They say we like to scare ourselves. When it comes to our finances I doubt that’s true, but there are still times when Mr Market slashes at our investments like Freddy Krueger at a couple of horny teenagers.
It’s time to face our fears. The best way to stop yourself panicking like a hapless American virgin on a camping trip is to know just how bad things can get.
Our recent investigations into risk tolerance tell us how much carnage we think we can take.
But how much might we have to take?
Let’s roll the tape and take a look at investing’s scariest horror shows.
Scream!
The UK stock market’s biggest bloodbath was a real return loss of -71% from 1972 to 1974. It wasn’t until 1983 – 10 years later – that the market recovered its former value.
If that seems like ancient history, well, the FTSE All-Share was cut down by -33.4% in 2008.1 Recovery took a mercifully short two years.2
And you only have to go back a few more years before that for A Nightmare on Threadneedle Street 3: the -40% loss between 1999 and 2002.3 Recovery took three years.
Hellraisers
There’s no denying the that the 1972-74 UK stock market crash was horrendous. But we can find even worse if we look at the returns from other markets around the world.
Japan lost -98% between 1943 and 1947. Recovery took 26 years. That’s an investing lifetime.
More infamously, Japan sunk -71% from 1990 to 2002, and it has yet to recover.
The biggest non-war shocker? That would be Spain’s -84%, between 1974-1982. It took them 22 years to finally get back to square one in 1996.
Meanwhile the Great Recession hacked -75% from the Irish stock market between 2007 and 2008. Recovery ongoing.
The longest ever recovery was the 89 years it took Austria to come back from its -96% 1914 to 1925 trauma. The breakthrough finally came in 2003. The great-grandchildren must have been delighted.
The worst fright visited upon the US was a comparatively mild -60% during the first leg of the Great Depression, 1929 to 31. It took seven years to recover.
The US took another -57% hit 2007 to 2009 and went down -49% in 2000 to 2002.
But perhaps none of that is as scary as the slow torture inflicted on UK bonds over 27 years from 1947 to 1974. The total real return loss: -73%.
The recovery date? 1993, a spine-chilling 46 years later.
The ultimate horror is of course the total wipeout of Russian stock and bond holders in 1917 and Chinese investors in 1949. There was no coming back from that.
Scream too
Thankfully the bogeyman doesn’t lop huge chunks out of us that often.
In the UK, the historical returns data shows we took heavy losses in calendar years about one year in every ten between 1899-2014:4
- 10 years have ended with a decline of over 20%.
- Four years have ended with a loss of over 30%.
- One year ended with a loss of over 50%.
The frequency of losses of 20% or more rises to one in seven years in the US, according to passive investing demon-slayer, Larry Swedroe.
Even a portfolio diversified across the developed world will be gored frequently according to this analysis of the biggest falls from the monthly peak in the MSCI World Index from 1970-2016 by Ben Carson.
| Date | Loss |
| 1970 | -19% |
| 1973-74 | -40% |
| 1982 | -17% |
| 1987 | -20% |
| 1990 | -24% |
| 1998 | -13% |
| 2000-02 | -45% |
| 2007-09 | -54% |
| 2011 | -26% |
| 2015-16 | -20% |
| Average bear market |
-28% |
Source: A Wealth Of Common Sense
By the light of the historical record, it’s clear we’re going to take pain every few years. In any given year, global equity returns have only been positive 60% of the time.5
Even a global portfolio, balanced 50/50 between equities and bonds, was splattered -61% in the wartime period 1912 to 1920.
And a balanced UK portfolio was shredded by -58% between 1973 and 1974, taking nine years to recover.
Is nowhere safe?
While locking the doors or calling the sheriff rarely seems to hold the darkness at bay, time usually provides the silver bullet.
The annualised return averaged over the last 116 and 50 years has been:
| Selected countries | Last 116 years | Last 50 years |
| UK | 5.4% | 6.4% |
| US | 6.4% | 5.3% |
| Sweden | 5.9% | 8.7% |
| South Africa | 7.3% | 7.9% |
Source: Credit Suisse Global Investment Returns Yearbook 2016, 1900-2015
But here comes the baddie back from the dead one last time:
- Austrian equities averaged a hideous 0.7% gain over the last 116 years.
The only stake in the chest against that kind of dire performance to diversify your portfolio globally.
Global equities have earned a 5% average annualised return over the last 116 and 50 year periods.
And while they’ve only earned a 1.6% average over the last 16 years, a 50/50 global portfolio would still have returned 3.8% on average, over the same timeframe.6
It’s behind you!
The difference between a scary movie and the investor gore I’ve cited above is that those investment returns returns are real. (And after inflation, too, not nominal).
But understanding the monsters that can stalk your portfolio is your best defence against doing the wrong thing in such terrifying situations.
None of these work:
- Running away through the woods at night.
- Calling a priest.
- Emotional sex in a flimsy tent after your best friend was eviscerated.
- Selling up when the market bottoms out.
Take it steady,
The Accumulator
p.s. The recovery times can be a bit misleading. Reality can be kinder. If you keep buying assets as they fall in price and rebound then you will personally recover more quickly (because you bought more assets at cheaper prices) than the market overall. However if you are forced to sell assets during the downturn then your portfolio will take longer to recover its previous value (as you have fewer assets that must now rise further to reach the previous peak). Bear markets (a loss of 20% or more) across global markets (Jan 1980-2016) took an average of 798 days to recover (or just over two years and two months) according to Vanguard.
- Barclays Equity Gilt Study 2015 [↩]
- Smarter Investing
, 3rd edition, Tim Hale [↩]
- Smarter Investing, 1st edition, Tim Hale, page 291. I know it’s the Bank of England that sits on Threadneedle Street but the London Stock Exchange is on Paternoster Square and that’s not going to work. [↩]
- Barclays Equity Gilt Study 2015. The use of calendar years probably masks some big falls where the market recovered before year end but these stats are the best I have. [↩]
- Smarter Investing, 1st edition, Tim Hale, page 286 [↩]
- Not taking into account costs or taxes. Credit Suisse Global Investment Returns Yearbook 2016, 1900-2015. [↩]
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What a great article.
I have witnessed a few bear markets and after the first one which was a true scary movie for me it got a little easier. As you rightly pointed out in your “ps” buying into the falling markets and its subsequent recovery phase will help you rebound quicker.
Long term successful investing is largely about mind-set. Articles such as this help the investor by showing them that corrections/bear markets are part of the process.
Thanks
Richard
Tremendous piece. A must-bookmark map reminding us of the icebergs, hidden reefs and pirates out there in the hunt for treasure. Thank you!
Reading this, it sounds like the kind of thing that investors would speak of around a campfire, a torch held under the speaker’s face to cast scary shadows. Though it is much scarier than the stories we used to tell on camping trips as kids (maybe there is the potential for a lucrative career as a horror writer here…)
Theatrics aside, it is an important lesson to take away, the importance of diversification and not freaking out when the big scary bears arrive.
What a great read and thanks for the reminder that one must prepare oneself for the inevitable!
The recent ‘bear market’ is the only one I’ve experienced as an investor so far and of course, it was just a little blip compared to the proper horrors you’ve described.
Will Brexit (Remain or Leave) cause some big screams?
@Weenie
I think in the event of a leave vote on 23 June it would be the £ that would take the strain immediately, possibly by a double digit fall on 24 June
Most of the FTSE 100’s revenue is foreign denominated, Barclays estimated 75% in 2014
I’m not saying that the FTSE would go up though…
If you are interested the effect of the Swiss National Bank removing their currency peg to the Euro in Jan 2015 is worth a look, but the opposite direction of course
This is a sound and sober article, no doubts about that.
Falls in the capital value of our investment assets are unpleasant; perhaps less worrying if one is focussed on the yield, rather than the capital value.
However, the true nightmare is for those who’re in the accumulation phase, when they lose their job, or similar income stream. If one can’t replace that income, and one has outgoings to cover, then one has to consume capital regardless of whether the market is up or down.
It’s hard to hedge or insure against this kind of conjuncture. Losing one’s job because one is employed in an industry which is in decline (for example, currently, steel-making or retail-banking) leaves one with a desperate scramble to recover one’s social position and -security.
Some discussions of investor reaction to market falls talk about a simple response to the financial news: it’s quite a different matter to “keep one’s head” and remain invested when one faces the prospect of needing to consume capital to stay afloat in the foreseeable future.
This is truly a nightmare, because one’s risk capacity becomes eroded due to external circumstances, no matter what one’s theoretical risk tolerance is.
Whereas selling up at the bottom of the market may not be the best idea, the option above of things that don’t work does have a certain appeal.
I think all you can do is try to use common sense, (and I acknowledge that that’s not so simple when battling the cognitive bias in your brain screaming to panic at the time) by being aware that these things will definitely happen and therefore having a strategy for it, which you then know you are capable of sticking to.
In my case that is to monitor my general circumstances carefully and constantly. This teaches me more accurately with experience what my real (vs guessed) risk tolerance is. It also prompts me to re-balance investments if I feel a change in situation, like losing work for example, upsets that overall balance.
Ultimately too, you have to understand beforehand that if you are invested in shares for example you may not be able to get your money out (to avoid sealing losses) for up to a decade at least. Now if you can’t handle that, what with your day-to-day financial needs, or even just mentally, then that’s a sign that you shouldn’t really be invested in that risk category.
“However, the true nightmare is for those who’re in the accumulation phase, when they lose their job, or similar income stream. If one can’t replace that income, and one has outgoings to cover, then one has to consume capital regardless of whether the market is up or down.” Johnathan
This is indeed a nightmare, but not peculiar to stocks. Housing can be almost as volatile. Our thoughts and sympathies are now with those in the kind of situation that those in the steel industry are facing. The possible loss of income combined with declining house prices.
Maybe for stocks the answer lies in dialling back exposure, where the investor deems such dreadful situations are possible, and then ensuring the investor’s other assets will be sufficient to pull through a year or two of such difficulties? (Emergency fund of cash and/or short bonds).
As TA points out in his P.S.; for the investor who has a ‘Well Balanced Portfolio’, then stock price declines can be welcomed, as an opportunity to load up on stocks at lower prices. Much as we would with non-persishable goods if the supermarket puts them on offer?
Mr Market (see Ben Graham) has been described as a manic depressive, who when on a high, will offer the investor a high price, when depressed will offer the investor a low price.
For this investor the volatility of stocks is one of their main attractions! But then we probably hold more in non-stocks than most here!
Chilling stuff. Makes it even more important to remember what your Granny told you and never put all your eggs in one basket…
I’m likely to start unlocking my pension in the next year, and the spectre of market falls stalks the almost-retired in a very real way. After I take my 25% tax-free bung, the rest will need to stay invested to allow me to take an annual income from it.
On the one hand, my remaining SIPP fund will need to include a sufficient proportion of equities to give it the opportunity to replenish itself. But on the other hand, not so large a proportion that I am left vulnerable to unmanageable losses.
40%? 35%? 20%? – I find it hard to decide, to be honest. At lunchtime I am up for an exuberant 40%, but in the wee small hours of the morning I find even 20% a bit too rich 🙂
What else to do? Well, I am diversifying by having several different income streams – rent from a mortgage-free property, state pension, and income from my SIPP.
I shall give my SIPP fund at least three years’ breathing space after I take my 25%, during which it can hopefully start to grow again, before I begin drawing anything else from it. I have in mind a conservative 3% (max) annual withdrawal rate.
Finally, I’ll maintain a cash fund equalling what I would need to draw from the SIPP for two years’ income, in case of market plummet. As the years go by and I (hopefully!) get old, I’ll review the possibility of buying annuities if it all becomes just too much hassle.
That’s all I can reasonably do to mitigate market risk, I think. And my plan to unlock my pension within the next year is probably stuffed if we Brexit…
Jane
I think this is why the ready made solutions like Vanguard Target retirement funds are so useful – they reduce the number of decisions you have to make. Can’t decide an equity allocation post retirement? Pick what’s in the TRF….
That’s a nice article. Wade Pfau has done everyone a good service by looking outside North America and the 4% rule that generated from there. The truth is, the future is largely unpredicable ( surprise surprise)
Based on the data I have looked at however, a British investor from the early part of the 20th century might have been better off investing domestically, rather than falling for international diversification.
While they may have invested in the US or Canada and made good returns, they may have also invested in China or Russia or Argentina and suffered poor returns.
The one thing that is missing from studies on historical diversification is the fate of German investors who were globally diversified at the start of WW1. A lot of German assets were taken away from the victorious allies. For example research, Merck KGa and Merck Inc;-)
@ Vanguard fan – the only thing is, TRFs don’t work any more once you’ve actually reached your target retirement age and started to draw on your fund.
LifeStrategy/Consensus type funds are the nearest approximation – but you’ve still gotta decide on allocation 🙂
A pretty chilling article which has had the desired effect of me now reconsidering my bond allocation (currently zero, but holding plenty of cash).
Particularly close to home for me as I work in an industry which seems to be suffering a death by a thousand cuts… there’s only so long you can avoid the Reaper’s scythe.
I’m also mentally reassessing how much to spend on our future house move. Classic ‘needs vs wants’ situation to work through.
@Jane – they are certainly designed to take you all the way through retirement – not sure what you mean by ‘not work anymore’? My understanding is you simply take income and sell units to fund your income needs each year.
@Vanguardfan – apologies if I’ve got this wrong, but they appear to be structured so that you choose the year you expect to retire and then the fund automatically rebalances to a more conservative allocation each year as you approach your chosen retirement date.
So it seems to be an accumulation fund targeted to a certain date when you intend to start drawing down. You could indeed sell off units for income once you get to that date, but you’d presumably be stuck with whatever allocation the fund ends up at when it reaches the chosen retirement year. Wouldn’t you need to make sure that this allocation fits your own post-retirement date aims? Very happy to learn more if I’ve missed a trick here! 🙂
Jane
Well, put it that way Monevator, and I can see the appeal of bricks and mortar 😀 Seriously, though, you’d have to be one thick-skinned individual to keep investing over those nightmare scenarios. Maybe if I could guarantee not needing to draw on my investments for the next, eh, 116 years!
@jane, the changing asset allocation actually occurs over about a 12year period with your anticipated retirement date somewhere near the middle, ending up at 30% equities. The rationale being a balance between growth to keep up with inflation, whilst reducing volatility once human capital is reduced and you don’t have capacity to earn. Of course some people will choose to partially or fully annuitise eventually, others will continue with drawdown. It’s worth reading the research paper on the vanguard website which explains the rationale much better than I can. Of course, many people will prefer to make their own choices, but an off the shelf solution can be useful, even if just to provide a benchmark for comparison as you think things through.
A hilarious post on a serious subject, thanks.
I’ve just finished a course at Imperial College on predicting cardiac risk and despite all the data, research, tools and analyses it is really not an exact science because we just don’t know all the “markers” that influence the likelihood of a poor outcome. Yet, paradoxically, the more markers used in the algorithms, the less accurate the prediction. There were some really big brains there, dare I say it, more so amongst the post docs and clinicians attending the course rather than the professors teaching on it. And we all spent a lot of time questioning the whole process. It was more like a philosophy course. It’s useful on a large scale, to manage population risk but individually it’s difficult to make an accurate prediction. We all agreed we have to fine tune our risk calculations with our clinical judgement, based on expertise and experience and to allow for an element of intuition and philosophy. Can’t help thinking that there are similarities here with investing risk analysis. ‘History does not repeat itself, but it often rhymes’. Time for a bit of horror indulgence methinks.
Experiencing Jonathon’s nightmare scenario at the moment – it’s not pretty. So the takeaway is hold steady and keep contributing in the face of fear, so you’ll recover from a drop faster, eventually.. and keep your income stream secure, above all else. Sometimes there’s little you can do about it – large firms lay off staff en mass – but certainly don’t jump without something else lined up. Live and learn.
You can add Greece to your list. Athens Stock Exchange index dropped 93.5% (so far?) between 1999 and 2016.
Thanks for another thought provoking article @TA.
There’s no mention of the ‘protection’ offered from reinvesting dividends though – perhaps assumed in the underlying calculations for the time it takes markets to recover? If not, the recovery time for a portfolio post a crash such as those above will be considerably shorter.
This also means that if you’ve been investing and reinvesting dividends for a period, you’ll have a nice ‘buffer’ built up to help weather future storms. I appreciate this doesn’t help if you’re in or close to drawdown, but while in the accumulation phase it does mean you’re less likely to see red numbers when reviewing your portfolio – which can be helpful psychologically. Not that emotions ever influence my investing. 😉
Thank-you for the entertaining and sobering warning, TA.
I’d be remiss not to point out the two mathematical insights — none of which change the central message that time is your friend against the rollercoaster:-
i) The PPS to your PS is that you’re about as likely to buy at the peak as you are to sell at the bottom. So simply because we have daily close prices doesn’t mean that these are the best way to think about the actual effect of such drops. Sure — it makes the biggest headline number. I see that the UK index fell a third in 2008 so I look at my portfolio and wonder how that would look if it were only 2/3 as big.
The peak from which we measure often has a nice sharp rise just before it — so if you measure three months either side of the peak and three months either side of the trough you get a fairer view of the actual impact of these drops. Suddenly a 33% fall turns into a 25% fall. This is a much fairer way of doing the comparison with the long term gains since these aren’t typically measured trough to peak but decade to decade.
Put simply — the absolute trough and the peak aren’t accessible to you to trade on (unless very unlucky), so aren’t the right things to be thinking about.
ii) Exchange rates make a huge difference. At the start of this year, the S&P500 was flirting with a 20% fall from peak, tempting a definition of a “bear market”. However, VUSA, the stock which tracks this in GBP was at an all time high. With the USD strengthening as the GBP weakened, the index was either still a running bull or nearly a terrifying bear, depending on how you priced it.
So when we talk about the MSCI falls in Ben Carson’s article — my question is “which currency was that index assembled and rebalanced in?” It’s invariably USD, which creates a quite different result from a GBP balanced index, as well as the varaibles in currency at the pricing of the end-points.
It’s one of the differences I’ve noticed in synthesising a world stock index out of each index rather than just buying VWRL. I suspect the same is true of a lifestyle fund rather than one synthesised out of bond and equities.
@mathmo — Great comments, to which I just want to add just a couple of “on the other hands”.
On the unlikelihood of “buying at the peak” this is of course true.
But I think it’s increasingly overplayed* in the blogosphere as a defense (or garlic or holy water in the vernacular of TA’s piece!) against the horrors of market falls.
(*overplayed in the sense that you never heard it before and now you always do — that doesn’t mean it’s not a great tune! 😉 )
You are of course very unlikely to invest all your money at the peak.
However you are *extremely* likely to have *held* your portfolio at a peak. (I forget the statistics but something like 90% of the time the markets are below their all time highs).
For investors who are aware of their portfolio’s day to day value (or month to month, even), maximum drawdowns from peaks to trough are visible and — particularly relevant from the point of view of the article — psychologically and emotionally taxing as well as financially notable.
This is especially true if your portfolio is in draw down mode in retirement — and perhaps you’ve been glib about bear markets because you’re several years into a long bull market and decided “who needs bonds anyway?” See 1999… 😉
As for the currency point, where were you when I needed you! 🙂 Re: This discussion the other week.
Apologies – I was off spending those over valued Euros on a beach with the family… 😉
“This is especially true if your portfolio is in draw down mode in retirement”: that’s a key point. Investing in retirement is quite different from investing for retirement.
You might well not have been buying much at the peak
But if your retirement provision amounts to defined contribution pensions and stock ISAs you are very likely to decide you have enough for an early retirement at peak or close to it
“if your retirement provision amounts to defined contribution pensions and stock ISAs you are very likely to decide you have enough for an early retirement at peak or close to it”: and if you are contemplating early retirement when you’ve accumulated (say) a million and a half, and the market loses 33%, are you really likely to think “ah well, a million is enough anyway”? Aren’t you likely to think “I won’t retire now because it might involve selling at a market bottom”? Depending, of course, on your plans for retirement.
It’s easier being rich by virtue of a DB pension, as long as you are confident that your widow will outlive the pension scheme.
I’m at the cusp of ‘enough’, and the falls of of the last 6 months pushed me under, and the recovery (and more contributions) has pushed me over again.
It just makes me feel more bolshie about handling the job I hate, perhaps so they force the issue and ask me to go, rather than me choosing to go. I mentally write 2 versions of the annual appraisal, the politic and the real, still can’t decide which to present…
If I go, and the market plunges, I can always get another job. I might be rusty (and bolshie), but I’ll still have skills someone in the labour market will want, for a salary that will still be sustainable. Even after a 90% plunge I’ll still have more than everyone on on minimum wage, and they cope.
Are there figures for how the dividends hold up after market collapses? I can understand companies suspending dividends for a year or so, but then the returns must be pretty good relative to the now cheap shares. As others have said, if you stick it out, what matters is the cumulative sum at the end, not the index level.
@ John B
“Are there figures for how the dividends hold up after market collapses?”
Following link (if it works) might throw some light!
http://www.multpl.com/s-p-500-dividend-yield/
Great article, and a reminder to diversify across multiple asset classes – not just equities and bonds.
Magneto,
I am probably having yet another elder moment but the graph gives me very little understanding of how dividends stack up in market collapses as requested by John B. The data refers to yields not dividends. Obviously, yields are determined by fluctuations in share prices in comparison to dividends paid. The prices, and therefore the yields, would of course be all over the place in a collapse and it would be hard to work out what happened to the dividends paid without a lot of research. Am I being dumb? Ec.
I think what that graph tells you (the fact it is broadly within a range of about 2%) is that dividends and prices move together (which should be of no surprise to the true believers of the tome “Valuation”: dividends are an imperfect indicator of discounted cash flows) and also that we are living in a low yield world.
Mathmo, I am being dumb. I still don’t get it. I thought that while dividends do fluctuate, they do so to a much lesser extent than prices. The graph only tells me about yields which is a function of combined price and dividend fluctuations. It’s hard for me to see from the graph how dividends alone performed in the crashes. Don’t answer if the answer is self-evident and I’m being thick.
To answer my own question
For S&P reinvested dividends:
http://www.stockpickssystem.com/historical-rate-of-return/
http://www.simplestockinvesting.com/SP500-historical-real-total-returns.htm
The latter has most detail, including the annual return after inflation by decade. In the 70’s, it was only falling 1.4% a year (The 2000s were worse, at 3.4%, probably due to much lower inflation, but also the tining of the crash and Titanic effect – “we start our records in 1913…”)
@MyNamesEccles
OK here is another link:-
http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/spearn.htm
While it covers the 2008/9 period, which is instructive (note the earnings and dividends decline), unfortunately it does not cover the really dramatic events of 1929 and the subsequent depression.
From memory (although not there at the time!) stocks fell about 80% peak to trough. So looking at that first chart link, dividends must have also taken a severe hammering (or yields would have continued astronomic), which we already know from reports from the time, but it would be informative to put some precise figures on the dividend history.
@MNE – the point is that the yield is broadly fixed (it looks like it’s gradually sliding down but fluctuating around a number by about 2% up or down).
And it’s the ratio of price and dividend. So the dividends must change a lot like the price does. If the price doubles and the yields doesn’t half, then the dividend must double.
Yield is a funny beast as it’s often ttm (a contemporary knowable variable) rather than forecast (knowable in the future only, but a better comparable to the price).
@ Mathmo – one thing I’ve always wondered, when people talk about yield, how do you know whether they’re talking about earnings yield or dividend yield or some other kind of yield I haven’t thought about?
@ Theta – good point about Greece. What a calamity.
@ Dividend Growth Investor – interesting point about the UK but really that’s just pot luck. It’s not about trying to maximise returns by picking the right country any more than it’s about trying to maximise returns by picking the one best performing stock. By diversifying we accept we’re not going to pick the outright winner but neither will we face catastrophic loss by betting the farm on an outright loser.
@ Lads Dad – I’m in a similar situation. Also holding plenty of emergency cash in response.
@TA — my basic assumption would be that it’s ttm dividend yield. I’d expect it to be clearly stated if were anything different.
“diversify across multiple asset classes – not just equities and bonds”: what do you have in mind?
@dearieme well I read in a broadsheet that lego has been one of the best performing asset classes in recent years.
@The Rhino — Tsk! Why are you straying from us, comrade? 😉
http://monevator.com/investing-in-lego/
ah my mind deceives me – i probably read it here then..
@lads dad…I went for mortgage overpayments over cash or bonds, but all personal circumstances are different I guess!
You have to bear in mind that cash and bonds are a place to store value while you wait for equities to get cheap (June 24th, anyone?), rather than a place to seek out yield.
As long as mortgage overpayments are reversible then they do allow that with the added tax advantage (although hard to wrap them up in an ISA).
“As long as mortgage overpayments are reversible …”: yes, yes. We had a flexible mortgage, and very convenient it was.
@Mathmo said “You have to bear in mind that cash and bonds are a place to store value while you wait for equities to get cheap (June 24th, anyone?), rather than a place to seek out yield.”
Think again! Cash and bonds are NOT the same thing and 10y gilts have outperformed UK, European and global equities over the last 26 years, with much less volatility:
https://www.vanguard.co.uk/documents/adv/literature/markets-guide-brochure.pdf
The main advantage of gilts is that movements are negatively correlated with equities and as such can dramatically reduce volatility in a balanced portfolio. They are far from being “A place to store value while you wait for equities to get cheap”.
Gilts have indeed rocked for the last 30 years due to the interest rate cycle. But in reply to dearieme – and bearing in mind the next 30 years the possible impact of interest rates on bond prices, seeing equities as risky and bonds as safe is a bit flawed.
I intend holding a mix comprising equities/bonds/cash/commercial property/gold. Probably in that order of weighting, so 50/20/15/10/5….something like that.
Whatever the fine tuning UK house prices will probably beat my investment portfolio in any case 😉
@semipassive- how are you accessing commercial property and gold? I hold property trackers, but I count them as part of my equity allocation. I have decided not to hold gold as an asset class. I’m currently something around 50% equities, 15% bonds, 35% cash. I don’t see my cash as liquidity for buying equities in a downturn, apart from rebalancing, but more as a buffer against having to sell equities to live off.
Vanguard fan I’m currently more like 60% equities, broadly ok with my current bond and cash allocation so will be naturally rebalancing by putting new money into commercial property to start with. I’m going to drip feed into F&C Commercial Property Trust, a nice yield of 4.4% and it owns property rather than builders. But being an investment trust its exchange traded so highly liquid.
As for gold, iShares have a physically backed ETF with only 0.25% charge so that will be tempting for holding in a SIPP.
In no great rush to add gold, it will be a multi-year process and it will take me a while to build up my commercial property allocation.
@Naeclue
1. “The main advantage of gilts is that movements are negatively correlated with equities”
Financial history shows that this has not always been the case. While it is true esp at present, that when stocks fall there is often a flight to the perceived safety of bonds. We have got very used to seeing our bonds rise as stocks fall. However in a rising interest rate environment or other scenarios everything can change, esp in the mid to long term. Unfortunately there are no guarantees of bond negative correlation.
Quite the reverse!
2. “They are far from being “A place to store value while you wait for equities to get cheap”.
Afraid am very with Mathmo on this one. Traditionally bonds threw off a significant positive real yield and were worth holding for that alone. This is hardly true today unless the investor goes to the riskier or longer duration issues. But the usual more thoughtful advice to investors is to “take your risk on the stock not the bond side”.
Difficult times!
No easy answers.
All Best