Earlier in the month I started off this series taking a look at individual shares (part 1) followed by investment trusts (part 2). In this third and last part I will look at the use of fixed-income investments (FI). These may take many forms – gilts, commercial bonds, retail bonds, permanent interest bearing shares (PIBS) and preference shares are some of the more popular.
There are still some attractive FI investments on offer, so that as collateral prices surge their yields reduce so, as and when a chance for rebalancing the entire portfolio arises, it could be rewarding to have a closer look at FI. Flavor of the month at the present time appears to be an almost weekly offering of new retail bonds.
With the comparatively low rates from cash debris – 3% if you tie up your cash for 5 years happens to be the best available – the chance of a steady 5% or 6% come back is certainly appealing. For me, as with equities, I would not be interested in chasing higher yields and compromising on quality.
Some years, when I was giving some considered to my income collection, I decided it could be smart to include some bonds and set income within the mix. This is largely due to the higher immediate produce available – at the time some produces were over 10% – combined with the wish to provide some variety and stability. At the right time, the yields on gilts did not look especially attractive (but still don’t) so I settled on an assortment of PIBS from Coventry BS and Nationwide BS, preference shares, and corporate bonds.
The starting produce should be significantly higher than cash deposits – say 100% more as a rule of thumb. Today EASILY were starting, I’d therefore be looking at a starting yield over 5% or 6%. That is to pay for the absence of a rising yield to keep pace with inflation. The institution offering the FI security must be have and powerful strong basics. I therefore steer clear of the ‘junk’ end of the FI spectrum. Diversify – an acceptable mix of PIBS, retail, and corporate bonds, and preference shares. For me, the holding of FI securities are a way to an end.
They give a fairly stable, predictable fixed income for a known period of time. They are currently set up to bridge the gap between where I had been while I purchased a couple of years back and resulting in a condition pension age group up. At that point or shortly before, I shall review the FI portfolio.
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Unlike with equities, it is not therefore a buy and hold for the long term – more like a buy for convenience for the medium term. With my current broker, Sippdeal, there is certainly the excess costs of a supplementary £20 for the telephone trade if the deal cannot be exchanged online. Apart from this, it will not involve any ongoing costs or charges to hold preference and PIBS shares in a FI profile. With some of these PIBS and preference shares, the spread between buying/selling price can be wider than with shares. An expert broker such as Collins Stewart recommended by Mark Taber of Fixed Income Investments will probably be worth considering.
For corporate and business bonds, I take advantage of iShares Corporate Bond (ex-lover financials) – ISXF – which has charges of 0.4% p.a. A recent innovation from Investec Bank or investment company together with FTSE has been the release of a retail connection index. Order Book for Retail Bonds), which compute the return with the price performance and interest payments of each bond within the world, and the Gross Redemption Yield.