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Bonds

Discussion in 'Investing Strategies' started by Johny_come_lately, 14th Sep, 2009.

  1. Johny_come_lately

    Johny_come_lately Well-Known Member

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    Hi All,

    Does anybody use Cash, Fixed interest, Bonds, T bills or Corporate Bonds as a means of reducing risk or providing an income, within their portfolio of shares?

    I know they are not sexy, but are they a valid form of investing? Won't Bonds go up if we get inflation in the future.


    Johny.
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    They certainly are a valid form of investing.

    Cash is a very important part of any portfolio - and not just from the point of view of smoothing out the returns on your portfolio. If you have a geared portfolio (property and/or shares), you will need cash to service that debt and to provide a buffer in case of unexpected expenses or margin calls, etc.

    For people who are young and just starting out, I'm not a fan of investing in cash for the sake of it - I think you need to take on a much higher risk profile when you are young in order to give you the necessary capital base when you are older. At that age I think cash should be used for risk-management rather than as an investment strategy. This means that the cash needs to be available at-call and generally not tied up in long-term investment vehicles. High interest savings accounts or even better, house loan offset accounts are my preferred places for parking cash for risk-management.

    Obviously the older and closer to retirement you get - your risk profile tends to change and it would pay to re-balance your portfolio with more weighting towards cash investments in order to protect your capital for when you need it to live on.

    This is just my opinion - I am not a financial advisor!
     
  3. venger0

    venger0 Active Member

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    @johnny, yes, you can actually get some capital growth from bonds - but they are normally used for getting income. The books I've read reckon bonds are good diversifier. In fact, according to Mr J C Bogle (and a few other ppl), stock/bonds ratio of our portfolio are key asset allocation decisions to make.

    To be honest, I mostly use index funds these days -
    so most of what I have learnt re:bonds have been built up as I read up on books about index investing. Unfortunately, these tend to be american-centric :D

    Most of my bonds are in super since this was the most tax effective/sensible approach for myself. So I haven't had to look at bonds outside super.
    But I did sneak a peak at Vanguard Diversified bonds fund at some stage - you might want to check it out -seems true to its name, very diversified :D
    The only concern I would have is that it is 60% overseas bonds (tho hedged). Guess this is coz we don't have too many high-grade bonds in our country.
    As for getting into bonds now... i dont want to predict since I don't know.. but I would think that interest rates are already at all time low.. so the bond market could be bubblish right now?
    Depends on your time horizon i suppose....

    RE:corporate bonds, frankly, if I was to invest in bonds, and use them as a diversifier, I would get the safest bonds I can get my hands on (ie, government backed). But suppose the corporate bonds do give a higher yield?


    Sorry, no expert on bonds.. but thought i share what i've read..
     
  4. Johny_come_lately

    Johny_come_lately Well-Known Member

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    Hi Venger0

    I am also an indexer. It does not seem popular in Australia. I have also read Bogle and visited the Bogleheads forum. Indexing appears to be american centric, and more popular over there.

    Questions:
    How do you get growth from Bonds?
    What is your Bond Allocation and how did you come by it?
    How would a Bond Bubble in the US affect Oz?
    Why is Vanguard so expensive in Australia?


    My Time Horizen is the rest of my life. I'm in my early forties and I am drawing down from my capital (my distributions don't equal my expenses). I have a couple of years Buffer. I had 10% Bonds and now have 2%. I am trying to work out when to best buy back.



    Johny.
     
  5. AsxBroker

    AsxBroker Well-Known Member

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    Bonds usually have what is called the Face Value, what they will give you back at the end of the maturity. Usually these are in $100 but can be any amount. If I say to you I will give you 6% pa for one year the value of the bond will be approx $94 currently. If interest rates drop say to 3% then the current value would be $97. That's capital growth on the bond. If interest rates increase then it would be reasonable to expect that bond values would drop :eek: unless you hold them to maturity and you don't have to worry about it

    Personally I don't have any defensive allocation, personal choice obviously, I'm 30 and my background is in stockbroking so I feel very comfortable in stocks

    Probably be the same, I wouldn't so much call it a bubble but more so a vacuum as US rates can't move down much further but obviously much more upside potential

    Probably because of costs? In Australia they have 11 funds in the US they have 116 funds. I couldn't find any information about how much they have invested over in the US but it would obviously be substantially more.

    Why does a Dell Mini 10v cost AUD$549 in Australian and USD$299? With an exchange rate of 0.86 one would expect it be about AUD$347.67

    Have you spoken to a financial planner?

    Cheers,

    Dan
     
  6. venger0

    venger0 Active Member

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    also re:vanguard costs, i've tried to find cheaper funds too.. and within the unlisted retail market, i haven't found any others that have comparable rates given the pretty reasonable range of assets classes that Vanguard provide to the small retail investor (ie, me).

    Dan's suggestion above re:financial planner is something worth considering. My only caution is just be careful of dodgy ones that push you towards 'products' - esp. ones promising high returns with less risk. Or 'products' that have high fees and commissions.
    Maybe some of the more knowledgeable users here would be able to suggest some reputable FPs?
    I consulted an FP for a couple of years... but got tired of the fact that he kept pushing me to use his preferred funds (higher cost ones!)

    One advantage with using FP is he/she may provide access to wholesale vanguard funds which are considerably cheaper. Yes, you will probably have to pay for a wrap account and FP's fees but at least you also then get (i) wrap reporting (ii) FP to help you stay focused (iii) know that you have a true fee-for-service FP who is not afraid of supporting vanguard funds, thus missing out on commissions,etc.

    ps: talking about FP and wrapaccounts, etc, reminded me of dkmc who use to frequent these forums. IIRC he used a fee-for-service FP. Maybe you can pm him to see if he won't mind sharing his FP contact details?
     
  7. Johny_come_lately

    Johny_come_lately Well-Known Member

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    Venger0, We must think alike. I PM'd dkmc a week ago. What is your Bond allocation if you don't mind me asking?

    Johny.
     
  8. roidz

    roidz New Member

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    Hi Johny,
    A couple of things for you to think about. If you are interested in indexing you could use ETFs. vanguards ASX200 has a MER of .27 very cheap.
    Allocation 60%.
    Bonds perhaps the Vanguard product again .9 up to $50k In the scale of things you have to look at the value proposition how else are you going to get exposure to gov debt in small amounts?
    Allocation to this 20%.
    Cash say online account 5% return
    Allocation 10%
    Here is the clincher what about ETFS Physical Gold ASX listed.
    Allocation 10%.
    Basically a variation on the permanent portfolio but a heavier weighting to equities due to the value that can be had.
    The most important thing to do for this to work is rebalancing every year, selling your best performers and buying your worst. A fact overlooked in a truly diversified portfolio and forgotten about by most FPs owing to the last 15 years of bull markets.
    Hope this helps as it does provoke thought.

    Cheers, roidz
     
  9. venger0

    venger0 Active Member

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    @johnny, its pretty much a 50/50 balanced approach. But asset allocation does not have a one-size-fit-all answer. I came up with my allocation after taking into account my age, personal circumstances, goal, appetite for risk, need to take risk, etc.

    BTW, if IIRC, there is an index investing site (Index Funds | DFA Funds Approved - DFA Advisors - Dimensional Fund Advisors Approved) that provides an online questionaire to help with determining stocks/bonds ratio. Unfortunately, it is also american-centric plus the questions are quite generic.
     
  10. Johny_come_lately

    Johny_come_lately Well-Known Member

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    Hi,

    I am heavy on cash ATM and light on Bonds. I know its imposible to time the markets, but are there any trends in Australia for a good buy?:p




    Thanks. Johny.
     
  11. Chris C

    Chris C Well-Known Member

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    I don't think anyone really answered your original question so I thought I'd just comment on it.

    My understanding off the top of my head is bond prices are more likely to go down in the presence of inflation due to the fact that in the presence of inflation interest rates increase to offset the erosion of value effect that inflation has on holding money which in turn push bond prices down.

    So as has been mentioned a few times, with interest rates at all time lows most people are arguing that they can only go up from here, and I probably agree with them. That said bond prices will likely rise if people again become overly worried about the threat of deflation (which is completely possible in the presence of high levels of debt which we also have in the current climate).

    Deflation has the opposite effect of inflation in that it makes money more valuable with time which would increase the demand, thus price, for bonds.

    That said to date the threats of deflation have been offset by central banks around the world through their quantitative easing with which they have entered the bond markets to purchase government bonds in a bid to reinflate western economies and keep interest rates low to support their recovering economies.

    Though of course when/if western economies start genuinely recovering this quantitative easing is likely to have more significant inflation implications.


    Well it won't affect Australia until the bubble collapses, but when/if it does (I'm betting it will) it will have major ramifications for not only Australia but the world.

    So if the bond bubble was to burst that would mean that US interest rates would be going up as people tried to offload their US bonds, which would mean any business or household in the US which was reliant on cheap credit would collapse, this would probably be obvious in the property market which under the stress of higher interest rate in already weak condition would begin spirally down like it did from 2006 to 2009 as a result of the supply of properties for sale outstripping the demand, and of course many businesses and banks would also go under, once again freezing credit markets, and it would plunge the US (and the world) back into a recession.

    It would also mean that the government would be unlikely to be able to raise money through bond sales as it's unlikely their would be many institutions or countries like China or Brazil who would be willing to buy an asset that is losing value, and there is every chance both these institutions and countries that hold large amounts of US bonds would also be looking to off load their holdings which would only exacerbate the problem. So this would mean that interest rates on government debt would spiral up in addition to the government being unable to raise finance for its deficits (which are massive at the moment) which would mean cutting back government expenditure as the economy is in the middle of a deep recession, creating an even deeper recession.

    Of course this will have massive flow on effects to international money markets and will increase the cost of finance around the world, which is a problem for an under funded nation like ours. I guess a good way of looking at it would be, look what happen to the worlds financial markets when Lehman Brothers collapses, now imagine what would happen if the US was in financially dire straights!

    Of course the major difference between Lehman Brothers and the US is the US can print money, which is probably what it would do, but of course this causes massive inflation and the USD would probably lose its status and the reserve currency of the world, and you'd probably find that those countries which are well funded, China, Brazil, etc would have rapid currency appreciation (unless they also engaged in competitive devaluations of their currency) given that countries like the US, UK and Japan who all have major debt issues would be rapidly debasing their currency so they can repay their debts.

    At the end of the chaos would probably be a world where "developing" nation's standards of living will have dramatically increased, but their comparative advantage in terms of exports will have decreased as a result of their currency appreciation against the countries who used to be the main buyers of their exports. At this point I imagine there would be a large amount of repatriation of outsourced businesses back to western countries, or alternatively both the western countries and Asia both begin to look to exploit the comparatively cheap labour in undeveloped regions like Africa...

    At the end of the day, I guess to simply answer the question, yes, a US bond collapse will affect Australia, and that effect is most likely to be negative because we too as a nation at this stage are heavily reliant on cheap credit. Our debt problems aren't as bad as some, but we as a nation defintiely aren't good.

    At the end of the day all debts must be paid, and equilibrium is always found in the long run... so I think this will be the decade that the "developing" nations finally come of age and will join the ranks of "developed".

    :p

    As for when all this happens, I think your guess is as good as mine, it might happen this year, it might happen in 5 - 10 years, but at the current trajectory it will happen, and nothing that has happened in the last two years of financial crisis has changed this path, if anything it's only hastened the day of reckoning.

    That's my two, gloom and doom, Aussie cents.
     
  12. Johny_come_lately

    Johny_come_lately Well-Known Member

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    I have a lot of commonwealth bonds, corporate bonds and fixed income. What effect will a Melbourne Cup rates change have on the value of my investments?



    Thanks,
    Johny.
     
  13. Johny_come_lately

    Johny_come_lately Well-Known Member

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    I recorded the value of all my fixed income before, and after, the RBA rates change. The value of all my bonds went up, with one exception. My corporate bonds dropped 0.5%. Now why is that? :confused:




    Johny.
     
  14. QuietAchiever

    QuietAchiever Active Member

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    Cashflow is what you want right

    Now I dont pretend to have all the answers but I know what works for me is an automated trading platform that gives me a return of 4% per month on my money , $10k investment, and has done so for 12 months thru the most volatile currency market there has been since ive been alive.. the best thing is i dont have to know anything and i can invest my super too, 4% pm or 4% per year in a super fund ..i know what im gonna do
     
  15. Shaunus

    Shaunus New Member

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    Retail bonds

    Hi Johnny,

    I am looking at investing in bonds as well. I find it very hard to access anything in the retail market. Who do you use to buy your bonds? Do you deal direct with the RBA for the treasury?

    How about the corporates?
     
  16. Johny_come_lately

    Johny_come_lately Well-Known Member

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    Australian Bonds aren't nearly as popular as those in the US Bond market.

    To buy an Australian bond from the RBA will set you back at least $10K. The secondary market is the best bet.

    There are no Bond ETFs at the moment.

    I use Colonial First State (wholesale, its cheaper). The Fund is CFS Index Australian Bond.

    http://www.colonialfirststate.com.au/prospects/FS1545.pdf


    The MER (management expense ratio) is 0.4% per anum.



    Johny. :p