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We’ve reached the letter G in the Elite Investor Club’s A-Z of investing. And this is one that many people have vaguely heard of but don’t fully understand. G is for Gilts.
Like so much in the investment world, a simple concept is made murky and confusing by the use of jargon. We’ve already covered bonds, and a gilt is nothing more than a particular kind of bond. Remember a bond is a loan, either to a government or a company. Gilts are loans made to the UK government by institutions, pension funds and private investors like you and me.
So we lend money to the chancellor and he gives us an IOU. He promises to pay us a fixed rate of interest, called the coupon, for the duration of the loan. Then, assuming we haven’t had a Greek-style collapse in the mean time, we get our money back at the end of the gilt’s term.
That’s all straightforward enough but, as with most bonds, gilts can be traded on the financial markets from the moment they’re issued. With the amount of interest being paid, the yield, being fixed, the more you pay for the bond the lower your yield will be. And of course, the less you pay, the higher the yield will be.
You’ve almost certainly got some gilts in your pension pot, whether you realise it or not. Especially if you are coming up towards retirement age. Conventional wisdom among financial planners has it that, the older you get, the less money you should have in ‘risky’ equities and the more money you should have in ‘safe’ bonds. Here at Elite Investor Club we have a technical term for that kind of thinking – bollocks!
For two reasons. First of all, most people approaching the traditional retirement age of sixty five still have another twenty to thirty years of living to do. More than enough to withstand some volatility in equity markets where much higher returns can usually be found. And second, gilts like all government bonds are in a thirty year bubble with many experts predicting a collapse at any time. Indeed the so called safe haven of German government bonds was recently rocked by a 25% fall in a couple of weeks.
The other issue with gilts is that they are the bedrock on which annuities are calculated. So, as the yield on gilts has declined in recent years, so has the amount of income they can buy when people trade in their pension pot for an annuity. I’ve been as negative as anyone else about the wisdom of annuities as a retirement income vehicle. But I have to say I’m partially changing my mind.
I’m leaning towards annuities having some part to play in what I call Lifestyle Asset Allocation, where you use one kind of investment to cover the essentials of living, another kind to cover the nice-to-have things and yet another sort of asset to cover the luxuries. They are the only vehicle that give you a guaranteed income until the day you die. With all the uncertainties in the stock market, the bond market and the property market, having at least part of your income rock solid certain is certainly attractive.
For the more experienced investors among you, I’m looking at a particular kind of annuity in the American market which has been providing much higher returns than gilt-backed UK products, so I’ll let you know if I can find a way of making it available to investors outside America. Do get in touch if that’s something you’d like to learn more about.
For now, I’d urge you to find out how much of your portfolio is invested in gilts and decide whether you’re comfortable with that level of exposure. Gilts have had a great run for three decades now. Make sure you’re not vulnerable to the significant correction that’s well overdue.