Do you Still Need Bonds in your Portfolio?
For the longest time, bonds have played a crucial role in most people’s capital preservation and investment options. Their history of offering stability and income to a portfolio, particularly for retirees, made it possible for people to fund the bulk of their future income streams. However, the past couple of decades have seen bonds lose their profitability and attractiveness in the eyes of most investors.
The US Treasury’s 10-year yield currently stands at 1.24%, while several other government bonds across Europe can only manage negative rates. The matter is further worsened by the fact that the core inflation currently stands at 4.3%. Therefore, if your bonds yield 1.24% and inflation is at 4.3%, then your investment is practically at a negative 3.06% return. So, the question is, does it still make sense to hold bonds in your portfolio?
Investing in Bonds Outside the US
As earlier mentioned, bonds have, for the past couple of years, been yielding nominal rates. Yet, interestingly, some people still want to invest in bonds as a means of diversification. If you’re still interested in investing in bonds, several ways can help boost better outcomes. And that involves doing something that can feel like dangerous living: investing in international bonds. One great example of this is investing in the Chinese bond. China boasts a favorable balance of trade and higher yields than the US. Nevertheless, before you go rushing to get a piece of the Chinese cake, you need to understand several risk factors involved—for example, political risks and currency fluctuations.
All in all, there is some value to be gained in international bonds since the factors that drive international prices are often uncorrelated to those that affect the US. Plus, the higher yields and favorable economic balance of payments are far too lucrative compared to the risk involved.
An Extremely Diversified Portfolio
Most people understand what portfolio diversification is, yet most investors don’t know how to diversify. For example, the less informed investor sees diversification as investing in different companies in unrelated fields. And the more stubborn investor will not invest in anything outside the big names such as Amazon, Microsoft, and Google. These companies compound capital the fastest, and so, to them, it makes sense to position most of your wealth in them.
Although the overall aim of investing is growing wealth, the best investment strategies involve both growth and preservation. According to Ray Dalio, the best diversification strategies involve investing in US equities, international equities, and tangible assets such as real estate, gold, and cryptocurrencies. Therefore, instead of adding more shares from the big industry names, get yourself some real estate or gold and just essentially minimize the risk in your portfolio.
Listen now to learn Why Own Bonds When Rates Are Low And Inflation Is High?
Links and Resources
Why in the World Would You Own Bonds When… | LinkedIn
Portfolio Strategy Commentary | Northern Trust Asset Management
