Pension fund performance - do you monitor yours, how is it doing, do you actively change it?

[danlightbulb]

I still maintain there's still no paper loss on a bond.

You buy a bond for £100 knowing you're guaranteed to get £105 back in a years time, or whatever the figures are.

Even if that bond trades lower during the term, you'd still say it's worth £105 to you because all you have to do is hold it to maturity (which you knew the exact term of in advance) and it is guaranteed to be worth £105.

Now if you do decide to sell it mid term for a loss, there's an actual loss there. But if you aren't selling it theres no reason to consider the interim value, the only value that matters is the maturity value.

I don't dispute that people sell bonds early but it's wrong to say there is a paper loss. On paper that bond is worth the guaranteed maturity value the whole time. If you choose to sell it, then yes you'll realise a loss but then it's an actual loss not a paper loss.

 

[danlightbulb]

But there are plenty of people.out there who went in on very long dated UK bonds as a 'sure thing', probably regretting it now as the rate and inflation outlook changes

They will get exactly what they signed up to. They get the exact return they knew they would get on the exact date of maturity they knew in advance.

So they are a sure thing from the bond's perspective.

The issue is the opportunity cost of that money could now be making more elsewhere. That's nothing to do with the bond itself, the bond is doing exactly what it said it would do and all the investors have to do is hold that bond to maturity and it will deliver exactly what it said it would.

People shouldn't invest in bonds if they want to treat it like a liquid stock (they could use bond funds for that).

It's no different to locking cash in a fixed term savings account then there is a fee if you withdraw early. You wouldn't say on paper your cash is worth less during the term, because the fee only occurs if you withdraw early, which you shouldn't be doing (don't lock cash up if you think you might need the money).

 

[Richie]

DIY Investor Diary: why I’m ‘all in’ on this volatile gilt

A reader shares the details of his bet on a UK government bond maturing in 2061 that is hinged on the economic outlook of the UK.

www.ii.co.uk

I don't get that guy's investment... He bought it in his 60s and won't mature until 2061 which means he will be in his 90s?

Am I misunderstanding it?

 

[danlightbulb]

I don't get that guy's investment... He bought it in his 60s and won't mature until 2061 which means he will be in his 90s?

Am I misunderstanding it?

He'll get twice a year guaranteed payments from the bond for it's term.

Gilt holders receive semi-annual coupon payments from the UK government – which all but guarantees its interest payments – and the return of their £100 principal per gilt when the bond matures.

And then he'll get the full capital back on maturity.

So there is zero risk in cash terms, everything from the amount of the payments and return of capital at maturity is guaranteed.


He also thinks that there is a chance of capital appreciation of the bond if interest rates fall.

The investor said: “I am attracted to this gilt’s duration. Clearly if you look at gilts as an asset class, they have really underperformed recently. It was due to rates going from an all-time low, so gilt yields were minimal, to where they are today after a spurt of inflation.

“TG61 has fallen the most due to its duration. But what goes up must come down. As rates fall there is every chance that there will be a significant capital appreciation for investors buying at today’s prices. I’ve bought at an average price of £29, with yield to maturities of about 4.5%.”

By his calculations, if the yield on the bond drops to around 3.2%, which he thinks is likely to be a reasonable long-term interest rate for the UK government to borrow at, then that means the price of the bond will have to rise to £42, nearly a 50% capital gain on the £29 he has paid for the bond on average.

This is the speculative element. It may work for him or it may not. I would assume however that whether it does or doesn't come off, he is safe in the knowledge he will get his guaranteed return from the bond.

He could choose to sell the bond mid term if it appreciates. If it doesn't, he is guaranteed to get back what he signed up to when he bought the bond. If he's not comfortable with the bond's terms, and holding it till maturity if he needs to, he shouldn't have bought it.

 

[200sols]

I don't get that guy's investment... He bought it in his 60s and won't mature until 2061 which means he will be in his 90s?

Am I misunderstanding it?

He plans to sell it well before maturity. He thought rates would fall, yes the BoE is cutting rates but the middle and long duration yields moved up instead. He's been caught out and now has to wait. Stuck with a tiny coupon as well.

What Dan fails to grasp is the psychology of investing and how it causes people to make mistakes. Nobody has argued about holding to maturity and the guaranteed return if you do that.

 

[danlightbulb]

What Dan fails to grasp is the psychology of investing and how it causes people to make mistakes. Nobody has argued about holding to maturity and the guaranteed return if you do that.

I'm not failing to grasp this. I'm saying if people are seeing it this way then their method of accounting is wrong.

If you buy a bond for a year for £100 and it's guaranteed to return £105.

I would account for this on my books as being worth £105 the whole time as a minimum.

I could separately track the market and have a 'if I sell today' price. But I wouldn't be saying I've made a paper loss based on that, because I haven't. In my mind I still have a guaranteed £105.

This is different to stocks or bond funds. These do have a paper loss because you're never guaranteed to get back to the original price if there is a dip. With bonds if there is a dip you just have to wait, so why would you say you have a loss here?

 

[200sols]

I'm not failing to grasp this. I'm saying if people are seeing it this way then their method of accounting is wrong.

If you buy a bond for a year for £100 and it's guaranteed to return £105.

I would account for this on my books as being worth £105 the whole time as a minimum.

I could separately track the market and have a 'if I sell today' price. But I wouldn't be saying I've made a paper loss based on that, because I haven't. In my mind I still have a guaranteed £105.

You are just stuck on a 1 year timeframe. Move out a bit. People use 5/10 years for planning. Its not hard to see a scenario 'oh crap yields are rising, i'll sell now and buy back when they're even higher' and then it moves against them and they locked in a loss. People make mistakes like that all the time despite having the best intentions not to.

Logging into their broker and seeing their £100 bond now worth £90 does funny things to people.

I think we've gone a full circle anyway now and its derailing the pension talk.

 

[dlockers]

Money is a finite resource for an individual. Quite happy to crystalise a loss now if it means I can join another club thats going to make more in the same time period. "Fail fast" and all that.

 

[danlightbulb]

You are just stuck on a 1 year timeframe. Move out a bit. People use 5/10 years for planning. Its not hard to see a scenario 'oh crap yields are rising, i'll sell now and buy back when they're higher' and then it moves against them and they locked in a loss. People make mistakes like that all the time despite having the best intentions not to.

Logging into their broker and seeing their £100 bond now worth £90 does funny things to people.

I don't think the timescale matters for the principle of this.

What you're describing above is bond trading, which isn't really the point of buying bonds at the individual level I would say. They are meant to be a fixed return held until maturity.

So broker websites show the current value of a bond in your portfolio? I can understand how that could be misleading. Whilst I can see there is a 'sell now' price that may be less than maturity value, I would not see it that way at all. I would see the guaranteed return as the minimum asset value and that cash as being locked up for the term.

 

[dlockers]

I , I would not see it that way at all. I would see the guaranteed return as the minimum asset value and that cash as being locked up for the term.

Ok but then someone offers you 100 5090s at 30% of cost..your only cash is tied up in a bond that delivers 5% or you take a loss now.

People do it all the time. Look at folk whining about lifetime ISA withdrawal fees.

 

[danlightbulb]

Money is a finite resource for an individual. Quite happy to crystalise a loss now if it means I can join another club thats going to make more in the same time period. "Fail fast" and all that.

That's fine, we're now talking opportunity cost.

Forget the idea of selling anything - imagine this isn't on your mind at all and you were asked to value your portfolio today and you held bonds, would you use the current value of bonds or would you use the guaranteed value at maturity?

 

[dlockers]

That's fine, but if you were asked to value your portfolio today and you held bonds, would you use the current value of bonds or would you use the minimum guaranteed value at maturity?

If I was valuing them today I'd use today's price, because that's what they're worth today. Id have a future price in a forecast column and then use that to make decisions.

Like chappy who bought the bonds betting on rates reducing - he may realise he's tied up way too much cash on a bet that didn't work out, and call it a day now rather than wait 61 years. He wouldn't even have that thought if he had valued it in his spready at tomorrow's price.

 

[dlockers]

Another example is ERCs on mortgages. When rates were doing their thing quite a few folk realised they could take a loss against their existing mortgage because the gain on a renewal outdid the penalty and then some.

 

[danlightbulb]

If I was valuing them today I'd use today's price, because that's what they're worth today. Id have a future price in a forecast column and then use that to make decisions.

Like chappy who bought the bonds betting on rates reducing - he may realise he's tied up way too much cash on a bet that didn't work out, and call it a day now rather than wait 61 years. He wouldn't even have that thought if he had valued it in his spready at tomorrow's price.

Ok.

So let's say you have £1000 cash in a fixed savings account with a 1 year lockup and 10% penalty for withdrawing.

You're asked to value your portfolio. What figure do you give?

 

[danlightbulb]

Another example is ERCs on mortgages. When rates were doing their thing quite a few folk realised they could take a loss against their existing mortgage because the gain on a renewal outdid the penalty and then some.

This is opportunity cost again.

We're talking about portfolio valuation.

I'm not saying you shouldn't evaluate your options, and the paper value of your assets is key to that. But do you see it as a loss?


Here's another example to illustrate the point.

Let's say you buy an asset for £100 and you are guaranteed £105 back in a year.

Let's say you physically cannot sell this asset. It's not possible at all.

The market however still moves around, and your asset is nominally valued at £50 for some reason.

What is the value of your portfolio at a snapshot in time, is it £50 or £105?

 

[danlightbulb]

I was valuing them today I'd use today's price, because that's what they're worth today.

It's not though, because your not accounting for the implicit value of the guaranteed return component. The guarantee itself has a value to it that youre ignoring in your accounting.

 

[dlockers]

It's not though, because your not accounting for the implicit value of the guaranteed return component. The guarantee itself has a value to it that youre ignoring in your accounting.

Balance sheet is a snap shot at point in time. Income statement and cashflow are overtime. My valuation today would be today's value because that's what it's worth to me right now.

 

[danlightbulb]

Balance sheet is a snap shot at point in time. Income statement and cashflow are overtime. My valuation today would be today's value because that's what it's worth to me right now.

How about the savings account example a few posts up?

 

[dlockers]

This is opportunity cost again.

We're talking about portfolio valuation.

I'm not saying you shouldn't evaluate your options, and the paper value of your assets is key to that. But do you see it as a loss?


Here's another example to illustrate the point.

Let's say you buy an asset for £100 and you are guaranteed £105 back in a year.

Let's say you physically cannot sell this asset. It's not possible at all.

The market however still moves around, and your asset is nominally valued at £50 for some reason.

What is the value of your portfolio at a snapshot in time, is it £50 or £105?

0 because if I liquidate it now it's worth nothing to me. It's basically a red/black gamble with no in-between.

 

[danlightbulb]

0 because if I liquidate it now it's worth nothing to me. It's basically a red/black gamble with no in-between.

You're not being asked to value your portfolio 'if you liquidate it now'. You're being asked to value your portfolio. You are yourself assuming the 'if you liquidate now' part. Who says you can't include guaranteed future returns in your portfolio valuation?