Bonds Are Not The Residual

“As much as possible in equities. But only as much as you can bear. The rest in safe bonds.”

This is my general recommendation to anyone who wants to invest in the financial markets and preserve or even increase their money in real terms - i.e. after the impact of inflation.

This means that only the equity portion of the overall portfolio is actively decided. What is left over goes into bonds. They are therefore merely the residual value of the investment strategy. Is that really the case?

Carrying the load

My colleagues in the bond team are skeptical. And rightly so! Bonds are not a residual value, they are an important and frequent component of every portfolio. The fact is that over 90% of our clients do not hold pure equity portfolios. Their arguments: 

-    Excessive stock price fluctuations 
-    Security of bonds due to seniority over equity
-    Some of the money may be needed in the coming years
-    Bond yields already meeting expectations
-    Regular cash flows through the coupon
-    Potential price gains in a financial crisis
-    Potential price gains with falling interest rates
-    Precise control of the maturity structure
-    Some investor groups must hold bonds

Bonds do quite a lot! And it quickly becomes clear that it makes sense to invest in quality bonds. Ultimately, we lend the money over a certain period of time with the expectation of getting it back, including interest. 

The continuous thread

Share prices can fall sharply and quickly in value and there is no guaranteed mechanism that they will ever return to their previous highs. Bond prices can also fall below their nominal value. However, as long as the issuer does not go bankrupt, the money must be repaid at 100%. This is a fact, regardless of the remaining term of the securities.

Our common thread in the investment strategy: We avoid frantic and expensive buying and selling. Instead, for our bond allocation, we focus on high diversification and a steady hand.