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226. S&S Q1 2019_portfolio

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  • 1 Chloe Barton April 7, 2019, 11:48 am

    Hello, I read your stuff each week. It’s thought-provoking. I have a couple of questions, the third of which will indicate why I am so interested this week:
    a) Why has protection against rampant inflation now become an issue for the S&S PTF and why does an allocation of 5% of the bond portion address it? Perhaps it was your plan all along?
    b) What is the probable face value / nominal value of the bonds in the OEIC vs the price of the OEIC (i.e. how much of a premium is the market charging for the investments; presumably, they will drop to face value + inflation at redemption)? Does it matter?
    c) Suppose I have money in an ISA, currently invested in a world equities index tracker, that is intended to make a major contribution to the fees and living expenses of my grandchildren when they go to university in 2023, ’24, ’28, ’29. Does conventional theory mean that I should swap a substantial amount / all of the tracker to short-dated, index linked bonds and, if so, when?

  • 2 The Accumulator April 7, 2019, 8:54 pm

    @ Chloe – all good questions. Rampant inflation was always an issue. Originally I thought using a UK index-linked gilt fund would protect the portfolio. I only discovered that wasn’t necessarily the case in 2016. See this piece: https://monevator.com/why-uk-inflation-linked-funds-may-not-protect-you-against-inflation/
    It’s taken until now for us to be happy that a fund exists to solve the problem. I don’t think a 5% allocation is enough. In the fullness of time, I’ll ramp the inflation-linked side up to 50% of the bond allocation, but I’m proceeding cautiously for now because this is a big change. The answer to B will emerge through the performance of the fund. I expect returns to be slightly negative for a good many years unless bond prices spike. It doesn’t matter to me because it’s worth paying a premium price for good inflation protection.
    C) Yes, standard practice is to lower your exposure to volatile assets like equities and increase exposure to less volatile assets like high quality government bonds the closer you get to needing the money. I can’t tell you how much you need and when because it’s a very personal matter and I’m not qualified to offer financial advice. These two posts could help you think through the issues:
    https://monevator.com/what-you-need-to-know-about-risk-tolerance/
    https://monevator.com/how-to-estimate-your-risk-tolerance/
    I will need to tap some of my funds in less than 10 years and I’m moving a substantial amount into short dated index-linked gilts and short dated conventional gilts.

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