Bond, James Bond
- Bob Smith
- 3 days ago
- 4 min read
Ok, not really but today we are talking about Bonds, just not the kind that drive Aston Martins, drink shooken martinis, and bed women on an hourly basis.
This type of Bond, is something to hold in your portfolio? Yes, but not for the reason that you think.
Market Crash?
Bitcoin in the dumpster?
https://finance.yahoo.com/news/more-than-half-of-us-homes-lost-value-in-the-past-year-171219733.html
Housing is already in the dumpster... ya we knew this...
And even Gold is not shining today...
Yes today things went for a shit, but one day does not make a market correction. A few weeks of this and there may be stories to tell of doom and gloom, but this, we don't worry about, its normal. Like the weather, it will rain some days and shine the next. But what does this have to do with Bonds?
Start reading articles by Peter Lynch, (Fidelity) and Warren Buffet (Berkshire Hathaway). Bonds are not for making money, they are for Parking money, to buy quality stocks at bargain prices. Also they create a nice cash cushion in retirement. But if you are in your 20's, you don't care about retirement, so a 100% equity position is ok.
Ya, not sure how this is going to display, but lets give it a shot, the point is here, the longest period (in present terms) of a market downturn, not producing any capital gain, was about 6 years. That said a 100% equity postion in the DOW60, would have produced nothing during those years... oops, forgot about dividends didn't we. You would likely still have netted a 3-5% dividend from these blue chips companies during that time. The average return from a Bond fund is 1-4%.
Do you have 6 years to wait? In your 20's its a no brainer, then look at the gains in the index from that point forward, 11k-46k a quadruple gain over a 25 year period, not including dividends. Its decent, this averages out to about 6% per year, and adding in dividends, your portfolio would be increasing about 10% per year.
So why even have Bonds in your portfolio? For times like today. Both Peter Lynch and Warren Buffet believe in saving cash (Bonds, T-Bills, Green stuff in you mattress) especially now in times of uncertainty. Why? because bargains can happen at any time, and we want to be ready to take advantage of them. Warren is only converting now, he is selling Apples and buying Oranges... ok he is actually buying Meta, and selling Apple, but he is also building a much larger cash position, does he know something we don't ? No, its just there in case he needs it.
Back to 100% equities... I would have no problem suggesting a 100% equities portfolio, and that includes some housing, aka buying a home right now, is a good idea, but under the following conditions.
you are 20-30 years away from retirement.
The market has declined by 20-40% after a 5-10 year Bull market
You are not planning on making a large purchase with this money, in the next 5-8 years.
Certainly if your saving to buy real estate, and right now, if you have the money, its a good time to buy, you don't want it tied up in stocks. This is where a cash layered portfolio comes in, Bonds, long and short, T-Bills, GIC's, and some cash for immediate spending. When rates were high, bond prices were lower, and are starting to come back, but not at the rate I expected. T-Bills accounts faired well, as just after the pandemic, rates were around 5%, and at the same time a smart banker friend of mine, talked me into converting several cash accounts into short term GIC's that were paying 5.5%, I still have one that is coming due, wish now I had bought more. The current rate now is close to 3%.
Why did I write this article? As the equity markets have been ramping up, I have watched capital being added to my portfolio, and that wow, that's great, but then FOMO kicked in, (the fear of missing out) Until today... you see now that I am retired, I have at least a 40% cash cushion:
a. to fund my retirement next year
b. to pay down my mortgage at 3.4%
c . to buy bargain investments, which don't seem to be happening
But today I feel better. I sleep better at night, when I see these doom and gloom news reports, layoffs across the corporate sectors, stores of McDonalds only selling 1/2 as many burgers, and my real estate agent, who now drives for Uber, and stated, "Its a very slow time, clients are happy just to get a showing, and will entertain any offer on the table"
Stay safe out there, don't panic, but if you haven't
done already, now would be a good time to talk to your financial advisor and balance you portfolio to your needs. There are lots of good people out there, you don't have to listen to me and my crappy advice.
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