The Right Way To Use Bonds - Ramin Nakisa Pensioncraft
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- Опубликовано: 15 июл 2024
- Do you invest in bonds? You might not realise it but you probably do. If you have a workplace pension the default is to invest you in both stocks and bonds. But is this actually the right way to build long-term wealth? Ramin Nakisa from Pensioncraft and friend of the podcast, is a fan of bonds. That doesn’t mean he thinks they’re always the right choice but he believes they can be more useful than you might think.
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This is not financial advice. The reason it’s not financial advice is because it’s not tailored to you. We explain the principles of building wealth but if you want personalised advice, it’s worth speaking to a financial advisor. As with everything financial, please do your own research. We really encourage that because no one cares more about your money than you and if you learn the basics then it will change your life.
Chapters:
00:00-00:42 - Intro
00:42-04:39 - What is a bond?
04:39-09:51 - When to use bonds
09:51-13:49 - Bond yields
13:49-14:45 - Hostinger ad
14:45-21:50 - How to invest in bonds
21:50-25:40 - Bond funds
25:40-31:57 - Why the 60/40 rule is dead
31:57-38:05 - Pension funds & bonds
38:05-47:37 - How politics affects bonds
47:37-01:00:35 - The ultra-short bond market
01:00:35-01:05:32 - How to use a bond ladder in retirement
Here's the paper Ramin talks about:
papers.ssrn.com/sol3/papers.cfm?abstract_id=4590406&_kx=z7n_A5XHwCNgqDonI7oBeMqGASziWRPjVPiVRL8WcZw.Uad8eU
For a summary of the episode (including all the links mentioned) sign up to the newsletter makingmoney.email/S3E3
The most eyebrow-raising aspect of this paper might be the idea of a 50/50 domestic/international split (and the study is based on all developed countries, not just the USA). Maybe the pros and cons of a UK home bias would be a good topic for a future video?
People criticise the paper he mentions because it doesn't fully consider how human erratic behaviour combined with sequencing risk. I think one of the advantages of target dates and 60/40 is they help you sleep and not behave in bad ways.
I am 51 years old. Private pensions 100% equities but I also have 20 years in public sector pensions so I am willing to take risks.
It took me a while to appreciate that my 30 year public pension allows me to go 100% equities and with a back up cash slush fund, will not touch bonds.
I do the same on 10years.
100% stocks for drawdown and when market goes well draw 6% but in bad years for down to 3-4%! Simple as that
me too. 56 years old and 28 years in DB pension before it stopped. 100% of my active DC pension in global index trackers. Experiment a little in my ISA (eg money market fund) but majority is in index trackers. Would look at supporting municipal bond for my local council provide tax incentives right. eg salary sacrifice
@@porschecarreras992cabriole8 I'm 59 and try to keep the draw down to a maximum of 3% to preserve my capital for the long-term. Index trackers are great!
US Treasury bills: 4 weeks to 1 year.
US Treasury notes: 2, 3, 5, 7, or 10 year.
US Treasury bonds: 10 or 20 year.
My favourite financial RUclipsrs together again. Love it!
I pressed Like before I even started watching. Then it’s just a case of waiting for the obligatory “yield curve” from Ramin. Which today was less than 8 minutes in the sweepstake 😊
And less than 10 minutes for the “inverted yield curve”. Impressive!
36:05, "Whats the reason for someone in their 20's holding an 80/20 stock/bond portfolio ...not being 100% in equities?" FYI, It's basic portfolio theory 101. In contradiction to the 'Beyond the Status Quo' paper, conventional thought says the 80:20 portfolios represents he maximum geometric return per unit of risk. If you increase equity to 100% of the portfolio, geometric returns do increase slightly, but risk increases A LOT. So if risk (i.e. standard deviation) is factored in, it never makes mathematical sense to hold 100% stocks. Similarly, the 60/40 portfolio represents the maximum sharpe ratio portfolio. i.e. the asset mix that has the best risk-adjusted returns relative to any other mix of the same assets. The paper seems to strongly question these allocations and I'm not in the least bit qualified to comment on which is 'right'. The paper also questions another important aspect of asset allocation. It recommends non-US investors invest a minimum of 35% in their domestic market. Everything else I've ever read about diversification says that you should be globally diversified according to the size of your domestic market relative to the global market. For a UK investor this results in an allocation of only approx 4% to the UK. If you're trying to make evidence-based diversification decisions like me, the disparity between 4% and 35-50% is worryingly large.
I'm only about 2% invested in UK - 21% in World Index tracker which has 9.62% UK. More money to be made in US, AI & Semiconductor ETFs.
Take a shot when Ramin says "Yield Curve" two shots if "Yield Curve Inversion"? Always good to hear the soothing tones of wisdom from Ramin.
I'm starting to see how bonds and money market funds can be really useful. Respect to Ramin.
My workplace pension is currently about 60/40 and I'm now certain that I'm going to change it
Bonds almost certainly outperform stocks in the next 12 months
Ben Felix dod a great video on this where even after retirement age, stocks do a better job of maintaining wealth in comparison to bonds in most cases over the past 100 years.
Seas are rising my brotha, I am noooot making it to 100 💀💀💀
Seas are rising?😁😁😁
Estrada finance professor has put out several papers confirming best long term returns with equities
Check out portfolio charts and see that 100% equity portfolios have sometimes taken 12 yrs to recover, just to get back to where they were before the crash etc. How would that work in retirement if you're taking a lump sum from your portfolio once a year, I think there is a very real chance you'd run out of money long before you passed away. Unless you had say 10 yrs of total living expences in cash. Then you could take from cash when your portfolio was down significantly
This is an excellent video. A clear, comprehensive guide to bond investing in just over 20 minutes, plus exactly why Liz Truss was so disastrous as an added bonus. Everyone in the UK should watch it!
My only issue with “stock markets recover quickly” is that sometimes they really don’t. The most recent example is the NASDAQ in 2000. It took 13 years to recover to its 2000 high. The S&P500 takes about 5 years to return to its high before a crash. For most people, 5 years is ok, but 13 years might be pushing it.
Well said. Just because they often do doesn't mean they always will. Markets can sometimes go nowhere for years, Japan is proof of this.
37:34 Damien is so right here. In pre-RUclips times when investment research and advice was harder to come by, Nest’s early derisk would be welcome to prevent long-term underinvestment. Now, it’s much easier to keep reminding young people to just ride out the storms. 👍
Thank you, I really needed this having just paid an FA £2.5k for a plan and it’s all bonds.
I have been waiting for this :)
The incentive for fund and pension managers is to not get sued in the future. Your returns are entirely secondary!
Loved this video. Content was great, as I’d expect from you guys. What really stood out to me though (as someone new to MMP but not Damien & Ramin content) were the production values. The lighting in particular was perfect - nice job.
Thanks @richardharnwell3331
This was a brilliant video before watching this video I never really considered bonds, but for short term and holding cash they are really useful. Thanks for the video found it really useful.
Great video. Definitely going to look into bonds as I approach retirement
Ramins weekly podcast. I'm here for it 👍
Do you think T is thinking of a premium bond? as they came via the post office
Great chat and production as ever. Thank you!
Brilliant video, loads to take away and think about. Thought I had a basic idea about bond funds but learnt I clearly didn't. Would like to know more about the paper on domestic/international equities vs equities/bonds. Thanks to all involved.
Great video - Thanks Guys.
Great stuff- I learnt a lot about bonds from this discussion
Another great episode.
Best Trio ❤
I could watch 100 hours of Ramin on this podcast.
Ramin Part Deux - Marvelous 🙂
Another great episode!
Very interesting video.. also love the buzzer idea
Thanks you for this advice on money markets!!!!
There is a point you should have discussed... About asset allocation. When Warren Buffett says buy the market, he means you will be exposed exactly to the exact proportion of each stock/market regions as per market dictates to beat the 90% of market operators. In the same vain, the same proportion of market (types/duration/world) should be applied to the bonds (if you are interested in such asset) and gold and real state, etc... Whatever. Therefore, the asset allocation of the market for someone that wants a diversified portfolio, comes directly for replicating the market in full without thinking too much of fixed percentages given by the advisors or what one can think for the stock/bond 60/40%.
Wonderful discussion with excellent information
Thanks guys, great vLog. Considering a longer than 5 years bond ladder as a proxy for an annuity which will be passed on if I die earlier than expected.
That was a great podcast lads👏
I think quite a few people that have written ab this paper since it came out, and why some of the assumptions don't make sense (uses bonds from countries like Argentina and Turkey and also the home bias of 35 to 50% is also very questionable still) the impression given here is that this paper de-bunks the previous evidence that bonds help with sequence risk, this is highly debatable and many people are picking holes in it. Love the content of both you guys but think some of the things discussed could be a bit dangerous if people act on it and in a couple of years we have a major market crash and bonds go up a lot at the same time.
1970s high inflation erodes the value of bonds, so always thought 60:40 was too risky and low growth. 10 or 20 % government bonds seems appropriate when stocks are expensive.
Well depends if we ever get deflation (don't rule it out) 20% gov bonds would probably be just ab ok.
I've heard the term de-risking several times over a number of videos now. from my understanding that means as you get nearer retirement you would chnage the funds you have to something that is less risky (and i guess less % return)
ive a couple of quesitons on this
1: Approximately how many years before retirement should you start de-risking?
2: Have you done (or could you do) a video/podcast on a scale of investments from risky to least risk?
ナキサ・ラミンさん、ありがとうございました Thank you for your wisdom Nakisa Ramin San
I break the norm and pepper my pension with actual stocks that pay a dividend, they generally pay out even if stock crash (they have over the last couple of years) so that is my protection against not wanting to sell stocks when they are down - not perfect some might say but its balancing act that I am happy with
The returns on dividend investing are worse than average for the market.
This is closing the barn door after the horse has bolted
The new ibonds are very interesting as an alternative to holding cash. Personally i wont be looking at bonds until im in my mid 50s. You need an absolute bucket load of cash to see any kind of meaningful return.
Hey, would you maybe consider to do a podcast with Ramin on the topic how a passive investing has an effect on market efficiency and if what could happen if majority of investors will become passive investors? I am reffering also to the prognose of index fund bubble stated by Michael Burry some time ago. What would really happen if majority will turn to global indices? How it would hurt the market and majority’s retirement savings after all?There are still many active investors, but it is changing very rapidly in recent years with the knowledge spread via many youtubers. What balance should be there?
Bond-Master 😉
Q. what is the best way to set up your Vanguard Etfs for drawdown of your pension, to give yourself a monthly income. While making your portfolio of funds grow year on year.
Most people are overwhelmed with a choice of over 30 funds and the default option offered by the pension provider is usually the cheapest, so it's selected.
It is not the cheapest option in most cases.
Hey guys - did you link the paper Ramin mentioned? Can't see it.
I would like to know if bond funds, bought before interest rate rises will recover.
Do you have any views on WiseAlpha and fractional bonds ?
Fascinating conversation got me looking at corporate Uk bonds. There are some tasty yields but the trading charges seem prohibitive for a retail investor.
£12 to buy and another £12 to sell at HL
Best I found was £6 each way at Barclays
Not really worth it for less than 1k
Maybe use a savings account if your safe pot is less than that. However, HL has some of the highest trading fees around.
Great inside, I have missed this, what paper is Ramin refering to? Cheers
Any free tools to work out the return on maturity of the bond? Some figures look really low so not sure how much the return is.
Great summary on this topic. Why would Ramin only run his bond ladder 5 years into retirement then stop it?
Ive opted out of my works default pension fund, however i don't think i can buy bonds through it, so how would i setup a bond ladder nearing retirement if i wanted to?
A fixed term annuity to fill the gap between retirement and state pension does make sense. Not far off the ladder here.
Even in the short term, the S&P is much better than any bond for retail investors
One of the things I would say that gets overlooked about the economics of Japan is that their stagnation began when the US started issuing trade tariffs and other protectionist measures against them in the way they are now trying to against China. So much for the free market !!
Thats how ww2 started in asia actually they wernt allowed to buy so they took it
@@hachimaru295 That's just weird im currently watching a show about Japan WW2 lol
Japan stagnated because they had an enormous bubble and because of structural reasons they didn’t have a massive corrective crash just endless stagnation.
Great stuff watched this several times!! ... interestlingly Javier Estrada of IESE Business School took a hypothetical $1,000 investment composed of 90% stocks and 10% short-term Treasuries. Using historical returns he tracked how the $1,000 would do over a series of overlapping 30-year time intervals. 60:40 was the only allocation that never ran out of money during 5 diffrent 30 yr periods taking 4% pa , including all the ups and downs The worst allocation was 30/70 with a failure rate of 12.8 %
But that’s assumes a static drawn down. The trick is to be adaptive and not pull out as much in a down market. Also if the returns are higher and compounding then 3% of more can be > 4% of less.
Of course ots the right strategy. When they were all going tits up during trusses budget the bank of england were there to save the day amd always will be
Great video! Please share the paper that was referenced.
Beyond the status quo: a critical assessment of lifecycle investment advice
YESSSSSSSSSSSS
I saw at the moment that for someone now 65yrs old legal & General offering 6% standard annuity payment for life.
If you choose drawdown possibly 4% a year may be sustainable, so surely a 6% annuity which is worry free would be preferable unless you want to leave money to children, wife etc or you're concerned about the pension still providing money for your wife if you die first. Of course there are annuities that will still pay out to your partner if you die, I think at the moment they're still paying out possibly 5% annuity. So under these current circumstances why would you want to do a drawdown
58:36 they didn't answer his question.... no. the 2 ETF's mentioned here (ERNS, CSH2) do no have "money market" in the name but others do. i'm not sure if that means they're not technically money market funds but do a very similar thing or it's just a naming thing.
So the 60/40 is dead. Wasn't there a headline in 1979 which pronounced 'the death of equities'? Just saying..........
Ramin did another video about the 60/40 portfolio in Oct 2020. You might want to watch that one as well. It's entitled, is the 60/40 portfolio dead
Wouldn't an issue with local municipal bonds be the people not buying them but still reaping the rewards from them.. ??
So you have £100 k at 69 , other than an annuity what is the alternative to bonds , what do you do
30 to 35 % of my portfolio is in short term bonds (treasuries) while CAPE is absurdly high to cover the first few years in retirement. Using a rising glide path for stocks as i get closer to my full SS claiming age. Logical or not, that is my plan.
Will you guys have Pete Matthew on at some point?
Got us and uk treasury bonds when i set up my sas isa a couple years ago. Bonds crashed harder and longer than ever before, their the only part of my portfolio that hasnt recovered yet 😕
Did you buy funds of bonds, or bonds?
@@jam99 us and UK treasury etf so funds. Wasn't as educated as I am now and thought having a base of some gov bonds would be good (there was also a lot of hype around bonds at the time which I didn't recognise due to naivety) before building more into stocks.
Basically bought at the top of the bond market B4 their historic crash. Live and learn I guess.
Any chance to get the link to the paper that was mentioned multiple times in this episode?
The title is "Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice"
The blood is in the street of the long term treasury bond market, at the moment it's an asymmetrical bet bet if you think interest rates are coming down, look at TLT pays about 3.5 percent
Jack Bogle - Point 8. Beware of fighting the last war. What worked in the recent past is not likely to work going forward. Investments that worked well in the first market plunge of the century failed miserably in the second plunge. So stocks crashed and bonds crashed at the same time. Jack would say this will not happen again. Stay the course. - In addition Any conversation without mentioning quantitative easing is not worth listening to.
BOND-AGE 🤷🏿♂️
Croydon Municipal Bonds 💀
At 50.18 minutes, money market funds are only a no brainer at the moment if you ignore reinvestment risk. Obvious anyone buying a 4% 5 year bond when you can get 5% from a money market fund is expecting interest rate decreases. The person in the money market fund will not be buying 4% 5 year bond without paying a premium when interest rates fall.
Damien how do you manage to save in your money market fund without it exceeding your annual ISA allowance If using for your income tax amount? Or am I missing some other tax-exempt method?
Puts cash into stocks n shares ISA, parks it in money market fund within ISA until he decides what ETFs to buy.
@@george6977 But he talked about using it for his income tax bill. So sacrificing ISA allowance is the only way to avoid tax on that for large chunks (other than a low coupon gilt and then probably having to sell before maturity when the tax bill comes due).
If you are in debt there is little point investing. Having a workplace pension with say 8% contribution over your lifetime. But you continue to pay off a large mortgage and other debts. Im sorry but your end result will be not good. Even if you were to make 10% on your investments which aquate to 10% of your wage. You are still going to be worse off when you add together you debts through the same period. And you won't get 10%. The only way to make money is to clear all debts permanently then build your money. Make your money earn an income. That will only happen when you have no debt. These guys have been talking for years when rates were low and money was clutenous. It is no longer so making money will be much more difficult looking forward. Thats history.
That is simply incorrect. It depends on what your debt interest rate is vs the yield you can generate from investing (taking into account tax). With low priced mortgages like we had until recently you absolutely would be far richer investing in S&P or msci world than paying down the mortgage.
In the USA mortgage rates on mortgages are fixed for 30 years. In the UK they only go to 5 at the longest. So I'm not incorrect for the UK. As this is a UK channel I was referring to the UK. Interest rates for mortgages here are up to 8% on variables. Plus adding compound interest over the long term that makes investment not worth it. Mortgage amounts or averages in the UK are £220k so it can vary even if it's only 160K it will be highly unlikely that you have more than this amount in savings. So even if your savings got 15% and you are holding £50k you still are not making more than your debts. And I've not even added credit cards or car loans to this equation. Please add up your payment per month for all your debts. Then add up how much interest you make on your investments. Tally it to an annual amount. If your investment is lower then you are not making money regardless of your interest rate on your mortgage. Even if your interest rate stays at 2% the amount you have borrowed will be higher than the amount you have invested.
I’m in U.K. with some mortgage on a floating rate of 5.5%. My S&P tracker still destroying it. You should check your maths or at least quit handing out advice.
I like these podcasts they are informative, except for those moment when host starts to giggle loudly like a horse, or when they downplay and belittle their co-host as if they aren't smart enough.
You hasve to be so careful what you say, this is a really interesting dicussion but being domestically invested in the UK, hasn't really helped for quite a long time. Not only do you suffer from the persistent underperformance of the UK equity market but the devaluation of the pound also has an effect. The price of most things we buy are determined by foreign currencies, most often the US$ The £ has been in a gradual long term decline against the US$ for decades, pretty much since the end of WW2. Yes UK stocks are cheap but they have been for a long time, as the UK is only 4% of the global equity market there's no real incentive to overweight them for big funds because the portfolio impact is small. We have very few growth stocks and little in the way of significant tech, the biggest being Sage at abouit $16bn a minnow on the global stage. The reason the FTSE is cheap is because of what's in it, not really because it is massively undervalued.
I haven’t really understood. Are these bonds you’re talking about protected from tax on interest. Like in an ISA?. I already have 4 x 2yr fixed rate bonds running that mature every 6 months BUT THEIR NOT PROTECTED FROM TAX. . I’m now going to get the money into stocks as they mature cos I’m gona end up paying £500 IN tax for 2025/26.
It sounds like your “fixed rate bond” is a bank issued bond? Not the same thing at all as what is being discussed here. It is confusing. A “bond” is simply a loan to someone who promises to pay you back with interest. Sometimes the promise is broken (the bond defaults). The bonds being discussed here, mainly, are gov bonds known as gilts. They are traded on a stock market. The coupons from them is taxed but any capital gain is tax free.
LAW & ORDER
The continuous accumulation of state debt, without citizen input and primarily to service interest on existing debt, can be seen as a form of theft against its citizens. This practice leads to higher inflation, which erodes the value of citizens' savings and purchasing power, prompting citizens to take action to protect themselves.
Imagine the collective power of 300 million citizens taking legal action against the state for this criminal activity. Such a united effort could profoundly hold the government accountable and seek restitution for the financial harm caused by inflation.
The widespread involvement of citizens in legal action against the state would show a widespread recognition of the injustice and harm caused by the state's actions. It would place immense pressure on the government to address these concerns and enact meaningful reforms to prevent further financial harm to citizens. This level of citizen engagement could also lead to significant changes in the political landscape, compelling policymakers to listen to the people and implement policies prioritizing fiscal responsibility and transparency.
In summary, the prospect of 300 million citizens taking legal action against the state for this criminal activity demonstrates the potential for collective action to effect positive change and hold government institutions accountable to the people they serve.
Great idea, let’s buy bonds from profligate, indebted countries who can inflate that debt away when they can’t meet their obligations
That sounds like a long term winner to me
The richest people in the world have made a chunk of money from bonds😅
The new mix is as Fidelity has just released 59:40:1, 59:39:2 and 82:15:3 with the lower numbers being a crypto allocation. People need yield and that is only coming from crypto and tech stocks...
Bitcoin
Dirty Sonia. Rated 'AAA"....
What's there to stop a labour government intentionally defaulting on bonds? Only pensioners have bonds and they don't vote labour! They didn't borrow the money. It was irresponsible to lend the gov this much money
It would pull the rug out from under everthing else if they did
@@hachimaru295 what does this mean tho?
@@MatthewEng2593 No one would lend to the gov't in the future, which would be very bad.
@@Michael-DS but we are borrowing just to pay back the interest and not even pay off the loan. We may as well just default. There will always be another sucker willing to loan a government money.
Those pensioners voted conservative, and they very much borrowed the money. Look at debt to gdp under the tories. Anyway, finger pointing isn’t helping so I’ll instead say this: we are screwed. Whichever government gets in is going to have to deal with this debt burden and the demand driven inflation from ai. Interest rates will continue to rise as money is borrowed to build data centres. An ai arms race has begun. The currency will fall as gov will try to do fiscal to counter the damage from high rates but then rates will continue to rise to save the currency which will weaken. Something has to give. The value of the pound. Look up the trilema and the circumstances which arose which caused George Soros to short the pound.