For most of the past 30 years, nobody has worried about lower prices for government bonds.
In the UK and the US, bond yields – which go down as bond prices go up – have fallen as steadily as TV channels have multiplied and footballers’ salaries have gathered zeroes.
The grind has been so remorseless that for most of the time we didn’t even notice it, like a frog being boiled alive on a beach in the Costa del Sol because he forgot his sun hat.
This wasn’t the sort of bull market that excited private investors. Like most, I didn’t really see a reason to prefer bonds to cash when I started investing – let alone favour them over equities.
Yet bonds went on to beat shares over ever-lengthier historical periods, after two stock market crashes in a decade beat equities up something rotten.
The long gilt yield was very nearly 15% in 1980, and as recently as 1990 it was at 12%. It continued to fall pretty steadily for 20 years – barring a wobble in 1994 that was called a ‘massacre‘ at the time – to approach 5% by the turn of the century. Then, in the nervous wake of the financial crisis, ‘safe’ UK and US bond yields headed unthinkably lower.
In 2012, ten-year gilts sneaked briefly below 2%, which would have seemed about as plausible to a red braces wearing Yuppie in the City in the 1980s as a mobile phone that didn’t do double-duty as a doorstop.
Bond yields have fallen for 30 years. What goes down must go up?
Yields are unlikely to fall much further on this graph – if only because at 2% there’s not much further for them to go. Theoretically, yields could halve again to 1% – or less –which is the sort of thing that happened in Japan. But at current levels I’m reminded more of Zeno’s paradoxes.
Indeed, scars hard-earned on the investment battlefield make me much more worried about falling bond prices than missing out on further gains or forgoing their 2% income a year. That is why I personally hold no government bonds, and prefer cash for ballast.
But how fearful should those holding UK government bonds (aka gilts) really be?
Italian, Spanish, and even Greek bondholders were once pretty confident about their ‘safe’ investments, too, and look where it got them.
How far would your own bonds fall if yields rose in a bond market crash?
A word of warning to would-be traders
Before I show you how to estimate how your bond holdings could fare in a sell-off, a word of warning.
My co-blogger, The Accumulator, has already asked whether pure passive investors should sell their bond funds ahead of a correction, and concluded they should not.
And despite my bearish stance on bonds, I agree with him.
Firstly, a bond crash is by no means inevitable – do a Google and you’ll find people have been expecting one in the UK and the US since at least 2008 (which was when I first got worried). Yields could bump along the bottom like this for many more years if we continue to stumble in and out of recession.
Secondly, even if you do successfully move out of government bonds, are you really ready to become a more active investor – with all the hassle and likelihood of inferior returns it entails? Will you know when to get back into bonds, or how much to allocate to equities instead, or what to do if bond prices keep rising instead of falling like you expected?
The evidence is pretty clear that most people would do best to invest passively and rebalance between their asset classes periodically. Like this, you’ll automatically top-up any declining bond allocation from your other assets that are hopefully doing better. And you’ll benefit from the secret wisdom of passive investing, which is that it works when you follow the plan, rather than vacillating with the headlines.
Read The Accumulator’s article on whether to sell your bond fund if you’re on the passive camp. Then by all means read the rest of this article for your erudition – but not, I’d suggest, ahead of taking evasive action.
How bond prices will fall when yields rise
Most people hold their bonds via a bond fund or ETF. However it’s easier to first explain how bond prices – and hence the value of a portfolio of bonds – can fall by looking at what happens with individual bonds.
We need to establish a few things:
- It’s normal to talk about bond yields, rather than bond prices, due to how investors compare bond yields with interest rates, inflation, and yields from other asset classes.
- Many factors explain why bond yields rise and fall: expectations about growth, inflation, and interest rates are most important. (Credit risk – the risk of default – is not normally an issue for government bonds, though that’s no longer the case in Europe!)
- Bond prices and yields are inversely related. When bond yields rise, prices fall, and vice versa.
Please read my articles on UK government bonds, how to calculate yields, and what drives yields and prices higher and lower if you don’t already understand the vital differences between bonds, cash, and equities.
The key point is that bonds deliver a fixed return at whatever price you buy them for. This return is made up of all the income you’ll receive for the life of the bond, plus the face value of the bond that you’ll be repaid when it matures.
By combining these two income flows (income plus return of capital) and looking at the years left to run on the bond, you can calculate the redemption yield, which is the estimated annual return you’ll get from the bond if you hold to maturity, assuming you can reinvest the income at the same rate.
Redemption yields are nearly always positive. This is vitally important to appreciate when anyone talks to you about a bond market crash. If you hold a UK government bond (gilt) to maturity, you’ll get your money back via the total return.
For instance five-year gilts are currently priced at £140. When they mature, the holders will be repaid the face value of £100 per bond.
By the looks of it, then, anyone buying them today faces a certain loss of just over 28%.
However this five-year gilt began life with many years to run, and was initially issued when rates were high. The coupon on the bond is 8.75%, entitling the holder to £8.75 in income a year for the life of the bond.
That adds up to £43.75 over the five years remaining, which when added to the £100 face value means a buyer today can expect to receive £143.75 back from their investment, or a small profit of £3.75. Do the maths (or look it up) and you’ll find this is equivalent to an annual redemption yield of 0.69%.
In other words you’ll expect a positive total return from this bond, even though you face a certain capital loss.
This is very different to equities, where neither capital returns or dividends are ever certain in advance. That’s the first huge thing to realise if you’re fearful about a bond market collapse.
(I am not going to go into real returns in this article, which take into account inflation. Of course 0.69% is a terrible real return with inflation over 2% and hideously unattractive in my view, but it is the going rate as I write and whether it is sensible or not is not the subject of this piece).
Duration, and why it matters
So far, so arcane – such is the world of bonds – and now for another wrinkle.
Remember I said that redemption yield calculations assume that you can reinvest your coupon at the same rate – but also that yields rise and fall over time?
Clearly there’s a conflict here. Redemption yield is a useful approximation, but that’s all it is, as higher or lower yields may be available over a bond’s lifetime of reinvesting its coupon.
If the bond has only a year or two to run, you can be pretty confident of the rate you’ll get when you reinvest. But what about when you’re reinvesting in 20 years? All bets are off, as interest rates are likely to fluctuate all over the place during that time.
This means that bonds become riskier the longer they have left to run – which is why long bonds (those with ten or typically many more years to run) pay a higher rate then short-dated bonds.
Risk and reward go together, remember? If your friendly neighborhood bond peddler wants you to buy a 30-year bond when one-year bonds are available sporting very certain returns, you’re going to want a higher rate of return to compensate you for tying your money up for 30 years of sleepless nights.
Bond traders wised up to this years ago. While the rest of us drank, danced, and looked forward to the advent of cheap air travel, they struck upon a measure called duration, which is properly defined as how long (in years) it takes an investor in a bond to get her money back through interest and capital payments, but is commonly referenced as the sensitivity of a bond to interest rates.
The bond wonks then went a step further, and created modified duration, which is a slightly more accurate measure of the sensitivity of a particular bond to interest rates. I’ll (incorrectly) use the terms pretty interchangeably from here.
You can work out the duration of a bond for yourself using a formula, but I wouldn’t bother. It’s available via various proprietary data sources, and I’ve just discovered you can also download it via the government’s own data on daily gilt prices via the DMO website. You can also try plugging numbers into a duration calculator.
If you do so you’ll see a long list of gilts in issuance, and you’ll notice that duration increases the longer a bond has left to run.
This makes perfect sense, since as we’ve discussed you’re more uncertain about interest rates the further out you go.
You’ll also see that duration is always less than the time left to maturity.
Again, pretty logical; you’ll benefit from the cash flows from the annual interest coupon, as well as the principle repayment at the end, so you’ll get your money back before the bond matures1.
Finally, duration is affected by yields and the coupon rate on the bond, as well as by how long it has left to run. Duration falls as yields increase, and vice versa.
This makes perfect sense, too – if you’re getting 8% a year on a 20-year bond, it’s going to take you a lot less time to get your money back than if you are being paid 2% a year.
This final factor has especially big practical ramifications when rates are very low, like today, as I’ll get onto later.
How bond prices will fall when yields rise
So we have two vital pieces of knowledge:
- Holding UK government bonds (gilts) to maturity will very likely deliver a positive (if pitifully small) return, since redemption yields are currently positive for all issues.
- Gilt prices fluctuate with interest rates, as indicated by their duration, on their way to that final repayment date.
Together this means that if you hold a portfolio of gilts and intend to run them all to maturity, you can assume that you are going to get your money back, with a bit of interest.
However you also know that their value will go up and down until then as interest rates fluctuate, according to their duration.
Let’s put all this together with some examples.
To work out how much a particular bond will rise or fall if its yield to maturity rises or falls, you multiply its duration by the hypothetical change in interest rates. (Remember that as yields of bonds rise, prices fall, and vice versa).
For instance, consider a ten-year gilt maturing in 2022 (named 4% Treasury Gilt 2022), which I see from the DMO website has a modified duration of 8:
If the yield rises by 0.5%, the price will fall by 4% (because 0.5 x 8 = 4)
If the yield rises by 1%, the price will fall by 8%
If the yield rises by 2%, the price will fall by 16%
On the other hand:
If the yield fell by 0.5%, the price would rise by 4%
Another way to work out how your bonds will change in price is to use a bond calculator, and to try out various different scenarios. You should find the numbers returned are the same as those you’ll calculate using duration.
How do you work out how bond funds might fall?
Exactly the same technique can be used to calculate how bond funds will fall as interest rates rise.
The trick is to use average yield and duration data that factors in all the bonds in a fund’s portfolio.
Such data should be available in your fund’s latest fact sheet. For example, here’s bond data for the iShares short-dated gilt ETF (Ticker: IGLS).
How much should you worry about a bond market crash?
Now you know how vulnerable your bond holdings are to a sell-off and rising yields, what if anything should you do about it?
As I said at the top, there’s a strong answer for saying you should leave well alone. While it may seem a no-brainer that rates will rise and bond prices fall, it’s seemed that way before:
Here’s a fund manager writing in the FT in August 2010:
“All told, benchmark ten-year bond yields may normalise at rates between 3.25% to 3.5% in the eurozone and 3% to 4% in the US in the course of next year.”
Actually, rates on US ten-years are now less than 2%, and nobody talks about ‘eurozone rates’ any more, given all the divergences.
By December 2010, other FT pundits were growing more confident a crash was coming:
“A great 28-year bull market in bonds in its dying throes, and inflationary pressures building, unless leverage and herding behaviour have suddenly become a thing of the past, no investor should be surprised to find that bond markets are vulnerable to sharp and painful adjustments, of which last week’s movements are a foretaste.”
Actually, UK gilt yields have approximately halved since then to their low point this summer.
Even more amusingly, we can go back to 2006, and this FT piece entitled A dangerous bubble in the gilt market:
“Real interest rates on long-dated government gilts have fallen still further, in some cases to below half the level in the US. This is a bubble on top of what may be a global bond market bubble.”
I could go on and on, back to the 1990s or even the 1980s.
The point is not that these writers are idiots – far from it. I was worried about a bond bubble in 2008. It’s that the future path of rates is very uncertain, however certain it looks at any time.
For most people, bonds are in a portfolio to protect against stock market crashes and to reduce the volatility of returns. Private investors are not advised to trade bonds for the best outcome (and I repeat again that held to maturity, all UK gilts will currently deliver a positive nominal return). Given how gilts have confounded the experts it is probably foolish to try.
That said, I hold no gilts, and it’s partly because they give me the willies. Call me foolish, but I prefer to hold cash, for its higher yield and optionality2.
What makes bonds particularly risky at the moment is the low yields you get for holding them. As we’ve seen, this increases duration, and so makes them much more vulnerable to interest rate shocks.
You don’t need to be a bond market nerd to understand this. It’s simple maths.
Total return in a year from a bond = Change in price + income received
In normal times, a decent yield will shore up your total return. For example, if a bond yielding 5% falls 10% in a year, the total loss for the year would be -5%.
In the great bond collapse of 1994, the Vanguard fund that tracks the US bond market saw a negative return of roughly -3% for the year! (It did fall further intra-year). Hardly the stuff of nightmares, is it? All those interest payments ameliorated the capital loss (which proved temporary anyway, as yields soon resumed their march down, and hence prices rose).
When yields are very low, this safety cushion is not available.
We’ve had a few discussions about the wisdom of holding bonds on Monevator in the current climate, and I suspect some readers think I’m complacent about the risks. I’m really not complacent, as I hope this article demonstrates.
However you’ve got to realise that the average person would have sold gilts years ago if they were looking to trade them, and may well have bought them back at a higher price as yields continued to fall. The bond market is inconceivably deep and liquid, and is currently being buffeted about by abnormal factors like QE, too. You think you know better than it does at your peril.
A more pragmatic response if you’re concerned about today’s low yields but want to keep owning bonds would be to hold bonds (or bond funds) with a lower duration. As we’ve seen, this reduces their sensitivity to interest rates, so you’ll not be hit as hard by a crash should rates rise.
I don’t hold any gilts, as I say. Cash suits me fine as a buffer.
You pays your money and takes your choice.
- For short-dated bonds, and given the low yields of today, we might better say you will theoretically get your money back before you are repaid the principle. In practice, the lump sum principle repayment will be required for short and medium bonds and even most long bonds at low yields to return your money, plus a bit more. [↩]
- That is, the ability to quickly deploy it into another asset class such as shares or bonds. [↩]
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Useful article on bonds – balancing previous commentary on asset allocation. Of course it’s true that none of us can ever spot the bottom (in this case in yields) because you only recognise a bottom once it’s walked past you !
But this is not to say you can’t recognise a bubble and by any historic measure we are most certainly in one right now with UK and US bonds. So, beware.
I’m with you – short gilts and cash ready for buying more interesting stuff at better prices.
I’m avoiding bonds for now. But here’s a question I’ve not been able to find an answer to: where will the money go when bonds fall? Everyone who sells, at a loss or otherwise, will be looking for an alternate investment. These investors clearly value security over yield, so what else is there? Equities don’t seem to appeal to those investors, or they would have been there.
Gold?
What else?
@TI,
Great summary of the issues with bonds. I am with you (and Paul C), I wouldn’t touch them. Last time I questioned the safety of bonds your co-blogger finished off with “Equities are never safe” and recommended going to bonds for safety whether your equities were going well or not. This sent me back to the data to see if I could find any back-up for this.
I looked at equities (Shiller US data) over 10, 15 and 20yr periods.
Since 1871 there have been 132 10-yr periods (obviously overlapping). Of these, 15 show a real loss with the worst period showing a loss of -3.8%pa.
Of the 127 15-yr periods there are only 6 periods showing a real loss with the worst giving a loss of -1%pa.
Of the 122 20-year period there are no periods showing a real loss. None at all.
I do not have the same details for the bond markets but Jeremy Siegel gives the following data.
Long bonds
1946-1965 (19 years) -1.2% pa real
1966-1981 (15 years) -4.6% pa real (which is the stuff of nightmares)
That is a losing period at least 34 years.
Short bonds were not quite so negative but still lost value over the same periods.
These are far worse than the equity numbers. The reputation of bonds for being safe is based entirely on their nominal results. The problem is they get murdered by inflation. In real terms they are highly dodgy. They may be a good investment from time to time, but safe they ain’t.
Bonds have now had a winning run of 30 years. Equities don’t have winning runs like that either. Clearly equities have a much stronger mean revision which, in my book, makes them much safer. They also have a much higher average annual gain. Pay more, safer…….equities look good to me.
@William — A lot of bond buying is being driven by institutions who are forced to buy bonds (e.g. pension funds) so they may need to keep on buying, despite the fluctuations. They are theoretically matching liabilities to assets, so you could argue that it was that should do, though you wouldn’t hear me making that argument with bonds at these yields!
Don’t worry, equities will have their time again (the stock market is small compared to the bond market, so it doesn’t require much displacement). Commercial property might be another area that will look attractive, once people are no longer worried about fire sales by banks knocking down prices etc. At the moment yields on some listed REITs are attractive, absent that threat.
My bet is we’ll start to see a big sell off in Bonds as money printing inflationary fears take hold. This would also take equities down violently as future dividend flows get discounted at higher rates.
This happened in the 70s and then Gold took off like a rocket. But this time Gold has already been in a bull market for 10 years so not sure it has a lot further to go but I retain reasonable % (with “put”protection just in case!)
And if equities over react – as they normally do then I’d expect the wise money to go back into them after wards as a nice inflation hedge.
I guess this whole question depends on how much you have to protect or whether you’re starting out with regular investments.
In the former case you’d have to believe in efficient markets not to think we’re heading towards a nasty turn in asset prices.
Thanks, good article. Would it be possible to do something similar on inflation-linked gilts?
At the moment I have no conventional gilts or corporate bonds in my SIPP, but do have a chunky 25% allocated to an index-linked gilt fund.
They are the forgotten asset class, in a few years worth of Hargreaves Lansdown propaganda magazines they never even got a mention.
ISA-wise I do have some conventional gilt exposure as I have plumped for Vanguard’s LifeStrategy 60% equity fund to beat the platform fees. I really wanted low volatility and figured the equities will make up for bonds dropping unless we get an inflationary depression with rising interest rates.
That sounds unlikely but bonds and shares are not always reverse-correlated. From 1982 they both went up side by side for 18 years – so could they both go down together over a sustained period?
Problems with Index linkers
In his book – “The Trouble with markets” Roger Bootle (one of the more intelligent economic forecasters) argues that these assets present big risks in the event that we flip into the dreaded deflation. I’ll try to summarise:
Gilts and Linkers are priced according to a discount rate for valuing future cash flows. That rate is normally linked to inflation at say RPI plus 1% pa which makes linkers fairly stable in price during most “normal range” periods of inflation.
However, if we slide into deflation the discount rate for pricing these securities is forced up. Why? Because it cannot go below zero at the short end where cash gives a minimum zero return.
So, if the expected rate of inflation (deflation) fell to say -3% on a 5 year outlook we might have a discount rate of RPI +3% pa over that period. (i.e a nominal expected return of 0% – or similar to cash)
This rising discount rate might be less pronounced further down the yield curve but would nonetheless rise at most durations reducing the present value of future cash flows. In other words prices would fall.
To quote Bootle – “this quirk complicates indexed bonds. Many people expect them to be safe and predictable instruments throughout their life and not only if held to maturity. This they are NOT – if the economy flips into deflation.
I wouldn’t say hold none as we all need to hedge against inflation (as well as deflation) but I hope this clarifies that they are far from a risk free bet.
Also – with regards conventional UK gilts during inflationary times.
Data from the “Equity Gilt Study” shows the worst 5 year period in last 50 years was – Not surprisingly – 1971 to 1976.
Real (total return i.e. gross income reinvested a la pension or ISA) returns on the medium term bond index was . . . wait for it . . . .
Minus 10.7% per annum.
That’s a 43% real terms loss over the period.
The worst year ?
Yep you guessed it again – 1974 – the same year that the stock-market tanked. The bond index lost 40% in real terms.
Mind you back then there’s was loads of yield on gilts to soften the blow. So the loss was reduced to a modest 30% after income reinvested.
And the moral is?
Watch out about making any assumptions that UK or USA bonds are safe. Havens.
Short term individual gilts held to maturity may be OK but managed funds of them – with loads of long duration bonds inside ?
Not on your nelly – not now.
Paul C – How does one add put protection to a gold (or anything else for that matter) investment as a retail investor?
There is a great deal of institutional demand from pension funds and insurers for gilts driven by a desire to hold matching assets and by the various solvency standards affecting them. If yields were to rise, I suspect that the market would see prices supported to some extent as funds derisked by switching their equity holdings to gilts.
However, my ‘liabilities’ don’t look bond-like in the same way as a pension scheme so I don’t hold gilts (or even much credit) personally. Big swings to prices and yields don’t really bother the ‘immunised’ (assets matched to liabilities) funds, but they’d sure as hell bother me.
I’m far more concerned with finding a diversified pool of assets that deliver real returns. All of my financial modelling that I do is on an inflation-plus basis.
This is a complex area and of course I cannot advise you but here are some thoughts.
I personally steer clear of high octane methods of hedging – (spread betting and CFDs) where the risk to capital is many times your stake. With options you can only lose your stake – think of it as insurance.
However that insurance is still only as good as your insurer (options writer investment bank) and there’s no bail out fund that I’m aware of for investors from providers that go bust.
We talk about options but we’re really talking about “Covered warrants” (CW) which are the cash settling version of options used by retail investors. A put option gives you the right to sell (call is to buy) a certain assets at a certain time at a certain price. You don’t want to actually have to sell other assets to realise the profit so we have covered warrants instead.
These securities are only available via certain investment platforms. I don’t have a list of who does and doesn’t but I use them within my Barclays SIPP and ordinary Stockbroking accounts. They are not permitted within ISAs as far as I’m aware.
If you’re starting off on your wealth building road I’d certainly warn you off the use of CW to insure against downturns. They are expensive and this drags down returns. So a better strategy might be to just keep piling your money into a set of long term reliable risky assets (what are they? yes good question) and you’ll benefit from pound cost averaging – be happy if markets fall and you buy more at a lower price.
If you’re at the other end the wealth building road and concerned more about wealth preservation than investing new money then covered warrants may be useful from time to time – but their high cost still cannot be ignored. For example – in today’s markets – putting a 6 month floor on your FTSE 100 index holding at just below today’s prices would likely eat up more than the whole of the dividend yield – and given that dividends provide most of our total return in the long term it makes no sense to use them at all times on all our risky assets.
The cost of putting in a “floor” of protection under your main holding depends using Covered warrants depends upon various factors:
• The level at which you want the floor to kick in (normally you’d choose a level below today’s price – which means the option is “out of the money” i.e. it will become worthless at maturity unless the market falls to below that strike price)
• The volatility of the underlying asset (more vol = more cost which means if you wait until markets are crashing to buy protection it will cost you a fortune)
• The length of time you want that protection in place (longer time = more cost)
o Assuming that you buy out of the money options (strike price is below current market price) then you’re paying purely for time uncertainty. The option has NO intrinsic value.
o I tend to stick to short term warrants to keep costs down but of course this risks getting caught with markets in freefall just as you want to renew / roll over onto the next period. I’m not aware that there’s a perfect answer.
• Interest rates – to a small extent.
• Competition – how many providers / option writers are there. In the case of Gold I can only find one – Societe Generale.
And this brings us back to the earlier issue – How robust would the CW provider be in the event of another global meltdown? I can’t’ answer that but it’s worth thinking about. Protection from CWs are only as good as the provider.
As a private investor, most people won’t have requirements for holding non-equities (cash or bonds) outside of the limits of the government deposit protection scheme – so since you can hold money in a savings account that’s 100% guaranteed (i.e. effectively a gilt) but with the bonus of no capital variation based on yield, and in many cases an interest rate higher than the bond yield, it seems foolish not to use this facility rather than bonds.
Since this also applies separately within your pension fund cash holdings, it would seem silly not to avail yourself of this facility within a SIPP, unless you have such a large pot that you can’t split it into various £85k holdings.
To TP – Fair point about benefits of cash- i’m a big fan – but there is a challenge in finding good interest rates in accounts you can hold in SIPPs.
Have you found some gooduns?
I have to admit that I haven’t – though I haven’t actually looked. I’m an 100% equities fan and whilst I do hold some cash, I’m too lazy to bother looking for accounts to get 3% instead of 0.5% or whatever – it’s all pretty small beer so I try to keep out of cash as much as possible 🙂
I agree to a great extent about the benefits of cash (and of NS&I index certs over index-linked bonds for that matter!)
Here’s a list of SIPP-able cash accounts: http://www.investmentsense.co.uk/free-services/best-buy-savings-accounts/accounts-for-pensions/
Sourced via our recent-ish article on the joys of cash: http://monevator.com/making-the-case-for-cash/
Thus, one might argue for any private investor, leave the bond market to the actuaries and the annuity providers, and take advantage of one of the very few areas that a private individual has an advantage over big scale finance companies…
To TP. I think mixing only cash and equities has many benefits but i wouldnt ignore other asset classes at all times.
Do you base your allocations on market timing, stock picking or both? –
Sorry, yes that’s fair enough – I’m really just suggesting one needn’t bother dealing with low yielding bonds when cash is such an attractive alternative for the private individual.
I have ‘investments’ in property as well (principally my own home of course!), along with some unusual options – race cars principally – though these do tend to be at the riskier end of the game!
@ Paul C – I’ve been on holiday and didn’t get to see this. I stand by my comments on equities (the Dow experienced a bear market from 1929 – 1949, I guess it depends on what data you use) and I certainly don’t claim bonds are “safe”.
Here’s what I said to you: “Don’t think anyone in their right mind would declare any asset safe. Point is, if you’re long on equities and you want a low correlation asset that will reduce your risk if things get even worse (perfectly possible) then bonds are a reasonable bet. Is any strategy guaranteed? No. Will it work every time? No. Should you take into account the risks that affect your particular circumstances? Yep.”
You seem caught up on the idea of safety. There is no safety. The only point I’m trying to make is that bonds have a place in a diversified portfolio that will give you a reasonable chance in most circumstances. What I’m not talking about is a one-way bet designed to maximise growth in the event that things turn out according to your forecast.
Perhaps I should stand down from commenting on this site.
I have no hang ups on safety or other matters. The importance of protecting wealth increases as wealth increases and the prospects for many years of earned income reduces. Bonds can indeed provide a buffer from equity market falls under many scenarios but every so often (and here we get back to the timing issue) bonds reach the end of a long bull run and become a very risky asset too. I note that Hargreaves L have issued a note of warning on this point also.
@ Paul C – sorry this is a case of mistaken identity. My comment was aimed at Paul S who referred directly to a previous conversation in his comment near the top. Too many Pauls for my addled brain to cope with. Anyway, very sorry to drag you into it, I’m going to edit my comment above to make things clear.
Ach. I’ve no powers to edit my comment, so it’ll have to stay as is.
No worries–we’re all good.