Thoughts on a "bond ladder" in defence against downturns?

[Gilgongo]

I stumbled across this article on retirement investing the other day, which seems applicable to my own situation (I'm approx. 5 years from retirement):

https://www.marketwatch.com/story/a-rec ... 2019-09-25

It's written from a US-perspective of course, but seems generally applicable to UK-based retirees. Apart from being an interesting approach (as far as I think I understand it), I was intrigued by the use of the term "bond ladder" which I'd not encountered before. But then I looked it up and it sounds like a right faff.

But if a similar effect can be had (eg from some bonds EFTs paying a divi?), what do people think about the approach described to deal with the effect of recessions during drawdown?

G

[Chrysalis]

Its basically a way of liability matching your portfolio, aiui. You set it up with bonds of different durations to mature each year - its one way of providing a risk free floor for spending in retirement. Another way is to buy an annuity.

I myself run something similar for the cash element of my portfolio - I run a rolling ladder of 5 year fixed term bank deposits. This means that I am always reinvesting into the best cash interest rates, and yet each year a fifth of my cash allocation becomes accessible, should I need it (at the moment I'm just reinvesting). For me its a way of maximising the returns and minimising costs on my fixed interest allocation whilst keeping the duration short (I also hold bond ETFs but about half my fixed interest is in cash). No idea if its the best way, but it suits my cautious approach...

[tjh290633]

I looked at a theoretical one, but neglected to update it this year. I took the next stock to mature in 5 years' time each year, held to maturity and repeated the process each year. It gave me negative returns.

Those more experienced in gilts told me I should have worked with gilts 10 years to maturity and cashed each one in at the 5 years mark. The interest each year went into the next gilt to be purchased, and I have forgotten exactly how I worked things out.

If you can find a workable example that gives a sensible return, good luck.

TJH

[Chrysalis]

The point is to provide certainty, and at the present time, that is expensive.

[stevensfo]

Its basically a way of liability matching your portfolio, aiui. You set it up with bonds of different durations to mature each year - its one way of providing a risk free floor for spending in retirement. Another way is to buy an annuity.

I myself run something similar for the cash element of my portfolio - I run a rolling ladder of 5 year fixed term bank deposits. This means that I am always reinvesting into the best cash interest rates, and yet each year a fifth of my cash allocation becomes accessible, should I need it (at the moment I'm just reinvesting). For me its a way of maximising the returns and minimising costs on my fixed interest allocation whilst keeping the duration short (I also hold bond ETFs but about half my fixed interest is in cash). No idea if its the best way, but it suits my cautious approach...

I do more or less the same thing, but with 1 year fixed-interest. From what I remember, the whole concept of bond ladders originates from TMF when yields were VERY much higher than today. At the moment, the cash part of any portfolio is the pain in the proverbial! As I keep telling myself, a fixed interest rate of 1.5% when the RPI is 3% means that I'm losing only 1.5% rather than 3%. But diversification comes at a price.

Steve

[AleisterCrowley]

Bond ladders have been around for years, I don't think they are a TMF 'thing'
With current rates I'm not an enthusiast...

[xxd09]

I did it for some years with 5year gilts
Simple procedure and easy to do -once it is setup
Just divide your bond portfolio into a few sections-in my case 5 and then start buying 5 year gilt with a section.
After 5 years ladder up and rolling and complete.Just reinvest each bond as it comes due.
However:-
I wanted US exposure-higher interest rates
I wanted a simpler procedure
I put everything in the Vanguard Global Bond Index Fund hedged to the Pound-admittedly average7 year Government Bonds plus some corporate bonds BUT simple,cheap and easy to understand
Averaged over 4% pa during last 10 years
xxd09

[Chrysalis]

I think they are advocated more in the US by Boglehead types, specifically to provide a risk free ‘floor’ for income. Here in the UK private investors seem willing to take much more equity risk than similar folks in the US.
And of course if you have sufficient defined benefit pension income that can provide your safe floor, then arguably an equity heavy portfolio is fine.

[AleisterCrowley]

I did it for some years with 5year gilts
S...
I put everything in the Vanguard Global Bond Index Fund hedged to the Pound-admittedly average7 year Government Bonds plus some corporate bonds BUT simple,cheap and easy to understand
Averaged over 4% pa during last 10 years
xxd09

VAGS ? As discussed on Monevator recently (I'm 'Berkshire Pat' over there...)
https://monevator.com/lars-kroijer-onhe ... /#comments

[xxd09]

Mex Id -VIGBBD
As per Monevator discussion board and Berkshire Pat-yes
One really has to nail down the ticker of these funds to identify them precisely as each fund has at least five different ones!
Just changed from ATS to Interactive Investor -done first trade-and noticed that the platform system identification of funds is different
xxd09

[AleisterCrowley]

The ACC version is ISIN: IE00B50W2R13
Income/DIS version is ISIN: IE00B2RHVP93
(but please check if you are purchasing !)

[TUK020]

I stumbled across this article on retirement investing the other day, which seems applicable to my own situation (I'm approx. 5 years from retirement):

https://www.marketwatch.com/story/a-rec ... 2019-09-25

It's written from a US-perspective of course, but seems generally applicable to UK-based retirees. Apart from being an interesting approach (as far as I think I understand it), I was intrigued by the use of the term "bond ladder" which I'd not encountered before. But then I looked it up and it sounds like a right faff.

But if a similar effect can be had (eg from some bonds EFTs paying a divi?), what do people think about the approach described to deal with the effect of recessions during drawdown?

G

ETF of 5 year corporate bond ladder IS15
Much easier

[AleisterCrowley]

IS15/ iShares £ Corp Bond 0-5yr ?

looks interesting-ish but;
about 48% banking and insurance
>50% credit rating BBB, so only just investment grade?

[TUK020]

IS15/ iShares £ Corp Bond 0-5yr ?

looks interesting-ish but;
about 48% banking and insurance
>50% credit rating BBB, so only just investment grade?

Yup, and balance it with a little ISXF - longer duration, but excluding financials

[AleisterCrowley]

A lot of these bond ETFs look like a halfway house between equities and the 'minimal risk asset' part of a portfolio (traditionally Gilts)

[Alaric]

A lot of these bond ETFs look like a halfway house between equities and the 'minimal risk asset' part of a portfolio (traditionally Gilts)

The problem with Gilts is the extremely low yield, so the bond ETFs offering 3 to 4% mean you see some sort of return. You can get a similar yield buying Bonds direct through the newish Retail Bonds market, but you have the same Company failure risk as with Equities but without the same upside potential.

[AleisterCrowley]

You can get ~ 2% on a 5 year fixed rate cash ISA with full FSCS protection up to the limit (£80k?) so 'AAA' pseudo risk free

Obviously the mechanics of ISA limits/transfers get in the way...

[bluedonkey]

You can get ~ 2% on a 5 year fixed rate cash ISA with full FSCS protection up to the limit (£80k?) so 'AAA' pseudo risk free

Obviously the mechanics of ISA limits/transfers get in the way...

Yes, good point. Why make life complicated?