Bonds Advice

50pc bonds at 50. Is this investment philosophy dead?


The older you get, the more you should invest in bonds and the less you should hold in stocks and shares, so runs the advice traditionally given by financial advisers to those approaching retirement. But does this broad philosophy still hold true, or should investors take a more nuanced financial approach in their retirement?

A rule of thumb has been that you should invest the same percentage of your investment portfolio in bonds as your age, with the remainder in the stock market or cash. For example if you are 20 years old you should have 20pc in bonds and 80 pc in shares or cash. Aged 21, it should 21pc and so on.

Those in favour argue that bonds are less risky than stocks and shares, which can lose investors a lot of money in the short term if they buy the wrong stocks at the wrong time.

By contrast, bonds offer a fixed annual income – something that many people find extremely important in retirement. In principle, this allows them to enjoy a comfortable lifestyle without any risk of losing the pension pot that they have worked so hard to accrue.

Andy Merricks, head of investments at Skerritts Wealth Management, however said he would have thought there is a more “scientific method” for calculating risk.

Ryan Hughes, head of active portfolios at fund shop AJ Bell, said that this question has becoming increasingly important since the introduction of pension freedoms.

Previously, people would typically take out annuities when they reached retirement, but now many more are choosing to get a steady income through investing.

And after years of rising prices, the future for bonds is looking uncertain.

During the global financial crisis of 2008, interest rates fell to record lows. In reaction, the price of owning low-risk investments, such as government bonds, increased and as prices rose, the amount of income that these paid out (also known as the yield) fell.

As a result, bond owners have seen the price of their investments rise for much of the last decade.

But now market expectations are that interest rates will rise – something that is not good for bond prices.

The US Federal Reserve has been slowly raising rates for some time now and there is anticipation that the Bank of England may do the same (depending on the outcome of Brexit). This will cause the price of bonds to fall, meaning investors will lose money.

As such, bonds are a lot riskier than they have been previously.

Conversely, companies are now paying more income through dividends than they have previously, with Mr Hughes noting that stocks are paying more income relative to bonds than they have since the First World War.

As a result the old rule of thumb of increasing bond allocations in line with your age has "largely disappeared,” he said.

“Moving forwards you should be much more based on how you see the world in the future rather than how it has necessarily been in the past.”

Mr Merricks agreed, adding that the best thing for investors is to diversify across a number of different asset classes, including property, stocks, bonds and other alternatives.

“This is the only true way of spreading risk,” he said. “You may miss out on some upside when markets are rising, but you’ll provide a safety net of sorts when you get tough times.”

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However, finding lots of different investments that genuinely spread out risk is extremely difficult. Tom Sparke, investment manager at GDIM Discretionary Fund Managers, said that alternatives to bonds that can provide the security required while providing a positive return are hard to spot.

One option is cash. While it does not generate much of a return if sat in a bank account – and will almost certainly be below inflation – it can be a good balance to your high-risk stocks and shares.

“Cash will continue to play a vital role in older investors’ portfolios and the rule I always heard was to keep ‘two years’ income’ in cash,” he said. “Clearly the pot must be of significant size to allow for this but I think it still holds up.”


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