Bonds are a viable alternative to equities.

The equities market is now high risk with investors chasing the higher yields available from shares but some investors seem to be unaware of the risks. A viable alternative to equities are corporate bonds which are a debt securities offered by public companies. Bonds not only provide diversification to a portfolio but have the advantage that an investor knows exactly what future earnings will be through the periodic interest (or coupon) payments and that capital will be returned in full at maturity. As with any investment, bonds are not without risk and there are two risks that investors must consider.

Credit risk. A low credit rated company could well go bankrupt with no repayment of capital to the investor. So there is a risk in investing in bonds which have a lower credit rating and thus a higher risk even though there may be a higher return. Investors need to… Continue reading

Asset allocation in an uncertain market

Asset allocation is an ongoing process and is particularly important in times of market uncertainty.  I continue to evaluate the market with a view to understanding the position of the market and always ask the question, “how will any change in the market affect my assets and my income”

This question is very significant now at a time when all major world markets are showing bearish divergences suggesting that there the probability of a significant market correction.  With the risk of market volatility and potential capital loss, an investor must ask “what proportion of my assets should be in equities and how much in more defensive securities?”

Given my assessment of current market risk, I have reduced my exposure to stocks to about 15% with the remainder in “fixed interest” securities.  With the interest rates in Australia now very low, corporate bonds are attractive with yields… Continue reading

Is high exposure to equities risky at this time?

When one considers the obvious bearish divergences on most equity markets there is technically a high probability that a significant correction to world markets will occur soon.  When comparing technical signals, the current divergences we now see in most world markets are very similar to those divergence patterns which immediately preceded the bear market of 2008.

Given the very strong bull markets on most world markets over recent years a correction is very likely which would suggest that over the next year the returns from equities will be poor.  Are investors considering the risks of being heavily exposed to equities at this time? 

Investors in equities are chasing a yield of about 5% but not considering the probability of capital loss in a market correction.  This is a dangerous investment strategy particular for investors who are retired or who are approaching retirement. 

It… Continue reading

Corporate bonds: the hazards of the search for yield

The search for higher yields has always lured investors into high risk investments. In this market, investors are looking for high yielding equities but high yielding bonds are also tempting.

The other day a broker suggested that I invest in a corporate bond. This was senior debt in an Australian company and it was returning 9% with a 6 year maturity.   What are the risks with this bond?  The following is my evaluation of this bond, (without actually naming it), based on available technical and fundamental data.

Let’s start with the chart which is not the chart of the company in question but is a chart which is very similar. The chart of this stock reveals some underlying problems: it is out of favour with the market and shows a strong downtrend for the past two years with a recent recovery. The old adage is “never buy… Continue reading

Bonds and equities

Bernanke’s speech last week was not positive for equities and there has since been a surge in bond yields in the US with 30 year bonds now returning about 3.5%. These higher long term bond rates usually create a real problem for US equities when thirty year bonds are cheaper than equities which may provide not only a higher yield but a lower risk. The last time that this happened, equities were sold to purchase bonds and there was a volatile period for equities. Perhaps the current volatility can be explained on this basis.

In monitoring Australian bond prices, I have noted a similar trend over the past week with some very respectable yields now on offer. For example some long dated inflation linked bonds are yielding 7.25%. Clearly this is less attractive than a fully franked 7.25% yield from an Australian bank or Telstra but the capital risk with… Continue reading

Risk and return – the psychological dilemma for investors

Experienced investors and traders recognise that psychology is the single most important limitation to investing success. The current investing environment is a case in point. With declining interest rates, the yield particularly for retirees who are dependent upon fixed interest for their living costs is now very low and will go lower. With bank interest rates in much of the developing world so low, returns on US treasury bonds are about 1.6% and German bunds are significantly lower so investor returns are now negative after inflation. It is not surprising that investors in the US and Europe should be turning to equities and now Australian investors face this same problem. To enter the equities market at this time investors must to balance risk against return. It is the psychological dilemma, higher risk or lower return?

No doubt the pressures of low interest rates and declining bond yields have forced many… Continue reading

A move to bonds – is the crowd wrong?

There is no doubt that investors are risk adverse at the moment and rightly so considering world fundamentals and there has been a significant move out of equities into bonds based on the perception that bonds are low risk. Bonds are not low risk securities.

Assuming one buys quality bonds, the risks depend on what future interest rates will do. Personally I see interest rates in Aus falling further, perhaps another 75 basis points before end of the financial year. I don’t see world interest rates rising soon given high unemployment, low growth and deflation rather than inflation. I believe that we have another two years of declining interest rates, but that situation could change quickly. When interest rates rise there will be significant capital losses with bonds so bond investors need to be careful.

While some of the bonds that I hold have given capital gains of up to… Continue reading

Equities or fixed interests – it’s all about risk

Investing is always about managing risk. In the current environment equities must be considered high risk.  There are just so many influences which could bring a dramatic correction to the equities market, including the US, the EU, China and the Middle East.

On the other hand, with markets now looking somewhat positive despite the world fundamentals there is the temptation to increase exposure to equities. In Australia there is the added temptation to invest in equities because equities carry dividend imputation which makes high yielding blue chip stocks very attractive.

 I can sympathize with the American investors who need to live on investment income.  With the return from fixed interest and bonds being effectively zero, there seems little alternative but to invest in equities.  But in Australia the situation is very different largely because of our higher interest rate environment.

What is the appropriate exposure to… Continue reading

The dilemma for self funded retirees

As investors none of us have ever experienced the investing environment we now face.   The self funded retiree in Australia faces a particular dilemma.  In recent years many Australian pensioners have depended on fixed interest and have done well by investing in very low risk term deposits.  But these retirees are now facing a real challenge with falling interest rates and unless they monitor their situation with care they will not sustain the “self funded retiree” status for long.

What are the alternatives?  While bonds should have an important role in the superfund, Australian super funds have significantly less exposure to these securities than their overseas counterparts.  With global economic uncertainties the yields on bonds have been driven down.  Corporate bonds, particularly fixed coupon corporate bonds still look interesting and while returns have fallen in recent months they still offer yields of 5-6%… Continue reading

Equities or Fixed Interest

Investors have a dilemma in this current investing environment. We need to have an adequate return on our investments but we want reasonable assurance of safety of our capital. It becomes a question of what is a reasonable return and how do we ensure safety of capital.
While in the longer term investors looked at returns of around 12% which is the long term returns for the All Ords accumulation index, these are unlikely returns in the sort of investing environment that we could see over the next few years.  Perhaps a more realistic return is of the order of 6% to 8%.

There are many Australian stocks which are fully franked and offering at least 5% return, so some of these would seem to be a pretty safe bet. But how safe are stocks? In a falling market there is the potential for significant capital loss and there… Continue reading

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