QUESTION: Vanguard wrote an article on why bonds are better than term deposits for investors, do you think they are correct?
ANSWER: yes, but...
Simplistically, and generically, the answer is obviously yes. However, investors do not come all in the same size (of portfolio assets). Investors who have a large enough investment portfolio, which means they are non-retail investors might be able to take a much more efficient, riskier and more profitable route of having only two asset classes in their portfolio: cash and equities. This might seem strange to exclude bonds, but in a higher inflation environment bonds and equities are positively correlated. Also, moving from cash to equities (and back) is far cheaper than the transaction costs of a bond portfolio. Additionally, in many jurisdictions bank deposits are government guaranteed.
In the words of the prophet, Brian, “you are all individuals” so think carefully before acting on publications aimed at a mass audience.
ACTION PLAN:
- Put together a list of your assets and income, and determine what return you are looking for and how much you are willing to lose in the first year of your new portfolio strategy.
- If you don’t have a view on the expected returns/risks of the different asset classes, you are just punting securities, derivatives, etc, rather than investing. You should get a licensed investment manager.
- The most significant means to increasing your wealth is getting the asset allocation correct. For most people, that means knowing when to put money into equities, bonds, et al and when to take it out. The first thing you need to ask your investment manager (or yourself if you take the DIY route) is what is the expected 10-year US Treasury yield and the percentage of a portfolio that should be equities, bonds, realty or cash (the other asset classes are so speculative, they should be only for the very brave).
- Once you establish how much to allocate to each class, then it is a question of which security or property in each class to buy. For the DIY folks, that will most likely be an index. For professional investment managers, it will be buying individual stocks, bonds, realty or leaving money in cash.
- Contact TurnerStreet if you wish to buy our current asset allocation recommendation (we do cash and equity only allocations for our wholesale clients), and the list of the stocks TurnerStreet would buy for a typical wholesale client, or if you would like TurnerStreet to manage your equities and derivatives portfolio.