Cash & Bonds Why Bother With Bonds?

Why Bother With Bonds?

 

this is a good read.. I enjoyed it..

Funny though cause about a month ago I changed portfolios and included 20% in Australian bonds..

I felt that even though they may return less, the allocation will certainly lower the portfolio volatility.

but to my surprise, this article suggests bond returns over the long term are very similar to equities. and that would make sense, because equity returns are based on which sample of time you measure to show their return.

 

I used to be a person who thought that buying and holding stocks for the long run is the best bet. Now I really do believe that you must hold a substantial amount of your net worth in government bonds. The reason is because you have a government guarantee on your interest. Stocks can go up and down because dividends can be cut.

Just because some stocks or some groups of stocks have gone up over the long run, that is no guarantee that any stock you pick or any group of stock you pick will continue to go up.

 

Loads of governments have defaulted on bond payments in the past. Whilst government bonds tend to be more secure than stocks they are not immune to dividend cuts and default.

I'm actually expecting through the process of this recession we will see a couple of governments around the world default on their debts. Even some big names like the UK and US look like they may have trouble continuing to fund themselves in the short term.

That said I think inflation indexed bonds are definitely worth a look in the current climate...

 

I agree. Government bonds aren't risk free, but they are definitely less risky than stocks. Government bonds are not good investments if the government fails. However, if government fails in a particular country, you can be sure that stocks would all fail as well since government is necessary to provide the legal structure that enables companies to exist. When a company goes bankrupt, bondholders are paid before stockholders.

 

It would be fairer to consider apples with apples rather than apples with an orchard.

Government bonds should be compared to blue chip stocks and not "stocks" in general. If you want to compare orchards with orchards, you'd be comparing all bonds (not just government bonds) with all stocks.

Also you can lose capital value on bonds by selling them before maturity, you only are "guaranteed" the return of capital on the maturity date.

Cheers,

Dan

PS Didn't the Iceland government hit the wall recently? And I remember the Russian Bond Default Crisis as well?

 

In their own currency?