funds globally. Such was the nature of that particular crisis. But intermediate-term index bond funds only went down around 1.4% for the month of March. Most equity index funds were down around 14-15% for the month (a bit more than 30% on 23 March!!). So I would argue that the bond fund was a pretty good “dampener” in this particular case, and even with the loss on the month presented a good opportunity to rebalance into equities. If you are looking for an index bond fund that will never go down when stocks also go down, you’re going to be looking for a long time. There are a number of new volatility-hedged ETFs in the US that claim they will protect you from any downside risk, but I remain unconvinced that they will operate as advertised and be worth their costs. If 2-4% volatility in bonds is uncomfortable for you, then better to look for cash/cd/premium bonds as an alternative for that portion of your portfolio, and just make sure you have a larger nest egg to offset the effects of inflation on your standard of living.
Wait, aren’t Bogleheads the original diamond hands?
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Re: UK investors: what are you doing for fixed income?

Post by Valuethinker »

Tourne wrote: Tue Apr 06, 2021 7:41 am
steve321 wrote: Tue Apr 06, 2021 5:53 am
actually just looked VAGP up. It actually went down in March 2020 at the same time as stocks, so not sure whether it's a good volatility dampener after all.
Yes, VAGP went down in March 2020, as did most other bond funds globally. Such was the nature of that particular crisis. But intermediate-term index bond funds only went down around 1.4% for the month of March. Most equity index funds were down around 14-15% for the month (a bit more than 30% on 23 March!!). So I would argue that the bond fund was a pretty good “dampener” in this particular case, and even with the loss on the month presented a good opportunity to rebalance into equities. If you are looking for an index bond fund that will never go down when stocks also go down, you’re going to be looking for a long time. There are a number of new volatility-hedged ETFs in the US that claim they will protect you from any downside risk, but I remain unconvinced that they will operate as advertised and be worth their costs. If 2-4% volatility in bonds is uncomfortable for you, then better to look for cash/cd/premium bonds as an alternative for that portion of your portfolio, and just make sure you have a larger nest egg to offset the effects of inflation on your standard of living.
Good answer.

Thank you.
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Re: UK investors: what are you doing for fixed income?

Post by steve321 »

Valuethinker wrote: Tue Apr 06, 2021 7:22 am
steve321 wrote: Tue Apr 06, 2021 5:53 am
xxd091 wrote: Tue Apr 06, 2021 5:33 am Retd 17 years and made a big enough pile
65% of portfolio is Vanguard Global Bond Index Fund hedged to the Pound-been for many years
It’s main job is to reduce volatility in the portfolio which it has done successfully
The NAV has increased at over 4% pa which has been a bonus
Done the “ fixed income “ part of the portfolio for me
xxd091
actually just looked VAGP up. It actually went down in March 2020 at the same time as stocks, so not sure whether it's a good volatility dampener after all.
I can't remember where it was posted, here, but in at least 40% of instances, when stock market moved down so did US Treasury bond market.

As Nisiprius points out, there is a big difference as to magnitude. As we saw in March 2020.
all right then, but in that case if you're looking for a diversifier in bear market, cash (in a safe account - read an article in the FT this morning saying that Italian and to some extent French banks are heavily invested in Government bonds, so they might not be that safe) might be better as is appears to be less correlated to stocks
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Re: UK investors: what are you doing for fixed income?

Post by steve321 »

Tourne wrote: Tue Apr 06, 2021 7:41 am
steve321 wrote: Tue Apr 06, 2021 5:53 am
actually just looked VAGP up. It actually went down in March 2020 at the same time as stocks, so not sure whether it's a good volatility dampener after all.
Yes, VAGP went down in March 2020, as did most other bond funds globally. Such was the nature of that particular crisis. But intermediate-term index bond funds only went down around 1.4% for the month of March. Most equity index funds were down around 14-15% for the month (a bit more than 30% on 23 March!!). So I would argue that the bond fund was a pretty good “dampener” in this particular case, and even with the loss on the month presented a good opportunity to rebalance into equities. If you are looking for an index bond fund that will never go down when stocks also go down, you’re going to be looking for a long time. There are a number of new volatility-hedged ETFs in the US that claim they will protect you from any downside risk, but I remain unconvinced that they will operate as advertised and be worth their costs. If 2-4% volatility in bonds is uncomfortable for you, then better to look for cash/cd/premium bonds as an alternative for that portion of your portfolio, and just make sure you have a larger nest egg to offset the effects of inflation on your standard of living.
I agree about cash; it seems less correlated to stocks then, and at current yields I don't see much difference in the returns of say a Direct Saver vs bonds.
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Re: UK investors: what are you doing for fixed income?

Post by Tourne »

steve321 wrote: Tue Apr 06, 2021 8:54 am
I agree about cash; it seems less correlated to stocks then, and at current yields I don't see much difference in the returns of say a Direct Saver vs bonds.
Right now, in the short term, I agree - there is not a huge amount of difference between the return on cash and the return on bonds, and there is a risk that bond prices go down. In the longer term, however, cash always loses to inflation, and bonds at least have a chance of keeping up with inflation (so you at least do not lose purchasing power - I am not so optimistic as to believe that bonds will actually have a positive real return as they did in the past). So invest we must, unless we have so much money that we don’t have to worry about trivialities like inflation.

I would definitely recommend you do a search on the BH site for “liability matching portfolio” and “bond ladder”. Even if you decide these are not for you, learning about them will help you to understand how some folks who are a lot more knowledgeable than I am on this subject have chosen to reduce the risk of their bond portfolios while also trying to keep up with inflation. FWIW, I decided not to go for either of the above strategies right now in the accumulation phase, but I will likely implement at least some elements of them during retirement. Best of luck on your journey.
Last edited by Tourne on Tue Apr 06, 2021 11:51 am, edited 1 time in total.
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Re: UK investors: what are you doing for fixed income?

Post by xxd091 »

I use the OIEC fund (VIGBBD)
Went down a bit but nothing like equities-that what’s dampening effect of bonds is supposed to do
So I touch nothing and can sleep at night
Portfolio now fully recovered and up some thousands
I sell whatever number of units I require from equities and/or bonds as needed once a year to keep asset allocation intact
Only have 3 funds-a FTSE tracker,a World ex U.K. tracker and aforementioned bond fund
Being an old and experienced investor I had sold some equity units at the top of the market in Jan for this year’s withdrawal
This is not my usual plan but could smell that the market was very “toppy”
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Re: UK investors: what are you doing for fixed income?

Post by steve321 »

xxd091 wrote: Tue Apr 06, 2021 11:51 am I use the OIEC fund (VIGBBD)
Went down a bit but nothing like equities-that what’s dampening effect of bonds is supposed to do
So I touch nothing and can sleep at night
Portfolio now fully recovered and up some thousands
I sell whatever number of units I require from equities and/or bonds as needed once a year to keep asset allocation intact
Only have 3 funds-a FTSE tracker,a World ex U.K. tracker and aforementioned bond fund
Being an old and experienced investor I had sold some equity units at the top of the market in Jan for this year’s withdrawal
This is not my usual plan but could smell that the market was very “toppy”
xxd091
That's very cool that you can sense when the market is toppy.
Why do you have a FTSE tracker and a World ex U.K. tracker as opposed to 1 World tracker? Do you overweight UK? I've seen arguments for and against (mainly against) home country bias.
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Re: UK investors: what are you doing for fixed income?

Post by Forester »

Insofar as GBP is a cyclical currency an unhedged global bond fund might be superior for when it's most needed - rebalancing in Q1 2009, Q1 2018, Q2 2020 etc.
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Re: UK investors: what are you doing for fixed income?

Post by xxd091 »

Been investing for many years and a single global equities index tracker was not available when I set out on this journey
It is an option that I have looked at but it would be a lot of hassle now to change things plus the single fund is more expensive
A Vanguard LifeStrategy fund is another option-one fund only but too much U.K. bias unfortunately
I think I will probably now keep these funds to the finish
One thing I might do is raise the ratio of equities to bonds but why change a winning formula?
My original premise was to access the US market-equities and bonds-biggest and most productive market in the world
U.K. is about 2-3% of world stockmarket so being overweight U.K. is a big gamble even though U.K. equities are composed of international companies
John Bogle saying that US citizens only needed US investments to be successful only emphasised the point
It all paid off for me

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Re: UK investors: what are you doing for fixed income?

Post by Valuethinker »

steve321 wrote: Tue Apr 06, 2021 8:50 am
Valuethinker wrote: Tue Apr 06, 2021 7:22 am
steve321 wrote: Tue Apr 06, 2021 5:53 am
xxd091 wrote: Tue Apr 06, 2021 5:33 am Retd 17 years and made a big enough pile
65% of portfolio is Vanguard Global Bond Index Fund hedged to the Pound-been for many years
It’s main job is to reduce volatility in the portfolio which it has done successfully
The NAV has increased at over 4% pa which has been a bonus
Done the “ fixed income “ part of the portfolio for me
xxd091
actually just looked VAGP up. It actually went down in March 2020 at the same time as stocks, so not sure whether it's a good volatility dampener after all.
I can't remember where it was posted, here, but in at least 40% of instances, when stock market moved down so did US Treasury bond market.

As Nisiprius points out, there is a big difference as to magnitude. As we saw in March 2020.
all right then, but in that case if you're looking for a diversifier in bear market, cash (in a safe account - read an article in the FT this morning saying that Italian and to some extent French banks are heavily invested in Government bonds, so they might not be that safe) might be better as is appears to be less correlated to stocks
In historically normal circumstances (which we are not, now). if you held cash instead of bonds you gave up 1-2% of your portfolio return, pa, for the holding period.

So 1-2% pa over 30 years compounds to quite a lot of money, if bonds are say 40% of your portfolio.

However the yield curve is much much flatter now than it has been historically, so the cost of holding cash is theoretically less. Unless interest rates go down even *further* :happy :happy :? :?
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Re: UK investors: what are you doing for fixed income?

Post by Valuethinker »

Forester wrote: Wed Apr 07, 2021 4:42 am Insofar as GBP is a cyclical currency an unhedged global bond fund might be superior for when it's most needed - rebalancing in Q1 2009, Q1 2018, Q2 2020 etc.
You are adding an asset class with a volatility greater than its expected return. You are basically taking a bet on currencies.

The main reasons to diversify bonds globally are:

- diversify as to credit risk (hopefully not a factor for UK investors)

- diversify as to interest rate risk. As I have posted several times, the UK gilt index has a 13 year duration, various foreign bond markets (govt) are more like 7-8 years

I don't see there is a strong logic holding unhedged foreign bonds.

Diversification of currency risk? Well I do that by holding global equities. And the FTSE100 itself is very much a global index (70% revenues earned outside GBP). Main problem with FTSE100, All-Share is that they are so tech-lite v global index (which includes US and Chinese internet giants plus Taiwan Semiconductor plus ASM Lithography etc).
Last edited by Valuethinker on Thu Apr 08, 2021 5:04 am, edited 2 times in total.
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Re: UK investors: what are you doing for fixed income?

Post by xxd091 »

Agree with all your posts Valuethinker
However was it not another of the great John Bogle,s sayings......
“Financial forecasters never tire of saying -This time it’s different!-in fact it rarely is”
Over many years of investing-am now 75-found his take on this particular statement to be accurate
Form a Investment Plan-write it down and stick to it
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Re: UK investors: what are you doing for fixed income?

Post by Valuethinker »

xxd091 wrote: Wed Apr 07, 2021 11:41 am Agree with all your posts Valuethinker
However was it not another of the great John Bogle,s sayings......
“Financial forecasters never tire of saying -This time it’s different!-in fact it rarely is”
Over many years of investing-am now 75-found his take on this particular statement to be accurate
Form a Investment Plan-write it down and stick to it
xxd091
Good advice.

I think the thing people are not ready for, mentally, is bad decades in stocks (and bonds). Holding your nerve when everything is down, down, down.

2000-2010 was a stinker, especially if you were non-US weighted (e.g. if you had a lot of UK funds, and I did, FTSE100 trackers were the cheapest). 2 brutal bear markets. The existential nature of the 2008/9 crash (literally the end of the world, in financial terms) kind of blurs memories - that shocking discovery, partly in retrospect, that we could have restaged the Great Depression with the collapse of major financial institutions ( but instead wound up with The Great Recession).

But that's kind of been forgotten in the 2010-2020 bull market. Driven by a handful of amazing companies - the big US internet commerce stocks.

The other thing which *is* different is that you are earning almost nothing on bonds. I was getting quite excited in the recent mini-bear market on bonds because US Treasury 10 year was back over 1.0%. Start of (finally) a move upward in interest rates? Seems the Central Banks can sit on that & stop it in its tracks. Covid-19 has stopped the normal interest rate progression.

Canada is interesting, because housing boom, on very low interest rates, has moved into bubble territory. As bad as 1989 (after which there was a huge housing crash - 1989 was a demographic boom as much as anything else, the last Baby Boomers (born 1964) clamboring on board the housing market).

Accepting a negative real return on your cash assets, or safe govt bonds, is painful, to say the least.
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Re: UK investors: what are you doing for fixed income?

Post by steve321 »

Valuethinker wrote: Wed Apr 07, 2021 10:19 am

However the yield curve is much much flatter now than it has been historically, so the cost of holding cash is theoretically less. Unless interest rates go down even *further* :happy :happy :? :?
As far as I see, if you are a long-term investor that doesn't help at all because the bonds you already hold will go up in price but then your fund will buy new bonds at even lower yields so in the long haul it will do even worse.
It's probably good if you're a good speculator however, especially with long term bonds.
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Re: UK investors: what are you doing for fixed income?

Post by Valuethinker »

steve321 wrote: Thu Apr 08, 2021 8:50 am
Valuethinker wrote: Wed Apr 07, 2021 10:19 am

However the yield curve is much much flatter now than it has been historically, so the cost of holding cash is theoretically less. Unless interest rates go down even *further* :happy :happy :? :?
As far as I see, if you are a long-term investor that doesn't help at all because the bonds you already hold will go up in price but then your fund will buy new bonds at even lower yields so in the long haul it will do even worse.
There is definitely a crossover point there, and it's been discussed a lot here.

As a rule of thumb (only) match the duration of your fixed income investments to the duration of your cash needs. So if buying a car next month- current account. If buying a house next year - CD or other bank term deposit. If investing for retirement - probably the 7-8 year duration of most government bond funds (but *not* a gilt fund where the whole index has a duration of 12-13 years) works.
It's probably good if you're a good speculator however, especially with long term bonds.
There is a good argument that the best hedge to an equity portfolio, for a USD investor, is the 30 year Treasury bond. (the 30 year zero coupon US T Bond is a very exciting instrument ;-)).

Vineviz makes that point periodically.

For me, I'd rather own (close to) the index and let someone else figure out the "optimum".
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