Adding in some bond funds

[TeddyK301]

Hi all

Would love a few pointers on choosing a suitable bond fund on Vanguard. I've read a number of articles on Monevator and other sites, so have a good priming in the subject.

I started investing at Vanguard in March 2020 and my plan was to build up a pot in 100% equities (currently split between a global tracker, a FTSE one and an emerging markets tracker) for around 1 year to 18 months. After that I planned to switch my regularly monthly investing into one or two bond funds to start diversifying a little.

I'm aiming to get to around 80/20 equities bonds over the course of the next year.

My plan is very long term and I won't be touching the pot for the next 15-20 years.

Of course, i could make it easy and just transfer it all into Vanguard LS80 fund.

But if I wanted to add a bond fund, what would be a good option to fit with the long-term?

Is the global bond index fund the way to go? And is it also worth building up a UK gov bond index fund as well?

Thanks very much

[TeddyK301]

Hi again

Just wondering if I have missed some important protocol on posting a new subject?

I did see there was already a thread on UK bonds, but it didn't really help with my thinking.

I have already made a rough plan, but it is just helpful to sense check it and see what others think.

As for transfering all my funds into one easy Vanguard LifeStrategy fund, I have weighed that up, but given the overexposure to the UK I'd rather not go that route.

Having read a good article on Monevator about weight of funds per country, I am aiming for 4% of portfolio in the UK. Vanguard does do a global equities fund that hits the right weight for each country, although it is slighly more expensive than owning the individual developed world ex-UK, all-share ftse and EM indexes, but probably worth it in the long run in terms of simplicity.

So, in light of that, would just one global bond index fund be the way to go or does also holding a UK focused one also make sense?

Thanks again

[never give up]

Hi TeddyK301. If you aren’t a fan of the UK bias that comes with the LifeStrategy funds but fancy some bond diversification you could pick LifeStrategy 20 to go with a global equity fund or individual geographical index funds. It makes the asset allocation maths slightly more complex but not by much.

If you would rather simplicity the VG Global Bond Index fund contains both government and corporate bonds and is the largest bond component in the LifeStrategy funds. That paired with a global equity fund provides a really simple two fund approach.

I’m no expert on all of the funds available but either of those approaches would be completely fine to me.

[vand]

I suspect the reason why you haven't had much feedback suggestion is that actually picking a bond fund isn't as intuitive as an equity fund.

Bonds have fixed maturity, so just saying that you want to allocate a portion to bonds isn't very useful. Do you want long dated bonds or Tbills?

was asked earlier too: https://forum.mrmoneymustache.com/uk-tax-discussion/uk-bond-funds/

[TeddyK301]

Hi TeddyK301. If you aren’t a fan of the UK bias that comes with the LifeStrategy funds but fancy some bond diversification you could pick LifeStrategy 20 to go with a global equity fund or individual geographical index funds. It makes the asset allocation maths slightly more complex but not by much.

If you would rather simplicity the VG Global Bond Index fund contains both government and corporate bonds and is the largest bond component in the LifeStrategy funds. That paired with a global equity fund provides a really simple two fund approach.

I’m no expert on all of the funds available but either of those approaches would be completely fine to me.

Thanks very much - this is definitely something to think about. I had looked at the LS funds to get an idea of the bond exposure. And I was also leaning toward the global bond index fund as well for a simple option. I just wasn't clear on whether it would also be a good idea to also hold a dedicated UK government fund alongside it.

All the best

[TeddyK301]

I suspect the reason why you haven't had much feedback suggestion is that actually picking a bond fund isn't as intuitive as an equity fund.

Bonds have fixed maturity, so just saying that you want to allocate a portion to bonds isn't very useful. Do you want long dated bonds or Tbills?

was asked earlier too: https://forum.mrmoneymustache.com/uk-tax-discussion/uk-bond-funds/

Thanks for your input Vand - much appreciated.

I did have a look at that thread you linked to before posting but didn't leave me any clearer. Perhaps I should have gone over it in more detail before posting.

Yes, it doesn't seem quite a straightforward as picking an equity fund - even after reading numerous articles on here and Monevator etc.

I have to also admit I hadn't even factored time scales into my thinking on bonds. I'm aware of how bonds work and the maturity side of it, but didn't realise this would be a consideration when investing in a bond index fund. I'm not even quite sure how to answer that question. All I know is I wanted to regularly invest a set amount into a bond fund every month for the next 15 years, exactly the same way as I'm doing for an equity index fund.

Is there anyway you can shed some light on this aspect for me?

Cheers

[PhilB]

I think we're still not clear on why you want a bond fund.  Is it to reduce volatility because you're worried you'll panic?  To benefit from rebalancing?  To try to minimise your losses in a crash?  To liability match for an annuity purchase or what?  If we have a better idea of what the bond fund is for then people will be better placed to advise on which type of fund might be appropriate.

[TeddyK301]

I think we're still not clear on why you want a bond fund.  Is it to reduce volatility because you're worried you'll panic?  To benefit from rebalancing?  To try to minimise your losses in a crash?  To liability match for an annuity purchase or what?  If we have a better idea of what the bond fund is for then people will be better placed to advise on which type of fund might be appropriate.

Got ya. Thanks Phil.

Basically just to act as a bit of a brake for if/when the market falls. It was never my intention to stay 100% equities for years. I felt I wanted to build up a bit of a pot first and then slowly balance the ISA to an 80/20 split for the next couple of years. Possibly adding more bonds later or maybe a property fund etc (but that isn't anything i'm seriously considering yet).

I'm not worried I'll act rashly if there was a sudden crash. Barely look at the account and have a direct debit set up. Will just keep putting away what I can every month for the forseeable. But not sure sticking to 100% equities is all that wise in the long run.

[PhilB]

I'm a 100% (or close to) equities person myself, but I can afford to be as we have DB schemes coming on line in 2029 and cash in the meantime to fulfill the place of bonds in reducing volatility.

For long term investing I personally really struggle to see a good reason for bonds at the moment.  They are giving minimal returns, little scope for further capital gains and, for long dated bonds, plenty of scope for capital loss if interest rates improve.  Historically they have benefitted from a flight-to-safety effect when stocks have crashed, but it's hard to see how that could happen from where they are now as that would turn yields negative - at which point either a bank account or a shoebox under the bed would seem a better bet.

If interest rates ever return to something more like historic levels then I would be all in favour of having a reasonable sized bond component.  For now though I just don't see it.

[TeddyK301]

I'm a 100% (or close to) equities person myself, but I can afford to be as we have DB schemes coming on line in 2029 and cash in the meantime to fulfill the place of bonds in reducing volatility.

For long term investing I personally really struggle to see a good reason for bonds at the moment.  They are giving minimal returns, little scope for further capital gains and, for long dated bonds, plenty of scope for capital loss if interest rates improve.  Historically they have benefitted from a flight-to-safety effect when stocks have crashed, but it's hard to see how that could happen from where they are now as that would turn yields negative - at which point either a bank account or a shoebox under the bed would seem a better bet.

If interest rates ever return to something more like historic levels then I would be all in favour of having a reasonable sized bond component.  For now though I just don't see it.

Thanks PhilB.

I'm a freelancer currently and consolidated past work pensions into a Vanguard SIPP in early 2020. And I also have a S&S ISA, opened in March 2020, which is 100% equities. So, safe to say I'm at the start of the journey.

I share your doubts about bonds for LT investing outlined here. But at the same time, if the bonds are to act as something of a safety net in a crash then they wouldn't be held for returns anyway.

This article perhaps sums up my thinking on why I want bonds:
https://monevator.com/are-bonds-a-good-investment/

As well as my monthly investment in the S&S ISA, I am also putting aside a decent chunk of cash as rainy day money. This goes into premium bonds and represents about 11% of my total portfolio at present.

I would imagine I'll start holding 10-20% of bonds at some point, but am reluctant at present.

I like this article outlining possible options and it sounds like 80/20 equities/intermediate government bonds (gilts) is a good idea (I'm not counting my cash here to keep things simple).
https://monevator.com/defensive-asset-allocation/

[PhilB]

One should always be wary of anyone saying "this time it's different", but I do believe that being already so close to negative yields would prevent any significant gilt bounce in a stock market crash - or if it did happen you'd need to cash in on it fast before the bubble burst.  Fundamentally I don't like any asset priced solely on the greater fool model which is what any bond with significant negative yield would be.

I agree with the idea of holding something less volatile to cushion you in a crash and I use cash for that purpose.  I am missing out on the possibility of capital gains on bonds if yields did indeed go massively negative, in return for avoiding the risk of capital loss if interest rates increase.  Personally that's a choice I sleep better with.

[TeddyK301]

Just a quick update.

Found a good article on this at Occam Investing:
https://occaminvesting.co.uk/the-best-vanguard-bond-funds-for-uk-investors/

Seems to be a thorough answer to my question - just in case anyone else had a similar query.

Any thoughts on the article? Seemed to back up my thoughts after reading the Monevator stories that intermediate duration bonds are a good compromise and offer good crash protection.