Cash & Bonds BONDS VS CASH IN SAVINGS

VGB (Bond Index) price chart only over the last year

Around 12.15% with dividends

 

Not an expert on bonds by any means and as @Redwing ‘s chart shows Bonds continue to provide good price growth. But as interest rates are now approaching negative here and around the world (some already are) the price appreciation of the three decade massive Bond bull market is coming to an end.

Investing in a Negative Interest Rate World - A Wealth of Common Sense



Bonds will still provide benefits such as dry powder for portfolio rebalancing and to meet living expenses when stocks experience a nasty downturn. Then again so do high interest online savings accounts and Term Deposits.

The key point is STARTING YIELD determines the vast majority of returns from Bonds.

So when I can get a higher yield from an online high interest saving account and Term Deposits why would I risk investing in Bonds especially a bond “fund” given where rates are now? I may miss out on a wee bit of price appreciation if Bonds head further toward negative but that’s it, the party’s over.

Oh although posted elsewhere the rest of the article is worth reading also. For a retirement income in a low return world that grows faster than inflation with far less volatility than price it will be no surprise that for me there’s only one choice “Dividends”.

PS: Duration is also a consideration.

 

I also like Carlson's quote about bonds as a volatility hedge

Agree 100% with what you posted @Nodrog that's the primary reason for an allocation to bonds in my portfolio, the price appreciation charts posted are just of interest (for me anyhow), US Fed and the RBA lowering rates was a bonus to the bond component, yields dropped so prices rose

Not so great for my online High Interest Savings accounts

The general expectation was that moving into 2019 and beyond that the US government would continue to increase rates from the lows it imposed post GFC, the Fed's now indicating it will lower rates once again

Bonds and Shares have both moved higher in 2019, Bloomberg had this to say

Two Epic Bull Markets Are Dueling Over the Fate of Global Growth

In the US the iShares 20+ Year Treasury Bond ETF (TLT) is up 21.90% return YTD whilst correspondingly the yield has fallen from around 3% to 1.8%

For the ASX (via Bloomberg) that currently shows as

• GovBonds YTD 9.38% and 1YR 11.68%
• ASX200.... YTD 15.53% and 1YR 10.42%

 

This from Carlson also

Gold +22%
S&P +18%
LT bonds +25%

The year this happened......1986

 

I suppose my view around dividends is unrealistic for some investors. If one is fortunate to accumulate enough equities where dividends generously cover living expenses then as I’ve often said price volatility and the need for Bonds as a volatility dampener is irrelevant.

I was having a conversation with Peter Thornhill awhile back where he like others in the financial industry surmise that central bank financial repression has brought forward future returns. Should this be the case then for quite a period Bonds will pay bugger all income or gains and equity capital growth could be very subdued. So the dividend component of equities is likely to provide the majority of returns during this period.

Given the bull market post GFC (especially strong in US) in Bonds and equities I sense a level of complacency setting in where many investors have unrealistic expectation in regard to equity price growth and the ability of Bonds to provide the same level of volatility dampening as in the past when yields were higher.

No one knows the future of course but personally more than ever given the mess central banks have created since the GFC I feel the safest way to generate a retirement income stream is from dividends.

Have gone off topic somewhat but I just can’t get myself to like Bonds. Maybe there’s a limit to what one can change when old and stubborn. Best I just accept that I love equity income and stop reading about Bonds. Given how much I’ve read about Bonds over the years if I haven’t changed my mind about them by now I never will.

So using @SatayKing ’s proven rule of “it’s all about me” then I and @Redwing are both correct.

 

I wish I'd chanced across @Nodrog and @SatayKing posts years ago

I'd be in a much different boat than my current one

 

I assume you are refering to the Titanic.

 

I was told this stuff very early on by Daryl Dixon but that still didn’t stop me doing stupid stuff for many years afterward. In fact I sold my first LIC AUI for a handsome profit to fund my “I’m gonna get rich Trading phase”. Bloody idiot. If I had kept those AUI shares from decades ago I shudder to think how much wealthier we’d be now.

My investing life has been one trail of mistakes which fortunately have gotten less and less overtime. All we can do is continue to try our best to get better.

Fortunately nowadays seeing that passive stream of income grow each year tends to keep me wanting more and more which in turn keeps me generally heading in the right direction. Capital growth as a motivating force just doesn’t do it for me, could be here today then much of it gone tomorrow then waiting years for it to recover. Too damn stressful and depressing. Equity Income unlike cash or bonds however Continues to grow and just seems to be so much more consistent minus that scary volatility.

We’ve got a lot more cash than usual given the stage we’re at and global risk factors but I look forward to most of that being invested in shares hopefully sooner rather than later.

What has all this got to with cash and bonds? A lot in that ideally the less I own of either the better!

 

You can't underestimate the extra push dividends give a portfolio over time

 

Not often you see @SatayKing and my yacht together. SK’s yacht in the middle is much larger than mine in the foreground as he’s near a decade older than me. Not sure about the small boat at the back, is that yours @Redwing?

As you can see not everything shrinks with age:



Never give up hope though. I started out with something like this:

 

Should clarify. You'd be on the Titanic if yiu follow anything I post.

@Nodrog too ostentatious that yacht. Chews up money anyway. However, if someone owned it and invited me on board... More my style

 

Fixed income offers more than diversification

Bond ETFs have become more popular in recent years as investors have sought to diversify their portfolios away from equities and as they have chased yield in a low interest rate environment. BetaShares' figures show around $1.2 billion was invested in these instruments in 2017.

 

The Best and Worst Case Scenarios for Bonds from Here - A Wealth of Common Sense

 

Just saw this old quote from Jack Bogle on Bogleheads forum where I’m assuming he’s referring to index funds rather than direct shares / bonds.

The important point being differentiation between Bonds vs Cash. Cash / term deposits guarantee “stability of principal” which is important if needing for Liability Matching at a given point in time. That’s something that no Bond Fund can do!

 

I thought you had gone all -in ?



Bonds are definitely shrinking, does that mean more yield or less though

 

I have in personal names. However the SMSF still has around 12% of portfolio in term deposits (earning around 1.7%). These were of a somewhat longer duration than the other TDs which when they matured have been invested into equities. The remaining term deposits mature at the end of April. These will then be DCA’d into equities which hopefully are still in a Bear market. Then finally other than a bit of cash to meet mandatory pension payments we will be 100% equities.

All dividends other than what’s required to fund living expenses from personal holdings and pensions from the SMSF will also be DCA’d into equities. The goal is to be fully invested in equities at all times going forward.

 

Bonds have the same problem as gold now. Liquidity crunched.

 

Those pensioners relying on TD's returns have had a rough few years

 

Long dated and corporate bonds have risks I want to avoid. However, in industry and retail funds, it is hard for members in premixed options (like 'balanced' or 'conservative') to avoid being exposed to bonds (fixed interest)- in fact the more conservative you go, the more exposure to bonds you get. This is a worry given we seem to be at the floor for interest rates (according to the RBA governor) and therefore on the horizon, there are probably only capital losses in store for bonds (and no gains). Of my two industry funds, one managed in 2019/20 to make a negative return on Fixed Interest and the other earned about 2% ( the one making a negative return has something to answer for, especially given that falling interest rates in 2019/20 should have led to gains - was it that they invested in too many risky corporate bonds? or did they play the futures market wrongly?). Neither super fund invests in Australian floating rate government bonds such as NSW Treasury Corp to reduce risk, presumably because they don't want to dilute coupon returns. It would be handy if industry or retail funds offered short term government bond options, for those members who are averse to capital losses both through interest rate risk and credit risk. I suppose they would say to such people that they should invest in their cash option. On closer inspection however, most "cash" options in super that I have looked at are in fact not really all cash deposits e.g. Caresuper "This option invests in a mix of cash and money-market securities, including at call and term deposits, bank bills, negotiable certificates of deposit, short-dated and floating rate securities issued by Australian and overseas government, banks and companies". They probably do this to enhance the yield and keep up with the Jones, even though most members probably think that if they choose the cash option they are really putting their money in bank deposits. I suppose if you want to avoid risk and invest your super in true cash or in short term government bonds then you have to go to the trouble of running an SMSF. And the extra benefit is that your SMSF's bank deposits are covered by the government guarantee up to $250k per bank (whereas in your retail or industry fund, the $250k guarantee on bank deposits is shared across all members).

 

@LongTermOwner here's VGB over the last 2 years

Vanguard Australian Government Bond Index ETF (VGB)