The Lemon Fool

Just made a fairly momentous shift in mindset & investing strategy.

I have read lots over the years about stocks/bonds asset allocation and rebalancing. It seems to make sense, but....
I have long viewed the Bond markets to be 'broken' as they seem to have been artificially skewed by government intervention, and for the last 15 years been 'yield suppressed' and hence their value inflated.
This seems to have been corrected by major Central Banks ramping interest rates to get on top of inflation, and these folks have paused (possibly at a high in this cycle??) to see if their medicine is starting to take effect.
Good chance that we will see a co-ordinated recession (or at least major slowdown) start. If it overshoots, and/or geopolitics causes major wobbles, then we are likely to see interest rates heading in the opposite direction within a year or two.
Still not sure where inflation is heading during that time.

I have long been 0% in bonds, and >95% in stocks, with a small 'insurance policy' in Physical Gold ETF and Gold Producer ETF.

I have just done a portfolio tidy up, and sold nearly 5% of the portfolio, mostly in tail end holdings of smaller cap, and used the proceeds to move into INXG inflation linked Bonds.
Intention to to continue a regular shift every 2-3 months; this is with the aim of trying to improve my resilience in terms of capital preservation, and give me dry powder in the event of a market crash.

Is this a stupid move? stupid timing? stupid choice of safe haven?

I don't think it's stupid at all, I think it's pretty smart with yields where they are right now. Traditional 60/40 should work much better from here, especially if there is a "traditional" deflationary recession where there is now a lot of room to cut interest rates if we go back to the easy stimulus playbook - if that happens the bond portion of the portfolio should go back to being a nice counterbalance when stocks sell off, and even if we don't have such a scenario, bonds won't a huge drag on overall portfolio performance when they still pulling their weight nad delivering 5%pa.

"Plan for the worst, hope for the best.". Lee Child's Jack Reacher.

Although I've been using that saying long before his books but you haven't heard of me.

One never knows what is going to happen and when. So having funds available is always useful. Your personal circumstances also play a part. If a downturn hits how will it effect you. If your thinking great, time to buy some cheap stocks you will be fine.

I know someone who was needing cash to pay off his mortgage in a few months and had everything in a falling stock market. So if you can sit tight and wait for any upturn you will be OK too. Again you might be able to reinvest and dividends.

Those who will be hurt by a downturn, mortgage payments, converting pension pots etc unless done with some prior planning or those who can't wait possibly for a few years.

Now I know there will be a(another) down turn but I don't know when. Otherwise I would sell up the day before.

The hardest part is deciding when the low is. Sometimes you just have to take what's on the table and hope it comes good in time.

How much difference will it make with your plan compared to staying in the market and waiting?

I've been looking at "linkers" (UK) as a potential diversifier. I can only really access them via collectives. As such, the duration is very long (more than 80% greater than 5 years). This makes me think twice. I need to understand the risk/benefits more before I jump in. I'm not looking for big capital gains, just reliable(ish) appreciation, but as I say, the duration of readily available funds is an issue for me. Rising inflation and falling FI yeilds seem to be the sweet spot. Seems an unlikely combination, but who knows?

I understand the logic behind what you are doing , INXG has a duration of 16…. It’s a pretty full on bet.

I have a modest holding of INXG and have traded INXG a few times recently to take advantage of the volatility.

Similar but different I have a decent 6 figure sum in UBTL, is 10+ years US$ TIPs , similar ‘bet’ but with a real yield of around 2.5% and duration of 14 years. Presently around £8.40 up from recent lows of below £8 ( down from highs of £14 in recent years) The underlying purchase of a real yield of 2.5% is likely to work out long term but may be volatile in the shorter term !!!

(But), as we are currently at a point when inflation is dropping back from recent "highs" and expected to continue falling, isn't now an inappropriate time to invest in index-linked investments?

richfool wrote:(But), as we are currently at a point when inflation is dropping back from recent "highs" and expected to continue falling, isn't now an inappropriate time to invest in index-linked investments?

Are you thinking that falling inflation means falling prices? Or are you concerned with the effects of falling interest rates?

Index linked investments continue to rise as the index of inflation rises. Not that I would invest in them.

TJH

tjh290633 wrote:

richfool wrote:(But), as we are currently at a point when inflation is dropping back from recent "highs" and expected to continue falling, isn't now an inappropriate time to invest in index-linked investments?

Are you thinking that falling inflation means falling prices? Or are you concerned with the effects of falling interest rates?

Index linked investments continue to rise as the index of inflation rises. Not that I would invest in them.

TJH

I was thinking of it from the point of view that falling inflation would mean a falling (rate of) return.

richfool wrote:(But), as we are currently at a point when inflation is dropping back from recent "highs" and expected to continue falling, isn't now an inappropriate time to invest in index-linked investments?

The OP is using INXG with a long duration , it’s a play on interest rates not inflation. Over the last 2 years with inflation shooting up it’s fallen over 40%.

If you want to protect against inflation you need to keep the duration short if you are using a Fund with constant duration or buy an individual gilt with a duration to meet your needs.

Long gilts can offer the performance (and have the volatility) of equities.

Potentially, in the event of stagflation they may do very well indeed, however you need to consider the duration very carefully, you are still exposed to real yield expectations and duration is effectively leverage on the direction of travel.

richfool wrote:

tjh290633 wrote:Are you thinking that falling inflation means falling prices? Or are you concerned with the effects of falling interest rates?

Index linked investments continue to rise as the index of inflation rises. Not that I would invest in them.

TJH

I was thinking of it from the point of view that falling inflation would mean a falling (rate of) return.

But the other point of view is that falling interest rates would lead to a rise in price, hence increasing the rate of return in the (relatively) short term.

TJH

Adding INXG inflation-linked bonds for diversification is a good move. Timing can be tricky, but having a balanced portfolio that matches your goals is key.