Last updated September 14th, 2018.
You’re supposed to put part of your portfolio in bonds with the rest being a mix of stocks and cash. At least, that’s what investment advisers have told people for decades.
That might be a slight oversimplification. The exact percentage of bonds, stocks, and cash in your portfolio might vary based on your risk tolerance. You can also put parts of your portfolio into alternative assets like property and gold.
But for the most part, advisers have given their clients a variant of “60% stocks, 30% bonds, 10% cash” since the 1980s.
My belief is that bonds are largely a dead asset class. Apart from a few very rare exceptions, I don’t see any reason why you should buy bonds in Asia or anywhere else. There’s plenty of superior assets with cash flow.
I understand that’s a bold proclamation. Nonetheless, I’ll lay out a convincing argument that bonds have way too much risk for too little return.
Bull Market for Bonds is Over
Bonds have been a staple of most portfolios since the late 20th century. That’s only because their fundamentals haven’t changed until very recently.
The Global Financial Crisis of 2008 marked the end of a long bull market for bonds. To stop a recession, the U.S. Federal Reserve lowered interest rates to near-zero. This increased borrowing and spending, which in turn stimulated the economy.
U.S. Interest rates are currently at their lowest point since the 1940s.
Bonds are typically a good investment during periods of falling interest rates. This is the reason why they performed well since the early 1980s. Rates were then set at 15%, near record highs, and continued their decline until about 2008.
People have taken bonds’ safe and consistent performance over the past several decades for granted though. Interest rates are now hovering around 1% for the first time in over a century. They have nowhere left to go except upwards.
Meanwhile, bonds will only offer shrinking returns as interest rates inevitably rise. Bull markets don’t last forever.
There’s Better Alternatives to Buying Bonds
Stable income with less risk is the whole reason people buy bonds. However, both companies and governments have taken on an increasing amount of debt in recent years. Are bonds truly a safe investment anymore?
The answer depends entirely on which bonds you’re buying. For example, the U.S. government has a low risk of default, but their five-year bonds have a paltry 2% annual yield. That’s below the inflation rate, so you’re technically losing money in real terms.
On the other end of the spectrum, junk bonds yield 6% on average. Do you really want to own an indebted company’s bonds for just a 6% return though?
There are much better options. What if I told you a mere bank deposit can yield above 10% in some places?
Singapore’s Phillip Bank is a well-capitalized firm with a strong history and operations all across Asia. Their branches in Cambodia offer U.S. Dollar time deposits with yields exceeding 6%.
I can assure you the bank is far less likely to default than some desperate business issuing junk bonds.
You can also buy real estate for low risk and stable cash flow. Unlike stocks or bonds, your property will never go bankrupt and can be insured. Real estate also has the benefit of capital appreciation on top of rental yields.
Either way, the age of bonds is over. Most already have sub-par yields below inflation, while interest rates will only rise in the future. Choose one of the countless better investments instead of buying bonds in Asia.
Or Europe, America, and practically everywhere else for that matter.
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