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Diary of a Dumb Investor: being clever with bonds

I desperately want to diversify my portfolio away from commodities, shares and assets likely to be severely impacted by Europe's debt crisis. And I think I have a cunning plan.

 
Diary of a Dumb Investor: being clever with bonds

Reading through last week’s post, it dawned on me just how skewed my portfolio is towards commodities, shares and holdings likely to be severely impacted by Europe's debt crisis.

Read Dumb Investor: the story so far.

If it were a cocktail, it would be considerably more expensive than most of the other drinks in the bar, and significantly less tasty – due to its rather oily, garlicky flavour. No doubt any bartenders who offered it would risk having the drink hurled back in their faces by enraged, retching customers.

I would like to avoid a similar fate; and, as such, desperately want to diversify my portfolio.

But I’m nervous, as I understand that the two asset classes to which I’m not exposed, bonds and property, face a potentially mortal danger in the form of interest rates, which are due to rise soonish.

This is because when rates rise, it will be harder for property firms to finance real estate acquisitions, I’ve heard. And fixed income assets like bonds will also suffer as higher interest rates make cash more attractive.

Or as my old friend gggggg hjhjkl;', a Citywire reader, put it last week: ‘As to bonds do bear in mind they provide short term stability but in the long term they are losers. IMHO the bubble will burst when interest rates rise.’

However, after scouring a number of investment websites, with little success, a City mate pointed out a way of both investing in bonds and benefiting from future rate hikes.

It’s called ‘negative duration,’ where the traditional yield-price ratio is reversed: this would mean that a bond's price increases as the interest rates go up, and decreases when the interest rates fall.

I’ve also located a fund in Citywire Selection whose portfolio is in a negative duration position: the Old Mutual Global Strategic Bond fund, run by Stewart Cowley. This fund has given total returns of 50% in the three years to the end of April, beating its benchmark, the Citigroup World Government Bond Index, by just under 11%.

According to the fund’s most recent factsheet, Cowley, a Citywire-A rated manager, also engages in currency plays, which could also boost returns and possibly mitigate losses.

I actually wanted to buy in last week, but had a brief bout of nerves last week upon reading an article about another online brokerage service, BestInvest, launching a platform that would blow Hargreaves Lansdown – the one I use – 'out of the water.'

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27 comments so far. Why not have your say?

Peter Jenkins

May 31, 2011 at 13:49

The bid/offer spread may not be included in the TER but the current prices are prominently displayed (293.22p & 303.86p as I type). All you need is a calculator.

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Andrew Painter

May 31, 2011 at 14:12

Why do you feel the need to be fully invested, why not have 40 - 50% of your portfolio sat in cash waiting for some better opportunities, that may come later this year, once the Euro/UK/USA debt crisis really takes off.

If you place all your bets now, you'll have nothing left, and if the market really crashes, you are going to be left looking at some very heavy losses, with no free cash to either average down or buy on weakness.

I'd get out of Lloyds now and take a small loss. The banks are so going to fall when the money stops being printed!

Good luck.

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Tony Peterson

May 31, 2011 at 14:41

Dear DI

You are clearly regretting copying YF's buy into Lloyds. You would not feel so bad about shares had you opted for his GSK recommendation.

YF himself has no regrets about either. And indeed OF has added to his holdings of both. Andrew thinks that you should cut your losses with Lloyds. Do you hold your shares in certificated form? If so I will buy them from you at MMP whenever you like. No spread. No commission. Wouldn't even attract Stamp duty for your toy trades.

Meanwhile, let me give you a word of warning about Baldrick world where cunning plans abound. (I might be able to find you a couple of parcels of AAA rated CDOs in exchange if you wanted.)

Today, shares and commodities are good. Bonds are doomed. But that's just my opinion. Time, as it always does, will tell.

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Karl Smith

May 31, 2011 at 15:00

Andrew Painter has a point re: sit on cash, but where would the fun be in that? A quick look at your portfolio shows losses abound. But it has been a tough year so don't dwell too much on this. However, bonds are not the answer! Not now when:

a) QE will end at some point

b) Inflation is raising its head & looking mean

c) Currency risks are increased with a weak pound

d) Interest rates are at the bottom of the cycle with a rise expected.

Your overall strategy seems in turmoil. If you were looking at capital preservation then maybe an early dip into bonds would've been in order. However, I thought you were after growth! I see only minimal upside in the bond market at present. Diversity for diversity's sake makes no sense. Follow the opportunities - which currently lie in equities. If you're wanting a hedge, try following the dividends.

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Dumb Investor

May 31, 2011 at 16:02

Hi Karl,

Thanks for the advice. And, you're right: losses certainly do abound!

I am certainly after growth, but I do believe in diversity - even if it is only for diversity's sake. So losses will not be able to abound in every holding.

Your point about interest rates and inflation is exactly why I think (and hope) Cowley's strategy will give me some much-needed growth.

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Tony Peterson

May 31, 2011 at 16:20

Diversity for diversity's sake? What sort of drivel is this? Investment is for gain, not diversity.

C'mon DI. Sell me your Lloyds. Or perhaps exchange for some my GSK?

Hypothetically if you wish. Or for real.

Has anyone failed to make 50% over the past three years? Cunningly planned or otherwise? Shares and commodities are just seeing the beginning of the good times. Bonds are toast. But - if you wish to diversify - you know where to find me....

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Keith Hilton

May 31, 2011 at 17:20

Aviva - good dividend and still looks cheap.

Balfour Beatty - decent dividend, geographically diversified and whether nuclear or wind farms, will probably mop up the work.

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gggggg hjhjkl;'

May 31, 2011 at 17:45

DI - I am interested in your comments about the new account at Best Invest, as I hold my SIPP with HL and their charges for equity purchases are far,far to High.

However their SIPP costs cannot be beaten.

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Antony S

May 31, 2011 at 18:49

Couple of points.

The Bank of England ended QE over a year ago and

Sippdeal beats HL on SIPP costs.

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Jayanti Gandhi

May 31, 2011 at 19:04

You wrote about BEST INVEST and compared with H-L. The dealing fees 7.50/trade is only upto sep11 and thereafter only if 50k invested( Note_ 12.50 normal dealing cost /trade). Also note the custody fee per quarter .

H-L vantage account ( exc ISA,SIPP) do not have this custody cost. It all depends on number of trades made in Quarter.

Citiwire should make all these details clear in an article, without going into details..

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dave sullivan

May 31, 2011 at 21:35

DI,

Keep some cash and if you are really what you say you are start listening. There is little point going through the citywire selection of funds for diversity sake - keep some cash in the bank for now - there is more fun to be had on the rollercoaster - I will not be investing lump sums @ these levels!!

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AA

May 31, 2011 at 21:44

Cash is guaranteed to loose 5% per annum, probably more based on RPI.

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P L

May 31, 2011 at 22:56

The comment about BestInvests new platform is quite interesting - I don't doubt that it is entirely down to the arrival of RDR in 2012. They, like all the others are now attempting to hoover up as much of the trail commission business as they can before the party ends and its goodbye to commission based selling. The rules as I understand them mean that pre-existing business can continue under the old regime - although how this will work in practice I've no idea.

If you want a cheap broker/advisor then commfreefunds.com my be worth a look - £60/yr flat - no initial commissions, all trail commission rebated. That's 12K of funds with an average 0.5% trail to break even - big drawback is that they only support CoFunds and re-registration between Fundsnetwork (or anyone else) isn't currently possible - unless you convert to cash first - which isn't ideal . Still if you are with CoFunds already it should be just a switch of registered advisor. I'm currently with CommShare and getting a huge 50% cut eg 0.25% - no doubt commfreefunds will be doing as little as CommShare do for their cash.

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Maverick

Jun 01, 2011 at 08:49

Dumb Investor - I am reminded of Warren Buffett's quote that diversity is only necessary for beginners . . . . . .

I'd have put the whole £10,000 in carefully-chosen investment trusts - each of which has perhaps 100 holdings, so there's your diversity - and monitored them.

On the other hand, that wouldn't have made much of a blogging story, would it? But don't you feel you're getting perilously close to information overload by now?

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DGL

Jun 01, 2011 at 10:20

When is a bond a bond ? Chunk of my SIPP and ISA money going into either new(ish) RBS bond that pays at RPI or 3.7% (whichever is higher) and PIBS ..but probably not the Bank of Ireland one currently yielding about 22% !

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john_r

Jun 01, 2011 at 16:47

In my view bond prices will drop when interest rates start to increase - an event which perhaps isn't too far away. So keep thinking equities but steer clear of financials.

As for a broker the charging stucture for holding isas peps etc isn't yet clear for Best Invest. Beating HL still doesn't mean Best Invest will be the best value. You were warned of charges on your first blog so I can only repeat previous advice and advise you to use a low cost execution only broker with a good dealing platform.

I have Sipp and Isa Accounts with Sippdeal and Alliance Trust for my own investments (mainly shares and Investment trusts) and using these brokers saves me hundreds of pounds per annum in charges compared to the broker you are using - albeit for a much larger value accounts.

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ynys

Jun 01, 2011 at 23:48

I doubt that the bestinvest offering blows HL out of the water.

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ynys

Jun 02, 2011 at 00:17

Re Old Mutual Global Strategic Bond according to trustnet smallish fund yields of 0.2 percent yet annual management fee of 1 percent! Ok it may have done relatively well in capital terms but past performance is no guarantee of . . .

What do u want to accomplish from investing? Giving a savings account a good run for its money?

Shares in good companies which increase profits and therefore dividends and hence the their value are worth considering. But hey the choice is yours.

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R Ellis

Jun 04, 2011 at 12:46

I was thinking about putting together a blog in a similar vein - about my own portfolio. When I mentioned this to a couple of IFAs they thought that I would need to be sanctioned by the FSA. Is this not the case? Are you FSA authorised? Just asking.

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Ines

Jun 05, 2011 at 09:18

The government isn't going to let Lloyds go to the wall while they own it, so probably your investment there will show a profit in the end. Personally I won't do anything with financials of any sort at the moment - including Aviva - as there seem to be so many bad debts hidden on balance sheets and I think that might include the insurance companies too. Balfour Beatty is a nice suggestion, and investment trusts with big reserves. I like small cap shares too, but they look a bit frothy at the moment.

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Suzie B

Jun 05, 2011 at 19:42

re Bestinvest... good firm, but with this latest offering the devil is in the detail. I think the discounts are only for portfolios over £50,000, and if you hold any shares or other non -commission investments, then there is also a quarterly holding charge on the portfolio you hold them in.

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Fund of Funds

Jun 05, 2011 at 23:42

For buying funds I have found Hargreaves to be a good deal with refund of most ,if not all of the initial fee, up to 5.5% on the fund purchase. Also an annual loyalty bonus of up to 0.5% annual rebate on their renewal fee.

As far as some spare cash, why not try some Index linked Savings Certificates, RPI +0.25% and tax free for 5years, can cash in after a year if you need the money. Gross that up if you are on 40% tax and look at current RPI which is going to stay high for the forseeable future.They discontinued the last issue RPI + 1% for 3 years very quickly and this issue will go just as quick. Max limit is up to £15000 per person. Don't do it in joint names or I think u just get one allowance.

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Juliette

Jun 06, 2011 at 10:57

Dear DI

I do enjoy your diary.

Yes, I share your worries about Lloyds. As others have noted, GSK are doing well. Perhaps they are worth considering. My instinct tells me that the market will fall again soon and that perhaps it's worth holding on to your cash to invest in more shares then.

A website useful for buying shares cheaply is Interactive Investor. They are cheaper that HL, but HL are good value when buying funds.

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Ginty 50

Jun 19, 2011 at 11:06

John_r Your comment," Keep thinking equities but steer clear of financials". I have equities with J P Morgan, Fidelity, Barings & Blackrock. Are these the financials your refering to ?

Excuse my ignorance not an invester as such, but do like reading about Company's, Merger's & Takeovers ect.

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john_r

Jun 19, 2011 at 22:54

Ginty, I'm no financial wizard but I think I have learned the hard way that long shots don't usually come off unless there is good reason on your side. What I meant by 'steer clear of financials' was simply to avoid any more investments in banks as I view now as a very uncertain time again. In particular I view Lloyds and RBS as still on life support and so I view DI being better off selling his Lloyds holding and instead buy other equities ( in preference to bonds or bond funds) which are in better upward trend or demand. For example no one knows how the Greece restructuring will play out but if Greece defaults or is ejected from the Euro then yes, all equities may be negatively impacted but as for banks they could get a real hammering if the banking system is thrown into dissarray.

As for your managed investments - no I wasn't referring to these as financials. I also hold investment trusts with some of your listed managers.

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Ginty 50

Jun 20, 2011 at 10:32

John_r Thanks for taking the time to reply to my question regarding Financials. As for the problems that Greece is having, this was predicted during the Banking problems. The domino therory may well kick in with the PIGS + Belgium, lets hope not.

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Gone for a Cuppa

Jun 23, 2011 at 20:20

For the moment, sit on the sidelines with new money and wait for the crisis to blow over. For cautious investors, have a look at Newton Real Return Fund and

M&G Optimal Income Fund.

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