Hello everyone,
While reading posts in the forum, the general idea I am getting is that there is a somewhat widespread mistrust for high bonds allocation in one’s portfolio, and a lot of people have their portfolios fully comprised of equity
What is this adversity rooted in? If you don’t use bonds to protect your portfolio from high volatility, what protection are you employing to achieve that?
That is sensible, but if someone hasn’t lived a 2008 market crash on their own skin, how can they know their risk tolerance is high enough for a 100% equity portfolio? Feels like an area where it’s very easy to trick themselves into a bad situation by being overly-confident in their own ability to withstand risk?
I actually really like that as a way of looking at a downturn: burgers on sale is good news if you’re still hungry, even if you already had a burger:P
I think a lot of people on this forum invest for the longterm. So you can happily ignore the volatility as a trade off for higher gains in the longterm compared to lower volatility and lower gains with bonds.
There might be some biasing in your sampling. Many people have a non trivial amount in pillar2, or are super early in their career where risk don’t matter as much.
Personally I’m on 65/35 and happy with that (with “bond” allocation in pillar2 and formerly cash, but moving to other fixed income solution now that the yield make sense).
If you dig deeper, usually there is also a significant amount saved in the second pillar.
I second this. Many people in Switzerland have an occupational pension fund. For all intents and purposes, this is very similar to bonds. Depending on how high your penson fund benefits are, the bond portion of your porfolio may well be taken care of by your pension fund alone.
It’s different in situations where people do not have a pension fund, as might be the case if you are self-employed. In that case, you definitely should allocate part of your portfolio to (rock-solid) bonds, and not put it all into stocks.
Bonds didn’t provide much diversification vs. equities at the end of the “everything rally”. With low and even negative rates they were a high risk asset and almost a certainty to lose money,
[Edit: I have a large % of nw in 2 pillar]
[Edit 2: If I was living in US or UK where rates are now 4-5% I might start DCA ing into bonds. In CH we are still way below historical rates, the rate is even below the target inflation rate]
When you are taxed in switzerland, the situation that you pay taxes on the coupon of the bond but you only pay taxes on the dividend of the stocks but not on the rising value also is in favor of stocks.
I would also predict that most amateur bond investors do not understand the risks of bonds in case of interest hikes.
Switzerland’s favorable tax environment for capital gains, and unfavorable tax environment for dividends and interest is certainly an argument in favor of stocks.
Here too, the favorable tax environment for pension funds is another argument to use that as the bond portion of your portfolio. Of course, if you find bonds which are as secure as your Swiss pension fund and pay far more interest (enough to cover taxes, and then some), then investing in those could be a better move than buying into your pension fund.
Also, if you expect to need the money in the near future, then pension fund buy-ins don’t make sense. I would consider high-yield bonds or medium-term notes preferrable to keeping money in a low-yield savings account for shorter terms for which investing in stocks is way too risky.
Me too. I consider pillar 2 like bonds, and including tax-deductible buy-ins it happens to grow along my shares at my allocation of 70/30.
Plus, if you have a mortgage, it doesn’t make sense to hold low-yield fixed-income here, while paying higher interests there.
And third point, we had years of negative interests, where at least for small and medium amounts it made more sense to just leave non-invested money in the saving account at 0%.
Beyond those points, there’s no adversery or mistrust to bonds at all for me.
I set my asset allocation target and find the appropriate vehicle to get there.
In my opinion the “I have a 2nd pillar so I don’t need bonds” logic doesn’t quite work, as it ignores one of the biggest advantages of bonds: Liquidity during a crisis. If stocks are down 40% but you lost your job, got injured, want to make a down payment for a house etc. you’re forced to sell at a loss. With bonds, especially short term bonds you can often sell them during downturns without taking that much of a hit. Yes, the current bond crash is a bad example, but in 08 and other crashes bonds were negatively correlated to stocks, so they even gained value.
If your money is tied up in your 2nd pillar, you can’t do that, with exception of the real estate example.
I think bonds make sense in a portfolio if:
You can’t rule out larger expenses in the next 10 years
You think you’ll sleep better at night with a 30% drawdown as compared to a 50% drawdown.
I’m eagerly awaiting the next move by the SNB. Our rates are still pathetically low compared to history and to other countries.
Those unplanned cases should be handled by the emergency fund (or its “equivalents”, e.g. margin loans); and planned ones properly accounted for (downpayment) - ideally no need to disinvest (just rebalance).
What short term bond would you buy right now for example?
This!
I would also predict that most amateur bond investors do not understand the risks of bonds in case of interest hikes.
Investing in bonds is still shrouded in this mystique “smart money” thinking. Which means many people do not get the underlying risks; the most basic being the interest risk.
If you are holding individual bonds and hold to maturity, the rising interest rates will not affect neither your coupon, nor your principal. But if your bond exposure has a form of a bond fund, then the rising interest rate will have a major negative impact on your holdings because bond funds generally do not hold to maturity but actively buy/sell bonds in their portfolio.
Amateur bond question here.
For those that don’t invest with 100% equity, until a while ago VIAC advised against bonds and for cash. Now I see that has changed and they advise to include bonds + there is an option to decide now for each portfolio. Does the market situation really support that pivot?
It was just mentioned: Rising interest rates cause a (basically immediate) decrease in bond prices. And interest rates recently did increase sharply as a response to rising inflation.
Once inflation and thus also interest rates are plateauing off - of which there are signs at least in the U.S., bonds become a more attractive invest. If and once interest rates begin to decline, that should result in an increase of bond prices - i.e. basically capital gains.
Cash, on the other hand, doesn’t immediately react to (anticipated) changes of interest rates.
Fiscal repression is one point that hasn’t been mentioned before
We’ve lived through fifteen years where central bank funding rates and long-term bond yields were actively held below inflation, with deliberate intent
This is about as clear a losing trade as you will ever see.
There’s still interest rate risk, but bonds are definitely in positive territory wrt ytm, that wasn’t the case when VIAC launched.
Why? Lower volatility lower return as what we would expect, that’s a win for a lot of people. (Not all of us would sleep well during a prolonged market crash)
Maybe call your bond part wealth preservation of that makes you feel better.