Question
I have seen your recent posts that stock markets are being propped up by Central bank intervention. As the FTSE index is quite high now and could crash in the near future, I am looking at ways to reduce my riskier funds by investing in much more cautious funds, especially as I am not far off 60.
I have checked out some cautious funds (e.g. Investec Cautious managed) and notice that this fund manager lost money in 2008/9. Even though I am happy to accept a lower return on funds now, I do not want to lose money when a crash comes. Are there any ultra cautious funds around that offer reasonable returns and will return minimal loss should a crash arise?
Are gilts still a good bet now, even though the financial press seems to give a negative forecast on these?
Also, which are better in today's market and going forward: corporate bonds or strategic corporate bonds?
Thank you very much for any help you can give me on this.
I really enjoy your website.Answer
Stock markets are very difficult to predict, especially in the current fragile economic climate. However, reducing your portfolio risk may well be sensible, especially since you're approaching age 60 - there's little point taking excessive risk in retirement if you can afford not to.
Unfortunately the only investment where you can be pretty sure of not losing money is cash - and rates are currently low compared to inflation, other asset types and historical levels.
Most 'cautious' funds tend to be run along one of the following strategies:
1. Hold mostly gilts, corporate bonds and cash, with the balance held in stock markets.
2.As above, but also hold other assets such as gold (this is the approach taken by Investec Cautious Managed).
3. Run an absolute return strategy that tries to deliver positive returns regardless of markets, for example the manager might bet on share prices falling and profit if they do.
The trouble with all the above strategies is that none are immune to stock market downturns. Most cautious funds have some stock market exposure (Investec Cautious Managed around 40% as at end of April - last published data) and absolute return managers usually fail to deliver consistently positive returns (It's a very tall order).
That's not to say holding funds like these is a bad idea, but it's important to adjust your expectations as to how much protection they'll provide in a downturn.
If stock markets do crash then gilts, high quality corporate bonds and gold are likely to fare well - as these tend to be favoured assets when investors are nervous or panic. However, all are currently riding quite high, in part due to stock market uncertainty in recent years and central banks buying gilts (or equivalents) as a mechanism for pumping billions into economies. If the stock market doesn't crash and economic confidence grows it seems likely gilts, bonds and gold could all take a hit.
Which basically leaves us in a conundrum. How to take a cautious approach without resorting to just holding cash?
There isn't a magical answer I'm afraid.
In practice the most sensible approach is to probably combine a variety of investments, including cautious and absolute return funds and accept that you could lose money if markets crumble. Provided you're looking to remain invested for 10+ years chances are you'll ride through any downturns to still end up in profit overall long term.
However, if any readers have other strategies I'd be really interested to hear.
As for corporate bond or strategic corporate bond funds, the latter gives fund managers more flexibility. In simple terms high quality 'investment grade' corporate bonds tend to be more influenced by interest rates and inflation than higher yielding bonds, which are often more correlated (i.e. move in a similar direction) to stock markets. Most plain vanilla corporate bond funds invest largely in investment grade bonds while strategic bond funds invest in both, with the manager adjusting the proportion based on their outlook.
Strategic bond managers who get it right should outperform conventional bond funds, but obviously the reverse holds true as well.
I have seen your recent posts that stock markets are being propped up by Central bank intervention. As the FTSE index is quite high now and could crash in the near future, I am looking at ways to reduce my riskier funds by investing in much more cautious funds, especially as I am not far off 60.
I have checked out some cautious funds (e.g. Investec Cautious managed) and notice that this fund manager lost money in 2008/9. Even though I am happy to accept a lower return on funds now, I do not want to lose money when a crash comes. Are there any ultra cautious funds around that offer reasonable returns and will return minimal loss should a crash arise?
Are gilts still a good bet now, even though the financial press seems to give a negative forecast on these?
Also, which are better in today's market and going forward: corporate bonds or strategic corporate bonds?
Thank you very much for any help you can give me on this.
I really enjoy your website.Answer
Stock markets are very difficult to predict, especially in the current fragile economic climate. However, reducing your portfolio risk may well be sensible, especially since you're approaching age 60 - there's little point taking excessive risk in retirement if you can afford not to.
Unfortunately the only investment where you can be pretty sure of not losing money is cash - and rates are currently low compared to inflation, other asset types and historical levels.
Most 'cautious' funds tend to be run along one of the following strategies:
1. Hold mostly gilts, corporate bonds and cash, with the balance held in stock markets.
2.As above, but also hold other assets such as gold (this is the approach taken by Investec Cautious Managed).
3. Run an absolute return strategy that tries to deliver positive returns regardless of markets, for example the manager might bet on share prices falling and profit if they do.
The trouble with all the above strategies is that none are immune to stock market downturns. Most cautious funds have some stock market exposure (Investec Cautious Managed around 40% as at end of April - last published data) and absolute return managers usually fail to deliver consistently positive returns (It's a very tall order).
That's not to say holding funds like these is a bad idea, but it's important to adjust your expectations as to how much protection they'll provide in a downturn.
If stock markets do crash then gilts, high quality corporate bonds and gold are likely to fare well - as these tend to be favoured assets when investors are nervous or panic. However, all are currently riding quite high, in part due to stock market uncertainty in recent years and central banks buying gilts (or equivalents) as a mechanism for pumping billions into economies. If the stock market doesn't crash and economic confidence grows it seems likely gilts, bonds and gold could all take a hit.
Which basically leaves us in a conundrum. How to take a cautious approach without resorting to just holding cash?
There isn't a magical answer I'm afraid.
In practice the most sensible approach is to probably combine a variety of investments, including cautious and absolute return funds and accept that you could lose money if markets crumble. Provided you're looking to remain invested for 10+ years chances are you'll ride through any downturns to still end up in profit overall long term.
However, if any readers have other strategies I'd be really interested to hear.
As for corporate bond or strategic corporate bond funds, the latter gives fund managers more flexibility. In simple terms high quality 'investment grade' corporate bonds tend to be more influenced by interest rates and inflation than higher yielding bonds, which are often more correlated (i.e. move in a similar direction) to stock markets. Most plain vanilla corporate bond funds invest largely in investment grade bonds while strategic bond funds invest in both, with the manager adjusting the proportion based on their outlook.
Strategic bond managers who get it right should outperform conventional bond funds, but obviously the reverse holds true as well.
Read this Q and A at http://www.candidmoney.com/askjustin/876/where-to-invest-in-troubled-times
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