I know this now but when I first started investing ( large sum from a house sale ) I went with the safest option I felt was for me ie 60/40 split portfolio and NO ONE mentioned that it was a bad idea or pointed out the risks involved if rates went up, my portfolio went down a LOT. Seems so obvious now so why werent all the finantial experts highlighting the dangers when it was still time to get out of bonds? This is not aimed at you btw, just my experience. So I am now making my own decisions and making mistakes but with a mind set that I will learn and get better at investing and eventually get back the money I lost and make a better portfolio in time. The ready made portfolios that I bought are still down 20 to 30% whilst my own basic index choices are 2 to 3% down, really makes me NOT want to pay anyone to manage my money. Shame in the UK we are not taught more about this stuff at school so that we can do it right from the start rather than learning about it all once its too late lol.
Financial education in this country is dismal. Having good mentors along with excellent channels such as this one are priceless. ATB with your journey.
Totally agree. I was advised as I got nearer age 60, move the 60/40 to more of a 35/65 split in favour of bonds, so I wouldn't be over exposed to equities. Result, my 'safe' portfolio got hammered as I didn't know what is being well explained in this video about bonds. Agree also about UK schools. Success achieved in my life and career has almost been in spite of school. We need to teach financial planning at school age.
Interesting video. I contacted my pension provider 3 years ago to say I was planning on early retirement and they promptly "de-risked" my pension pot by moving a large chunk into bonds. Luckily, I wasn't happy with this....not because I knew bond prices would collapse, but because I didn't see how the "low risk" strategy would give the returns I needed to sustain my pension for 30 years....so I took the decision to move back into equities and keep some in cash. This saved me tens of thousands of ££s when bonds tanked last year. I'm now thinking some bonds might be a good idea!
Thanks Chris. I can't believe people bought bond funds with a near zero base rate. There was only one way the price of the bond fund could go from there. Even the banks bought in. Stunning.
I know Nick. The problem was, there were few alternatives with the requisite capital protection. Things like pension funds always need interest flows to pay for today's pensioners.
There was actually two ways yields could go. Negative, as many commentators at the time were predicting, and was happening in some Scandinavian countries, or up..... Personally I wouldn't have been afraid of bonds, but would have carefully positioned the maturity towards short duration.
Hi Chris, you have a great channel going. I bought some UK gilts one 2yr the other 4yr as part of my SIPP. I will hold till maturity. I’am learning the benefits bonds can have in my portfolio although bond funds have been uneasily correlated to equities this past year or so.If I was to add a bond fund do you think a managed or index linked fund would be best. Keep up the good work you are one of the few guys I pay any attention to on TH-cam.
Thanks very much Gary. We’ve seen index linked bonds suffer quite badly in the last quarter. I generally prefer a more balanced approach than just focussing on one type of bond.
Thank you Chris, another great video as always! You are my go to Financial Advice channel on TH-cam now. I love your comprehensive and balanced approach whilst weighing up the associated tax considerations. Would you be able to do a video on investing in Bond Funds? I invest in the i shares corporate bond index fund and would be keen to learn more about the Pros & Cons vs buying Individual Bonds. Thank you!
Thanks Gemma! Really glad to hear that. It may not answer every specific question, but I do have a video from a year or so ago that looks at how to build a bond portfolio for income. It’s called How to Create Income Using Bond ETFs. The main considerations of bond funds vs direct holdings are: Risk (high quality government bonds held from issue to maturity are virtually risk free, whereas assets bought second hand, potentially at a premium to nominal will carry a loss to redemption risk) Tax efficiency (directly held gilts can sold CGT free) Accessibility (it is easy to invest into a bond fund. It is not so easy to buy bonds from issue, especially when competing with institutional investors) Diversification (it is easier to achieve diversification of underlying assets in a bond fund).
Amazing thank you so much Chris! I’ll definitely check out this video! I’ve still not maxed out my ISA allowance so tax is less of an issue but it’s good to know the tax benefits of GILTS if I do (especially as I am a higher rate taxpayer).
Hi Chris. Informative as ever. I'm confused over whether buying individual bonds or a bond fund. Ypu have no control over the sale or maturity dates within the Vanguard Global Agg Bond or their LS60 ( both of which are down). I get the purchase of short duration gilts on II and get a return on their capital gain. (But haven't had the confidence to act on that). Is it only certain bond funds that make sense now ? The content of these videos is excellent. Keep it up
Hi Gordon. Thanks for your kind words. You are correct that you have no control over the purchase prices, or indeed the assets held, in a bond fund. You are relying on the expertise of a fund manager and their team to make the best decisions for the fund. You would have greater control by purchasing individual assets, but naturally there would be less diversification. Generally though, asset managers are seeing greater opportunity in high quality bonds now as an asset class. High quality bonds being investment grade bonds - those that have a low default risk and would act as a safe haven from turbulent equity markets. High yield bonds (lower credit quality) would behave like equities do in a volatile market.
I have a Liverpool Victoria Investment Bond which I took out in the year 2000, I put £10,000 into it at the time and it’s worth £33,760 as of today, the returns in the past couple of years have been pretty non existent, I don’t need the money but just wanted to know if it’s worth keeping it or would you sell it? Thanks Mike.
I prefer NSI (cash) premium bonds, gives a couple £100,000 and its current 4.65% rate of return is good. I also have an emergency fund easy accessible. Unlike a bond or a guilt which im tied into for a year +. I'm of the mind that its worth just buying ETFs and when a crash occurs i dip into my Premium bonds and wait for the ETFs to bounce back (which it will) then fill the Premiums up again.
Yes the rate of return on cash is better than it has been for a long time. Sadly, as explained, there is still zero capital growth potential due to lack of duration.
@@sweetfreedomGB its not always about making money. Its about having funds available when you need them. Its about having a stable environment for money you have saved all your life for. Simply putting everything in an investment portfolio is not savvy. Diversity is key to making sure you are proactive against RISK.
Hi Chris, I’m starting to learn about bonds and looking at buying more for my SIPP (interactive investor). So far I’ve added short term gilts, TR28 6% and T26. I’ve also added some high yield US corporate bonds with 5.5% yield (SHYU). Any thoughts on these choices or suggestions what else to look at? I want stability with some modest income / growth. Thanks.
Hi Steve. My suggestion would be to remain in the investment grade end of the corporate bond market. If you go too low down the credit spectrum you don’t get negative correlation with equities, which is what you’re seeking in a mixed portfolio.
Hi there. First, you'd need to check if your SIPP allows you to buy bonds direct to build the ladder. Most pension plans are not true SIPPs and won't provide all of the investment powers. Second, you'd need to buy the gilts at issue through a broker.
Hi Chris... As a balanced risk investor I've contemplated leaning toward a lower risk which comprises more bond and cash until we see market and economic conditions improve. I'm in my mid 50s. Any thoughts or potential drawback in taking this approach??
Hi Paul. Normally I’d say that the time to invest in equities is when you feel like waiting it out to see if markets improve - that’s a sure way to miss out on gains and buy the market while it’s high. Currently though, there does appear to be value in bonds that we haven’t seen for quite some time.
Funnily enough, ive just started to buy back into Bond funds (Invesco Monthly Income Plus strategic bond fund to be precise), so it looks like my timing might be fortuitous. I think a mild recession is likely and inflation falling at a reasonable lick. As always, time will tell, and ultimately, no one really knows whats going to happen. Thanks for the great video.
Hi Paul. Well there is the potential to buy securities directly, but if you are looking for a fund, a global aggregate bond fund is a good proxy for international bonds, slanted towards the high quality credit end.
Chris thankyou for the reply. Ive Subscribed to your channel. Very informative and clear information. Massively building my financial acumen with your help.
If BofE rate now hypothetically stayed fixed indefinitely at the current rate. Which would give best return money market or gilts, assuming equal charges/platform costs? Isn't choosing gilts just a gamble that on average the BofE rate will lower than current over the chosen horizon?
Longer dated stock has always produced better returns, as highlighted by the Vanguard research shown in the video. If, hypothetically, rates never changed, and the government knew they were never going to change, longer dated securities would always pay more than shorter dated ones, because the only way of enticing people to tie up their money for longer would be to pay them a higher interest rate. As we know, that's never going to be the case, which is why we sometimes see inverted yield curves. In an environment where rates never changed, I would always prefer gilts because of the security of the issuer.
SO what do you think about the sp500 price over the next year or 3? There is SO much borrowed money still on the index and in the hands of the companies themselves that if rates stay at these levels people will start to de leverage driving prices down hard? Or will the fed stop that by lowering rates again? And investing in it from the UK obviously the other big issue to pound to dollar exchange rate. Who knows where this will end. Personally I am in savings 1 year with 60% of my pot right now, 40% invested vwrl or similar with a tiny bit of bond exposure, I'm really wondering if I should put that 40% into a 50/50 split bond/equities and really de risk for the time being .. ready then to jump right into equities when the crash comes...
Trouble with this last comment a about buying shares when in recession (which is not bad advice) shares have now reached an all time high and we are technically in a recession and shares should not be in a position of all time high in a recession. Should we be buying shares at an all time high? Why buy shares now, when it is being recommended to put money (cash) into bonds? Here we are told that investors generally buy bonds when markets are falling as they want something safe as shares fall. Expansion and contraction. Fine. But is this a time of contraction or expansion today. We are 6 months down the line. Is it time then to our savings into bond as recommended or shares when they are at an all time high and interest rates that are predicted to fall? If only the markets were not at an all time high. Bonds then are better to buy than shares at the moment? Shares look like they could fall? Or if interest rates fall, that will lead again to expansion hence more interest rate rises and a fall in bonds?
So basically bonds win over the long term as long as interest rates don't go up? I am old enough to have paid 17.5% on my mortgage so I am still a bit sceptical of bonds of more than 1 year atm. Given the state of things I think there may be more pain to come rates wise, So I'm mostly 1 year bonds and a smaller amount of 2 to 3 year bonds all paying 5 to 6%. The 30 year bonds are paying 4% which I don't think are high enough, I can't see rates going so low as they have been for the last decade ever again after seeing the damage it's done. But at the same time the gov needs to keep the national debt under control too so who the heck knows lmfao. Thanks for your insights into investing , not just this video but I have learned a lot from many of your other ones.
If long term rates are lower than short term rates, that means the yield curve is 'inverted'. It's a sign that rates are expected to fall because the economy is weak.
HI Chris, great video, one i might have to watch a few times to fully understand. Could you elaborate a little on the area of pensions, as many i suspect I was auto enrolled in to a lifestyle pension to de - risk close to retirement, and a large allocation to UK gilts in the current climate has in fact increased risk and the gilts have free falled and still not recovered where equities have. Its also a little difficult to understand the purchase of gilts for a pension as the coupon is somehow re invested in the collective fund to keep its value somehow (which it hasn't). I know you cant give direct advice but where might we look to get evidence to decide whether to crystalise losses and move back into equities? or is there potential for recovery if interest rates fall ? also is there any culpability of pension providers with these de risking strategies which havent done what they said on the tin ? Thanks David
Hi David. In my opinion, now wouldn't be the time to sell bonds that have fallen in value - the risk adjusted return prospects of high quality bonds are better than equities in the short to medium term. Whilst there probably should be better education out there, pension providers would just point to the long term volatility of bonds being lower than equities... Bonds had overperformed for a long period following the Global Financial Crisis, but everything eventually reverts to mean, and that is what's happened. I was negative on heavy bond exposure and sceptical about lifestyling options prior to 2022 as I explained in an old video called 'Don't De-Risk'. I'm now less negative on bonds though.
Hi Chris thanks for lengthy reply, most kind !. Black rock 15 year is still falling past-35% very painful when close to retirement, fact sheet shows level 5, whilst equities 4, so hard to see this as de risking. Fingers crossed they improve, also difficult to see how this fund works ...as the coupon is back in the fund somehow but this doesnt improve the market value on the surface it seems.
Great to see this video. There is normally way too much focus on 100% equity portfolios on TH-cam, even though there have been significant periods in history where a mix of stocks and bonds has outperformed. Its nice to see the case for bonds presented.
That's a great tip about the value of a gilt changing by 1% for every year until maturity for every 1% decrease in interest rates. I have considered a simple hedge of a 50/50 split between a long duration gilt of say 20-25 years paying around 5% coupon and putting the other half into money market funds. That way if there is a shock and rates rise the money market fund helps to offset it, I would also buy more money market funds with the gilt coupons. Then later as rates fall you could drip feed the cash from the money market funds into equities then at some point if rates fall to say around 4% in 3-5 years you could start selling the gilts at around 25%+ profit and drip feed that back in to equities. Does that sound logical or is there a better way to do it do you think? (for simplicity lets say its all within a tax fre wrapper, as gilt coupons would be taxed as income etc...)
Hi Luke. Remember to not confuse term to maturity with duration - they're different things as mentioned in the vid. It's certainly good to diversify. The short dated holdings may not offset a fall on longer duration holdings, because they lack the capacity to provide much in the way of capital growth - they would just not fall in the way longer duration bonds would if rates rose. Also, bear in mind it's not always easy to buy small amounts of new gilts from issue. Any strategy could potentially work if the conditions are favourable to it. How things play out in reality is what we can never predict.
@@chrisbourne-retirementplanner Good points, I was looking at pre existing gilts for example T46 going on the assumption as new gilts get issued the price of existing gilts should adjust to offer similar value once you work out the "dirty" price etc and know what your real return is. I do think one more rate hike of 0.25% is on the cards and after that a pause until inflation really is under control but anything could happen. Thanks for the tips and keep up with the great content 👍
The business cycle or less commonly known the 'debt cycle' takes roughly 7-10 years (depending on the source) and there is an underlying 'long term debt cycle' which really dictates the direction of markets. Bonds have been in a bull market for better part of 40 years, fueled by easy money and the onset of QE and more recently 'helicopter money'. A relentless game of kick the can down the road. Eventually too much debt leads to excesses and mal investment and rising interest rates expose those who were swimming naked.
Bond ETF shouldn't be recommended in brokerages... The defence approach their suppose to bring, gets shattered when good times come. I don't the use of seeing the value goe down so easily, and not being reciprocated the other way around.
Personally I don't trust banks or governments so I invest in something I can physically hold in my hand. Gold is good, other bullion comes with a 20% VAT burden. But consider copper ot similar commodities.,
@@megasefton5876 Imagine it this way, instead of paying into a pension out of taxed income (income and NI) you 'sacrifice' part of your salary and instead this is paid into your pension and means you are not taxed on it, thus receiving tax relief at your 'marginal rate of income tax' i.e., 20, 40 or 45%, in many cases higher than this if you fall within certain income 'traps'. You may be able to talk to your HR department about this, or your firm may pay for advisers to look after your workplace pension who you can ask about this. I hope this helps.
But a fixed term bond, placed into a bank, usually up to 5 years will return a higher interest rate. Up to £85,000 per bank is government protected, in the un-likely event of a bank failure. So it is more or less as safe as a gilt.
Some long term bank deposits will pay similar or slightly higher returns to treasury bonds. They cannot be sold on the secondary market though, so there is no potential for capital gain. The strength of the issuer is also more of a concern. As you quite rightly say, the compensation limit is £85k. You wouldn't have the same concern with gilt stock - the government has not defaulted on a payment in its history since gilts were first issued in the 1600's. We can't compare the security of a commercial enterprise with that of a government.
If My wife pays all of her salary into her workplace pension and I buy a 2nd home in her name and she earns £1000 per month / £12,000 per year which is under the £12,750 you can earn before paying tax would that mean she wont have to pat tax on the income from her 2nd property please?
If her total earnings are above £12,570 then she’ll pay tax on the rental income. She will at least be getting tax relief on the salary she’s paying into her pension though.
That’s exactly what I’m about to do. My wife doesn’t work so the rental income will be within her personal allowance and tax free. I plan to start drawing my pension and taking £16k / year which will also be tax free (my personal allowance + 25% TFC), then top up what’s needed from savings / ISAs. In theory we’ll be living tax free…let’s see!
Thanks again Chris for another concise easy to listen to video. In the current climate it's smack in line with my thinking having just loaded my portfolio with TR25 & TR28 UK gilts. Giving me over 5% risk free yield at the moment, and in my view will increases as interest rates peak and start to come down, pushing bond price up.
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I know this now but when I first started investing ( large sum from a house sale ) I went with the safest option I felt was for me ie 60/40 split portfolio and NO ONE mentioned that it was a bad idea or pointed out the risks involved if rates went up, my portfolio went down a LOT.
Seems so obvious now so why werent all the finantial experts highlighting the dangers when it was still time to get out of bonds?
This is not aimed at you btw, just my experience.
So I am now making my own decisions and making mistakes but with a mind set that I will learn and get better at investing and eventually get back the money I lost and make a better portfolio in time.
The ready made portfolios that I bought are still down 20 to 30% whilst my own basic index choices are 2 to 3% down, really makes me NOT want to pay anyone to manage my money.
Shame in the UK we are not taught more about this stuff at school so that we can do it right from the start rather than learning about it all once its too late lol.
Financial education in this country is dismal. Having good mentors along with excellent channels such as this one are priceless. ATB with your journey.
When an asset class has fallen 20-30%, it's a good time to assess its current value and upside potential.
Totally agree. I was advised as I got nearer age 60, move the 60/40 to more of a 35/65 split in favour of bonds, so I wouldn't be over exposed to equities. Result, my 'safe' portfolio got hammered as I didn't know what is being well explained in this video about bonds.
Agree also about UK schools. Success achieved in my life and career has almost been in spite of school. We need to teach financial planning at school age.
Interesting video. I contacted my pension provider 3 years ago to say I was planning on early retirement and they promptly "de-risked" my pension pot by moving a large chunk into bonds. Luckily, I wasn't happy with this....not because I knew bond prices would collapse, but because I didn't see how the "low risk" strategy would give the returns I needed to sustain my pension for 30 years....so I took the decision to move back into equities and keep some in cash. This saved me tens of thousands of ££s when bonds tanked last year. I'm now thinking some bonds might be a good idea!
Indeed Steve. The main asset classes will ebb and flow between opportunity and risk.
Yip, glide scope to buying annuity. This is the lifestyle approach. I moved out this just before I hit the age of transitioning to bonds
Thanks Chris. I can't believe people bought bond funds with a near zero base rate. There was only one way the price of the bond fund could go from there. Even the banks bought in. Stunning.
I know Nick. The problem was, there were few alternatives with the requisite capital protection. Things like pension funds always need interest flows to pay for today's pensioners.
Long horizon
There was actually two ways yields could go. Negative, as many commentators at the time were predicting, and was happening in some Scandinavian countries, or up..... Personally I wouldn't have been afraid of bonds, but would have carefully positioned the maturity towards short duration.
Hi Chris, you have a great channel going. I bought some UK gilts one 2yr the other 4yr as part of my SIPP. I will hold till maturity. I’am learning the benefits bonds can have in my portfolio although bond funds have been uneasily correlated to equities this past year or so.If I was to add a bond fund do you think a managed or index linked fund would be best. Keep up the good work you are one of the few guys I pay any attention to on TH-cam.
Thanks very much Gary. We’ve seen index linked bonds suffer quite badly in the last quarter. I generally prefer a more balanced approach than just focussing on one type of bond.
Thank you Chris, another great video as always! You are my go to Financial Advice channel on TH-cam now. I love your comprehensive and balanced approach whilst weighing up the associated tax considerations. Would you be able to do a video on investing in Bond Funds? I invest in the i shares corporate bond index fund and would be keen to learn more about the Pros & Cons vs buying Individual Bonds. Thank you!
Thanks Gemma! Really glad to hear that. It may not answer every specific question, but I do have a video from a year or so ago that looks at how to build a bond portfolio for income. It’s called How to Create Income Using Bond ETFs. The main considerations of bond funds vs direct holdings are:
Risk (high quality government bonds held from issue to maturity are virtually risk free, whereas assets bought second hand, potentially at a premium to nominal will carry a loss to redemption risk)
Tax efficiency (directly held gilts can sold CGT free)
Accessibility (it is easy to invest into a bond fund. It is not so easy to buy bonds from issue, especially when competing with institutional investors)
Diversification (it is easier to achieve diversification of underlying assets in a bond fund).
Amazing thank you so much Chris! I’ll definitely check out this video! I’ve still not maxed out my ISA allowance so tax is less of an issue but it’s good to know the tax benefits of GILTS if I do (especially as I am a higher rate taxpayer).
Hi Chris. Informative as ever. I'm confused over whether buying individual bonds or a bond fund. Ypu have no control over the sale or maturity dates within the Vanguard Global Agg Bond or their LS60 ( both of which are down).
I get the purchase of short duration gilts on II and get a return on their capital gain. (But haven't had the confidence to act on that).
Is it only certain bond funds that make sense now ?
The content of these videos is excellent. Keep it up
Hi Gordon. Thanks for your kind words. You are correct that you have no control over the purchase prices, or indeed the assets held, in a bond fund. You are relying on the expertise of a fund manager and their team to make the best decisions for the fund. You would have greater control by purchasing individual assets, but naturally there would be less diversification. Generally though, asset managers are seeing greater opportunity in high quality bonds now as an asset class. High quality bonds being investment grade bonds - those that have a low default risk and would act as a safe haven from turbulent equity markets. High yield bonds (lower credit quality) would behave like equities do in a volatile market.
I have a Liverpool Victoria Investment Bond which I took out in the year 2000, I put £10,000 into it at the time and it’s worth £33,760 as of today, the returns in the past couple of years have been pretty non existent, I don’t need the money but just wanted to know if it’s worth keeping it or would you sell it?
Thanks Mike.
I prefer NSI (cash) premium bonds, gives a couple £100,000 and its current 4.65% rate of return is good. I also have an emergency fund easy accessible. Unlike a bond or a guilt which im tied into for a year +. I'm of the mind that its worth just buying ETFs and when a crash occurs i dip into my Premium bonds and wait for the ETFs to bounce back (which it will) then fill the Premiums up again.
Yes the rate of return on cash is better than it has been for a long time. Sadly, as explained, there is still zero capital growth potential due to lack of duration.
Oh dear
@@sweetfreedomGB its not always about making money. Its about having funds available when you need them. Its about having a stable environment for money you have saved all your life for. Simply putting everything in an investment portfolio is not savvy. Diversity is key to making sure you are proactive against RISK.
Hi Chris, I’m starting to learn about bonds and looking at buying more for my SIPP (interactive investor). So far I’ve added short term gilts, TR28 6% and T26. I’ve also added some high yield US corporate bonds with 5.5% yield (SHYU). Any thoughts on these choices or suggestions what else to look at? I want stability with some modest income / growth. Thanks.
Hi Steve. My suggestion would be to remain in the investment grade end of the corporate bond market. If you go too low down the credit spectrum you don’t get negative correlation with equities, which is what you’re seeking in a mixed portfolio.
@@chrisbourne-retirementplanner Cheers Chris 👍 Btw, I follow a lot of finance channels on YT and honestly yours is one of the best. Top job.
Would it be prudent to start a bond ladder?
How would one go about this, in a SIPP?
Does the huge glut of TLTs and gilts affect future value?
Hi there. First, you'd need to check if your SIPP allows you to buy bonds direct to build the ladder. Most pension plans are not true SIPPs and won't provide all of the investment powers. Second, you'd need to buy the gilts at issue through a broker.
Good video for me - Thank you.
You're welcome glad it was helpful!
Hi Chris... As a balanced risk investor I've contemplated leaning toward a lower risk which comprises more bond and cash until we see market and economic conditions improve. I'm in my mid 50s.
Any thoughts or potential drawback in taking this approach??
Hi Paul. Normally I’d say that the time to invest in equities is when you feel like waiting it out to see if markets improve - that’s a sure way to miss out on gains and buy the market while it’s high. Currently though, there does appear to be value in bonds that we haven’t seen for quite some time.
Funnily enough, ive just started to buy back into Bond funds (Invesco Monthly Income Plus strategic bond fund to be precise), so it looks like my timing might be fortuitous. I think a mild recession is likely and inflation falling at a reasonable lick. As always, time will tell, and ultimately, no one really knows whats going to happen. Thanks for the great video.
I always like to hear what Invesco have to say on bonds - top quality research. Thanks for watching.
What Vanguard bonds would you consider investing in? Im 5 years from retirement and am in equities and cash at the moment
Hi Paul. Well there is the potential to buy securities directly, but if you are looking for a fund, a global aggregate bond fund is a good proxy for international bonds, slanted towards the high quality credit end.
Chris thankyou for the reply. Ive Subscribed to your channel. Very informative and clear information. Massively building my financial acumen with your help.
Many thanks Paul. I’m pleased the content is proving useful.
If BofE rate now hypothetically stayed fixed indefinitely at the current rate. Which would give best return money market or gilts, assuming equal charges/platform costs? Isn't choosing gilts just a gamble that on average the BofE rate will lower than current over the chosen horizon?
Longer dated stock has always produced better returns, as highlighted by the Vanguard research shown in the video. If, hypothetically, rates never changed, and the government knew they were never going to change, longer dated securities would always pay more than shorter dated ones, because the only way of enticing people to tie up their money for longer would be to pay them a higher interest rate. As we know, that's never going to be the case, which is why we sometimes see inverted yield curves. In an environment where rates never changed, I would always prefer gilts because of the security of the issuer.
SO what do you think about the sp500 price over the next year or 3?
There is SO much borrowed money still on the index and in the hands of the companies themselves that if rates stay at these levels people will start to de leverage driving prices down hard? Or will the fed stop that by lowering rates again?
And investing in it from the UK obviously the other big issue to pound to dollar exchange rate.
Who knows where this will end.
Personally I am in savings 1 year with 60% of my pot right now, 40% invested vwrl or similar with a tiny bit of bond exposure, I'm really wondering if I should put that 40% into a 50/50 split bond/equities and really de risk for the time being ..
ready then to jump right into equities when the crash comes...
Trouble with this last comment a about buying shares when in recession (which is not bad advice) shares have now reached an all time high and we are technically in a recession and shares should not be in a position of all time high in a recession. Should we be buying shares at an all time high? Why buy shares now, when it is being recommended to put money (cash) into bonds? Here we are told that investors generally buy bonds when markets are falling as they want something safe as shares fall. Expansion and contraction. Fine. But is this a time of contraction or expansion today. We are 6 months down the line. Is it time then to our savings into bond as recommended or shares when they are at an all time high and interest rates that are predicted to fall? If only the markets were not at an all time high. Bonds then are better to buy than shares at the moment? Shares look like they could fall? Or if interest rates fall, that will lead again to expansion hence more interest rate rises and a fall in bonds?
So basically bonds win over the long term as long as interest rates don't go up?
I am old enough to have paid 17.5% on my mortgage so I am still a bit sceptical of bonds of more than 1 year atm.
Given the state of things I think there may be more pain to come rates wise,
So I'm mostly 1 year bonds and a smaller amount of 2 to 3 year bonds all paying 5 to 6%.
The 30 year bonds are paying 4% which I don't think are high enough, I can't see rates going so low as they have been for the last decade ever again after seeing the damage it's done.
But at the same time the gov needs to keep the national debt under control too so who the heck knows lmfao.
Thanks for your insights into investing , not just this video but I have learned a lot from many of your other ones.
If long term rates are lower than short term rates, that means the yield curve is 'inverted'. It's a sign that rates are expected to fall because the economy is weak.
HI Chris, great video, one i might have to watch a few times to fully understand. Could you elaborate a little on the area of pensions, as many i suspect I was auto enrolled in to a lifestyle pension to de - risk close to retirement, and a large allocation to UK gilts in the current climate has in fact increased risk and the gilts have free falled and still not recovered where equities have. Its also a little difficult to understand the purchase of gilts for a pension as the coupon is somehow re invested in the collective fund to keep its value somehow (which it hasn't). I know you cant give direct advice but where might we look to get evidence to decide whether to crystalise losses and move back into equities? or is there potential for recovery if interest rates fall ? also is there any culpability of pension providers with these de risking strategies which havent done what they said on the tin ? Thanks David
Hi David. In my opinion, now wouldn't be the time to sell bonds that have fallen in value - the risk adjusted return prospects of high quality bonds are better than equities in the short to medium term. Whilst there probably should be better education out there, pension providers would just point to the long term volatility of bonds being lower than equities... Bonds had overperformed for a long period following the Global Financial Crisis, but everything eventually reverts to mean, and that is what's happened. I was negative on heavy bond exposure and sceptical about lifestyling options prior to 2022 as I explained in an old video called 'Don't De-Risk'. I'm now less negative on bonds though.
Hi Chris thanks for lengthy reply, most kind !. Black rock 15 year is still falling past-35% very painful when close to retirement, fact sheet shows level 5, whilst equities 4, so hard to see this as de risking. Fingers crossed they improve, also difficult to see how this fund works ...as the coupon is back in the fund somehow but this doesnt improve the market value on the surface it seems.
Great to see this video. There is normally way too much focus on 100% equity portfolios on TH-cam, even though there have been significant periods in history where a mix of stocks and bonds has outperformed. Its nice to see the case for bonds presented.
Thanks Mark. Yes I agree - fixed income info is underrepresented.
That's a great tip about the value of a gilt changing by 1% for every year until maturity for every 1% decrease in interest rates. I have considered a simple hedge of a 50/50 split between a long duration gilt of say 20-25 years paying around 5% coupon and putting the other half into money market funds. That way if there is a shock and rates rise the money market fund helps to offset it, I would also buy more money market funds with the gilt coupons. Then later as rates fall you could drip feed the cash from the money market funds into equities then at some point if rates fall to say around 4% in 3-5 years you could start selling the gilts at around 25%+ profit and drip feed that back in to equities. Does that sound logical or is there a better way to do it do you think? (for simplicity lets say its all within a tax fre wrapper, as gilt coupons would be taxed as income etc...)
Hi Luke. Remember to not confuse term to maturity with duration - they're different things as mentioned in the vid.
It's certainly good to diversify. The short dated holdings may not offset a fall on longer duration holdings, because they lack the capacity to provide much in the way of capital growth - they would just not fall in the way longer duration bonds would if rates rose.
Also, bear in mind it's not always easy to buy small amounts of new gilts from issue.
Any strategy could potentially work if the conditions are favourable to it. How things play out in reality is what we can never predict.
@@chrisbourne-retirementplanner Good points, I was looking at pre existing gilts for example T46 going on the assumption as new gilts get issued the price of existing gilts should adjust to offer similar value once you work out the "dirty" price etc and know what your real return is. I do think one more rate hike of 0.25% is on the cards and after that a pause until inflation really is under control but anything could happen. Thanks for the tips and keep up with the great content 👍
The business cycle or less commonly known the 'debt cycle' takes roughly 7-10 years (depending on the source) and there is an underlying 'long term debt cycle' which really dictates the direction of markets. Bonds have been in a bull market for better part of 40 years, fueled by easy money and the onset of QE and more recently 'helicopter money'. A relentless game of kick the can down the road. Eventually too much debt leads to excesses and mal investment and rising interest rates expose those who were swimming naked.
So LS 80/20 is a good plan
Yes as a long term asset allocation, it continues to have a lot of merit.
Bond ETF shouldn't be recommended in brokerages... The defence approach their suppose to bring, gets shattered when good times come. I don't the use of seeing the value goe down so easily, and not being reciprocated the other way around.
Personally I don't trust banks or governments so I invest in something I can physically hold in my hand. Gold is good, other bullion comes with a 20% VAT burden. But consider copper ot similar commodities.,
Great video
Thank you! Much appreciated.
I've put cash into fixed rate 1 year bonds at 5-6% then living off the interest then salary sacrificing 60% salary so I don't get spanked with tax.
What do you mean salary sacrificing?
@@kite9039 putting money into pension which otherwise would be taxed 40%.. brings your earnings down so not pay as much tax.
@@megasefton5876 Imagine it this way, instead of paying into a pension out of taxed income (income and NI) you 'sacrifice' part of your salary and instead this is paid into your pension and means you are not taxed on it, thus receiving tax relief at your 'marginal rate of income tax' i.e., 20, 40 or 45%, in many cases higher than this if you fall within certain income 'traps'.
You may be able to talk to your HR department about this, or your firm may pay for advisers to look after your workplace pension who you can ask about this.
I hope this helps.
But a fixed term bond, placed into a bank, usually up to 5 years will return a higher interest rate.
Up to £85,000 per bank is government protected, in the un-likely event of a bank failure. So it is more or less as safe as a gilt.
Some long term bank deposits will pay similar or slightly higher returns to treasury bonds. They cannot be sold on the secondary market though, so there is no potential for capital gain. The strength of the issuer is also more of a concern. As you quite rightly say, the compensation limit is £85k. You wouldn't have the same concern with gilt stock - the government has not defaulted on a payment in its history since gilts were first issued in the 1600's. We can't compare the security of a commercial enterprise with that of a government.
If My wife pays all of her salary into her workplace pension and I buy a 2nd home in her name and she earns £1000 per month / £12,000 per year which is under the £12,750 you can earn before paying tax would that mean she wont have to pat tax on the income from her 2nd property please?
If her total earnings are above £12,570 then she’ll pay tax on the rental income. She will at least be getting tax relief on the salary she’s paying into her pension though.
That’s exactly what I’m about to do. My wife doesn’t work so the rental income will be within her personal allowance and tax free. I plan to start drawing my pension and taking £16k / year which will also be tax free (my personal allowance + 25% TFC), then top up what’s needed from savings / ISAs. In theory we’ll be living tax free…let’s see!
Thanks again Chris for another concise easy to listen to video. In the current climate it's smack in line with my thinking having just loaded my portfolio with TR25 & TR28 UK gilts. Giving me over 5% risk free yield at the moment, and in my view will increases as interest rates peak and start to come down, pushing bond price up.
Cheers Alan. Sounds like a sensible move to me. I agree with your assessment 👍🏼