What caught my eye this week.
I answer comments on old posts every day on Monevator. A great many ask whether investors should still own bonds, given rates are “sure” to rise – and hence bond prices fall.
In the UK it’s still mostly an academic question. But US yields have been going up fairly swiftly. The Federal Reserve has been raising interest rates, and there are more signs of higher inflation in the US, too. Bond prices have fallen as a result.
My reply is usually some mix of the following:
- Your bonds are there [1] to cushion big share price falls, not to provide a huge return in themselves.
- Bond prices don’t really crash [2] like equities do.
- People have been predicting a bond bear market since 2009 (and in truth before that).
- There’s no denying a sudden surge in yields would hit bond prices hard [3].
- But inflation (and hence lower real returns) is what really kills you as a long-term bond investor.
- A moderate correction that sent bond prices lower and yields higher would be good for long-term investors.
That last point is the hardest for people to accept. We’re so conditioned to obsess over the level of the stock market, for example, it’s easy to miss the importance of reinvesting and compounding returns. The same is true with bonds.
This week Sellwood Consulting [4] wrote a very clear post explaining why bond investors shouldn’t fear rising rates. It is about US bonds, but the same logic holds true in the UK.
If you own bonds and yields rise, the value of your bond holdings will indeed fall. But thereafter you can look forward to a higher yield, and over time reinvesting this in now cheaper bonds can be more valuable.
Don’t hold too much in bonds, though. Not because they are super-risky – but because they’re not!
If you’re a long-term investor, being overly cautious can see you miss out on much higher returns. Michael Batnick explains why in his Irrelevant Investor [5] blog this week.
Happy reading!
From Monevator
Gold as an asset class – Monevator [6]
From the archive-ator: What does mark-to-market mean? – Monevator [7]
News
Note: Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber.1 [8]
Pensions cold calling set to be banned by June [Search result] – FT [9]
Coinbase is launching a crypto index fund. US investors only for now – Coinbase [10]
MPs call for ISA simplification [Search result] – FT [11]
Nimble schmimble: Most hedge fund money is held in giant funds – Bloomberg [12]
Emerging market investors fail to reap benefits of GDP growth [Sorry, search result not working for this] – FT [13]
Great chart of the history of the US 10-year bond yield, the global benchmark – via The Reformed Broker [14]
Products and services
Monzo, Atom, Revolut, and Starling: A guide to digital banks – Telegraph [15]
NS&I has cut rates on two of its popular products – Telegraph [16]
Get the most out of the free pensions help sessions for the over-50s – ThisIsMoney [17]
LendingCrowd’s P2P rates start at 5.6%; capital is at risk – LendingCrowd [18]
Why it’s so hard to invest with a social conscious [US products but relevant] – NYT [19]
Is this the beginning of the end for closet trackers? – Evidence-based Investor [20]
As a rate rise looms, it’s time to fix mortgage repayments – Guardian [21]
The key upcoming changes to the VCT and EIS regimes – Telegraph [22]
Fitting a new flat? 🙂 Grab two Sonos One speakers for just £350 – Amazon [23]
Comment and opinion
10 ways to safeguard your savings income [Search result] – FT [24]
How extreme frugality enabled one couple to retire early – Guardian [25]
Unpicking the pension allowance taper – 3652 Days [26]
The winners write the history books – A Wealth of Common Sense [27]
The five types of retirement – Get Rich Slowly [28]
Misfits, outcasts, criminals, financial professionals – A Teachable Moment [29]
Would Buffett’s index tracking bet have paid for deaccumulators? – I.I. [30]
The case for selling shares in AstraZeneca – UK Value Investor [31]
All growth stocks end up in the same place – Gannon on Investing [32]
Why Oscar winner Get Out resonates with value investors – The Value Perspective [33]
Fear and greed are undefeated – The Reformed Broker [34]
Off our beat
Bitcoin is ridiculous. Blockchain is dangerous – Bloomberg Businessweek [35]
Chuck Feeney: The billionaire who gave it all away – Irish Times [36]
The Boring Talks: The Argos catalogue [Podcast] – BBC [37]
Jerry and Marge go large [Lottery hacking] – Huffington Post [38]
James Altucher talks to Jim Cramer [Podcast, naughty step] – James Altucher [39]
And finally…
“The next bear market is sure to test the resolve of existing shareholders, but it will also – just as certainly – provide an opportunity for savvy trust connoisseurs to pick up bargains as trust discounts widen once more. For the forearmed investor, a crisis is an opportunity, not just a threat.”
– Jonathan Davis, Investment Trust Handbook 2018 (FREE on Kindle [40], saving £24.99!)
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- Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”. [↩ [45]]