Do you needs bonds?

[Zaxon]

I raised this question in another thread, but it deserves a dedicated thread to flesh it out more. You have to take risk to get good returns: share market. But due to market fluctuations, any money you need in the short term should be risk free: high interest bank account, term deposit. Bucket three is medium risk, lower return assets: bonds, p2p lending, etc.

The question is, do we need medium risk assets at all? The argument goes: if you're going to risk your money, then do it properly and get maximum returns (stock market). If there's some money you're not prepared to put in the market, then don't risk it at all (saving accounts, TDs). Personally, I can go either way on whether a medium risk class is required.

So here are your options. For this exercise, let's assume you're just retired (so no income), but 30+ years to live. This percentages I've chosen are arbitrary, and are just used to illustrate the three options:

1. 90% shares, 10% cash (earning interest, but zero risk)
2. 70% shares, 20% bonds/p2p, 10% cash
3. 100% shares, 1 months bills in cash.

Option 3 needs some explaining. Since stocks outperform all else, in theory, you could keep everything in stocks. Sell off what you need for expenses each month. Sure, the market will crash 50% every 20 years, but you're more than compensated for that by the excellent returns over the longer term.

Buffett espouses option 1. Financial planners use option 2.

 

[So_Cynical]

Yes, i bought some Bond exposure last week - first time.

I was thinking of a thread - Building your own annuity.

P2P at 6-8% yield has to play a part in any cash yield strategy, its simply a matter of what the individual is comfortable with risk wise, eyes wide open cos it's 100% loss risk.

 

[Zaxon]

Yes, i bought some Bond exposure last week - first time.

And is that for money you'll need in the medium term, or to smooth longer term returns?

P2P at 6-8% yield has to play a part in any cash yield strategy, its simply a matter of what the individual is comfortable with risk wise, eyes wide open cos it's 100% loss risk.

I think that's a risk most P2P investors don't realize. If the P2P company itself goes bust, what happens then? That happened in China. People lost a lot of money.

 

[StockyGuy]

Personally, I like the look of second option. But depends on so many factors.

Towards the very end of one's existence on the mortal plane option 3 could be very mentally taxing - few people are in a great state at the very end. Liquidating every month, and choosing which particular stock needs to be liquidated next, could be a pain.

It really depends how big the pie is, too. If that 10% cash in option 1 was massive then option 1 is best in my opinion. If you're intending to leave something for your family then they can keep those shares in the market (transferred into their name - which I think is usually possible) if market is in a serious downturn at moment you leave for harp lessons with the angels.

 

[Zaxon]

Liquidating every month, and choosing which particular stock needs to be liquidated next, could be a pain.

As a medium term investor, there's pretty much always something each month that I've sold anyway, so I would naturally have the cash flow to do that. Buy-and-holders would have to sell down.

If you're intending to leave something for your family then they can keep those shares in the market (transferred into their name - which I think is usually possible)

You can do an off-market transfer, but it is a capital gains event.

if market is in a serious downturn at moment you leave for harp lessons with the angels.

I'm not sure if they have harps and angels planned for me. I haven't checked lately

 

[john5]

funny, ive been thinking of a strategy along the lines of o3 myself in the past few weeks (with a little 'encouragement' from the rba's present antics) as i started out knowing zero about shares but these days know a lot lot more, and am more confident to swap cash for shares, so to speak, ie shares are the new cash, keeping your "cash" in shares would also serve to protect against any bail in event, in the absence of any glass-steagal-like protection in australia (in a crisis i dont trust the gov re the depositor guarantee, and i know they have quietly edged us closer in a legislative sense to a cyprus 2013 option down the track

 

[Zaxon]

i am more confident to swap cash for shares, so to speak, ie shares are the new cash, keeping your "cash" in shares would also serve to protect against any bail in event, (in a crisis i dont trust the gov re the depositor guarantee

I certainly like the idea of swapping cash for shares. As long as you're only withdrawing a small amount of your portfolio, it's the highest growth idea by far.

But you've added to that banks failing and the government not honouring its depositor guarantee? It's not something I'd ever considered would happen. Then again, that guarantee has never been put to the test.

 

[aus_trader]

Small % in Gold could act as a wealth preservation means as well. However it doesn't pay a dividend or any form of distribution so things like shares high interest savings accounts and TD's are better options.

Problem with 'high' interest savings accounts is, is it really high at the moment? Is 1% really high ? Does it even keep up with inflation, or are you (savers/retirees) going backwards ?

john5 is spot on about rba making the stance of 'punishing the savers/retirees and rewarding the borrowers'. Coincidentally I wrote about this in my "Speculative Stock Portfolio" when I posted the reasoning for buying a retail stock today which has a dividend yield in the high 6%'s.

 

[Zaxon]

Small % in Gold could act as a wealth preservation means as well. However it doesn't pay a dividend or any form of distribution so things like shares high interest savings accounts and TD's are better options.

Gold's actually done amazingly well this year. GOLD ETF is up 18.41% over the 1 yr, so it's actually outperformed the ASX.

Problem with 'high' interest savings accounts is, is it really high at the moment? Is 1% really high ? Does it even keep up with inflation, or are you (savers/retirees) going backwards ?

Yes. That's a real problem. HISAs are really an "insurance policy": something that costs you real growth, for the guarantee of stability. The question comes how much "insurance" do you need?

1) Access to the share market: (1 week). The share market doesn't have to open tomorrow, but I've never known it to be closed more than a few days.
2) Find your next job: (3-6 months). So if you lose your job tomorrow, how long until you find another?
3) Until the share market recovers: (7 years). Often a figure given to allow for a crashed market to recover.

Personally, I think 7 years of cash is a huge opportunity cost. But there will be some people who would want that level of protection. I can see 6 months in cash as being reasonable though.

 

[aus_trader]

Gold's actually done amazingly well this year. GOLD ETF is up 18.41% over the 1 yr, so it's actually outperformed the ASX.

Yes. That's a real problem. HISAs are really an "insurance policy": something that costs you real growth, for the guarantee of stability. The question comes how much "insurance" do you need?

1) Access to the share market: (1 week). The share market doesn't have to open tomorrow, but I've never known it to be closed more than a few days.
2) Find your next job: (3-6 months). So if you lose your job tomorrow, how long until you find another?
3) Until the share market recovers: (7 years). Often a figure given to allow for a crashed market to recover.

Personally, I think 7 years of cash is a huge opportunity cost. But there will be some people who would want that level of protection. I can see 6 months in cash as being reasonable though.

Yes Zaxon, a very good point about a liquid (cash like) asset that can give you a buffer for at least 6 months. It's not something everyone has saved up, but if you can be a little frugal, you can live for 6 months on a smallish chunk of cash which depends on personal circumstances such as single/family; mortgage/no mortgage etc. This is what is called the 'mojo account' by the barefoot investor:
https://amzn.to/2JwLOgk

Once you have that (therefore peace of mind), any extra money can be put into less liquid assets like property, shares, gold related investments and collectibles like wine etc. Shares are the easiest to liquidate but still not as good as cash since companies can go into long-drawn 'Trading Halts' etc when you need the money fast.

 

[sptrawler]

Personally, I think 7 years of cash is a huge opportunity cost. But there will be some people who would want that level of protection. I can see 6 months in cash as being reasonable though.

A lot depends on your situation, if you are retired in your 60's and the market takes a gfc hit the last thing you want is to be selling your shares to fund your compulsory draw down.
This was a problem, I thought about when deciding whether to purchase a property in the SMSF, when values were rising so would the draw down requirement. Which could leave the fund with insufficient cash to meet the pension.
Since retiring 8 years ago, I have about 30%cash, 60% shares, 10% property.
But when I was working, the scenario was completely different, as the pay was going into the bank regardless.
I guess the other thing that comes into the equation, is how much income you want to live on, if you need say $70k/P.A indexed. Then the mix will depend a lot,on the capital at your disposal.

 

[Zaxon]

Yes Zaxon, a very good point about a liquid (cash like) asset that can give you a buffer for at least 6 months. It's not something everyone has saved up, but if you can be a little frugal, you can live for 6 months on a smallish chunk of cash

Yup. We have around a 6 months safety fund, which as you say, comes from a bit of frugal living. That comes out of one salary. We try and live off one salary, while the other all go into investing.

extra money can be put into less liquid assets like wine etc.

I invest in chocolate each week. I'm pretty sure that's a valid investment. However, it does seem to get eaten (I'm presuming by inflation).

Shares are the easiest to liquidate but still not as good as cash since companies can go into long-drawn 'Trading Halts' etc when you need the money fast.

That's a good point. Recently, one of my shares went into a trading halt for a month. Needless to say, I wasn't impressed. Had I needed to cash out, I have other shares. But if that had been a weak performing stock that I was looking to sell, I would have lost control over the timing.

 

[Zaxon]

A lot depends on your situation, if you are retired in your 60's and the market takes a gfc hit the last thing you want is to be selling your shares to fund your compulsory draw down.

Very good point. Wage coming in vs a retirement drawdown can change the balance. Financial planners have this 90% in stocks when you're 25, trailing down to 50% when you retire idea. And that make sense for some people. But I can also see staying fully invested in the market can make sense.

For market crashes like the GFC, I can see two sides to that. We know the "4% rule" was calculated on 30 years of taking a consistent amount out, including during market crashes. So as long as the amount you're taking from stocks isn't too large, you can ride out crashes. On the other hand, if people do keep a mix such at 50% stocks and 50% bonds, hopefully they're living from only their bonds during a market downturn, and then topping back up the bonds in good market.

the mix will depend a lot,on the capital at your disposal.

For sure. I read in another forum, a guy who retired with several million dollars saying he only used term deposits simply because he didn't need any extra money. On the other hand, if you retired with 500k and your life expectancy is 30+ years, you might want to aggressively invest during retirement, to try and keep the balance building.

Since retiring 8 years ago, I have about 30%cash, 60% shares, 10% property.

OK. So no bonds? They don't seem to be popular based on people who have contributed to this thread so far.

 

[Value Collector]

I don’t own any bonds (except for rate setter loans, which are “bond like”)

But, learning about bonds definitely made me a better equity investor.

 

[Value Collector]

Buffett on bonds.

 

[Zaxon]

I don’t own any bonds (except for rate setter loans, which are “bond like”)

I'd agree that P2P lending is the same category as bonds, or more particularly, corporate bonds. Some risk; higher interest rates. Now all we need is a P2P lending ETF, where you could trade in and out of it at will. I don't see that as likely, but I think it would be very attractive to a lot of people if it did.

But, learning about bonds definitely made me a better equity investor.

How so?

 

[Zaxon]

Buffett on bonds.

He only addresses stocks vs 30 year bonds in this video, which I think we all agree on. The question I'm posing is more for medium periods. But thinking of what Buffett has said on bonds, he recommends his heirs hold 10% in short-term treasuries, and 90% in stock. I've always thought short-treasuries equate more to term deposits and high interest savings accounts: modest/low interest rates, but very secure.

 

[Value Collector]

How so?

A multiple of ways that I probably can’t explain well.

But, it was when I read Ben Graham’s discussions of Bonds in both the intelligent investor, and security analysis that things fell into place for me as far as understanding relationship between equities and bonds, enterprise value vs market cap, return on equity vs return on capital, Capital structure of companies etc etc.

As I said I can’t really explain it well, but it open my eyes and it’s just like a 100 small ideas fell into place and I saw the capital markets so much more clearly.


————

Yeah he recommends holding 10% cash/bonds as a buffer/insurance against the really bad years so they don’t have to become forced sellers.

 

[Value Collector]

Listen to this video from the 4 minute mark, Buffett describes shares as “equity bonds”, this is a great conversation that brings up some of the points I said helped me understand equities better as I learned about bonds.

 

[BoNeZ]

I retired early and am following option 1 although I don't use percentages.

I keep enough cash in a HISA to survive for more than a year with no additional income from dividends and trading profits and then "pay" myself a weekly wage to a transaction account.

Even in the GFC companies like the big four banks continued to pay dividends and in a down turn could probably survive more than two years without any drastic action.