Hi, I recently saw a Youtube video (I can’t remember which one) in which it was suggested that mature adults should be investing in bonds rather than individual stocks.
I know that limited life time left to build up funds was the reason implied but don’t understand why bonds should be any better than other type of investments in this case.
I’d appreciate views/comments on this.
Bond holders have priority over equity holders (they get paid out first) so they are inherently less risky. If a company goes bankrupt bond holders may get all or most of their money back during the liquidation process, share holders may get less or nothing.
For people with shorter investment horizons (i.e. older people) this may make bonds preferable as there will be shorter periods where you experience a negative return, so you should be less likely to lose money.
People with longer investment horizons (i.e. younger people) can assume more risk as they can afford to lose money over a 5 or 10 year period as long as they are happy to wait 10+ years.
The reason why younger people are willing to make this decision is that in efficient markets the only way to make a greater return is by assuming more systematic risk. So you expect to be rewarded in the long run for picking stocks over bonds.
To clarify, non-systematic risks are not compensated in the same way, so while picking an individual stock over a comparable ETF may be more risky you shouldn’t expect a greater return.
So, the idea is government bonds as an asset class are like very slow and steady gains, whilst providing you with income.
You take this slow and steady growth, as opposed to a stock’s super duper gain, so that when the stock markets go tits up, stocks crash and bonds will go up (or at least level out). And the reason you want that as you get older, is because you won’t generally have time to recover the losses from the crash in stocks, like the YouTube video said.
That’s generally why they’d advise for ‘mature’ people to get into bonds. And that’s generally government debt (US Treasuries, UK Gilts) because corporate bonds tend to act like stocks, which is a no-no.
That doesn’t mean that granddad shouldn’t invest in equities though, I don’t think many people go 100% into bonds, it just means that the vast majority of his portfolio should be into bonds depending on his age.
Thanks for the reply Cameron. A great explanation.
Thanks Rob. Yes, I should have said that Grandad should have a portfolio more heavily weighted towards bonds but not exclusive of stocks. Cheers.
I think it’s worth noting that bonds are a debt instrument whereas stocks are equity, giving you partial ownership in a company. That’s important because when you buy a bond, you’re effectively providing a loan to the issuer (governments or companies) of that bond which means they have a contractual obligation to repay your principle at maturity on to top of the interest or coupon, regardless of the present value of the bond.
So inflation notwithstanding, your grandpa could view bonds as a relatively lower risk means of capital preservation, offering surety of income over predetermined periods of time.
On the risk side, @Cameron is right in that in a liquidation event, bondholders tend to be higher up the creditor rankings, but that doesn’t mean risk free as defaults do occur. One indicator of the quality of the borrower or bond is a rating by one of the big agencies such as Moody’s, Fitch or S&P. Each notch, from AAA to CCC represents the credit quality of a borrower and a probability that they will not repay. Lower rated bonds tend to offer a higher coupon, which reflects the increased risk of either the issuer or the bond not repaying.
The secondary market and pricing dynamic is another conversation…
Also always consider duration risk. It’s a massive one, especially in times of almost 0 interest rates (assuming you buy on the secondary market and don’t sign and hold until maturity).
I dislike bonds in the current environment. Just not worth the risks. Currency risk is another one if you don’t stick to one denomination. Just a small change in ghe exchange rate can wipe out years of bond returns.
Understanding duration dynamics is absolutely essential, but worth noting there are funds that specifically seek to proactively mitigate sensitivity to interest rate movements.
Hello, first time investing here.
I read that bonds are usually a safe investment in the long term. I wanted to buy ibts and ibtm, the idea here is that they pay coupons right?
As of today they seem to be paying around 1.1% over 12months which is a rate I feel good with.
My question is, is this correct? Do I get that money every time the coupon is due to be payed? Or is it reinvested?
Those yield figures look like they might be out of date for those ETFs. Check either the fund issuing company’s website (IBTS and IBTM) or look them up on a site like morningstar.co.uk to make sure you know what you’re buying.
The answer to your question about payment is that these funds pay out quarterly, and you can see the exact amount that has been paid out each quarter in the past on the company’s website, under the heading ‘Distributions’. And yes, you will get that cash deposited into your account because these are funds that are identified as ‘distributing’. You might also see other versions of similar funds that are called ‘accumulating’; in those cases, the money is rolled up into the value of the fund so the share price goes up instead of being paid to you in cash. But be aware that even if the amount you receive in income each quarter is fixed, the share price of the bond fund can go up and down. Not usually anywhere near as volatile as stocks, though!
Bonds are a tricky issue right now and you should make sure you fully understand what you’re buying and whether it meets your needs. Interest rates are currently very low, and people worry about what will happen when they rise. One might think that interest rates rising would be a good thing for an interest-bearing investment, but normally with a bond fund, when interest rates rise, your income will rise slightly but the share price of the fund will drop more quickly than the income rises. This is because as rates rise, the bond fund still owns a mix of old, low-interest-paying bonds that nobody wants anymore, along with new, higher-interest bonds that are coming out, and it takes a long time for the fund to turn over its stock of bonds. So what you think is going to happen with interest rates. is a big issue for bond investors. I’ve personally been convinced by the argument that it’s sensible right now to hold short-term bonds, like the 1-3 year bonds in one of the funds you mentioned or even shorter, but not to hold longer-term bonds like the 7-10 year bonds in the other fund, due to interest rate risk. But you would be wise to read up on this and make up your own mind.
The other thing you should also make sure you are confident about is currency risk. These are US dollar bonds, so changes in exchange rates between the pound and the dollar will affect you. Some people suggest buying bonds in your local currency or buying hedged bond funds to reduce currency risk. Another thing to think about.
I find bonds (especially bond etfs) much more complex than they are made to appear and they should not be blindly bought into as @FailedTuringTest pointed out above.
My understanding is that the past year was probably the worst time to buy into these due to the interest rate hikes. Contrary to that it means that ‘soon’ (could be in a year or several) would be the best time to buy into these which is when interest rates drop once inflation is under control/declining?
Can anyone explain how TIPS are affected for high/low interest rate scenarios, since these are inflation adjusted?
No different really from buying a annuity other than the risk.
Anyway just received an offer from primary bid.
London stock exchange app.
Obviously not available on freetrade but if you have a broker they would probably be able to get it for you. I know nothing about them may put a couple of thousand in. IPO so no costs.
October 2026 (redemption)
So short dated.
No knowledge but I will look up tonight. And maybe put a bit in.
LendInvest Secured Income II plc
Issue price£100 Interest rate11.5% Term of bonds3 years Maturity date3 October 2026