What caught my eye this week.
The first few days of a new year are often an anti-climax. It turns out the problems we had last year aren’t magically wiped away by how human beings decide to formally turn a page.
However this time there’s déjà vu in the mix too. Because early 2025 has a distinct end of 2022 vibe.
Yes, bonds are selling off – and people are writing mean things about central banks and a UK chancellor again.
In fact, earlier in the week it was being framed with straight-up Truss-talk – another UK gilt crisis.
It’s true the UK is somewhat uniquely placed for bullying, being so enfeebled.
But rising yields are global, even if pundits in every country have tried to spin the rise in borrowing costs as their nation’s own special curse.
Here we’re blaming Rachel Reeves’ tax-raising and spending budget.
In the US people point to incoming Trump tariffs and a government deficit in the trillions continuing to add to its planet-sized national debt – as well as a growing conviction that inflation isn’t quite licked.
But yields are up in Europe too – in the EU and outside of it.
For example in Romania – where the ten-year yield is nearing 8% – I suppose they’re blaming their own barmy strongman moment.
It’s different this time
As often happens with bonds, trouble was brewing for months before it landed on the front pages.
Financial nerds (guilty) were especially worried by the unusual development illustrated in this graph:
As Torsten Slok at Apollo wrote when he posted it:
The market is telling us something, and it is very important for investors to have a view on why long rates are going up when the Fed is cutting.
By the end of the week – when the US posted a surprising high ‘jobs number’ that showed the economy was firing on most cylinders – the consensus was that the ‘terminal rate’ was going to end up higher, and that this was what the clever market had already discounted.
Terminal bore
The ‘terminal rate’ is just bond-wonk talk for where they expect rates to end up for the five minutes when everything is in balance, before the next crisis strikes and central banks have to act again.
Six months ago everyone was looking forward to multiple rate cuts from the US Fed. And many were still wondering where the long-promised recession had gone.
So yields seemed dead set to fall.
But looking at markets now, I’d be surprised if even the one Fed cut still expected comes to pass this year.
Of course, saying “yields are up because the terminal rate is higher” really just palms off the question of “why?”
As does another bit of bond jargon that I think is relevant – the ‘term premium’.
This term premium is basically the extra return you’d expect and demand for buying long-dated bonds instead of short-term bonds.
But without getting into the weeds – and knowing full well that some readers will confidently declare they know exactly what it is in our comments – let’s just say the term premium is a bit controversial.
That’s because it involves estimates of risk, not simple maths. (Some people even deny it exists!)
It’s a mad-a world
The sober way to assess the graph above is to say that the US economy is much stronger than was expected, inflation has been largely dealt with but is still over-target for the usual laundry list of reasons, and that Trump will cut taxes, boost growth, and continue to add to the US national debt.
However I’m minded to agree with economist Paul Krugman, who speculates there may now be “an insanity premium on interest rates”.
Krugman writes:
Look at the dynamic over the past few days.
Jeff Stein of the Washington Post reported that people around Trump were planning a fairly limited, strategic set of tariffs rather than the destructive trade war against everyone Trump has been promising; Trump quickly responded with a Truth Social post calling the report “Fake News” and declaring that he does too intend to impose high tariffs on everyone and everything.
In short, Sources: “Trump isn’t as crazy as he looks.” Trump: “Yes I am!”
Then, as if to dispel any lingering suspicions that he might be saner than he appears, Trump held a press conference in which he appeared to call for annexing Canada, possibly invading Greenland, seizing the Panama Canal and renaming the Gulf of Mexico the Gulf of America.
This morning CNN reported that Trump is considering declaring a national economic emergency — in a nation with low unemployment and inflation! — to justify a huge rise in tariffs.
Like any economist Krugman has been wrong about plenty of things, but I think he’s on the money here.
I’d even argue there’s some kind of Stockholm Syndrome thing going on in US politics at the moment, which has reached across the pond to us too.
A man who early last year was found guilty on 34 counts of falsifying business records to disguise hush money payments to a porn star has been re-elected as President for a second term.
You may recall the headlines:
Trump is the first ex-president to be sentenced for criminal conviction.
Yet this week he wasn’t given anything for his crimes – basically because he’s about to be a President again and nobody wants a fuss.
No fuss, like, say, that we saw four years ago when his followers run rampant through one of the US government’s most important buildings and multiple people died:
If you think this is all normal then good luck to you.
Indeed even if you’re one of his Poundshop fans stirring up trouble on social media this week – someone whose knowledge of history doesn’t seem to extend beyond The Battle of Britain – then you have to admit that for good or ill, things seem to be ‘in play’.
Just since Krugman’s recap we’ve had the MAGA wing blaming the L.A. fires on excess wokeism. As opposed to, say, last year being the hottest globally since records began due to human-induced climate change.
And now I read Peter Thiel opining in the FT and calling for a Truth and Reconciliation process in which US state secrets are declassified by Trump to the world because “the Internet won”.
Meanwhile Trump’s best-buddy and backer Elon Musk is getting stuck into politics here, in Germany, and elsewhere. And the same faction of Tories who clutched their pearls when Obama suggested Brexit didn’t make a whole lot of sense eagerly leapt up with their tails wagging and teeth drooling when this foreign master called.
You can obviously see my biases here – but it is all relevant for the bond market.
In the first Trump presidency we saw yields roiled by his random Tweets. Such uncertainty has a cost.
In short, bond holders want more of a return when they’re hostage to a self-proclaimed revolution, and I am pretty sure that’s reflected in the escalating term premium
Back in basket-case Britain
US bonds matter because they act like gravity on yields around the world.
If you can get 5% on 20-year US Treasuries – which you now can – then it’s harder to justify owning say European government debt on lower yields, let alone that of an emerging-emerging market like the UK.
The UK 30-year gilt yield is now 5.4% – up from a yield of 5.1% when we sang Auld Lang Syne and just 4.3% back in September.
That’s a huge move.
Mostly this reflects rising yields across global bonds, but the UK does seem to be getting it a bit worse.
Sure, the Budget won’t have helped. I didn’t like Labour’s anti-growth tax on business either.
True, blaming the new Labour government for coming clean on the mess left by the previous 10-plus years of unavoidable events – Covid, Ukraine – and witless self-harm – the ongoing cost of Brexit, which more or less covers the spending gap Reeves is trying to fill – seems to me like chastising the parents who are cleaning up a ruined house after a teenage party goes viral on Facebook.
But that’s democracy. He or she who who’d wear the crown must drink from the poisoned chalice.
And on that note – not incidentally – we have Nigel Farage and Reform waiting in the wings and polling a 20% share of the popular vote.
When you consider the best that can be said about Brexit is house prices didn’t immediately crash – but absolutely nothing good came of it, not even the all-important fall in immigration – then you can see the problem.
As in the US, some people are still voting with their hearts and feelings, not their heads.
In such a climate anything can happen. And with UK government borrowing now looking like rising and becoming more costly to service even with grown-ups in charge, I can well understand why a bond holder would want more return for holding a 20-year bond baby.
(Bigger picture: how’s your bug-out emergency plan coming along?)
Inflated expectations
With all that out my system, let’s also admit higher yields are about inflation expectations, as I said.
True, this is undoubtedly linked to politics too. The timing in Torsten’s graph above makes that clear. Non-token tariffs and mega-deportations would cost the US economy, and hurt the rest of us too.
But just on the numbers, inflation hasn’t yet returned to target in the US and most other places, and the big US jobs number won’t have settled any nerves.
Personally I don’t understand the surprise.
Just 18 months ago, confident sages were telling us we’d need a recession and soaring unemployment to bring down the double-digit inflation.
In fact we needed neither – probably because double-digit inflation was yet another hangover from the pandemic, more than anything normally cyclical – but I’m not surprised it’s lingering on above 3%.
I was warning here as far back as 2020 that the aftershocks from global lockdowns would reverberate for years, like a cranky old machine you turn off and restart. It was never going to be a painless reboot.
But how much does a little bit of ongoing inflation really matter, anyway?
Inflation targets are arbitrary, and while it would do more damage to abandon them here, the Fed and other Central Banks can probably quietly ignore them if they believe inflation will still eventually settle, if they’d rather keep the economy humming. Especially when inflation expectations seem anchored, and in the main the big demands for huge pay increases have gone away, at least outside of the public sector.
Alas, the trouble, as I’ve belaboured above, is that political and fiscal events are rocking that quiet agenda.
The bond scare and you
So what does this all mean for our personal finances?
Well, mortgages probably aren’t going to get cheaper anytime soon.
Even if the UK does go back into recession, the Bank of England can’t really cut much against wider rising yields. Besides, it’s that market rate environment that really sets mortgage rates.
Higher government borrowing costs could well mean more taxes, too. Goodness knows from where.
And/or spending cuts – but ditto.
On a brighter note savings rates should stiffen a bit. Good news for those with a stash of cash.
The 60/40 sitrep
Another thing worth mentioning is that bond portfolios won’t be feeling anything like as much pain as in 2022.
Yes you’ll probably be looking at capital losses rather than the gains that seemed likely a year ago. But check out this five-year graph:
Source: Google Finance
The recent declines in iShares’ core long-term bond ETFs are not pretty, but they’re nothing on the scale of what we saw in 2022.
As I’ve stressed a few times over the past couple of years, the dramatic re-rating of bonds from the near-zero era was a one-time massacre that shouldn’t put you off the asset class for life.
If your preferred asset allocation wants them in your portfolio, then you needn’t overly-fear a repeat of 2022. Or at least if we saw another 2022 in a hurry then we’d have problems that would roil everything else in your portfolio except perhaps for gold and tins of beans.
Finally, I presume those of you who believe that holding individual long bonds would somehow have saved you from the murderous maths of the 2022 bond sell-off will finally listen to me when I say that it wouldn’t have.
Here’s how the Treasury 4.5% 2042 gilt has behaved over the past three months, for instance:
Source: Hargreaves Lansdown
And here’s the five-year chart:
Source: Hargreaves Lansdown
As the second chart shows, own expensive bonds trading above-par and you’ll get whacked when yields rise, whether you hold the bonds individually or in an ETF that makes the job easier for you.
There are other reasons you might prefer to own individual bonds. But I see so much confusion in the comments about it that I think it needs its own article. For now know that reducing duration is the only way to prevent this kind of short-term volatility (typically at the cost of long-term returns).
The bond news signal
I’ll leave you with a hopeful thought.
Normally when ever-boring bonds make headlines around the world, we’re near or even past the peak of things getting worse.
So I imagine yields will steady from here. At least for a while.
Have a great weekend!
From Monevator
The Slow and Steady passive portfolio update: Q4 2024 – Monevator
Pensions and inheritance tax: Rugged by Reeves – Monevator
From the archive-ator: Three crucial steps to making New Year’s Resolutions work – Monevator
News
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US jobs market soars past expectations in last report before Trump – Guardian
Britain’s gas storage levels ‘concerningly low’ after cold snap – Sky
Tesco faces £250m in extra costs after Budget tax shake-up – This Is Money
Lloyds to let customers use Halifax and BoS branches – BBC
Man told he can’t recover £598m of Bitcoin from Welsh tip – BBC
Hard-boiled egg becomes healthy on-the-go hit for shoppers – Guardian
“My mum died after four days on an A&E trolley” – BBC
Which celebrities popularised (or tarnished) baby names? – Stat Significant
Products and services
Chip launches best buy easy-access savings account, bucking trend – T.I.M.
How to get cashback on train tickets – Be Clever With Your Cash
Get up to £1,500 cashback when you transfer your cash and/or investments through this link. Terms apply – Charles Stanley
Your new year pension tidy up could drag on until spring [Search result] – FT
Where are interest rates headed and what will it mean for mortgages? – T.I.M.
Open an account with low-cost platform InvestEngine via our link and get up to £100 when you invest at least £100 (T&Cs apply. Capital at risk) – InvestEngine
Is the Monzo 1p savings challenge worth trying? – Which
The best heated clothes airers to save money when drying laundry – Guardian
Homes for sale for fitness fanatics, in pictures – Guardian
Comment and opinion
Pot Kettle Black: active funds and index concentration – Morningstar
Why fears over IHT raid on pensions may be ‘overcooked’ – This Is Money
Ten reasons you’re not stupid for paying off debt – White Coat Investor
Risk is personal – Humble Dollar
How much money buys you happiness in retirement? [Search result] – FT
Why Michael Green is known as the Cassandra of passive investing – I.I.
You don’t need to budget [Podcast] – Money With Katie via Apple
Situational spending – Seth Godin
How to split your finances in a divorce – Which
About to retire? Here’s a must-do checklist – This Is Money
Lessons learned from The Purpose Code – Oblivious Investor
A look back at 2024 – Simple Living in Somerset
US markets are whack: 2025 edition
The US stock market has never been more concentrated – FT
Howard Marks on bubble watch – Oaktree Capital
Stocks are more expensive than they used to be – The Irrelevant Investor
Are we bullish enough? (Redux) – Of Dollars and Data
The Roaring 2020s – A Wealth of Common Sense
US credit markets suggest US stocks are overvalued – Bloomberg via Y.F.
2024 portfolio reviews mini-special
One from a mostly passive high net worth investor… – Fire V London
…and one from an unapologetic small-cap stockpicker – Maynard Paton
…and a dividend focused portfolio – UK Dividend Stocks
Naughty corner: Active antics
Meb Faber: shareholder yield 2nd Edition [Free audio book] – Spotify
The business of selling booze is under pressure – Sherwood
2035: an allocator looks back over the last ten years [Note: 20 thirty 5] – AQR
Simple formulaic investing still works – Alpha Architect
Risk management 2025-style – Known Uknowns
MicroStrategy starts the year buying more bitcoin… – Sherwood
…but why is the corporate HODL-er in such a hurry? – FT
Kindle book bargains
The Black Swan by Nassim Taleb – £0.99 on Kindle
The Simple Path to Wealth by J.C. Collins – £0.99 on Kindle
Number Go Up: Inside Crypto… by Zeke Faux – £0.99 on Kindle
Side Hustle by Chris Guillebeau – £0.99 on Kindle
Environmental factors
Richest use up their fair share of 2025 carbon budget in ten days – Guardian
Hottest year on record for the planet in 2024 – Guardian
Is climate change to blame for the California wildfires? – A.P. via Euronews
Wind was Britain’s top electricity source last year… – Reuters
…and the UK’s EV charging network saw record growth… – This Is Money
…indeed, EV sales are up around the world – Semafor
Robot overlord roundup
On roads teeming with robotaxis, street crossings can be harrowing – W.P. via MSN
US misrule mini-special
The slow assassination of the free press – How Things Work
January 6 was successful – Unpopular Front
The truth about January 6… – Kottke
…and what really happened with the first police officer suicide – Politico
Meta’s free speech grift [Or: if you can’t beat ’em join ’em] – Kottke
$1m knee pads – Spyglass
Understanding DOGE as procurement capture – Anil Dash
Off our beat
Against optimisation – The Garden of Forking Paths
Why we struggle – Humble Dollar
The extreme self-care trends shaping young men – Men’s Health
144 ways the world got better in 2024 – Reasons to be Cheerful
Why Germans don’t do it better [Podcast] – A Long Time in Finance
Coffee drinkers reap a health boost, provided they drink it in the morning – Guardian
And finally…
“How much money you made or lost on your last investments can transform how risky you think the next one is. The same bet can feel either dangerous or safe, depending on whether you are on a hot streak or in a slump. That’s how your investing brain is designed.”
– Jason Zweig, Your Money and Your Brain
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I digress from FIRE and monetary issues.An alternative view r DJT and the porn star. DJT is an adult, the porn star is an adult and a transaction of sorts took place, the second oldest industry in the world. He tried to cover it up using company expenses, naughty but not a hanging offence. Former president Mr Clinton took advantage of a young intern, Ms Lewinsky and then tried to cover it up. Did money change hands? I would suggest that Mr Clinton’s actions are potentially more serious than DJT yet reaction to each differ.
On the bug out plan and the A&E link. Is there a country in Europe with a functional health service?
I was chatting to an A&E medic at parkrun this morning and it wasn’t pretty (UK)
@Bally01 — He was found guilty in the American courts by the American justice system, and is the first ex-President to be so criminally convicted, let alone re-elected. What you or I think about how he spends his private time is irrelevant.
This is likely to be a debate-worthy post, I acknowledge my own biases in the piece (though obviously I think the evidence is on my side) but this isn’t the place to re-litigate the above conviction please everyone. Likely to delete to keep the convo on-track. (Posts about the political situation itself is fine, pending any influx of nonsense, provided constructive and additive).
Great article as ever . I really have never liked bonds and I know this is probably wrong but I can’t shake it ! This was even before 2022 . I have a very small allocation of bonds probably around 10% and at the moment have about 20% in cash. It just makes me feel more comfortable. It demonstrates how much of investing is a mindset as equities dont worry me as much. I have more confidence of a faster return following crash vs bonds and feel the risk vs reward is worth it . I appreciate there will be historical data that says this isn’t the case but again demonstrates how much choosing a portfolio is down to an individuals mindset vs reality.
@Rhino — Highly anecdotal, but a Spanish ex of mine used to book an appointment with and fly to see her local GP seemingly on demand. (Long weekend, she’d see them on Monday). Blood tests etc were arranged without fuss. The surgery/hospital looked more like an Apple Store from what I saw of it.
There was an element of explicit insurance premiums paying for this but it wasn’t bonkers. (Something like £100 a month from memory, versus the £4-5K per annum she was paying on UK PAYE).
@TI (#5):
Roughly, how long ago was that? I ask as such things have deteriorated significantly in other parts of mainland Europe over the last few years.
@TI (#5):
There is now a worldwide shortage of healthcare professionals (doctors and nurses) following the COVID pandemic. All Western health systems are under severe pressure due to a lack of staff (who can now pick and choose in which country they wish to work) and the demographic time bomb whereby older patients with increasingly more co-morbidities are using-up more and more health resource whilst living longer.
Bonds – doncha luv ’em?
Maybe not. Especially when I can get 5%+ on the Royal London Short Term Money Market fund. With inflation at 2.6% or so, that’s a handsome profit for little or no risk.
This will mostly be spent down as I use up my Personal Allowance from my SIPP once I pull the trigger. Helpfully, that nice Rachel has frozen the Personal Allowance for three years so I bought three nominal bonds to (more or less) provide the cash each year to provide certainty. I think I even got 4%+ yield when I bought them. Sorted.
Btw, it’s interesting that I settled on the growth half of my Portfolio yonks ago (Global Equities, consolidated into HSBC FTSE All World a few years ago), but fret over / fiddle incessantly with the defensive half. Finally settled on equal parts Gold (Whoa! Look at her go!) Royal London, Commodities and BHMG. Anybody else have this issue?
@Brod. Yes indeed. I find the defensive part of my portfolio much more challenging somehow (than even than the small caps I’m invested in).
BHMG / RICA / PNL, Gold, Money market funds…. but Trend Following funds instead of Commodities now. I don’t invest in bond funds directly… am hoping that the aforementioned ITs can make the right decision regarding those.
Dario Perkins at Lombard (always worth a read) coined the term “moron risk premium” to describe the higher interest rates the Truss government had to pay for their policies being … a bit silly. Krugman’s “insanity premium” is a straight lift of the idea, which I think he’s admitted!
Not sure Trump going for a repeat run is his best idea? Last time around he governed in a supine (comatose?) bond market. That’s not the case today, even with the US ‘exorbitant privilege’ etc. If it looks even half-likely that some of his crazier schemes might actually happen, I’d expect some fireworks at the long end (globally) + a stronger $ + trashed Russell 2000 etc. Paging James Carville!
Re the bond moves in different markets and how much is caused by what, Toby Nangle had a good piece in FT Alphaville breaking it down. TLDR: roughly what @ TI said!
The moves in UK long linkers have already been pretty fierce. You can now get RPI (CPIH from 2030) + 2.05% on the TG51 (so 27 years). If, like me, you’re too chicken for the long-end the TR31 (6.6 years) is RPI + 0.77%. The TG36 (11.9y) is 1.33%. How much further they all go is the $64,000 question…
Toby Nangle piece in FT Alphaville on rising bond yields:
https://www.ft.com/content/03975602-54ce-469a-9dbf-760ea30e3017
@Lesley Mackin- 100% agree. I never got over 2022 with my Bonds and Investment Trusts. Agree with “Mindset”.
Excellent and persuasive piece @TI.
Whilst not actually disagreeing with a word you say, I’m tending towards a slightly different set of conclusions:
1. DJT is a symptom and not *the* cause of chaos. The ‘West’ has been on a sticky wicket since relative de-industrialization/ offshoring and financialisation from the early 1980s onwards, but the productivity crisis (esp. UK & Europe), rise in inequality (esp. UK & US) and the emergence of social media ecosystems – all since the 2008 GFC – have taken things to a crisis point with much more marked political uncertainty and volatility. The 2016 referendum. Corbyn doing much better than thought possible in 2017. Boris securing the largest majority in 2019 for the Tories since 1987 but leaving in 2022. Truss serving just 49 days. Labour going from 200 to over 400 seats in 2024 on just 700k more votes than Corbyn got in 2019, whilst the Tories plunged to just 120 seats, and their worst result in two centuries. And Labour, the Tories and Reform now all polling about the same, with serious predictions of a Conservative -Reform coalition as soon as the next GE. In other words, things feel Bat **** because, since at least 2016, they really have been. Fixed income institutional investors finally want an uncertainty premium for that.
2. For reasons best understood by the towering genius that is Andrew Bailey, the BoE evidently thinks that it’s a good idea in the face of rising market rates, falling output and higher taxes to try this year and sell £100 bn of the gilts which it brought in QE back to the market as part of QT. I hope Mr Bailey understands what’s he’s doing here.
3. It’s seem like it’s time to ask whether or not bonds now have become cheap enough (relative to equities) and give enough yield to justify underweighting shares in order to overweight bonds?
On this last point, I note that @Finumus’ 2025 target allocation (with 1.2x leverage) is just 35% in stocks, but with the same in bonds (plus trend at 10%, hedges at 5%, commodities & gold at 5%, REITs at 5% & the last 5% in various).
I’ve read comments on linkers on here but never quite worked out how to buy them. How would one go about buying them on AJ Bell or HL? One for the watchlist at least with a view on timing the market when the ‘insanity premium’ increases a wee bit further.
@E&G (#14)
This site did a great write up of this (buying index linked gilts) just 3 months ago:
https://monevator.com/how-to-buy-index-linked-gilts/
@Al Cam @Grumpy Tortoise — We dated about ten years ago, but we’ve stayed in touch and I know she still returns there a lot for healthcare. I haven’t heard her complain.
But I appreciate it was pre-Covid of course and as you say there’s a lot of strains everywhere. Someone pulled me up on my beliefs about German trains running on time a few weeks ago, of which more on the Long Time In Finance podcast linked to above is revealing…
Thank you for the ‘Against Optimisation’ link. My kind of guy
Indeedy. And he’s got it in for hustle culture. I keep saying you are not your work 😉
Resilience nearly always comes at the cost of efficiency. F’r example, I wonder if anybody anywhere has the faintest idea of how to black start the internet, say after a Carrington event. Imagine a billion smartphones seeking the social media teat. Okay, there’s some hope that the Carrington event might blow out a lot of fondleslabs and mobile base stations, but I feel for the poor guys trying to bring up the backbone.
The original internet protocols may have been designed to reroute around a nuke, but today’s centralised and optimised internet ain’t your grandfather’s low bit rate thing paying homage to the end to end principle. Now there are many single points of failure.
The UK is an emerging emerging market? Oh that’s depressing!
@Alex — I said an ’emerging emerging-market’. We trade on higher yields and our currency is weaker than would otherwise be the case. At the very least, I defy anyone to say we’ve got stronger over the past ten years.
If you don’t believe me ask @ZXSpectrum48K, who has intimate professional knowledge of these markets. 🙂
p.s. Oops, apologies Alex, I see you quoted ’emerging emerging-market’ too. 🙂 (Or edited it afterwards during the window I guess?) Can be struggle to keep a close eye on comments when going about my day, especially when two threads are comment threads remain active (Finumus’ post is still going strong) and the spam is piling up.
Very fortuitous bad news AFAIAC. We will soon want to buy some RPI linked annuities and hopefully the rates will be a little bit better than before Christmas. We also have a gilt maturing at the end of the month, some of which will be reinvested into another gilt (or gilts) at higher yield.
@TI,
you’ve got a membership backend, why not create a free “skinflint” tier and require that for commenting? It might nudge some people into paying _if_ you can come up with a suitable adjective, as some might view skinflint as having positive connotations.
@TI (#16):
As I am sure I have mentioned before “the malaise” is far from unique to the UK; it is pretty shXt everywhere AFAICT!
@Naeclue (#21):
Graph at https://www.hl.co.uk/retirement/annuities/best-buy-rates seems to tells an interesting story – is there an implied delay, or is something else going on?
@xeny — It is tempting, not so much for the revenue as for getting rid of spam at a stroke. But we would lose some unfortunate refuseniks who do add useful content so not an easy call. Maybe if I add some kind of forum I’ll do this too.
@Al Cam — Increasing forgetfulness (re: your recent comment to TA 😉 ) is one thing but I literally say that in the article you’re commenting on:
With that said, the UK is (a) in a worse position than it would have been without its self-harm of the past eight years (b) doing slightly worse than peers (see especially the cratering pound this week, that I forgot to get to in those 3,000 words above).
The US is the only really strong big engine in the world at the moment.
We’ll see how long that lasts under new management, but we better hope that it does. 😐
“pundits in every country”: sadly it’s not truth that matters, but belief. Narrative, not evidence, is the OS of culture, and global macro will be weapondised for local political ends. Dem’s didn’t do too bad economically, but it didn’t help them.
Well, I’ve read a bit more about some of the aspects of our economy that are comparable to those of emerging market economies. Or, as an ex-US Treasury chief apparently said, that the UK was ‘turning itself into a submerging market‘.
Still a rather shocking concept for me to digest though as, like many, I’ve witnessed the decline and wondered how it could possibly be reversed.
Don Trump can do whatever he wants behind closed doors. It’s nobody’s business but his!! As far as bonds stick to treasury bonds and be happy. I like my money safe and secure. Most of my investments are treasury bonds and strips. I think it’s safe we will survive.
Whether there is a difference between holding individual bonds or a bond fund depends to a large extent on quite how you are holding the individual bonds.
Taking two example cases:
1) Holding a ‘rolling’ ladder of individual bonds and reinvesting the coupons and maturing bonds in new bonds is functionally similar to holding a bond fund with the same range of maturities.
2) Holding a ‘collapsing’ ladder of individual bonds where the coupons and maturing bonds are spent (i.e., there is no reinvestment) will not necessarily be the same as withdrawing from a bond fund over the same period (although the known income from the ladder might be better or worse than that from the fund depending on what happens to yields in the meantime).
Re shortage of docs
My daughter is a partime GP who would do more work but currently there are no extra funds for GP Practices to employ more docs
Fairly universal situation she tells me
xxd09.
#30 my wife is also a GP and it’s been like that for a while now, all the funds are going into Noctors (not drs) which fixes some things (cost savings in the short term, potentially more access for run of the mill stuff) but is storing up problems further down the line (significant lack of continuity of care meaning potentially serious issues are missed, tick boxing of things that don’t actually solve the issue, can kicking – I can’t do that examination as I’m trained in x not y, computer says no – etc). The patients don’t necessarily understand what sort of health professionals they are seeing either and this has a tendency to devalue the perceived value of the system as a whole.
Nothing against the optimisation of resources and something needs to be done but it’s very much saving pennies while storing up bigger problems for the future. I work in infrastructure and it’s the same sort of thing that’s been going on in that for years.
This Bloomberg podcast on the UK bond sell-off is a good listen
Bonus In the City: Why Are UK Assets Spiralling Now? | Bloomberg Daybreak: Europe Edition
https://www.youtube.com/watch?v=IRsOCXXQDMY
Thanks for the links, especially from Batnick, Carlson and Maggiulli, but also the II piece on Mike Green. Learning of the Inelastic Markets Hypothesis is a bit like Morpheus and Neo 😉
@Lesley Mackin #4 – I’m with you. I have the same bond aversion as you (don’t even like James Bond, TBH) but don’t have any bonds at all and I’m decumulating now but have small income which covers bills. I did have one Baillie Gifford mixed fund (bonds/equities) at one point but sold it out – was never any good and only fund I’ve ever lost money on – over 2.5K.
Now just stick with equities and cash savings accounts (in banks) – don’t do gold/commodities or owt else either – find it all too much faff/rebalancing etc. Whilst cash accounts are still giving a reasonable amount above inflation and predicted interest rates will be higher for longer now (due to this Govt. being just as useless and corrupt as the last) may as well take advantage as getting over 5% on existing fixed savings I have, 4.9% on notice and currently 4.75% easy access so not bad. May need to review if cash savings do not cover inflation at some point. As you say a lot is down to how comfortable you feel with different assets and past experience. I always feel that with bonds, I would most likely be getting a lower long term return for the chance that they *may* take slightly less of a hit than equities in a large crash.
Don’t hold enough cash though (not 9-10 years that should) and might regret come the US equity market apocalypse that’s on the way (apparently anytime now) when I’ll no doubt be living on bone broth/garden frogs and become more au fait with charity shops. C’est la vie mon amie.
I guess many people have felt that the analogy for the UK’s financial position over the past one to two decades has been that of a frog slowly boiling in water. The recent moves in bonds yields seem akin to gas being turned up somewhat.
There’s real lack of understanding generally amongst the population. Taxes may need to go up later this year again. Or services cut further. When you think on the one hand that taxation as a % of GDP is about as high as it’s ever been and on the other elderly people in hospitals are receiving third world care at best (as the link indicates), it is a shocking state of affairs.
My parents in law, nudging their eighties, are seriously worried about what happens if they get ill. What a way to live. I try not to remind them that Brexit hasn’t exactly helped the situation as that would go down badly.
I really hoped that the labour government with its majority might try to shift the overton window a little. Without it, the probability of a reasonably serious calamity affecting the UK is edging closer month by month and year by year. e.g. (a) Geopolitical crisis requires defence spending to hit 5 to 10% of GDP (b) another pandemic (c) major un-forseen climate event (d) global recession.
No one’s willing to face up or even discuss taking hard decisions. In all probability, the situation is clearly going to get considerably worse over the next decade. We are increasingly not really masters of our own destiny – the bond market is, us conglomerates / private equity firms are / uk is ever more just a vassal state of the US.
If reform are elected at the next election who can be surprised. (not that this will fix the problem).
With that in mind – I’m still deep in US equities (you see the cognitive dissonance there….) but I’ve got some decent hedging going on index linked gilts, US tips and gold.
maybe at some point, people will realise raising taxes isn’t going to fix the problem.
@TI. “As in the US, some people are still voting with their hearts and feelings, not their heads.”
This. On climate change, immigration, or anything really, people still prefer to believe the guy down the pub over the actual experts. Tribal apes we are. We still tend toward silly beliefs and feelings over cold logic. When the superintelligence arrives that may not count in our favour.
With regard to bonds and Gilts, I find this all a bit silly. Globally, bonds have been selling off for a few months. Longer duration Gilts tend to act like a halfway house between USTs and Euro-area bonds. As much as some UK citizens want to believe they can “take back control”, cold logic implies we are just flotsam and jetsam between two massive economic blocs.
As for the UK being a EM market. Not really. The UK has certain EM characteristics. Open economy, trade flow dependent. Benefits from globalisation, suffers from protectionism. The structural currenct account deficit means we are vulnerable when the reserve currency (USD) is strengthening. Yet, we are not really an EM country. We don’t have external debt vulnerability. We have no debt rollover risks. We have (for now) the rule of law and solid corporate governance.
@Seeking Fire #35: Tax up. Services down.
Gary (“the people’s economist”) is on the case:
https://youtu.be/YeH5UXYEzPE?feature=shared
Still working my way though the excellent (As ever) links but thought the FT Retirement article comments contained a good mix of viewpoints from the pragmatic to outlandish.
One comment also contained a link that I thought could be of interest here: https://www.portfoliovisualizer.com/monte-carlo-simulation
Might be a known resource but it was new to me and I found it worthwhile to play with and food for thought regards SWR.
I’m a long way off FI and still working through my thoughts on what “The Number” should be and what the post FTE phase of my life looks like. I’m currently of the mindset I need to invest as hard as I can for 10-15 more years, live as well as I can during that time and then be prepared for a non-zero estimated failure rate on my SWR if I want to pull the pin on RE. We’ll see but I know for a fact I’ll be much better informed as I walk that path thanks to Monevator articles and commentators.
ZXSpectrum48k, #36.
A very impressive comment. Your summary appears spot on to me.
TahiPanasDua.
I’ve mentioned it before, but I don’t see any evidence that the recent increases in UK gilt yields has a material contribution from an expectation of higher inflation. Of course governments can inflate away their debts from borrowing from conventional gilts, but the markets aren’t believing there is an increased likelihood of this happening going forward.
Here is a chart I’ve produced from yield curve data that shows the spot real yield on index linked gilts (10 and 20 year term) and the implied inflation from comparing nominal yields on conventional gilts with the real yield on index linked gilts of the same term. Note spot yields are simply the theoretical yields on a zero coupon gilt of 10 or 20 year term in this case.
https://ibb.co/cQSGfqY
What you see is that market expectations of future inflation (10 and 20 year) haven’t materially changed recently or even over the past decade or more.
Note the data pre January is monthly data. So here also is a chart of the real maturity yield on TR8F over time (the index linked gilt that matures in 2055) which uses daily data and indicates the comparative affect in September 2022 the Truss budget had on gilt yields.
https://ibb.co/NYXYJKX
On the question of why some of us don’t subscribe to monevator, in my case it’s because of the over-politicised nature of many of the articles. I don’t want to subscribe to somebody else’s political views. That’s TI’s choice of course to use his website to platform his political views, but it’s also my choice not to subscribe because of it.
@ZXSpectrum48k (#36)
Adding to your comment (which I largely agree with)
UK debt is in our sovereign currency and therefore, provided we can continue to sell debt (I think the last auction was oversubscribed by a factor of four) the risk of default is relatively low (but not zero). There are also several strategies the DMO could consider (these have also been done in the past, but I’m not sure whether you could get away with them now) – 1) auctioning shorter maturities until rates decline, 2) issuing low coupons (because of the way coupons are taxed, low coupon gilts will have slightly lower yields – this was particularly marked in the early 1980s when this strategy was last tried), 3) issuing callable gilts (IIRC, the last was issued in late 1990s)
From a retail perspective,
1) if you are in accumulation and have bond funds in your portfolio then bond funds are currently cheap (so passive investors with a bond allocation will automatically be buying more)
2) If you are in the market for an annuity (@Naeclue, #21) then rates are currently good – I note that Charupat et al.(“The Annuity Duration Puzzle.” Available at SSRN: https://ssrn.com/abstract=2021579) found that annuity payout rates responded to changes in yields over a period of weeks, with the response being more rapid when yields increased than when they decreased.
3) For those not quite yet at retirement age, self-deferral of an RPI annuity using duration matched linkers is quite attractive.
@Snowman — Fair enough, as you say your money your choice. 🙂
I would note though that by your own analysis (for which thanks for sharing!) inflation expectations haven’t contributed to the recent increases in gilt yields. This would mean something else has. I cannot see a better smoking gun than how the political dice have fallen, especially in the US, given the timings.
Of course you might say I don’t approach politics in a stone-cold and detached manner. To which I would say “You should see the other guys.” 😉
More seriously, we live in a time when politics (/political risk) looms large and the consensus has been shaken. This has consequences for investors.
Still, I don’t disagree there’s an additional dollop of personally-motivated politics in the mix here. For many readers it’s a draw (judging especially by emails but also some comments) but of course if one (not you specifically!) is for some reason say a Brexit supporter for economic reasons (as opposed to fair enough but naive constitutional reasons) then being repeatedly reminded that the benighted project has delivered substantially negative economic consequences must be frustrating.
Personally I’d change my beliefs in the face of the evidence. But human beings gonna human being.
@ZXSpectrum48K @others — Thanks for the concise thoughts. I’d note again I said ’emerging emerging-market’ — and the comment was a little tongue-in-cheek — but you put more succinctly than me the reasons why I don’t think its entirely facetious.
But I suppose another counter is that like currencies, such grading is all relative — and what Western country hasn’t become a little more emerging-market like over the past ten years…?
@Snowman — p.s. Your second graph really illustrates very strikingly how good the yield recalibration of the past couple of years has been for fixed income returns. 🙂 Cheers!
@TI (#25):
Very good! My tendency to speed read (ie inevitably skip over some things) has also increased. So much to read and so little time to do it all in! FWIW, the malaise I refer to is so much more than just bonds though, @SF (#35) captures some of it in his fairly downbeat summary.
@Alan S (#41):
Thanks for the Charupat et al reference. On a quick read, this (US based) paper is worth a further look. Interesting that they conclude there is a lag and 10 year swap rate is not the best proxy, but rather 30 year US mortgage rates! Explicitly they state: “Overall our findings are inconsistent with a financial economic view of a life annuity as a risk-free bond-like instrument, plus mortality credits.”
“gold and tins of beans”
I have both in my portfolio . No, really.
I have for a long time thought that there would be a huge government bond crisis in either the UK or the US or both. This may or may not be it – probably not. When it comes, it may or may not cause terminal losses to bondholders. But the temptation for the politicians to spend more and more to get elected is too high for prudence to resist – and so a great crisis in the bond market will come for sure. I still hold the stuff because I believe a way will eventually be found through it – probably by taxing the underpants off the citizens. I have, however, taken into the portfolio a minority but significant chunk of gold etfs and other commodity etfs in this case the situation blows up in ways we cannot predict.
PS I like the idea of an insanity premium being at work here. It seems appropriate in what we are seeing in our own politics, in Europe’s and in our American brethren’s “unusual” choice of president.
30 yr US TIPS yield to maturity hit intra day high of almost 2.7% p.a. today, closing at virtually 2.6%.
That means (consults free calculator app) that an investor with a 30 yr horizon could, at 2.7% p.a.real YTM, put 45% of an ISA into 30 yr TIPs and rest into equities and, whatever happened to their equity slug, they would, in effect, still be guaranteed (assuming the US Treasury honours it’s debts) at least the return of capital on the whole portfolio starting value in real, inflation adjusted, $ terms. In effect, and put another way, for using up less than half of the initial portfolio, the starting value purchasing power could be de-risked (at least in $ terms).
And the 55% allocated to equities are not going to return zero over three decades.
The lowest real return for US equities over any 30 yr period was approximately 1.5% annualised from June 1902 to June 1932, adjusted for inflation. Other low periods include 2.3% p.a. real returns in 1890–1920 and 3.1% in 1912–1942, which, although doubtlessly rather disappointing if they eventuated over 2025-54, would still match the 30 yr TIPS returns now available for the 45% side.
Contrastingly, the highest real return for US equities over any 30 yr period was about 14.8% annualised, for the period ending in 1968, which would be over 60 fold real terms increase in value if repeated.
Whilst it might not seem it now, these could actually turn out to be good times to start investing.
Personally I don’t buy that Reeves is to blame for what’s happening in the global bond markets.
After the relentlessly lower for longer era from 2000 (and not just from 2009) up to 2021, we are just (I think) normalising back to the previous regime.
Nonetheless, in the interests of balance, and whilst I don’t agree with it, here’s a link to the contrary view argued well in today’s DT:
https://www.telegraph.co.uk/business/2025/01/13/charts-show-keir-starmer-britain-falling-badly-behind/
Interesting post Delta Hedge ( well above my pay grade!) but what is an amateur investor to do?
Two good diametrically opposed investing arguments well presented plus a killer phrase “these could be good times to start investing “
Back I go once more to living frugally , watching my costs and “staying the course” -with a conservative asset allocation of global index trackers (bonds and equities)
Has worked for me so far but I do feel reading your post that there must be another way!
xxd09
Oh blimey,I started my journey late from a lump sum at work in 2016 ,and went for conservative 40/60 VGLS . So heavy in bonds and also overly heavy in uk (as all VGLS are).Now I’m not in a position to buy cheap as I’m not able to contribute any further funds, thankfully I won’t need the money for another 10 years .My question is being a novice how much will the bond trouble affect and the over weighting in UK affect as I’m unable to to contribute further.thanks
Hi all,I began my investment journey late after a lump sum from work, invested in VGLS 40 in 2016 and 2020 so fairly heavy in bonds and also heavy weighted towards UK without any further surplus to buy cheap. Fortunately I don’t need to to touch the fund for 10 years,but I was wondering going forward with no new money and overweight in uk how will recent movements impact in coming years? Thanks for any insights.
The MMT / neo-Kenysian perspective on the bond crisis (best played at 2x speed):
https://youtu.be/Y3hPMyU1o4k?feature=shared
Trigger warning – you won’t like his suggestions for ISA etc tax relief.
@ xxd09 (#47)
For those of us risk-averse enough to be interested in market independent income during retirement, then, most simply, RPI annuities (or DB pensions) or, with more complexity, collapsing linker ladders, form a ‘guaranteed’ floor to the income provided by drawdown. Market conditions are currently very good for annuity purchase with payouts for a single life ranging from 4.7% at 65yo to 6.8% at 75yo or for joint life with 100% beneficiary ranging from 4.0% to 6.1% for the 65yo and 75yo, respectively (https://www.williamburrows.com/calculators/annuity-tables/).
Whether the income from the annuity/ladder/gilts/TIPS will be better or worse over retirement is impossible to predict as @DH (#46) implies.
Alan S- thanks for that info
Annuities certainly have their place – if a secure income stream is required in later life but we would like to leave some cash to our kids -one of them especially -so ruling annuities out at the moment
I did rolling short-term gilt ladders years ago -admittedly not TIPs-but now want the simple life (both of us 78) so one bond fund only
Financial situations are all very personal of course -depending on amount saved and rate of withdrawals required
We seem to have a big enough pot at moment to live off the portfolio to the finish
It will be interesting to see to see what our kids do with this portfolio as they take over our finances-if that becomes a requirement -hopefully not!
Annuities might be used then-it will be up to them-less inheritance would then be received of course
xxd09
@xxd09 (#52)
Definitely agree about the personal nature of financial in both terms of situations and inclination.
Legacy with annuities is not entirely clear cut. Without a guarantee period, early death definitely means a loss of legacy, although in the longer term, the drawdown pot might, or might not, survive (and thereby leave no legacy). For an annuity with a guarantee period, payments will continue even after death and thereby provide a legacy albeit in the form of an income stream (I note that the guarantee period reduces the payout rate although not by that much for a joint annuity).
On a personal note, assuming we survive to receive our state pensions and don’t increase our expenditure by too much, we will actually recommence accumulation at that time, so our legacy will probably increase the longer we live.
@Alan S (#53):
Re: “On a personal note, …”
Would you be good enough to say a few words as to how you came to be probably over floored from SP age? I suspect this situation is more common than folks realise* and it would be good to know more about your scenario. Thanks.
FWIW, I sort of saw this coming and my ‘solution’ was to draw an actuarily reduced DB pension ahead of NRA. I say, “sort of” because I was primarily focused on staying out of the HR tax band – which I will probably fail to do, but that is another story!
OOI, and primarily due to favourable market returns, I have yet to commence de-accumulation** since I retired eight years ago. Again, I suspect this is not an entirely uncommon outcome too.
*and the possibility is usually over-looked whilst in accumulation mode too
** in real terms I did drop up to 5 pp below the starting value through the worst of the recent inflation debacle
@Al Cam (54 and general)
I have come to perceive a contradiction in your thinking about decumulation, or at least something I can’t reconcile in my own mind.
You often write about the inefficiency of over-flooring and this may indeed be true. However, with lean flooring there must be a willingness to draw down from the DC pot at a sufficient level to achieve the desired lifestyle and not just satisfy minimum needs.
Set against this, you have also recently revealed, I think on SLS rather than here, that your spending has increased in recent years and you suspect this may coincide with when you started drawing your DB pension. This seems to be evidence of the factor that we have previously discussed, that secure income encourages higher spending.
Now a legacy motive would tilt the argument, but in the absence of this, is this not an argument for higher flooring?
@DavidV,
There is a lot going on hereabouts – but one thing to bear in mind is that even with increased spending it is still possible to not spend all of your flooring (or foreseen flooring if your SP is still to start as Alan S describes at #53).
WRT my spending “Since I have commenced my DB*, spending has increased – but this may just be the usual year-to-year variation – or indicative of something else.” That is, “it is too early to be sure”. What I reckon may be going on is “our early retired years spending** was possibly anomalously low”. If that does turn out to be the case, the next obvious Q might be why and is this effect idiosyncratic or more general. In any case, I will keep monitoring – although I must admit my enthusiasm for that is definitely waning as time goes by!!
All of this leads me to conclude that: floor and upside is much harder to navigate than I had ever imagined; and there is a very real possibility that the upside may never be touched if you over-floor – which had never occurred to me in accumulation.
The obvious answer to “just spend more” is IMO a bit glib, but this post might be of some interest: https://www.theretirementmanifesto.com/scared-to-spend-youre-not-alone/
*some 6.5 years after pulling the plug
**before starting my DB – and I recall the factor & discussion you mention
@Al Cam (56)
“…..there is a very real possibility that the upside may never be touched if you over-floor – which had never occurred to me in accumulation”
Indeed. And this is the nice problem I find myself with. Only the over-flooring wasn’t really a conscious decision on my part – merely the by-product of taking my DB pension at NRA, ditto with the SP and annuitising the small taxable part of a Section 32 policy because pre-2005 rules applied, and it was the easiest route to take without involving an IFA.
I still regard this as preferable to the alternative of minimal flooring, as this now introduces two psychological pressures – spending up to one’s reasonable means and drawing down from the upside portfolio to support this.
Another 5 years before SP but retired from health service 2 years. I made the opposite decision to Alcam @54 taking the higher pension available (which is virtually unheard of in the NHS) So as to protect my investments in a downturn.ref post 49. The DB pension covers the outgoings and a little more( not a lavish lifestyle)but good enough. I have no regrets on that.
@DavidV (#57):
Yup, there is a whole load more to this stuff (which at times may often seem even contradictory) than nice tractable numbers!
Would it be correct to say that you became over-floored by accident?
@David (#58):
Happy it is going well.
Does this mean you did not take a tax free lump sum?
Also, is your DB fully index linked or is the indexation capped?
@Jezza (#34):
Re: “Don’t hold enough cash though (not 9-10 years that should) and …”
OOI, why 9-10?
@Al Cam (#54)
Here’s some of my thinking process. Most of the planning was to cover the first 10 years or so of retirement before SP age and to provide some diversity of income post-SP.
The early part was (is) complicated by two factors:
1) When I retired, 75% of my DB pension was fully CPI protected, and 25% was (partially) capped at 5%. So, planning involved assuming high levels of inflation (10%+) for a few years after retirement and dealing with the decline in the real income.
2) My early death would result in DB income being halved, so the residual DB pension combined with income derived from a life insurance payout (one level term and one decreasing term) needs to provide my OH with enough income until SP age.
Both of these considerations led to a generous floor. I also note that while there was some flexibility in how much income/lump sum I could take from the DB pension, this was limited (I took more LS than the standard).
Long-term considerations of flooring included recognising that my DB pension was underfunded when I retired and therefore I allowed for a large reduction in long-term income if it fell into the PPF (because of the 2.5% inflation cap). The scheme is currently overfunded, so this risk is at least postponed.
Finally, I’m not entirely sure there is an optimum amount of flooring because the amounts depend on what is being optimised (e.g., average income, terminal wealth, etc.) and the underlying assumptions about markets, inflation, and spending. However, I think covering ‘core’ spending is probably a good starting point.
To take spending as an example. Assume you have established a floor to cover ‘core’ spending and then used portfolio withdrawals to cover adaptive spending. Dealing with the variation in the portfolio income to some extent depends on personality traits. For ‘savers’ (me included), spending a strong upside might be difficult, but coping with a strong downside relatively easy, while for others (‘spenders’) the opposite might be true. So one might argue that ‘spenders’ would want a higher floor (or would define ‘core’ spending differently) than ‘savers’.
I’ve recently read some research where it was found spending tended to increase after particular events (at certain times, e.g., late in retirement?), but cannot remember where (if I come across it again, I’ll make a note!). I fully expect to spend a bit more once our SP are in payment, because at least some of the planning uncertainties will probably have resolved themselves by then.
@Alan S,
Thanks for the detailed response.
I recognise a lot of your thinking, e.g. I focussed on the early years up to DB/SP commencement* too:
a) for the same/similar reasons, I worried about the PPF and its various potential haircuts – I gave serious considerations to taking CETV’s*** too;
b) I over obsessed about [high] inflation (and at that time was firmly in the RPI camp);
c) I was concerned about DB capped indexation and capped revaluation algorithms (inc inflation indices used) too;
d) coping with survivor scenarios occupied a lot of my bandwidth and retirement income diversity is an interesting issue too (in some ways taking my DB pension early helped with this)
e) I feared getting it all wrong – so my assumptions were conservative and by & large have been proven to be so too;
f) having said that, ideally, I also wanted to i) not pay an LTA penalty and ii) avoid being a HRT payer again
Post pulling the plug, things went well and as time passed the items at f) above came to dominate.
I would summarise your scenario as over-floored possibly due to an [overly] cautious approach and a focus on the medium term. Would that be fair, or do you have a preferred one line summary?
FWIW, the link I gave above (to Fritzs blog) has within it a link to US work (Fink/Blanchett IIRC) that concludes that folks with annuities/pensions spend more. Blanchett is also responsible for the well known “spending smile” paper – that is oft misinterpreted but at least acknowledges the possibility of a later life up tick in spending (vs only the previous years and not the earliest years).
Have you come across Pfau et al’s Retirement Income Style Awareness (RISA) profile? If not, I think you may find it of some interest, as it tries to include traits similar to your ‘spenders’ vs ‘savers’.
Lastly, back when we were reaching the end of our accumulation phase, bar US blogs, there was almost a complete lack of UK de-accumulation/retirement phase info available – hence why I keep banging on about it. FWIW, I believe by explaining our journeys to date we might just help some folks out. Having said that, IMO people absolutely need to do their own planning and understand that they have to live with their plans inc. YMMV, etc
So, once again thanks for the detailed reply.
*I even have sheets called things like “crucial early years”, etc and I developed a whole load of useful tracking methods/metrics to monitor progress to my baseline** plan
**which, to date at least, turned out to be rather pessimistic
***I think had a partial CETV option been available I might have gone down that route – but we will never know that now
P.S. I am always reminded of these words from the late great Dirk Cotton:
“The most important decision you will make in retirement planning is how much of your resources to allocate to the upside and floor portfolios” and “The correct balance [between the upside and floor portfolios] will depend on how willing you are to risk losing your standard of living for the chance of having an even higher one.”
Hi Al Cam, The NHS pension gives you a choice between high lump sum and lower pension or vice versa. Between the both ends is approximately £3000 difference annually on your pension and £30,000L/S..It takes around 12 years to plateau 15years after tax. The L/sum is 3 times the pension. I was on the lower reaches so the smaller pension may not have been enough without dipping into investments so I took the higher pension available and lower tax free lump sum, although it took me into tax the bracket, and the pension is index linked so it’s swings and roundabouts I guess.whether it’s was right depends on whether I live for12 years.There is an argument I’m sure on the alternative (highly L/s) for investing purposes .but I’m a complete novice and worry enough about my VGLS 40 being heavily in bonds and uk weighted rather as it is.
Al Cam,apologies the pension is fully index linked and taxable above threshold.I did take tax freeL/sum but at lower end
Hi @Al Cam
Why would you think less or much more cash in that scenario (where only hold equities and cash)?
Of course it’s all very subjective and won’t apply to you anyway as a seasoned investor – you’ll be completely diversified & “defensified” which is likely the most sensible.
But I’m no authority, not saying holding 9-10 years spending in cash is the definitive number – just as 5% or 10% isn’t either, it’s so very personal but from some articles I’ve read – they seem to *suggest* around this number – maybe an 8 – 12 year range with most saying 5 years is not enough and substantially over 10 years would possibly be too much and not be feasible for many/most anyway. I only hold a pretty minimal 5 years cash at present which isn’t really enough for me as not working now. I choose to keep more invested and do have some income which covers general household bills/living but still maybe not enough if doomsday happened (and now Reeves has reduced CGT/dividend allowance to a pittance it makes withdrawals harder as well.)
Just to explain – (in case you hadn’t read it) I was responding to the comment by Lesley #4 who does not hold many bonds (10%) and does not like/favour them – so holds mainly just equities/cash but appears to feel guilty for not holding more – a sort of nervousness about mentioning it and virtually apologetic – when, TBH, if that’s your mindset and what you can handle then c’est la vie. I still think investing in some form is very much better than the alternative – simply sitting it out (all in cash) for life. I just had cash accounts for many years which I now think was a waste. I think sometimes others’ comments make newer/less experienced investors feel this way (*not saying you are, BTW) – just that comments on some forums can be “sniffy”/imply it and that’s why I responded in solidarity – in saying I didn’t have bonds either and so sort of shouldn’t feel guilty about it/bothered what anybody else thinks. I’m not.
Essentially I don’t have bonds on the basis of my past experience/biases and for simplicity – I think I have high risk tolerance and wouldn’t just sell out based on some stockmarket clusterfuck anyway. I know it’s not overly sensible based on historical returns data and some past long term downturns but sometimes it’s just how you feel/gut and how much faff you can be actually bothered with rather than the science. Investing isn’t all science anyway, it’s partly an art or we’d all be multi-millionaires if it was that easy. Investing is not pleasurable to me either, or many others, it’s often quite a pain/overly time consuming (especially tax side of it with taxable trading accounts) and so prefer to simplify where possible. Making investments has a lot to do with what you’re comfortable with, as if not, it may cause some to think it’s not worth investing at all. Each to their own I think.
Vanguard say this on the matter:
“When it comes to cash in your portfolio, it’s personal. You should consider your financial circumstances and objectives, time horizon, risk preferences, and liquidity needs. By following our framework, you can determine a suitable amount of cash to hold to meet your personal needs while keeping the rest of your investment portfolio best positioned for your long-term success.” (This is from the Vanguard article “How much cash should I have in my portfolio?” from Sept 2024.)
@David (#64 & #65):
I would view full index linking as valuable. Most private sector DB schemes have some form of cap, often called limited price indexation (LPI). OOI, some time back I did a calculation that showed RPI capped at 5% lost out on average by >1% PA vs RPI across the century to 2014. Something like 3%PA average indexation from LPI vs 4%PA average for RPI. AFAICT, nobody has a retirement spanning 100 years and the stats for shorter terms could be worse or better, depending on the sequence of inflation you face.
FWIW, I also took a relatively small PCLS. IMO, the overall value of a PCLS is probably better for higher/additional rate tax payers provided they have either a short-term need for it (to e.g. clear an outstanding mortgage) or have a cunning plan to permanently retain its tax free status. As well as your actual longevity, it is also intimately related to what is called the commutation rate (CR), essentially how much pension you have to surrender to get the lump sum. IIRC, the NHS CR is pretty poor.
Thanks for the info.
@Jezza (#66):
Thanks for the reply.
Whilst I may be have been at this game for a while, I too hold a lot of cash and very few bonds – and those are mostly as part of balanced funds, such as VG lifestyle. FWIW, my cash holdings are somewhat larger than yours, so I was just intrigued.
I did google “defensified” but to no avail. Do you want to say a few more words about what you mean, as it is all too easy to make assumptions. I am fully aware of the risks with holding cash, but like several people have noted, I also just do not like bonds that much – and I have spent years trying to understand them properly (to little avail) too. I am also fortunate to be the beneficiary of a DB pension too.
Hi @Al Cam,
I definitely made assumptions, sorry about that. Probably just because I assumed your were a more seasoned investor, I also wrongly assumed you would not likely be holding that much cash but more likely to hold other defensive stuff (as many do whole shebang of gilts/bonds/linkers/US Tips/commodities/gold/trend funds and possibly even the guns/ammo/beans – just joking there!) I agree you don’t find “defensified” anywhere on google – I was just being a bit tongue in cheek there with that invented word.
I was taken aback when you said you don’t really like bonds and don’t have many. Seems I do assume – experienced investor = many bonds/defensive assets (and berating too much cash) as consensus of opinion generally seems to be that way. I don’t read too many posts – just skim read bits n bobs of stuff I need to due to not particularly loving investing – it’s no hobby, I’m a disinterested investor pretty much.
I suppose you do have the balanced multi asset fund – and a DB pension to rely on (apart from the cash and equities) which is great to have. Also I’m not sure what age you are/if retired and you may already have enough in the PF for what you need, I can appreciate how many then may de-risk and hold much more cash as defensive part.
Personally I seem to have an aversion to bonds/other defensive assets. It’s not difficult to buy into bond funds & etfs so I could quite easily sell some equities but, like you, I just don’t like them – or believe I will be any better off in the long run and I don’t want the extra bother with them. Nobody knows what will happen in any particular timeframe – whether better off with bonds on the balance of probabilities, or worse – it’s all a gamble and I’m not particularly that risk averse anyway. I can cut my cloth if I need to.
Everyone allocates to assets as they see fit – it’s personal choice or gut instinct for most really. But as to those feeling criticism/guilty for not holding any bonds/defensives or even scaremongered into (because likely back in 1927 there was an almighty stock crash in Outer Mongolia, or some other such obscure place). Nah, they shouldn’t be. Cash and equities has done just fine for me and likely will do for many others.
Hi all,well I’m getting nervous with all the bad vibes on bonds. . An apology to begin as I have a question (I asked a similar question a month ago but can’t find the thread). When a person invests in VGLS 40 or any bond fund a few years back ,before the bond downturn, the last lump sum being in2020, and since then unable to invest any more . How does the bond fund increase in value if you can’t invest further when bond prices are lower.Im in no rush and intend to keep the fund for 10 years as I’m cash heavy. I appreciate the thinking is I should be more heavily invested in equities but I’m too risk adverse for my own good.Thanks
@Al Cam (59)
“Would it be correct to say that you became over-floored by accident?”
Pretty much. For much of my working life I never had any concept of decumulation in retirement – I had a DB pension and I assumed (as it turns out, correctly) that this would be the mainstay of my retirement income. The contribution rate was 3% and, unusually, the scheme was contracted in to SERPS/S2P. For a good few years, though, I voluntarily contracted out via personal pensions so there were there were NI rebates into these. At the age of 40 I decided it was time to start contributing also to the AVC scheme. Before very long I was contributing at the maximum rate permitted (then 15% total, so 3% DB contribution and 12% AVC).
In 2003, however, following the sale of the part of the company I worked for, I became a deferred member of the DB scheme. I continued my 15% total contribution rate to the new DC scheme (to be precise the first of three DC schemes). This persisted until about four years before I retired when I increased the rate to 20% to stay out of HRT.
All the while I was a saver rather than a spender, but I never felt I went short of anything I wanted. So I filled my PEP/ISAs, in later years up to the maximum. I was very concerned about possible redundancy in my fifties and the difficulty of finding another job at that age, so wanted a cash buffer to mitigate against this. In the event redundancy did not happen. I eventually took voluntary redundancy in 2017 just 17 months before NRA and my payoff fully covered this gap.
At NRA in late 2018 I took my deferred DB pension, full new state pension additionally boosted by the years I was in SERPS/S2P, and a small annuity from the first two years of the DC scheme which had ended up as a Section 32 policy. So this is my ‘floor’ and, so far, it has turned out to be more than enough to live on at my desired level.
The AVC was all taken as PCLS, as was the rest of the Section 32 policy. The remainder of the DC pension and both my NI rebate personal pensions ended up in my hitherto untouched SIPP.
So all-in-all I am in a very privileged position, but not exactly planned – just a result of taking advantage of the pension/investment opportunities available to me and an unrealised fear of early redundancy.
Re: Cash or bonds?
Since the term ‘bonds’ is a bit wooly, another way of framing this question is ‘short or long duration?’
I’ve looked at the effect of duration on historical retirements for both constant inflation adjusted withdrawals (https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4742456) and for percentage of portfolio withdrawals (https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4827947) with (as it turns out) fairly similar conclusions (Figures 2 and 3 and Table 1 in the first of those papers are a good summary).
1) In some retirements cash (proxied by 3 month bills) provided the highest SWR and in some the lowest
2) In some retirements long bonds (15+ years in the UK case) provided the highest SWR and in some the lowest
3) Durations between these extremes (‘intermediate’) were sometimes ranked in the top 3, but were rarely ranked worst. Interestingly, the common ‘all stocks’ gilt index has not often been a good choice in the past.
Cash performed best when yields tended to increase over the retirement period (e.g., 30-year rolling periods starting in 1950 through to mid-1970s), while long bonds did best when yields tended to fall during the retirement period (e.g., those from the mid-1970s onwards). Since the future behaviour of yields is unknown at the beginning of retirement, then, for a passive investor, choosing an intermediate duration (historically, the 5 to 10 year and under 10 year gilt indices performed well) is likely to give an intermediate outcome regardless of the subsequent changes in yields.
@Al Cam (#63)
“I would summarise your scenario as over-floored possibly due to an [overly] cautious approach and a focus on the medium term. Would that be fair, or do you have a preferred one line summary?”
While I would agree that we have more income than we are likely to need in the event of no risks turning up, I think the overall position is more nuanced than that once those risks (e.g., my early demise, DB pension falling into PPF, etc.) are considered. What it illustrates is that the clean scenarios usually described in retirement finance literature and their optimal solutions will often come up short in contact with reality!
While Blanchett’s smile is well known (and, as you say, often misinterpreted), the fit to the data is rather ‘loose’ and US based (where medical expenses can dominate in late retirement). There are some useful UK studies at https://ifs.org.uk/publications/how-does-spending-change-through-retirement-0 and https://ilcuk.org.uk/wp-content/uploads/2018/10/Understanding-Retirement-Journeys.pdf
@Jezza (#69):
Thanks for the additional info. From time-to-time we all make assumptions – so no worry. I retired in my mid 50’s, some eight years ago. All of this stuff is rather personal, and the only abiding “truth” seems to be that one size does not fit all!
@DavidV (#71):
Much appreciate your detailed description. A lot of which is familiar e.g. DB followed by DC, AVC’s, initially very affordable DB contribution rates, HRT management, redundancy, etc. It was a condition of employment in my first job that I join the DB scheme at the earliest possible opportunity. So it just happened, and I have occasionally wondered what would have happened had I had a choice. In that respect, and several others, good luck features in my story. Thanks again.
@Alan S (#72, #73):
Thanks for the detailed analysis. Very interesting.
I think the die was cast for me years ago, and to a large extent is down to employer share options. They paid off very handsomely and this left an abiding good impression. That: a) I was taking excess risk; and b) was extraordinarily lucky only became clear MANY years later. I pretty much eschew individual company shares nowadays, but having said that my non cash like assets are now very firmly equities; and, I have been systematically shedding bonds since retirement.
I know the International Longevity Centre UK paper very well. There are several related IFS papers, one of which (I do not recall the title/date) has IMO something wrong with it. Errors in IFS papers are not unknown, as @DavidV can attest to. Having said that, the IFS was quick to acknowledge its mistake, but I have never checked to see if they issued an update, correction, or similar.
RE: “What it illustrates is that the clean scenarios usually described in retirement finance literature and their optimal solutions will often come up short in contact with reality!” Do not disagree, but IMO you need to take a balanced view and not solely focus on the risks*, ie there are also probably opportunities too. I waffled on about this at great length last year**, see:
https://simplelivingsomerset.wordpress.com/2024/07/17/is-risk-always-bad-news/
One thing worth noting from the David’s, Alan S and myself is we all have DB pensions. Those days are seemingly gone – although there is a group of serious thinkers determined to get them resurrected. Having said that, the one advantage IMO younger folks have is embedded in sites like @Monevator where info, chatter, etc is freely available to all. Long may that continue as leveraging this information advantage looks to my eyes to be pretty essential. IMO all of us “oldies” just kind of wandered about (pretty aimlessly) in the dark and largely made it up as we went along!! Then, when we hit 40 or maybe 50 or even 60 had an “oh shxt moment”!
*as you could inadvertently frighten yourself excessively
**actually it is a relatively short post compared to some of my hosts offerings
@TI:
Apologies, but I seem to have inadvertently steered this chatter somewhat off course!
@Al Cam #74 – cheers, I agree and sorry for the misunderstanding/assumptions made.
TBH, I even assumed that the writer of the post that originally prompted me to respond (Lesley #4) was a female when it could just as well be a male – (probably assumed due to the turn of phrase/style of writing – but this could obviously be totally wrong and get me into bother!) Will have to stop doing it.
@David #70 – There’s no bad vibes here – not my intention anyway.
Just to explain if I can, I get a bit of agitation/annoyance when reading things such as the post I was originally responding to (not with the poster but how they feel) – maybe I should stop reading them!
Problem is always try to stand with newer/less experienced investors – or generally in life what I may perceive as an “underdog” so to speak in any situation. (As they say, the more experienced are old enough and ugly enough to look after themselves.)
Just I don’t feel particularly comfortable if someone comes across as feeling guilt/shame about how they might invest (and feel it might put newer investors off investing at all). That is why I responded to the post in saying – I do the same as you and understand what you are saying. (Sometimes forums/blogs do have derogatory comments against such but I know that wasn’t the case here.)
I came too late in the day to investment (and obviously don’t bother with defensive assets myself). But I’ve done pretty good since just with global trackers and odd US fund/etf – but I could have done better if I had done so earlier – rather than just cash savings for most of my life. So I think just investing at all, even if just equities, is better than the alternative and investing is personal/unique really to any investor. That’s all, I’m signing off now before I read any more posts that get me hot under the collar!
@Alan S (#73, #74):
I had a look around my stuff this afternoon and the IFS paper you link to is indeed the one that I have several issues with. TBH, I have never fully bottomed out my issues but I strongly suspect there are problems with their regressions. I have corresponded with Rowena before (about an earlier paper of hers that incidentally also drew IMO very iffy conclusions from regressions) and she was gracious enough to state: “You are correct ….” “Looking back we should have included discussion of active and passive changes in wealth, and the timing of the financial crisis in the paper. So thank you for your observations, they highlight an important aspect to discuss explicity in future.” Unfortunately, she left the IFS, shortly after the publication of the IFS paper you linked to IIRC.
The IFS paper you link to is somewhat at odds with lots of other works (both UK & US) and therefore IMO should have been subject to very thorough peer review, etc. I am not convinced that it was! There is a huge [commercial] lobby who want people to believe that retirement spending follows a U-shaped pattern. I do not know if you have ever read the review comments of the ILC UK paper but the authors took a lot of stick* for poo-pooing that U-shaped model.
BTW the incident I refer to above at #74 (that also mentions DavidV) was about neither of the IFS papers I mention in this comment.
*take a look to the papers main sponsor
@Al Cam — you write:
No worries keeping it up on this seven-day old post, but you’re right in general, let’s try to keep the first few days of convo mostly on-topic, otherwise we risk everything become an SWR/drawdown discussion.
Cheers and have a great weekend!