Equity/Share Funds vs Bonds/Gilts - Is There A 'Best' Strategy? - Hot Topics Q & A

Q. As a single lady dentist in my early 50s, I pride myself on having achieved financial independence. I plan to slow down at work and finally retire at age 60.

What concerns me are the various opinions on what type of investment I should have within my large pension funds. I have around £400k in total with various companies, and the two advisers I use are adamant that I should stick to a purely equity approach, and not have bonds and cash which are surely safer?

Recently, I personally switched most of the funds over to cash, much to the annoyance of the adviser concerned. He says that over 9 years equities will outperform cash and that I have been very silly!

I had to smile when the markets dived again recently, and I felt I was ahead of the game. But I realise that perhaps I am being over cautious with still quite a few years to go, but I am reluctant to use my existing advisers as they don't appear to really listen to my concerns.

What would you advise?

A. Thank you for the query here. We certainly do not feel that you are being silly. After all, this is your money!

It is clear from the information you provided that your funds, before you switched to cash, were nearly all in equities and property. You have also confirmed that you are not sure what impact these funds could have on your finances when you are aged 60 plus, and that the advisers you have used are tied, meaning that they are not independent.

Our advice tends to be simple in this type of query. We would recommend that you employ a fee based planner who will work for you and not the product provider. Get the planner to build you a cash flow forecast as this will give you a context upon which you can make your decsions.

Once you have a clear idea of where you are now and how the future looks the exact make up of what to invest in will become clear, as you will then know how much risk you need to take (or not) to achieve your goals.

Gilts/Bonds in an investment portfolio are really there to act as a risk reducer, but over time should still give solid returns. As an example, here is a comparison between two portfolios between 1956-2007:

100% equities - Return 12.77% pa - Standard Deviation 19.07%*

50% equities & 50% Gilts - Return 10.74% pa - Standard Deviation 9.54%

As you can see, the returns achieved in the second portfolio were less than the first. However, the volatility was halved! If you do not need to take the extra risk involved in 100% equities - don’t!

We wish you well.

*Data is based on UK Treasury Bills and the FSTE All-Share. The Portfolio Return is an annualised figure. All data kindly provided by Dimensional Fund Advisors. Past performance is not a guide to the future. The value of your investment can fall as well as rise.