Why have bonds in our portfolio and which ones?

I had a lengthy conversation with a friend on bonds. He bought into Aspial's 5 year bond that carries a coupon of 5.25% a few months ago at the recommendation of his father. 

When I asked him why did his father recommend the bond to him, he said his father felt good about it.

It boggles my mind, really, to be able to plonk down $XXX,XXX based on feeling good.




Actually, many people in this (still) rather low interest rate environment are taking more risks to get higher returns on their money. 

There is nothing wrong with this but they seem to be taking risks they don't understand or they might understand but have underestimated.

Well, it could be a case of ignorance is bliss if nothing goes wrong and they get their regular interest payments in the next few years and also their capital at maturity.

Why AK so kaypoh?

Bad AK! Bad AK!

Recently, I got this message:

Hi Ak, disturb u again
Saw on your recent post, you have purchase the perrenial bond.

I am first time in bond, what is the risk of bond?

Does the bond rate fixed?

If the company does not go bankrupt, mean I can get promised rate end of years?

Alamak. I think that it is time for another blog post.

I hear people saying that they put some of their money in bonds for diversification. 

They don't want all their money in equities. This is actually quite prudent.




However, for many, the prudence ends there because they think that as long as they have a good percentage of their portfolio in bonds, they have done a good job of diversification.

For example, my friend who plonked down $XXX,XXX in Aspial's recent bond offering told me he has maxed out his allocation to bonds in his portfolio with that one bond! 

Has my friend done a good job of diversification for his portfolio?




When we talk about diversification, it is to reduce the volatility of a portfolio. 

In the long run, all assets in our portfolio should ideally produce positive returns but do not move up and down together.

The idea about having bonds in our portfolio is that prices of bonds and equities move in opposite directions. 

However, this is only true if we are talking about certain types of bonds.

A sovereign bond that is issued by AAA rated country like Singapore or a high quality investment grade corporate bond add stability to an investment portfolio. 

They are less volatile in price.




When we park our money in bonds which are of questionable quality, we are not reducing risk nor volatility in our portfolio.

Do you wonder why is this so?

Lately, we have been talking about interest rate risk. 

We have been talking about how rising interest rates would put a downward pressure on bond prices. This is especially the case for long term bonds and perpetual bonds.

So, if we value peace of mind, avoid long term bonds and perpetual bonds. 

Also, avoid bond funds as they have no maturity dates and are like perpetual bonds.

Now, it stands to reason that when the economy does badly and the stock market plunges, investors seek safe harbours for their money. 

High quality, investment grade bonds are one of the things they would go for.

In a bear market, stocks of weaker companies or businesses of the more speculative kind get sold down more aggressively and, together with them, the bonds which they issued. 

Mr. Market is not worried about interest rate risk in such an instance. 

Mr. Market is worried about the risk of default.




Where is the supposed stability that comes from diversifying into bonds then? 

Bought the wrong bonds. So, no stability lah.

So, if you have bought some bonds and because of that, you think you have added stability to your portfolio, think again.

What are the bonds you have in your portfolio?


Related post:
1. Singapore Savings Bond.
2. Lost money in a bond fund.
3. Perennial's 3 year bond.
4. CPF as a AAA rated sovereign bond.
5. Perpetual bonds.

Don't thank AK but thank yourself in future (UPDATED).

My blog was born in December 2009 on Christmas Eve. 

When asked if I expected things to develop the way they have developed in recent years, the answer is always "NO". 

Sometimes, I would answer "I have created a monster" because my blog and its related activities are demanding more of my time than before. 

I am fully aware of one of the risks my blog is facing because blogging is a hobby and I enjoy it because it is a hobby. 

The day blogging becomes work, I might no longer enjoy it. 

It is about setting a more leisurely pace so that it remains a hobby I enjoy.

Having said this, blogging comes naturally to me because I enjoy writing, sharing ideas I believe in and ideas which have worked for me. 

So, this is the writer and teacher in me rolled into one. 

In a nutshell, through my writing, I enjoy helping people to help themselves.

From the many emails and messages I have received from readers, I discovered that my blog has been helpful and many people have made positive changes in their lives because of my blog. 

This is probably the most rewarding aspect of blogging for me.

I have shared some encouraging messages from readers before and here are a couple more which I received recently:

Hi AK,

Thanks for speaking to yourself all these years!

I've been eavesdropping !

Introduced a friend who was a terrible spendthrift to your blog last year - and is so glad to find that she has started saving quite a bit!

Our tag line now is "what would AK do?" Ha!!!!

Many thanks for your friendship !




And


Hi AK, 
 After seeing saizen rise today(my biggest holdings), I just wanted to drop u a msg to thank u for opening sharing all your thoughts through social media!

I think I am beginning to understand and appreciate your investment strategy especially after seeing u add ARA and Vicom recently.

Your strategy seems to be within a fixed framework of investing for income but u are flexible as well. Just like water in a cup. Haha. 

Flowing but contained. (Am I making sense?) 

I am referring to your recent sale trades of Sembcorp and Wilmar.

You don't seem to be fixated on holding forever but at the same time not jumping in and out through trades. 

 All in, thank u and hopefully many more people will appreciate what u do!

I cannot publish all the messages, of course, but to all the readers who have sent similar messages to me before, thank you for making the effort to write.

I hope that talking to myself in my little corner of cyberspace will continue to help people who are listening in. 

I hope that we will all make incremental positive changes in our lives to have a financially more secure future. 

For most of us, the desired outcome will take many years to achieve. 

We might feel tired or even demoralised at times but remind ourselves that as long as we are moving in the right direction, we cannot be wrong and we are getting closer to our goal with each passing day. 

We will see the light at the end of the tunnel and we will thank ourselves in future.

Related post:
How to have a comfortable retirement?