Cash & Bonds Do Australian Investors Need International Bonds?

I think I'm a fellow paranoid greedy nutter??? Truth is I'm also very conservative and have about 20% cash at the moment. I will reinvest a little each year over the next 10+ years until most of it is reinvested. If there is a major event in that time we have funds to invest. Also want funds for old age. We are not sure what aged care will look like in 20+ years time. Maybe I'm overthinking everything too - I do that. lol

 

Sounds like we’re the same. Aged care costs also concerns me. I’ve got a feeling despite what I’ve said earlier that I’ll get more conservative with age and still like to have a decent pile of cash on hand. Hopefully by then if our equities keep growing that cash pile albeit large in size might only be a small part of the portfolio.

 

Meant to add that we keep most of our Cash / TDs in Super pension environment to eliminate most / all tax and try to find decent rates on offer. At least that reduces the chance of it being eroded away by inflation.

 

Excellent question.

Some good general answers in the posts so far.

Major determinents are remaining life expectency, size of portfolio and market valuation.

Sequence of return risk is a nuts/crazy complicated area. Best we can do is make educated guesses. I have been considering putting some of my "rule of thumb" calculations into the SORR thread but not sure if a "rule of thumb approach" without the understanding of the limits of such rules is helpful or dangerous.

 

Sounds like a great idea to me. I’m up for dangerous.

 

I would need help stress testing the assumptions. Do you think there are enough people interested?

 

Whether you need bonds /cash is a how much volatility you can stand question.

You generally hold bonds for their low volatility characteristics. The low volatility characteristic of bonds however can be cancelled out by high volatility of currency if you do not hedge international bonds. Hence international bonds are generally hedged. Hedging though also neutralises interest rate differentials between different currencies.

Which leaves hedged international bonds as only a diversification of default risk question.

If you are slipping down the quality scale of bonds into corporate bonds to get the higher default risk premiums, then it makes sense to diversify as widely as you can against traditional default risk

Govt bonds are a bit different as countries that can print their own currencies won’t default traditionally but they can default in purchasing power terms through high inflation. So global diversification becomes a protection against runaway inflation in a particular country.

That’s how I see it. If I did hold bonds I would hold global bonds.

 

Would be really interested in this!! Great if you could share your analysis.

Curious to know what do you think of big ERN’s safe withdrawal series from a US point of view? (Ten things the “Makers” of the 4% Rule don’t want you to know (SWR Series Part 26))

He suggests a lower withdrawal rate around 3.25% is more appropriate due to current valuation and longer retirement horizon, and proposed an equity glidepath to minimise SORR.

 

Thanks @dunno. This is the question I was pondering. ie the worth of international bonds IF I were to invest in bonds at all.

 

Weeelll, I didn't say anything untoward soooo I cannot help in the way you think. He he

And thankfully I don't think like @Nodrog. Searching the net for a pic such as that is a bit of a worry.

 

Just another one of my fetishes.

 

I would think so. I’m always interested in your views. Have learnt a lot from you. Although I admit I’m a bad pupil at times. I was always in trouble at school.

 

hand in the air waving! I am in if I would be useful to you

 

Hey @dunno, I’ve got a question please?

Senior moments seem to be increasing in frequency as I age. When you concluded with that last sentence did you mean (unhedged) Global Bonds?

 

@dunno?

 

I reached senior moment way earlier than you and I've been working on it a lot longer. So back of the queue, bro.

 

Hedged.

 

@Nodrog interestingly (maybe) PIMCO runs a fund that looks like a Global TIPS fund (Global Real Return). I cannot find anything similar from the likes of Vanguard. At 51bps fee basis is not outrageous and may fill a role for local Swensen tragics.

Global | PIMCO

 

Wouldn’t touch TIPS in the current interest rate environment. In fact I wouldn’t touch them at any time. I’m sticking to Bill Bernstein’s rule for this rate environment:

Bernstein however does also like TIPs but more so when the time is right.

Add to that of holding this in the most tax effective structure possible.

51 bps is a big hunk of the return with such low interest rates.

So by staying safe with short duration I should have a reasonable chance of matching inflation like TIPs especially given this is mostly held in a tax free environment ie SMSF pension.

Importantly it also fits nicely with the KISS approach I’m wedded to nowadays. Simple old cash and Term Deposits (but shop around and minimise tax) does the job well for us. It also has potentially great optionality given the current market with no strings attached or unexpected surprises!

 

@Nodrog Sure, fair call. Vanguard have a Intl credit fund at 32bps, funds get up there a bit for these type of products...though thats a different beast being 60% corporate A-BBB.