≡ Menu

Weekend reading: Happiness is a spiky retirement spending plan

Weekend reading: Happiness is a spiky retirement spending plan post image

Good reads from around the Web.

I dread to think how many articles I’ve read about retirement spending over the years. Especially as I’m not even personally super-interested in the subject.

I’m certainly not like my co-blogger, who is constantly tweaking his parameters like a SETI researcher who thinks he might just have made first contact but is worried he could have just discovered a bird nesting in his satellite dish.

Many readers also seem to be searching for their perfect numbers, via spreadsheets, the latest safe withdrawal rate estimates, and micro-projections about their portfolio’s future returns.

I simply aim to have enough money to live off the income, whatever it may be, and to cut my cloth accordingly.

I appreciate though that this is a lofty goal for anyone who isn’t an investing fanatic with knowingly Spartan tastes and no spouse or kids (and a quixotic one, given that lack of heirs) and so I am forever reading articles on the pros and cons of this or that withdrawal method, especially when compiling these links.

Every week I come across at least a couple of takes on the subject – old news for most of us, but potentially an eye-opener for someone new to sorting out their finances. Each piece has to go through the sniff test.

All of which is a long-winded way of saying I actually read something a bit different this week in a Wall Street Journal article about the same old subject.

The author, Dr Shlomo Benartzi, is a professor at UCLA specializing in behavioural finance. The article is about how to maximize happiness in your retirement spending, rather than simply how to stretch it as far as possible.

The whole piece is worth a quick skim even if you think you’ve read it all before, but the idea I found most interesting was to include deliberate “spikes” in how you dole out your retirement dosh.

Informed by the way a kid enjoys chocolates as a treat but would grow bored if it was on the menu three times a day, the author suggests that in retirement:

…instead of gorging on candy, people would receive larger sums of money at various intervals, before resuming their regular payment schedule.

For instance, clients might enjoy a “luxury summer,” featuring higher levels of spending that allow them to travel around the world first class.

Although very few financial plans offer such a feature, people seem to know they’d like it. According to a survey by researchers at Harvard Business School, a majority of people want a retirement distribution featuring a “bonus month” every year.

This method provides an important psychological benefit. Because the higher drawdowns are a special treat, we never adapt to the elevated level of consumption.

The luxury summer feels like a special reward.

It’s a novel idea that would surely liven things up, if you can afford to include it in your plans.

Have you any other ideas about how to make your retirement spending more than just one long slog of spending money month in, month out?

Let us know in the comments below!

From the blogs

Making good use of the things that we find…

Passive investing

Active investing

Other articles

Product of the week: The new iPhone 7 is getting great reviews, not least because it doesn’t occasionally burst into flames like a certain rival. ThisIsMoney reviews the cheapest ways to buy Apple’s new handset, and also where to sell your old one. I’m still living with an iPhone 4, so I think it might be time for me to make the leap. Being an Apple fanboy (and shareholder) I’m tempted to go down the new Apple financing route. (The offer comes with AppleCare+ included, and after 15 years without any mobile phone insurance my number must nearly be up…)

Mainstream media money

Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber of that site.1

Passive investing

  • The most important investment decision you’ll make – Forbes
  • Why choose currency hedged bond ETFs? [US but relevant]ETF.com
  • The professor who was right about index funds all along – Bloomberg

Active investing

  • Hedge fund son thought hedge fund dad’s trades were fishy – Bloomberg
  • Are oil stocks good value? [Search result]FT
  • Property funds back in business after closures – Guardian
  • What single country ETFs are doing best this year? – ETF.com
  • What should you buy instead of expensive government bonds? – ThisIsMoney
  • The analyst serving the 0.01% on Wall Street – Bloomberg
  • Banks have a dubious business model and markets have noticed [Search result]FT

A word from a broker

Other stuff worth reading

  • Fund managers are the budget airlines of finance [Search result]FT
  • Low rates are pushing the next rung on the ladder away – ThisIsMoney
  • A pension is for life – however long it lasts [Search result]FT
  • The low rate world – The Economist
  • Why I’m making loans to PC World [Search result]FT
  • LSE boss claims 100,000 jobs could go with Euro clearing – ThisIsMoney
  • How to live The Good Life without giving up the rat race – Guardian
  • The difference between rationality and intelligence – New York Times
  • Want to age well? How about you never retire? [Couple of weeks old]BBC
  • I used to be a human being [On detoxing from the Internet]NY Mag

(Free) (e)book of the week: If you’re an active investor and you’ve been a Monevator reader for any length of time, you’ll have come across John Kingham’s UK Value Investor website. [Or at least you should have. If not then you and I need to have words. I link to John’s blog here almost every week! I haven’t been missing whoever they replaced John Peel with on Saturday mornings on Radio 4 and slowly inching towards arthritis all these years for nothing, have I? Hello? Is anyone listening? Is this thing even on?] In particular I’ve enjoyed his case studies of trades gone right or wrong, which he has now compiled into a free ebook. You can download it for nada as a PDF via dropbox.

Like these links? Subscribe to get them every week!

  1. Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”. []

Receive my articles for free in your inbox. Type your email and press submit:

{ 41 comments… add one }
  • 1 Ric September 24, 2016, 1:06 pm

    The “natural yield only” draw down method naturally leads itself to spikes in draw-down as it typically has a bonus month each quarter. Maybe I shouldn’t have built a cash reservoir to cushion the flow of dividend income after all!
    Thanks for the article, and the links.

  • 2 ermine September 24, 2016, 2:55 pm

    Spikes in spending are not just for retirement. The problem of hedonic adaptation means it’s worth considering that generally with elective ‘wants’ type of spend, and also vary your type of hedonism to get the maximum bang for your buck.

    We detect differences, which is why the problem of normalising on lifestyle creep has many people overspending as they earn more. The annual holiday is one form of spike spending, but it shouldn’t get too regular or predictable either.

  • 3 Sean September 24, 2016, 2:56 pm

    If, like me, you are in the fortunate position of having a final salary pension you can live on, plus investments in ISAs and/or SIPPS then you could do what I´m thinking of doing…

    (1) My final salary pension started earlier this year and is enough for me to live comfortably on.

    (2) I have over £100k in ISAs, which I´m still adding to, all of which is invested in income units of a handful of very low cost passive unit trusts such as UK All Share, FTSE 250 and Europe, all of which have yields in the region of 2.5% to 3.5. At the moment all income stays within the ISAs but I´m considering changing this to take income which would mean “bonus” payments 4 times a year which I could use for splurging if I felt so inclined. If not, I could choose to reinvest the money (now I´m retired I won´t be using my full ISA allowance in future so this would not waste any of it).

    (3) I also have about £150k in a couple of SIPPs so I could do something similar with those but probably won´t as I can afford to leave these untouched for either passing on to my children tax-efficiently or for funding care in later life if necessary.

  • 4 Neverland September 24, 2016, 4:32 pm

    Here’s a different way of looking at it

    Average weekly income in the U.K. is around £500 a week after income tax national insurance and council tax

    The frame of argument for a safe withdrawal rate before investment expenses seems to be between 2.5% and 4%

    Assuming you are willing to live outside the most expensive areas of the UK £500,000 can buy you a decent enough house

    Therefore if you can generate £30,000 gross income across a couple you will probably be ok

    Assuming you can get your investment expenses down to 1/4% you need just over £1.8m to be financially independent including £0.5m for the house, barring a truly awful sequence of returns in the first few years

    In London you probably need £2m or so

  • 5 MyRichFuture September 24, 2016, 4:40 pm

    I’ve got a three-year cash buffer as a big part of my retirement plans. But this will be untouched in the early years and used as a safety net against a market crash.

    However, if things go well with investment returns over the first five years, I’m planning to dip into the buffer for extra treats. I’ve been meaning to write a more in-depth article about this. Thanks for the reminder.

  • 6 SurreyBoy September 24, 2016, 6:09 pm

    I too have read a lot about SWR at sequence of returns risk. Blunt truth is, no one knows the future. I do think though that you can achieve FI without the vast accumulated values people talk about.

    I’m considering baling at 50. After passive BTL income (post tax) I expect I want £20k p.a to increase each year for inflation. My magic spreadsheet tells me that if I have a column with my age (51,52 etc), then a column showing a draw off of £20k p.a increasing each year by 2%, assume portfolio growth of 4%, and adding in the state pension for me and the other half at 67, then I need a starting pot of £350k.
    Strictly speaking the spreadsheet tells me that im down to £112k at 67 when the state pensions kick in, and im fine at 99 but go negative at age 100.

    Now, there are lots of criticisms you can make of this model – are my inflation and growth assumptions realistic, what if I have unexpected home repairs, I need care home fees, what if the state pension folds, I get a messy divorce etc etc. On the other hand, im unlikely to live to 100 and I doubt I will spending much at age 85 other than on heating bills and food.

    The biggest risk as I see it is sequence of returns risk – a starting pot of £350k to last 50 years is going down the toilet if it takes a knock in the early years. However, my point here is that in theory at least you can get £20k p.a off £350k if you retire at 50 and will receive a state pension and your spouse/partner expects to receive one also.

    Personally, I would not be comfortable hitting eject at “only £350k” but it’s a number that is more accessible than saying “I need 20k at a SWR of 3% and that is a pot of £571k”.

  • 7 magneto September 24, 2016, 7:19 pm

    Re “What should you buy instead of expensive government bond”.

    Links to The Telegraph article.
    Be aware that Telegraph have allowed a serious error to creep in on yield quoted for HICL Infrastructure. Undermines the case.
    Any investor considering HICL should double-check yield at source.
    No idea if there are any other errors in article! This particular one screamed out!

  • 8 gadgetmind September 24, 2016, 7:36 pm

    I *like* the idea of a bonus/luxury month. I have decided that this will be month 1 of retirement when I will buy myself a Tesla Model S P100D with Ludicrous Mode.

    You’re only young once.

  • 9 freebird September 24, 2016, 11:06 pm

    That’s basically my plan– no 3% steady annual safe withdrawal rate indexed to inflation for me. Instead I’ll be spending the two and twenty that’s now going out of style. So when Mr Market smiles, I’m in first class, and doing staycations after the down years. Not having any control over the timing makes it all the merrier.

  • 10 hosimpson September 25, 2016, 8:38 am

    A bonus months is an interesting idea. I think it would be appropriate for most people, especially those who take a more traditional path to retirement. You stop drawing a salary and begin drawing a pension; a bonus month in retirement substitutes a bonus month in employment (and virtually eliminates the need to save for holidays and chunkier purchases).
    However, my impression of the FI community so far is that of a fairly hands-on group. After all, we are the people who keep spreadsheets to track our monthly income and expenses (broken down whichever way imaginable), portfolio values, rates of return … Christ, I even have a 12-month rolling forecast. I don’t see how it would be possible to keep the bonus month out of those spreadsheets, and once it’s in the spreadsheet it’s no longer a bonus. Not in a just-look-at-this-heavenly-windfall, the-universe-provideth sense, anyway.
    A bonus year could be achievable though, by fiddling with the withdrawal rate. You take a lower income for a couple of years, then, if the market crashes, that’s bad luck and if it doesn’t you’ve got yourself a bonus year to do some round the world ocean racing. Yeah, that would be nice.

  • 11 John B September 25, 2016, 9:01 am

    Like many here I’ve grown rich by being frugal and not coupling my spending to my income. So a monthly spike in income would be ignored in my cash buffer, I’d not view it as a treat to spend.

    My planning is a u in retirement, more early for travel, less as I slow down and have a home bases life, but with a ramp at then for care costs (funded by a house sale). This would balance the observation that people become more content as they age (I’m at the low point in the mid-life crisis aged 48 and a half!) So cheer yourself with early spending, and build up a bank of memories.

    Defining a base spending profile, allowing for market movement, but putting excesses in a seperate treat pot might be the way to go

  • 12 John from UK Value Investor September 25, 2016, 9:38 am

    Super extra massive thanks for linking to my e-book old chap. At least I know someone is profiting from my occasional blunders!

  • 13 Techpilot September 25, 2016, 10:43 am

    Re: Telegraph article “Once safe bonds now offering only risk”

    I have been following Lars Kroijer’s advice to split investment between world equities and minimal risk asset: govt bonds (60/40 in my case). However, is buying govt bonds really minimal risk now? Are we in the situation where they are providing negative yield and a loss of capital? Are we “guaranteed a modest loss” as the Telegraph suggests?

    Would cash be a better minimal risk asset now? A cash ISA may only pay 0.75%, but it’s positive return (before inflation) and the capital is guaranteed under the financial services compensation scheme (up to 75k).

  • 14 Jed September 25, 2016, 12:17 pm

    @ Techpilot Yes in my opinion cash is better I get 1.3% in my cash isa however where its not possible to use cash such as a sipp I use short term bonds (yielding 0.9% ish) which will limit the downside when rates eventually rise.
    @ Surreyboy using £350k to get £20k pa fantastic if you can sweat your portfolio to get that much out for 50 years (state pension included) but that’s a starting withdrawal rate of almost 6% or have I missed something.

  • 15 SurreyBoy September 25, 2016, 1:52 pm

    @Jed – yes, but the 2 state pensions arrive at age 67 to rescue the decline in my example

    As i mentioned in my original post i cant recommend baling out for 50 years with £350k, but its a pot value that some will find more attainable than say £1m or more.

  • 16 Learner September 25, 2016, 3:57 pm

    @SurreyBoy in my head I read “passive BTL income” sotto voce 🙂

  • 17 old_eyes September 25, 2016, 4:29 pm

    As I have said before I think a key question is what are you retiring for?

    In my view what does the damage is thoughtless spending, not thoughtful spending to acquire/achieve something that you desire and are prepared to take the consequences of.

    I have been moderately frugal as I have tried to accumulate for retirement. Now that point is on me (end of next week in fact), I have been thinking about what I want to do with my time/money/effort.

    Various things are on the stocks, but one of my key ambitions is to spend more time on astronomy and astrophotography. Now this can be a mind-numbingly expensive activity, and even if you are are prudent it cannot be described as cheap.

    Many of you might find it ludicrous, but I don’t do fast cars or fast women, 5-star hotels, or top of the line electric guitars (for that authentic mid-life crisis feeling). I know that many have pointed out all the low-cost and life-enriching activities that are out there, and I already do many of them, but this is my dream. If I have to go back to work to pay off this little excursion into my dream so be it. At least I will have done something that I believe will enhance my life greatly. And if you don’t do these things, why retire?

    As always I believe that it is the mindful, eyes open, approach you take to spending that matters, not what you spend the money on.

  • 18 The Investor September 26, 2016, 8:49 am

    @Jed — While I don’t disagree cash is a decent substitute for UK government bonds in today’s strange environment (although cash won’t act exactly the same way, and decades of deflation could favour long-term government bonds even from here) I think you might be a bit optimistic about yields.

    The iShares short-term gilt ETF (1-5 years) currently has a yield-to-maturity of just 0.13%! Individual short-term gilts will have higher coupons (i.e. interest payments) but as you probably know that will be offset by their price falling to maturity. Even its ‘core’ gilt ETF, which takes the average maturity from just under 3 years to around 16 years only takes the yield up to 0.79%.

    Of course you might not be referring to short-term government bonds, but rather corporate bonds. 🙂 But then the substitution with cash is stretched even further, as even the safest corporate bonds are not comparable on a credit risk basis with cash or UK government bonds.

    Not saying anything about the relative merits of all these asset classes here (mix, match, and be merry I say, I think they all can have a place), just the heady yield alternative you cited.

  • 19 magneto September 26, 2016, 9:36 am

    “but one of my key ambitions is to spend more time on astronomy and astrophotography”

    Sound good to me!
    Certainly puts the trifling events on this planet tucked away in a tiny corner of one of an infinite number of galaxies, and such matters as we discuss here about financial decisions back into perspective.
    A bigger picture perhaps?
    Good Luck

  • 20 old_eyes September 26, 2016, 10:18 am

    @Magneto – thank you. As I said a long cherished dream, but one that is not compatible with a lot of travel and early morning starts (the UK is not the best place for clear skies and low light pollution either!). Now I hope it can be fitted into a different pattern of life.

    There is indeed something remarkable to be able to stand in your drive and see through a telescope something that is 2.5 billion light years away, or to photograph a galaxy 23 million light years away and see active star forming regions. I once even accidentally photographed a supernova in that galaxy – that is a real thrill, even if a million people around the planet were doing the same.

  • 21 The Rhino September 26, 2016, 1:12 pm

    ‘Nordvig says he has one overriding advantage: he simply understands markets better’


  • 22 Mike September 26, 2016, 4:06 pm

    @ old_eyes – that doesn’t sound ludicrous at all. Fast cars… I’ll stick to my trusty 12 year old Ford Focus.

    Btw, you must visit The Black Sheep Inn at Chugchilan in Ecuador. No light pollution and at over 3000m your photographs should be pin sharp(er!) As a bonus, being in Ecuador, you’ll be able to see the North Star and turn 180 degrees and see the Southern Cross. And a billion in between all with the naked eye.


  • 23 Jed September 26, 2016, 7:05 pm

    @TI Heady yields yes I remember those bygone days. I was referring to the vanguard Global Short Term Bond fund (hedged), average duration 2.8 years, the yield to maturity has since I checked last dropped to 0.7%. Mostly Govt. bonds with some Govt. related, average rating AA. Not quiet the 0.9% heady yield but not too bad.

  • 24 Borderer September 26, 2016, 11:24 pm

    @The Investor

    Am I missing something, or is it a senior moment?

    Why hold government bonds at all – if yields are <1.0%?

    What in the great scheme of things, and without risk, could dissuade you from being in cash?

  • 25 Mroptimistic September 27, 2016, 5:30 am

    Re cash versus bonds as a risk free asset. To some extent we are lucky that inflation is low, otherwise holding cash would give a more striking negative real return with time! Looks to me that in the short term the risk is that bonds and equities are correlated so the diversity argument won’t apply. It does perhaps show that the risk of deflation is still a factor, however cash would be good enough for that, barring government repressive action. I can’t see an argument for putting new money into government bonds at the moment rather than cash or equities. At least the latter hold some hope if a positive return and not the certainty of a real loss!

  • 26 Old_eyes September 27, 2016, 8:16 am

    @Mike – indeed! There as always a long list of amazing places to visit where the skies are stunning. You can access them by hiring time on telescopes over the Internet, but you miss the glory of standing under the whole sky, breathing the cold clear air, and generally being blown away by it all. Best so far for me? A gite in the French Alps at about 1000m with the whole Milky Way wheeling over my head.

    Brrr! This exchange is making me want to spend some money right now! I may get banned from the Monevator comments section for excessive hedonism!

  • 27 The Investor September 27, 2016, 8:40 am

    @Borderer — It’s very hard to make the case for government bonds versus cash nowadays, but not impossible.

    Firstly, there are “credit risk” issues, although this is really an issue for institutions, not the vast majority of private individuals who can spread their money between FSCS-covered banks. See the recent article by Lars.

    Secondly, government bonds will behave differently to cash in a market correction, even at today’s depressed levels. If the FTSE All-Share was to fall, say, 25% over the next 12 months it’s very likely gilt prices would rise (unless, as seems more possible than usual, the crash was prompted by a sell-off in those same gilts!) In such an environment it’s possible interest rates would be falling, too. So with bonds you’d get a capital uplift in your portfolio at a time when stocks are down, versus cash which would stay static (which is better than nothing!) and perhaps see lower rates. Again, from elevated levels for bonds it’s hard to see this having as great a dampening effect as usual, but it’s still there.

    Finally, for passive investors, getting involved in deciding whether or not to own government bonds is a bit counter-intuitive. The point of passive investing is you don’t try to second guess the market, you live a simple investing life according to simple rules, with all the benefits that brings — including outperforming many of the second guesses.

    You can read posts and more especially reader comments on this site going back to 2010 at least talking about a reversal in bonds. In the meantime the market has been right and all those speculators (including me!) have been wrong, as bonds have only become more valuable. Of course this can’t go on forever, but why do you (/any passive investor) think you know better than the multi trillion dollar/pound bond market? Likely you (we) don’t.

    If/when bond prices do fall and rates start to rise, passive investors will likely be made whole again within just a few years on their bond holdings, as reinvesting higher yields begin to compensate for the fall in prices. Bond crashes are very rarely like equity crashes in nominal terms. (Real returns are a different matter, but then cash will suffer in short order there, too).

    Personally I have held very, very few government bonds on and off over the past few years. But (a) I’m a very active investor and (b) I’d have been better to do so, rather than hold cash, as things have turned out, so I was too “clever” for my own good.

    On balance I think splitting the difference (so say 60% equities, 20% cash and 20% government bonds in a classic 60/40 portfolio) is probably a fair compromise for passive investors who want to “do something”. 🙂

    @Jed — Ah, got you. I thought we were talking about government bonds. Obviously more credit risk as you go into even short-term corporates so even less of a straight substitute with cash. Of course you may judge it’s worth the risk, especially in a widely diversified fund. Pays your money, takes your choice etc. 🙂

  • 28 magneto September 27, 2016, 11:07 am

    “If/when bond prices do fall and rates start to rise, passive investors will likely be made whole again within just a few years on their bond holdings, as reinvesting higher yields begin to compensate for the fall in prices.” TI

    This is an oft quoted helpful psychological prop, that has become so well established now that it just might have become a factoid?
    The statement certainly stands up well when comparing Bonds with Stocks (infinite maturity?), but maybe not so well when considering steady Cash? (with zero maturity).

    There are institutions (Pension Funds, etc) that have to hold such rock-solid assets as Gilts, to match future liabilities. But the suspicion occurs that momentum players are at work, such as Hedge Funds, to ride the present wave? If the moving averages ever cross in the wrong manner, we might then find out whether this is a classic Speculator v Investor example.

    The real plus for Gilt holders, as TI mentioned earlier, is if deflation become a reality. Central Banks have thrown the kitchen sink at the disinflation problem, so far with somewhat limited success. Many thought, including Merryn, that serious inflation would be the end result from the QE type measures!
    If inflation does tick-up short term, the removal of the QE type measure could see us heading back again towards deflation in the medium to long term. Then what?
    The global economic pattern since WW2, might just be atypical.
    Long-term Gilt holders might be proved astute.

    Personally holding off of Gilts for now, but using Short-Term IG Corps (IS15), which are ekeing out a slight +ve real yield.

    These sort of situations reveal the uncertainties of investing, and our lack of knowledge.

  • 29 The Investor September 27, 2016, 12:26 pm

    @magneto — We’re going around and around on this. Each time you comment on bonds you write scattered thoughts that I haven’t got time to address one by one (that’s what the rest of the site is for! 🙂 ) and you repeat yourself. You are either not reading the explanations/responses given, or your disagreeing (which is fair enough but becomes tedious) and yet you’re posing your disagreement as questions (which is frustrating because I’m tired of responding and seeing others respond, thinking it’s a question).

    This time you write:

    This is an oft quoted helpful psychological prop, that has become so well established now that it just might have become a factoid?
    The statement certainly stands up well when comparing Bonds with Stocks (infinite maturity?), but maybe not so well when considering steady Cash? (with zero maturity).

    It is not a ‘prop’ and it has nothing to do with comparing government bond returns to cash or to equities, I don’t understand why you’re bringing that aspect in.

    It’s simply a statement of mathematics. I’ve linked to explanations several times.

    Here’s a big long article on the subject for you to read: https://www.kitces.com/blog/how-bond-funds-rolling-down-the-yield-curve-help-defend-against-rising-interest-rates/

    One day bond prices will likely fall, and yields will likely rise. This won’t be a vindication of people saying “avoid bonds!” for year after year who either misunderstood them and what they were for, or who understood and made a market call that’s already been woefully wrong.

    People defending the case for bonds for passive investors are not saying there won’t be volatility or even losses, especially over the short term.

    These sort of situations reveal the uncertainties of investing, and our lack of knowledge.

    Indeed. Please read the Kitces article above.

  • 30 Borderer September 27, 2016, 1:38 pm

    @The Investor
    I myself am a ‘Passive Investor’ (c. 90% of my portfolio in ‘tracker’ ETFs), but I am not so enslaved by this philosophy that I can’t ‘wake up and smell the coffee’ when bonds, and particularly Gov bonds, are so clearly in such a bubble.

    Perhaps because I’m 6 months from FIRE my perception may be ‘distorted’, but I’m sure at this point it’s all about keeping what I have.

    With inflation (and, more importantly in my case, personal inflation) being so low as to be negative, why on earth would I risk anything on a so called risk free asset that is anything but?

  • 31 The Investor September 27, 2016, 4:22 pm

    @Borderer — Minus the various bits of colour (“enslaved”, “anything but risk free”) I don’t disagree a reasonable mind can reach that conclusion. 🙂

    Now try having that same conversation 200 times or more at least, for five or six years, often with the same people. For extra points, have people call you an idiot or irresponsible even for suggesting bonds can still have a place in a passive portfolio for many investors.

    And then — though this wasn’t actually part of your defense of the asset class, but still, irony — have them keep going higher. For five or six years. And then have precisely none of those people come back and go “Oops, didn’t see that coming.”

    Government bonds are risk free in the sense there is no credit risk. The yield to maturity on all conventional UK gilts currently is greater than 0%, or it was last I looked. So UK government bonds are also risk-free in the sense that you will get a positive nominal return if you hold the bonds to maturity. So they are all about “keeping what you have”.

    Yes, they’re risk free. (Not “so called” risk free.)

    “Why on earth” you would own them is because you consider those attractive traits to have among your diversified portfolio of assets.

    Or you may decide not to own any, as indeed I have not in the main in recent years.

    Your choice. 🙂

  • 32 Jedmir September 27, 2016, 7:15 pm

    @ TI @Borderer I can see where you both are coming from. Yes I can see where bonds at any price fit into a well diversified passive portfolio and also when you are approaching retirement/ FIRE where your portfolio has to feed you there is a natural inclination to reject assets in bubble territory. You have to sleep at night and be comfortable with your choices and therefore what you perceive to be right for you is the best decision for your circumstances. I’m no lover of bonds and prefer cash if possible. PS short term investment grade bonds fared ok in 2008 not as good as short term Govt. but not far behind.

  • 33 The Investor September 27, 2016, 9:21 pm

    @Jedmir — Yes, I’ve got no argument with people having their own views about what they want in their portfolio, as I hope I’ve expressed multiple times here and elsewhere. Each to their own!

    Where I argue (which I only do because it’s my blog, and I feel a responsibility to an extent to the commentor but much more to other unknown readers who may just be browsing by and picking up bad information (I don’t pick fights on other websites 🙂 )) is when people speak in absolutes about things they either don’t understand, are exaggerating about, or are expressing certainty about with regards to their own prowess (and arguably, from a passive point of view, anyone’s prowess) at knowing the future returns of when in reality such prowess is almost certainly far weaker than their rhetoric suggests.

    In short, it’s very, very easy to write Moneyweek style polemics about bonds, equities or whatnot, and to sound really adamant and wise just by not prevaricating.

    I could knock that sort of stuff out in an hour, based on my hunches, prejudices, and whatever I thought would get the most traffic.

    It’s actually much harder work — as a writer, but also I guess as a reader and investor — to embrace uncertainty, nuance, and so forth, and to endlessly dilute your argument (and broaden your thinking) by seeing one side and the other. (E.g. As above, where I’ve explained why people might own bonds, and equally said I own almost none).

    The endless ‘bonds are trash’ type stuff is extra-ironic to me I guess because this site went through 2007 and 2008 early in its life, and in those days the adamant argument across the web from private investors was “I want return OF capital, not return ON capital”, the system is going down, people saying shares were far too risky, the banks were going bust, they were 50% in gold, etc etc etc.

    This blog has only been going a decade and literally we’ve already seen such extremes!

    No doubt we’ll see more. 🙂

  • 34 zxspectrum48k September 28, 2016, 12:02 am

    I’ve found the negativity since 2008 around govt bonds frankly bizarre. You couldn’t have asked for a better environment for global bonds: low growth, weak aggregate demand, ageing demographics, deflation fears, ZIRP/NIRP, multiple rounds of QE, regulatory changes forcing banks (Basel III) and insurers (Solvency II) to buy govt bonds. This being Monevator, use the Vanguard Long-Duration Gilt tracker as a metric. It launched in early 2011 and has generated a modest 108% since then and a pathetic 32% YTD. I’m so regretting selling my FTSE trackers to buy all those overvalued bonds …

    Nonetheless, I admit I’ve taken profit on nearly all my UK govt bond funds in the last month. I think the BoE is against NIRP, we get more imported inflation and some fiscal expansion. So bond yields may be basing. However, I could be so wrong. Let’s face it, I’m trying to call a base in a 30 year trend for lower bond yields. The current 30-year benchmark gilt (UKT 3.5% Jan-45) yields 1.40%. While low compared to 30y US Treasuries (2.30%), it’s high compared to to Germany (0.40%), Japan (0.50%) and Switzerland (-0.10%). Zero is not a floor anymore when it comes to bond yields. If 30y Gilts rally another 100bp over the next 12m, I’m going to miss out on a return of 24% (cap gains + carry + slide). In the type of scenario where that happens I doubt the FTSE will rally 23%. Of course if they selloff 100bp, I lose 15% (isn’t convexity great?). But selloff in global bond yields, changing all those discount factors, might well trigger a selloff in global equities …

  • 35 Mroptimistic September 28, 2016, 7:08 am

    Over the many years I have been saving (not organised enough to call it investing) I held IL gilts directly and TIPS both as a safety net in my eyes. One thing I am unsure about is the difference in behaviour of a bond fund versus a direct holding. Holding corporate bonds directly isn’t too easy and probably not smart, but gilts are straightforward to hold in an ISA. Can anyone point me to a previous discussion on this, I would be grateful to get my thinking clarified.

    There is also the point about gry that with all gilts trading above par, redemption brings a capital loss even if the Npv is positive. Still find it difficult to label this as risk free 🙂

  • 36 The Investor September 28, 2016, 8:47 am

    @Mroptimistic — Strongly recommend the Kitces article I linked to above in my reply to @magneto. It’s based on US Treasuries but it covers the same thing you’re asking about (direct bonds versus bond fund).

    Albeit not the index linked variety, as I’ve just noticed you’re asking about, so on second thoughts perhaps not very applicable given the complexities of index linking. (I’ll happily admit index linked bonds do cause me to need to sit down with a calculator, a pencil, a notepad, and a cold towel. 🙂 )

    Of course you’re right re: capital losses, but that is why the bond market works of redemption yields (/yields to maturity). 🙂 Which as you say are positive for all but the very shortest duration conventional gilts. (I just checked. Short here means less than one year).

    Nobody (except @ZXspectrum — interesting comment 🙂 ) has been saying government bonds have been an easy buy down at these levels, and no-one is today. As I imply above, losses are quite possible and I think the balance of probabilities is US/UK government bonds (not index linked) will be poor performers for the next few decades, compared to a basket of global equities say. But who knows.

    My problem is (a) passive investors who wouldn’t think to have an opinion about equity markets suddenly get super confident about bond markets (which are far more deep and liquid, and whilst they may be distorted by Central Banks, any such distortion would anyway work its way up the yield curve into equities) and (b) active investors who think they’re a no-brainer sell without acknowledging that virtually the same arguments (except true negative yields, perhaps) could have been used 2/3/5 years ago (when others of their ilk were using them).

    The whole atmosphere makes me think we’re overdue a proper equity market crash. People seem to have forgotten (not intellectually but emotionally) what truly risky assets with utterly unknown future values, no guarantee of income payments to come and a perpetual life (i.e. no redemption date) can do in a slump!

    Perhaps UK investors are especially cocky on the fumes of their Sterling denominated post-Brexit rally! 😉

  • 37 magneto September 28, 2016, 12:03 pm

    “The whole atmosphere makes me think we’re overdue a proper equity market crash.”

    Yes, we may be taking our eye off the ball!
    A 50%+ stock decline is a distinct possibility from present levels.
    That’s what our relatively stable Fixed Income counter-weight is all about.

    The more I read in the financial press about low yielding Gov’t Bonds, the more the contrarian streak in me looks for reasons to get back into Gilts, after so reluctantly selling the last tranche this year.

    Today I read :-
    “The DMO yesterday sold £400m of IL 36 year debt for £870m.
    The yield on the issue was -1.77%, the ‘lowest in history’.
    ….. and means investors will get back only £855m after inflation.”

    Now there are several snags with this :-
    – The £400m would be the face value at the date of issue, whenever that was, not today’s inflation adjusted price.
    – As The Investor points out above, the calcs needed to arrive at real redemption yields for IL Gilts are horrendous. One has amongst other issues to assume a rate of inflation to maturity. How clever are the sources and what is being assumed?
    – IL Gilts (like the beloved NS&I linkers) are based on the discredited RPI, not the Gov’t preferred measure CPI. That gives them a head start (of about 1% plus) if CPI is considered a reasonable basis.
    – Investors are not stupid. They are investing in these IL Gilts for good reasons, we just have not fully adjusted our thinking to adapt to those reasons.

  • 38 Mroptimistic September 28, 2016, 10:01 pm

    Thanks Mr I. I was interested in bond funds so I will read that. Noted the discussion on IL gilts. Before Brexit they were offering -0.7% per annum real return, after it went to -2%. This is per annum. I hold IL 2.5% 2024. If the price followed the index I should expect 2.5% yield. If it offers a negative percentage not only have I lost the real coupon but also the negative margin. This reflects how the price has risen above the inflation adjusted par value. This reflects the appetite of the big pension players who have their risk models and regulation constraints. Their risk profiles are not the same as the retail punter so it is unwise to assume that the price set by their trades reflect the same risk return profile applying to us. The efficient market idea is not necessarily applicable here.

    One last point, have have you noticed that Vanguard have established a credit line to assist liquity recently. Do you think they are worrying about equity or bond redemptions?

  • 39 The Investor September 29, 2016, 7:54 am

    @MrOptimistic — Yes, inflation-linked gilts are have seen soaring prices especially at the longest durations over the last few months. Frankly I’m not really sure what it means. (Like everyone, I have my theories). See this FT article if you’re able: https://www.ft.com/content/8e5fc7dd-c42e-3950-8a99-e5fa1f6d3670. [Here’s the search result]

    It seems (via timing) that it’s at least part a reaction to Brexit and presumably inflation from the lower pound as well as a fear trade, but a 60% return YTD for the 50-year inflation linked gilt (!?) is frankly frightening.

    Again, though, I don’t know that passive investors should be hugely changing their portfolio strategy on the back of this (i.e. becoming active). If they owned an IL gilt allocation, it will have risen. If ILG prices do fall in the future for whatever reason, they’ll lose that gain but something else should do well at such a time. A passive investor should have a bit of all sorts, and muddle through. That, in a nutshell, is the whole point. 🙂

    As an active investor who has given myself permission to own any amount of anything, it’s a bit of a mind-minder. I agree it seems likely that the price is distorted by who has to buy/own (and thus I may prefer assets they can’t buy, such as equities, which I’d be minded to prefer anyway — but the price there is as you know the real potential for huge volatility/drawdowns even in normal times).

    Bottom line is as I type I own no IL gilts, though I did buy a slug of US TIPS via an ETF recently, where there hasn’t been this surge and I believe I’m still getting a sliver of ‘global hyperinflation’ protection (as opposed to matched to UK inflation) say. But obviously this brings in currency risk, and isn’t a strategy for passive investors. It’s active “thinking I know better than the multi-trillion market” thinking, with all the usual caveats. 🙂

  • 40 Mroptimistic October 2, 2016, 8:04 am

    Thanks, followed your suggestion and read the link, plus a couple of others on same subject from fidelity and vanguard. Rather surprised the first article assumed you could buy at par, and none of the articles had a real world example based on historic data. I suppose if you definitely want a known return of capital at a given time then direct holding may make sense and the slide down the yield curve through reducing duration is the Npv calculation in action. Anyway, thanks again. PS, you did note vanguard’s action to put in place a credit line, any worries about etf liquidity ? Wonder how an index bond fund would work in a disrupted market with inadequate liquity.

  • 41 Mroptimistic October 2, 2016, 8:20 am

    As a separate comment on retirement planning, we, until a recent falling out, helped a 92 year old neighbour with domestic chores. She lives in a cold, old thatched house and has progressively severe mobility issues. As of a year ago she is effectively bed bound and needs extensive paid for care. She considered herself wealthy with amongst other things a 300k portfolio managed by a well known bank. The holdings were only partly in ISAs and had a growth focus. She didn’t like my advice to derisk the thing. I think she was in the dangerous position of thinking she knew about things when she didn’t. Now the daily care bill must exceed £360, call it £120k per year. If she is drawing down her portfolio there will be capital gains and income tax issues. So even a sizeable pot at an advanced age can be put under pressure.

    Worthing thinking about in terms of drawdown: even £300k at age 90 may not be enough if you don’t manage other aspects of your life, eg housing.

Leave a Comment