Q: When to move your cash to bonds depending on yields and inflation? A: Always

As part of my buy-and-hold strategy, I want 25% of my portfolio to be in a safer asset, because 1. it helps buy when this asset is cheap every time I rebalance, and 2. because to hedge the risk that stocks sometimes perform poorly – see for example the 30ies, 70ies, 00ies Returns By Decade (NYSEARCA:SPY) | Seeking Alpha. Let’s not discuss the 25% here - my retirement situation is complicated, across countries. The question is whether to hold these 25% as govt bonds or in cash? How should this decision depend on current yields and the rate of inflation?

I’m confused about this issue at the moment, with several seemingly reasonable ways to think about this. I’d love your feedback on my reasoning below:

  1. When I started investing in 2018-2019, yields on government bonds were negative and inflation low. Thus, I reasoned that if I bought a bond at 100 CHF with a -1% yield, I’d get get 99 CHF back when the bond matures. Holding the position in cash beats this. Thus I kept my 25% bond allocation in cash. Makes sense?

  2. Now, yields are positive again, and inflation has increased. While inflation makes it a bad time to hold 10-year govt bonds at a fix rate — because the money will be worth less once the bond matures — it still beats getting 0% return on the cash. Thus, now is the time to move cash into govt bonds. Right?

  3. One should definitely hold the 25% of the portfolio as government bonds because we don’t buy these bonds directly but as ETFs whose price fluctuates depending on expected future gains: these ETFs are cheap when yields are low/negative and more expensive when yields are higher. So even when yields were negative back in 2018-2019, I should have bought bonds rather than hold cash. Sure, the fund manager may have charged an extra ~1% on top of the TER to cover negative yields. But the prices per share in the ETF were low, so I could have bought tons of them. A few years later, yields go up again, govt bond ETFs prices go up as a consequence, and guess who now holds tons of high-yielding govt bond ETF shares.
    Also, holding ETF shares whose price will increase with inflation is a better inflation hedge than holding cash.

Conclusion: Reasoning #3 is most accurate. Hold the course. As a buy-and-hold investor, just buy govt bond ETFs like you’d buy stocks ETFs, independently of what yields and inflation may be doing at the moment. Correct?


5 posts were merged into an existing topic: Bond ETF recommendation

8 posts were merged into an existing topic: Swiss government bond funds