We have taken a call this morning from a client concerned by the QE Bond Bubble article in the Daily Mail today.
The article explains that the ‘life savings of older workers have been left teetering on a cliff edge’ as a result of the Bank of England programme of quantitative easing.
It suggests that as much as £30,000 could be wiped off a £100,000 pension fund because a giant gilt bubble has been created by QE.
This claim is based on speculation from consultants Punter Southall who admit that the timing of such a bubble bursting is unclear, but could result in gilt values plunging by as much as 30%.
Are investors with exposure to government bonds right to be worried about a QE fuelled gilt bubble?
Gilt values have certainly performed strongly in recent years. This is not only as a result of QE, but also a flight to safety as UK and overseas investors look for a relative safe haven for their cash during difficult economic times.
Over the past five years, the average return in the IMA UK Gilt sector has been over 41%. It has returned an average of 24.25% over the past three years.
When gilt values fall, their yields experience a corresponding increase.
This means that those saving for retirement will experience higher annuity rates, which are partially driven by gilt yields, should the value of their gilts fall. One should largely offset the other.
Something else for pension savers to consider is the impact of regular portfolio rebalancing.
By rebalancing back to your originally agreed asset allocation each year, you take a profit and manage the risk within your pension portfolio.
When your portfolio is rebalanced, it is important to make tactical adjustments to the strategic asset allocation, in order to reflect current market outlook.
For example, here at Informed Choice we are currently underweight in gilts, reflecting our belief that there is a greater risk of rising yields driving down capital values than further falling yields.
We believe that those who are most exposed to any QE gilt bubble are those who have been investing blindly, not regularly rebalancing and not making tactical adjustments to asset allocation models to reflect changing market and economic conditions.
What all investors should do if they are concerned about the potential for a QE gilt bubble is seek professional independent financial advice to understand the implications for their own retirement planning and consider the various options.
The Daily Mail article raises some important questions that will hopefully result in investors taking a more active interest in how their pension funds are invested.
Do speak to us if you have any questions.
Photo credit: Flickr/jmorgan90
