Cash & Bonds BONDS VS CASH IN SAVINGS

Govt Inflation linked bonds are fairly scarce in Australia. As Ross said there are also inflation linked corporate bonds. Here’s one ETF that invests in Govt ILBs:

https://www.blackrock.com/au/indivi...nment-inflation-etf-fund-fact-sheet-en-au.pdf

In our case our inflation protected income is from our relatively small Defined Benefit Govt Super Pensions. About as risk free as you can get.

 

Ahh thanks @Ross Forrester and @Nordog. I had no idea.

Although the 5 year returns for ILB are pretty terrible. I am not sure how that can be inflation linked and still return growth plus income totaling around inflation.

 

Nordog.

This is the problem with Govt ILBs in the current low rate environment, the returns want to make you vomit.

Figure out what your retirement strategy is going to be first then select the assets to suit. If choosing one that relies on variations of SWR then a selection of assets with no / low correlation to each other will minimise the risk of too many negative return years (hopefully?).

 

Neither Wolf Nor Dog

 

The worst I’ve been called is NOGROG. Just the thought of it made me feel faint.

 

I must admit this is how I often read it for some reason!!

 

lol sorry @Nodrog.
As @Ouga said, I also tend to read it as Nordog because the first two halves of that word make up English words, and I always have to correct myself after I type it.

 

Could be Grogdog

 

A Bond-Free Portfolio: Why Cash Should Replace Bonds to Reduce Risk and Improve Returns

https://www.advisorperspectives.com...lace-bonds-to-reduce-risk-and-improve-returns

Not sure how accurate the following is given this was written by Peter Bernstein sometime ago but an interesting view:

Regardless of whether the arguments are flawed or not I’m not a fan of bonds. I personally invest in cash / Term Deposits rather than bonds. In order to try to protect against inflation I stay at the short end and hold most of this in a low / no tax environment being SMSF pension.

This also from the other Bernstein (Bill Bernstein) who is one of my favourite authors albeit it was written a few years ago:

 

A laddered TD portfolio behaves the same as laddered short term treasuries, but only the former really works for an Oz DYI investor - which is what I believe you are doing @Nodrog .

Old thread this one, but I think that the premise of either / or is not right, and the answer is both. I have set up so that I have bond etf along with other index holdings in company structure, and will hold additional cash in individual names going forward. The intention is always to maintain both.

 

I actually don’t maintain a TD ladder at this stage. Everything is around 6 month duration.

Yes of course there’s no right or wrong path, simply personal preference. A bond fund (especially for rebalancing) and cash / TDs can work very well together.

I stumbled upon the article posted and found a few points interesting albeit it was more a case of being reminded rather than new.

There’s bugger all choice of safer Bond Index ETFs of different duration available in Australia. Typically the duration is around 5 - 6 years.

 

Curious how you’ll manage the nasty impact of tax on cash / TDs?

 

No doubt boring stuff for many here but I’ll post for the hell of it. Used to talking to myself a lot as my wife generally ignores my ramblings.

An article from Ben Carlson about Peter Bernstein’s 75% equities / 25% cash portfolio vs the typical 60 / 40 portfolio.

An Alternative to the 60/40 Portfolio

And reposting this article on how a Total Return investor can combine Term Deposits with a Bond Fund very effectively:

A better way to generate retirement income

Hot outside today, nearly time for a dip in the pool.

 

Sorry for the silly question but can someone explain to me what exactly a bond is and why people invest in them?
A bond is a fancy term for a loan right? And from what I understand bonds to a fairly secure borrower such as the aus or us goverment will earn you a few percent return. Being that say UBank offer you 2.87% interest for there online saving account with no lock in period, what is the advantage of a bond over a high interest savings account? I’m aware that accounts such as UBank have a limit of $200k but you can have multiple accounts and with different banks if you want to hold larger sums in cash.
So why bonds over cash?

 

@Big Al

Bonds and Bond Index funds are quoted on ASX. They can be broadly classified into the type of interest they pay (fixed, floating or indexed) effectively they are an IOU between a borrower (the issuer of the bond) and a lender (the investor who purchases the bond) – just as a bank deposit is effectively an IOU between the bank as borrower and the depositor as lender.

When a government, corporation or other entity needs to raise money, they can borrow money from investors by issuing bonds to them. Investors who purchase that bond from an issuer are essentially lending money to the issuer for a fixed period of time. In return, investors receive an instrument (the bond) promising that they will receive interest payments at certain intervals and also have their principal returned on a stated future date.

Where the bond is quoted on a stock exchange, such as ASX, the investor can realise their investment by selling that bond to another investor at the current market price.

Issuance of Treasury Bonds in the 2018 financial year totaled $30.3 billion.

Gross Treasury Bond issuance in 2018-19 is expected to be around $52 billion. Weekly tenders of around $900 million each week (in addition to tenders held in conjunction with buyback tenders) will be held for the remainder of 2018-19 FY

From the ASX

Why are they popular investments?

The main reason is that, unlike equities, bonds generally provide greater certainty as to their income stream and return of capital. For retirees or others who need a predictable source of income, a bond’s regular interest income and principal repayments at maturity provide a comforting level of security. There are other advantages too, including:

• investment diversification, which can either reduce risk or improve a portfolio’s overall rate of return (because, with bonds as an anchor for a portfolio, an investor may feel more comfortable taking on greater risk with other investible assets in the hope of achieving a greater return);

• in the case of corporate bonds, a better return than some other debt investments – for example, income from corporate bonds is typically higher than the interest paid on bank deposits (although the same is not true with government bonds);

• in the case of government bonds, high levels of liquidity and security; and • the opportunity to profit from anticipated movements in interest rates.

Just throwing in a quick search 3 months to the low point in Dec see below index funds and a bond index (VAF in pink)

 

Nothing much you can do if you want the Govt guarantee, it’s always a compromise. Not particularly bothered though.

 

I imagine if Labor ever get to abolish franking credit refunds then those with excess franking credits that would otherwise be wasted might be looking to offset tax on interest income.

No chance of utilising franking credits in company to offset interest income? Wife on lower income perhaps and / or in combination of franking? No doubt you’ve thought of all this though.

Inflation protection on cash / TDs can be reasonably mitigated through seeking the highest rate on safe deposits with shorter duration but tax can be a killer. Hence why we hold the majority of interest bearing deposits in low / no tax Super environment. Then of course access prior to preservation age is an issue.

 

In my view given our circumstances I would suggest no advantage at all. But it can be a complex topic with many varying views. Then there’s individual bonds vs bond funds. There’s plenty of arguments out there that suggest there’s minimal difference between a bond fund and laddered bonds but for some retirees knowing your principal is guaranteed at a given date can be important.

Then there’s fees. Even low fee index funds can charge around a 0.20% fee to manage the bond fund. There is no fee to Invest directly in cash / TDs. Mighn’t sound much but 0.20% on large balances especially in a low interest rate environment is a fair slice of income.

In the current environment I subscribe to: direct, short, safe, no / low tax when it comes to interest bearing deposits.

 

Problem is you still need to pay company tax on the interest earnings @ 30%, so you will be generating additional franking credits anyway. The benefit of going external is the higher IR available on retail cash and the Govt guarantee, and to some extent just keeping a seperate asset pool. Cash holdings would not be pumped up until we are post-work in any case, you would cop the tax on cash interest then declare dividends from company to bring you up to your annual cash requirement.

 

Sorry must have overdosed on home brew when I wrote that post. I was actually thinking of a Discretionary Trust. The usual income splitting to lower income earner etc.