Annual Portfolio Review 2017

Annual Portfolio Review 2017

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10 Responses

  1. Avatar Bryan Matthew says:

    Mike- your portfolio has done very well and I congratulate you on that but I would be worried that you have no fixed income in terms of bonds or gilts as part of your strategy. You appear to be waiting for timing rather than time to buy into them, when one of the lessons the markets have taught me over the last 30 years or so I have been investing, is that bonds/gilts are valuble insurance.

    Just as an example, take the financial crisis of 2008. The worst performing UK Growth fund in that year lost over 62% whilst the worst performing Gilt fund returned +3%! The best Gilt fund that year returned 13% compared to the best UK Growth funding recording a loss of 15%. In those turbulent times they were a very good counterbalance.

    Even in recent times Bonds/Gilts have performed extremely well despite people always calling the bottom of the market – the best performing Bond fund/trust returned in 2017 over 12% (pretty much what the FTSE returned) and close to 50% over the last 5 years. Even the interest rate rise towards the end of the year did not stop some funds/trusts registering double digit returns.

    My portfolio returned 9.6% which meets my target (+7%) and I had 50% invested in Gilts/Bonds and they have given me great protection during the very lean times and moderate upside in the sunny days….

    • Mike Rawson Mike Rawson says:

      Thanks Bryan.

      At the moment bonds offer risk with no return, so I won’t be buying any. I keep many years of cash for living expenses, so I don’t expect to sell stocks when they are down. And I have a feeling that when stocks go down this time, so will most bonds.

      I’ll be interested in high quality bonds if / when they yield 4% or more.

  2. Avatar Bryan Matthew says:

    I would argue that if HY Bonds are giving a total return of around 12/13% (which they are at present) then that is return with risk rather than being risk with no return.

    It is also historically the case that when stocks go down big time that the two assets who nearly always do well in that situation are the two ‘Gs’ -Gold and Gilts. The last financial crisis is ample proof of that – the best gilt fund returned +13% and the best growth fund lost you 15% -that is exactly how I would expect gilts and stocks to work together – inopposite directions, thankfully!

    Corporate Bonds and HY Bonds will go down in that scenario as there is a linkage to stocks of course but when the usual stuff hits the fan, investors go for safety and there is no asset more secure than UK Gilts and the Gold price.

    • Mike Rawson Mike Rawson says:

      I think you are confusing two arguments there:

      1 – the bonds with return (a return I can beat with stocks) will go down in the next crash
      2 – the bonds that might not go down down in the crash (I say they will) offer a miserable return.

      The next crash won’t be like 2008 as yields and interest rates are too low. I think in a crash, there is no asset more secure than cash (unless you expect the UK to default on sterling).

      I don’t think I’m alone in saying bonds are terrible value right now.

  3. Avatar Bryan Matthew says:

    But the bonds are there for insurance purposes not to beat stocks . If cash was the most secure asset you would expect investors to flock to it in times of stress but historically they don’t – they go to Gold and Gilts instead.

    You are not the only one to say bonds are bad value but people have been saying that for the best part of the last 5 years – during that period, bond funds have delivered 10% per year over that half decade. Just because people say bonds are terrible value does not make them right of course…….

    • Mike Rawson Mike Rawson says:

      Hey Brian, all I can say is we all put our money where our mouth is. You buy bonds if you want to, I’m not going to.

      I can spend cash at Tesco’s- that’s why I prefer it to bonds and gold. And with enough cash ( I currently have 17 years worth) I can wait out any downturn in the stock market – so I don’t need “insurance”.

      The past is not the future. I firmly believe that there will be no flocking in the next crash. The only people buying bonds are institutions and pension funds that are required to do so.

      You have been warned.

  4. Avatar Bryan Matthew says:

    Mike- in fact it is not the case as you suggest that only institutions and pension funds are buying bonds – the biggest inflows of retail money in 2017 was to bond funds (there were net sales of over £1bn)- inflows to stocks was just £0.8bn). Investment Week wrote on the subject “There were positive retail inflows across all asset classes except Money Markets, which saw its first outflow since January 2016. Fixed income funds proved to be most popular with a net retail inflow of £1bn. [The] Sterling Corporate Bond was the second best-selling sector with £432m of net retail sales”.

    In short private investors are buying bond funds in significant numbers -you may not agree with it -but it is happening!

  5. Avatar Bryan Matthew says:

    Mike, But surely it is the person with no bonds who is acting irrationally? Interestingly enough in last week’s Investors Chronicle Chris Dillow was asked to comment on this issue with a reader who wanted a balanced portfolio and Dillow made the point that you hold bonds as an insurance against a stocks down turn (the main point I was making really) and with Index Linked Gilts you cover yourself against inflation to boot!

    You only have to go back to that great investment primer The Four Pillars of Investing by Bernstein who showed the value of holding bonds when he looked at the returns of stocks and bonds over the last 100 years. If you did not hold any bonds you would have lost in the century’s worst bear market 42% of your investment whilst if you just held bonds you would not have incurred any loss -in fact you would have gained 15% during that period. Pretty much identical to what happened in 2008- which surely says that this behaviour of flight to survival is not a fluke but is in the DNA of investors and they will continue to act that way in the future-what other conclusion can you reach?

    Indeed a no bonds portfoio returned just 10% a year during that 100 year period against 9% when you held 25% bonds. Not a huge difference overall but you avoid seeing such a huge loss in bad times.

    My point is that most people do not have 17 years income or expenditure in cash and they do need insurance which is Dillow’s, Bernsteins’s and my point.

    • Mike Rawson Mike Rawson says:

      Hi Brian. This is getting boring. You say bonds, I say no bonds.

      Chris Dillow would tell you to vote Labour, so I would argue that he is not infallible.

      I am not saying that holding bonds in the past was wrong – I am saying that holding bonds now is wrong. Only time will tell – an old book can’t prove me wrong.

      I’m going to draw a line under this one. Please don’t add another comment saying we should have bonds.

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Annual Portfolio Review 2017

by Mike Rawson time to read: 6 min
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