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Bonds
7upfree
Posted: 09 April 2018 09:41:43(UTC)
#18

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King Lodos;60365 wrote:
7upfree;60345 wrote:
King Lodos;60326 wrote:
I think the problem with investment grade is there's no real diversification benefit vs stocks: people won't run to corporate bonds when the next recession looms.

So then it's a simple matter of value .. and with yields of 2.8%, that's a PE ratio of 36 (for something with zero growth).

Then there's the added risk of things like ECB bond buying .. A lot of very weak businesses have been kept afloat by stimulus – so when that's withdrawn, there's presumably the risk of higher than normal defaults .. Pennies in front of a stream-roller, perhaps.


Agreed. My reservation is the quantity of BBB rated bonds in the portfolio. I have no doubt this in reality is a hop skip and a jump to junk in a deteriorating business environment. So a better bet might be a portfolio of AAA quality stocks.


It's what I've been moving towards this year .. GAM Star Credit Opps has been a star bond fund for the past year or two, but I always said I'd cut holdings when funds like that started to wobble.

So I've been loading up more on Lindsell Train funds, Unilever and Diageo .. On PEs around 20, that's an earnings yield of 5% on some pretty decent quality companies.

Warren Buffett simply compares earnings yields on stocks vs comparable bonds, and whether this is the right advice at the moment, you can see Buffett is doing the same:

https://i.imgur.com/NolA54J.png


The problem with any individual share is that I can often find as many positive and negative reasons to buy! I have read with interest the opinions of others that suggest such an approach is a mistake. Better just to pick reasonable bets and trade them within a range. I am not sure I have the discipline to do this but can see the efficacy of the approach if you have the discipline (and provided you never catch the falling knife!). Might be interested to start a new thread to pick 10 UK based shares (I think any fewer than 10 would concern me on the basis of inadequate diversification).
King Lodos
Posted: 09 April 2018 13:59:34(UTC)
#19

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7upfree;60369 wrote:
The problem with any individual share is that I can often find as many positive and negative reasons to buy! I have read with interest the opinions of others that suggest such an approach is a mistake. Better just to pick reasonable bets and trade them within a range. I am not sure I have the discipline to do this but can see the efficacy of the approach if you have the discipline (and provided you never catch the falling knife!). Might be interested to start a new thread to pick 10 UK based shares (I think any fewer than 10 would concern me on the basis of inadequate diversification).


Well I'm only a fan of range trading if all the stocks you pick are absolutely stellar (holding a maximum of 6), or they're all bond proxies, and you're there for income.

But a good portfolio will often have one real winner over a period .. So you might have 5 stocks that give you index-like performance; and perhaps one Apple or Amazon, that returns 3,000%.

And if that's the case, range-trading or rebalancing is the proverbial digging up flowers to plant weeds .. We can see mistakes like selling at the bottom of the market; but investors who neurotically top-slice or take profits on 30% gains, will NEVER compound those high returns – and it's a far more insidious reason investors struggle to beat indexes (which do nothing).


There's also a huge difference between a share in a company like Blue Prism, and a share in a company like Unilever.

A small company is usually a single operation, in a niche market .. So if you're buying small companies, you do want diversification .. A company like Unilever, on the other hand, acquires smaller companies all the time .. It's a whole portfolio of micro, small and mid-caps across many markets .. In many ways Google's a portfolio of large-cap companies, with a venture fund of all the start-ups it's buying.

So you can have huge diversification in a single company .. Warren Buffett's got the vast majority of his portfolio in 4 or 5 stocks .. Berkshire Hathaway's a single stock, but you'd have all of Buffett's diversification in that – so Bill Gates' stock portfolio's often been 50% BRK .. So I'd say if you can really pick good companies, you want 6 .. And that gives you one of the strongest edges over fund managers, who aren't allowed to be that concentrated .. Otherwise buy a fund or tracker
1 user thanked King Lodos for this post.
Tim D on 09/04/2018(UTC)
Robin Stone
Posted: 09 April 2018 18:57:26(UTC)
#23

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Chris Dillow wrote this week bonds are like an insurance policy that holds its value better in the event of a crash.

It’s basically partway between cash and equities. The issue I see is the risk reward ratio isn’t there currently, I think there are too many buyers at any price (insurance funds?annuities?)so if you want insurance hold cash , if you want reward hold equities . There are better equivalents with bond proxy equities, absolute return , p2p lending.

Hence Ihave a very small allocation to bonds and even if I am convinced of a bloodbath I won’t go near bonds at these yields.
King Lodos
Posted: 09 April 2018 19:04:41(UTC)
#24

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Two charts that *might* tell the tale of what to expect from bonds (and why valuations matter).

10 year treasury yields over a century: (the lower the yield, the more expensive the bonds)

http://allstarcharts.com/wp-content/uploads/2012/05/5-18-12-10-yr-bond-yields.png

10 year treasury real returns over a century:

http://images.investorshub.advfn.com/images/uploads/2015/5/5/ikbeo10YrLReal.png

Bonds were most expensive between the 1940s and 50s .. And as rates rose over the next 30-40 years, they returned nothing (in real terms) – until yields hit 16%, inflation started falling, and yields started coming down.

Expensive bonds probably mean 0% real return (unless things go radically differently this time, and perhaps rates somehow keep falling)
2 users thanked King Lodos for this post.
Robin Stone on 09/04/2018(UTC), Tim D on 09/04/2018(UTC)
George Muir
Posted: 09 April 2018 21:11:25(UTC)
#25

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Alan,please excuse my ignorance,what is I-lnscs as I can't find out anything about it?.Reading what people are
saying about N si,assuming there is tax to pay on this,it equates to 1.7% which currently is pretty good,
bearing in mind 12-24 months ago,tesco were allowing you to open 2 accounts each totally £6000 each paying 3%
gross,and Coventry were offering 2.2% on a cash ISA fixed for 3 years which was pulled in Nov,finding these
top deals is the problem!
Alan Selwood
Posted: 09 April 2018 22:37:37(UTC)
#26

Joined: 17/12/2011(UTC)
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Index-Linked National Savings Certificates were on sale until 2011, and when available offered a government guarantee of return of capital + interest + index-linking.

They were considered ultra-safe and capable of coping with extreme inflation.
I hold some bought in about 2008 and renewed again and again. Only existing holders are allowed to renew.

They have so far not been a good investment, but they have provided a pillar of stability in uncertain times. If inflation picks up, they will probably be both safe and profitable!

They are not liable to income tax or capital gains tax, and their only taxation Achilles Heel is inheritance tax.

In my view, my existing holding is considerably more attractive than gilts.
3 users thanked Alan Selwood for this post.
King Lodos on 10/04/2018(UTC), Tim D on 10/04/2018(UTC), dlp6666 on 11/04/2018(UTC)
AimingforFIRE
Posted: 10 April 2018 08:20:39(UTC)
#28

Joined: 01/07/2015(UTC)
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Recently I have been buying Retail Bonds at launch with the view to holding until they are redeemed so no transaction costs. They pay a coupon of between 4.5 and 6%. Not as safe as a Government Bonds but I believe no retail bond has ever failed to date, though Provident Financial has wobbled in recent months.

I hold:

BUR3
PAG3
PEP2
66WS
GSHT
LIV2

all together this is less than 10% of my portfolio.
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Slacker on 10/04/2018(UTC)
Mr Helpful
Posted: 10 April 2018 08:37:51(UTC)
#27

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Alan Selwood;60414 wrote:
Index-Linked National Savings Certificates were on sale until 2011, and when available offered a government guarantee of return of capital + interest + index-linking.
They are not liable to income tax or capital gains tax, and their only taxation Achilles Heel is inheritance tax.

But are heritable, which might suit some heirs.
sandid3
Posted: 14 April 2018 09:44:34(UTC)
#30

Joined: 18/02/2013(UTC)
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Warren Buffett Isn’t a Fan of Bonds. But They May Be Good for You.
The New York Times
Business Day
By CARLA FRIEDAPRIL 13, 2018

This article is another discussion about bonds, covering much as discussed above.
xcity
Posted: 14 April 2018 12:40:50(UTC)
#29

Joined: 12/04/2015(UTC)
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AimingforFIRE;60422 wrote:
Recently I have been buying Retail Bonds at launch with the view to holding until they are redeemed so no transaction costs. They pay a coupon of between 4.5 and 6%. Not as safe as a Government Bonds but I believe no retail bond has ever failed to date, though Provident Financial has wobbled in recent months.
I hold:
BUR3
PAG3
PEP2
66WS
GSHT
LIV2.

I like holding bonds to redemption.
But you have to be aware that prices are hypersensitive to any perceived change in risk. So will be hard to get out at a reasonable price.
Look at movements in IPF as well as PFG, for companies where the risk level was never that great.
ENQ and PMO were free money at times before their borrowing arrangements were stabilised; more so than the equity, so you can make money out of it providing you have the nerve and can assess the risk adequately.
A lot of interest levels are quite low. I bought some PHP 2019 because it matured when I expected to want the cash; even though the redemption yield was quite low it was better than anything else.
But do be prepared for the volatility; many private investors are alarmed because it's not what they expected.
1 user thanked xcity for this post.
Tim D on 14/04/2018(UTC)
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