The trouble with bonds and gilts appear to have hit the news quite a bit lately and here I argue some defence of these old fashioned loans. However, that’s not to say people should simply sit and do nothing.
The financial whizz kids talk about “life styling” as their approach to managing funds of people approaching retirement. The logic is someone’s pension pot is invested in the stock market and this will inevitably see various ups and downs but the end result should be worth it. Then, some time ahead of retirement and when the funds are needed, the life styling trick is to preserve, or lower the risk, of those gains by switching the equity investments into safer investments, typically bonds. Bonds are said to be absolutely secure, although they will never set the world alight with their returns. Corporate (i.e. businesses) loans have a slightly higher theoretical risk.
We all know the Liz Truss budget in 2022 caused havoc in our economy and this affected the bond market. Ms Trust’s short lived premiership is still being felt today with retirees facing losses in their retirement funds which were hitherto thought to be rock solid.
All readers will know I’m not an economist or a financial advisor of any kind, moreover I’m just an ordinary bloke who is retired and keeps an eye on our little nest egg. Normally I take the longer view and ride out any volatility without losing any sleep over the matter.
Checking our bonds
Thankfully we are in the position of not needing to do the life styling approach just yet. Most of our little nest egg is still long term stuff and has exposure to all kinds of weird and wonderful markets around the world and bobs up and down as we would expect.
Nevertheless there is some tiny bond stuff in there and sure enough, it has suffered. One fund has gone down 50% in the last 3 years and is showing no signs of recovery. I am glad it is only a small amount of money in that fund.
In defence
I still agree with the logic of life styling, even though I loathe the terminology. I get it. In normal times this would be the correct way of fund managers and financial advisors to proceed.
It is interesting to see our funds which are set to be drawn upon in 13+ years are the ones doing the best. Funds in the 5-10 year pot are a little lacklustre but still broadly okay. We remain happy for these to be “de-risked” in a few years time.
I wonder if this is where the finance whizz kids could have done more to help their clients?
So while the approach, the strategy, may have some logic, it hasn’t worked in recent times, has it? I wonder if this is where the finance whizz kids could have done more to help their clients? I question whether some are a little too passive and should have been more proactive in dealing with this crisis, or even seeing it come in the first place. It wasn’t just the Ms Trust effect, other things were at play also – post Covid economies, the Ukraine war etc. Surely those well paid fund managers could have done more?
Blame?
Crisis? Yes it is a crisis for those approaching retirement and finding their future pension income is less than they were expecting. Some might put up with a reduced income, others might have to delay their retirement altogether. So I have some sympathy with those looking for someone to blame.
And now?
The logic still stands in my view, although next time when I go for a walk with our advisor I will ask about it. We tend to walk over farmland in Hertfordshire, which like the markets is undulating: and now I hope the valleys won’t be too deep for us in the future.
Fidelity have written an interesting article about bonds – click here