Could anyone explain to me what is the point of corporate bonds if you already have stocks? They seem to correlate with the market anyway… so if you just use them to lower volatility, isn’t that the same as if you just had a smaller portfolio with only stocks (and cash on the side)?
Is it just a scam from fund managers to increase the sum of money that customers have invested with them (so their % share is more)?
I guess a bond ETF which circulates bonds over the whole market can be seen this way you describe. But if you look at a single bond, then of course it’s a different kind of product. You give them money, and they promise to give it back with a fixed return. That’s very different from shares where the return is unknown.
In my opinion, if you buy a bond, then it’s as if you’re saying: I don’t believe this company will use this money effectively, but I do believe that they will pay me back. Because if you believed they will do good things with your money, why wouldn’t you buy their shares instead?
Not necessarily. I agree with the fact that the upside is known, because the cash flows are contractual.
The only uncertainty is if the company will be able to pay you these cash flows or not.
Let’s say a company issues a bond, notional of 100, coupon 5% per year, maturity in 10 years.
There are 3 way you can make money with this bond:
-
Buy it for 100, keep it until maturity, cash in your yearly interest (almost no bond fund does that)
-
Buy it for 100, then the central bank lower its interest rates, so that new similar bonds pay a lower interest rate : your bond is suddenly more valuable because it pays more interest
(most Bond ETFs do just this) -
Most participant in the market think the bond issuer is going to default, so the price of the bond crashes to 20. You do your due diligence and figure out that actually a default is unlikely. You buy the bond for 20, and either:
a. wait until maturity for the company to pay you back 100, you made 5 times your money
b. or just wait for the market to realize that the default is indeed unlikely, so the price goes up significantly and you sell the bond back. You make as well many times your investment.
The third way is how the billionaire Howard Marks does it. This is the most intelligent way to invest in bonds, but also the most difficult. I don’t know if there is any ETF that invest in distressed debt, and I don’t know if it would have any success in the retail industry, because it is fundamentally a contrarian strategy and most people are not comfortable holding a security of a company which may be bankrupt soon.
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These two buy bonds with a formerly good rating that has fallen down hence the name «fallen Angels»:
Corporate bonds is a reality of the market and the cheapest way for a private company to loan some money. The dividend paid is higher and the volatility is not that bad if you work with good quality companies. The volatility is limited because the bond is only for a limited amount of time, stock is until broke or bought by a competitor. Corporate bonds give the possibility to improve a bit the yield if you buy them with a duration of 5 to 7 years and you sell them with a duration of 1 to 2 years (effect of the positive yield curve).
However if shit really happens even the bond holders will loose everything. This week it was the case for the bond holders of WOW air.
Hi!
I am in the process of restructuring my investment. The main part will be based on a worldwide capitalisation-weighted index. But due to my personal risk tolerance there will be a risk-free part.
For the risk-free part I am considering cash or government bonds (SBI® Domestic Government 1-3). When reading though this forum I found an number of writers that recommend a savings account over bonds, see for example:
What strikes me in this argumentation is that even tough it’s correct that the esisuisse deposit insurance will cover a maximum of CHF 100’000 per bank relationship, the protection would not work in the event of a systemic crisis since the system is limited to a total amount of six billion Swiss francs [1][2]. The situation might look better with cantonal banks.
Long story short, I am considering to split the risk-free into a savings account and domestic government bond part.
I am happy to hear your thoughts on this.
[1] Home | esisuisse => Download SRF radio report (German), 31.3.2018 on the bottom right.
[2] Verunsicherung nach CS-Übernahme: Wie sicher ist mein Geld bei der Bank? | Beobachter
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The esisuisse deposit insurance scheme in Switzerland is, unfortunately, not that great. As you described, in case of a systemic failure in the banking sector, the insurance scheme could reach its limits. A shock to the real estate sector could be such a trigger that would also have repercussions for the Swiss banking sector and the insurance scheme1.
If you choose to have a substantial amount of your cash in a savings account, go for a cantonal bank with an unlimited state guarantee by the local canton. Not all the cantonal banks enjoy such a guarantee (e.g. Zurich Cantonal Bank is one with such a guarantee). In that sense, the Domestic Government 1-3 Bonds you want to invest to are more secure compared to a regular savings account. You pay that additional security with negative rates, unfortunately. Be also aware that Swiss Banks are starting to hand over negative rates more and more frequently also to wealthy customers 2.
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how muhc money you got that this is a concern for you?
It’s not without its small share of risk too - ZKB unlimited guarantee is backed by canton Zurich and ZKB liabilities are an order of magnitude or so more than Zurich tax revenue.
But anyway IMHO in case of a big crisis if the government will decide not to bail out small time savers they are shooting themselves in the foot and I wouldn’t be worried about it if you all have if some small change
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It’s not a huge sum I have. Most other posters in this forms are writing about bigger ones. My concern is about a systemic failure in the banking sector. What is worrying me are statements such as the following one:
Dem Bericht zufolge erreicht das Volumen der Postfinance-Kundengelder, die unter die Limite von 100’000 Franken fallen, rund 50 Milliarden Franken. Laut Esisuisse bleibt die Garantiesumme von 6 Milliarden Franken auch für die zusätzlichen Spareinlagen der Postfinance angemessen.
Source: Postfinance verliert die Staatsgarantie | Tages-Anzeiger
So my naive “Milchbüechlirechnung” is that if I had CHF 100’000 with PostFinance (which I don’t) I would get at max 50/6 of my savings back. But in such a scenario, there are likely many more banks to be affected rather than just PostFinance and the esisuisse insurance can only cover a fraction of all the losses.
In Switzerland, the difference of taxation between bonds and equities makes fixed income almost irrelevant from a wealth planning perspective…
If you cannot withstand volatility then bonds can make sense but they really aren’t the most efficient way to reach FIRE.
Well it’s not really much of a news story. Just put two facts together - PF serves almost half the country and there are 8.5M people in Switzerland. Simple arithmetic the system only has 6B / 8.5M = 700 Fr coverage per person
But that’s an extreme case of utter total financial collapse when all of the banks’ assets (including swiss houses via mortgages) lose all their value. It’s unthinkable to me especially with the extreme tightening in the banking sector that we saw after 2008. Chances of another banking-caused crisis in our lifetime I think are pretty low. WW3 is more likely, so maybe a better plan would be to stock up on solid gold, canned food and ammunition.
While reading this thread I am constantly thinking that you are afraid of a big banking crisis. So the best bet would be to spread your savings across other industrial sectors and countries or continents. Corporate bonds have a the terrible property to lose a quite some values when interest rates hike so for me it comes down to stocks.
You give strong arguments to allocate a bigger share of your wealth to VT as there is no esisuisse needed to protect your assets
Good point. But don’t forget to insure your assets in the Schliessfach!
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Hi folks,
I didn’t want to create a new thread, so I’m using this one because it covers my questions best (from the thread title). Sorry for not following up the latest messages in the thread, but it has somehow derived from the original intention.
So, without further ado, here we go…
I know that most of you are not buying bonds at all, due to the negative interest rates atm (especially for Swiss bonds), but much rather prefer to hold cash.
1. question: did you create an original asset allocation for your portfolio initially, and still stick with it? E.g. 75% stocks, 25% bonds (or cash, whatever)
Some people here argued that they count their pillar 2 to their bond allocation. Maybe I’m missing the point, but for me asset allocation is also about rebalancing according to your initial setup. With pillar 2, you can’t simply take out some money and buy ETFs instead. Hence your AA would change over time (depending on how much you have in pillar 2 vs how much ETFs you hold). Rebalancing would definitely not work with the pillar 2 money.
Since most of us are holding Vanguard fonds (US ones or IE ones), we are all exposed to currency risk CHF vs USD.
2. question: do you hold CHF cash in your IB account, or rather leave it on your Swiss bank account?
The moment you change it to USD, you again have the currency risk.
My 3. question: why not get some US-bond ETF with corporate and treasury bonds, e.g. BLV (which is the same as VBTLX, the bond ETF JL Collins recommends)?
I know there’s the currency risk, I also know that the inflation in the US is higher than in CH/EU, so basically you don’t really gain more profit from it.
BUT: you can shift from your bond-ETF to stock-ETFs immediately when there are opportunities (e.g. in December 2018), and therefore can adjust your AA back to your original risk tolerance. Without first transferring money from your CHF bank account to IB, then changing to USD and buying new ETFs.
I know in the long run it would be better to go 100% stocks, but I guess it’s also depending in which phase of FIRE you are. Plus, not sure if everyone really has the nerves to simply buy new ETFs and hold on to the old ones once the market goes down 30 or 40%. I guess everyone thinks he’ll be ok with that, but most of the people here never experienced a real drop in stock prices (assumption from my side, of course).
Would be nice to hear from other’s experiences!
Yes, still sticking with it. And I’m counting my pillar2 as bond, I calculated that if 10% of my “bond” allocation is liquid at all time (outside of pillar2), it’s enough to rebalance a -40% equity drawdown.
Given I’m still accumulating, this is likely to be enough for rebalancing.
CHF mostly in swiss bank.
Because of currency risk, change in FX will dominate, and I don’t care about spending my money in USD (I might care about EUR tho, but they also have negative yields anyway). My “bond” allocation is the part that should be safe and not lose value over time.
(ok not exactly, if yields were positive I would be fine with some bond etf that would lose value due to interest risk, in practice it wouldn’t lose value with a ~5year investment horizon since the change in value directly reflects the change in yields).
Thanks for your reply @nabalzbhf
I have some more questions though
If 10% of your “bond” allocation is enough to rebalance a 40% drawdown, you have less stocks than bonds in your AA. Correct?
If I run the numbers (maybe it’s still too early or I’m just making a stupid mistake), this is only working for an allocation of stocks/bonds which is below 50/50
- T1: 4500 Stocks / 5500 Bonds (45% stocks, 55% bonds)
- T2: market goes down 40%: 2700 Stocks / 5500 Bonds (for simplicity’s sake, let’s say bond value stayed the same)
- T3: you are rebalancing with 10% of bonds (-550): 3250 Stocks / 4950 bonds (~40% stocks / 60% bonds)
As I’ve said, maybe I’m missing some parts here or my, really relly simple, calculation is just wrong. Could you explain your thougths maybe? 
Also, I assume you’re not planning to stay in Switzerland after FI, right?
So, in case of market drawdown, what would you do? Do you have plan / rules when to buy stocks again?
The drawdown in December didn’t really last long, so an annual rebalancing would have failed.
Also, you would then transfer the money to IB, change to USD and buy stocks. Right?
This is a part where I’m struggling with (understanding). Yes, there is currency risk, but if your AA has more than 50% stocks (which I assume, not considering my calculations from above) in Vanguard ETFs, then you are exposed to currency risk in USD anyway.
I guess it also comes down to withdrawal strategies, e.g. how much money you want to take out from stocks (USD) and how much from bonds (CHF) on a regular basis (monthly, quarterly, …) after FI.
Any ideas about that part already?
Please note that I’m not nitpicking here, I just want to get a better overview about the whole bond stuff 
It doesn’t matter if they’re Vanguard, US or Irish - or some (usually more expensive) fund domiciled in Switzerland. It also doesn’t matter whether the ETFs is denominated in USD, EUR or whatever currency. You could (in theory) have a US Vanguard follows a Swiss equity index, only holding Swiss stocks. In the end, what matters is the currency risk of the underlying stocks, i.e. how their finances, earnings and core business is affected by currency fluctuations.
I intend to diversify in currencies. Because from a holistic perspective, there’s always currency risk. There’s also currency risk in holding Swiss Francs, and the idea of holding Swiss Francs as being “risk-free” is a fallacy.
What happens if the Swiss Franc devalues rapidly? Import prices are going to skyrocket, and I as a consumer will likely be suffering, due to diminished purchasing power. And so will the value of my pension funds, with its home bias on Swiss stocks.
Granted, historically and especially as of late that risk seems to have been proven as small or virtually negligible. But nevertheless it is not to be ruled out completely. It might likely not occur in a “rapid” fashion - but there’s no rule of nature that prevents a depreciating Franc.
Forex transactions / currency exchange are cheap and fast at IB.
I would definitely not purchase foreign-currency fund units (and take a considerable currency risk) if it were for the sole reason of avoiding currency exchange.
What should matter primarily is my assessment of the “quality” of the fund itself (costs, security, tradeability) and my conviction of its underlying assets.
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Actually I have a somewhat conservative 65/35. And seems like I had other assumptions when I came up with that number thanks for pointing it out!
I rebalance/invest quarterly, I would continue to do that same regardless of what the market does. (To be fair I sometimes delay the day I pick when volatility is really high, it’s a pain to invest when market is doing large swings every day, but I haven’t set up a formal rule esp. since I don’t know if I can show it’s really better besides making me sleep better which is fairly important )
I think @San_Francisco covered it fairly well already (and there’s a bunch of threads in the forum as well).
Haven’t thought too much about it, I think it wouldn’t matter which part it comes from anyway, and I’d still rebalance regularly.