Bonds

[justakiwi]

Is there any point/logic in someone like me (very small beginner investor) investing in bonds (eg: Smartshares Gobal Bond Fund) or would I be better to just focus on building on the small portfolio I have for now, until I have a decent total investment balance? I’m only pondering it as I am aware my portfolio is 100% aggressive so wondering if I should add something like this to spread my risk a little.

Waste of time for such a minuscule investment balance?

[macduffy]

Personally, justakiwi, I wouldn't be interested in bonds if in a portfolio-building mode, and particularly not in a global bond fund, given the generally lower offshore rates plus the exchange rate risk. I'd stick to growth equities at this stage. Just IMO.

[peat]

the point of bonds is to smooth your returns and reduce volatility as they (supposedly) perform opposite to equities - though this isnt the case in more recent times when EVERYTHING is going up.
At the very small portfolio level you could as macduffy suggests avoid bonds and if you can accept the bad years that equities that may have just run with that.
However I personally think fixed interest investments are useful. I tend to use T/D's instead of bonds although these don't have capital gains/losses as bonds do. One of the problems with buying and selling bonds is that transaction fees are quite high especially for small investors. You may b e able to avoid these in funds but fees there will tend to destroy returns.
An amount of cash (possibly as you save towards further equity investments ) could act as a smoother of portfolio returns in that it wont go down when the equity market does during these early stages of wealth generation.

[justakiwi]

This makes good sense to me. Thank you

the point of bonds is to smooth your returns and reduce volatility as they (supposedly) perform opposite to equities - though this isnt the case in more recent times when EVERYTHING is going up.
At the very small portfolio level you could as macduffy suggests avoid bonds and if you can accept the bad years that equities that may have just run with that.
However I personally think fixed interest investments are useful. I tend to use T/D's instead of bonds although these don't have capital gains/losses as bonds do. One of the problems with buying and selling bonds is that transaction fees are quite high especially for small investors. You may b e able to avoid these in funds but fees there will tend to destroy returns.
An amount of cash (possibly as you save towards further equity investments ) could act as a smoother of portfolio returns in that it wont go down when the equity market does during these early stages of wealth generation.

[justakiwi]

Thank you. Appreciate the good advice

Personally, justakiwi, I wouldn't be interested in bonds if in a portfolio-building mode, and particularly not in a global bond fund, given the generally lower offshore rates plus the exchange rate risk. I'd stick to growth equities at this stage. Just IMO.

[SBQ]

Is there any point/logic in someone like me (very small beginner investor) investing in bonds (eg: Smartshares Gobal Bond Fund) or would I be better to just focus on building on the small portfolio I have for now, until I have a decent total investment balance? I’m only pondering it as I am aware my portfolio is 100% aggressive so wondering if I should add something like this to spread my risk a little.

Waste of time for such a minuscule investment balance?

IMO if you follow the great investors abroad, bond investments are a waste of time to the individual. In the US there are municipal bonds that attract some individuals who want a fixed return without the risk of owning shares. But that's because such bonds are tax free ; something we don't have in NZ. In this respect, why are Kiwi Saver funds presenting themselves with different levels of risk (ie. conservative, moderate, aggressive) SOLELY on the % they divide the asset pool? (that is an aggressive fund would have little or not bonds or fixed income assets vs a conservative fund will have a lot put in bonds). Anyways IMO, the % of the fund's portfolio put into bonds should NOT be the moderator of risk levels in the portfolio. This is old school thinking from the CAPM days.

BTW, it was the manipulation of bonds in the 80s that lead on to the GFC we saw in 2008. Because bonds were boring, they've found ways to turn them into 'derivatives', synthetic investments, bundling the bond assets into different ways to disguise the bond asset. Have a read here:

https://www.thebalance.com/role-of-d...crisis-3970477

[Joshuatree]

BNZ offering re 5.5% 5year tradeable bond,I've applied for some in this very forward looking mkt.

[GTM 3442]

Eastpack have some 5 year notes with a starting rate of 8.9%, but regular rate resets to a floor of 8.5%. Wholesale and retail welcome

Caveat Emptor - not interested.

https://www.syndex.exchange/investme...eastpack-notes

[Aaron]

Do you know what are the main ratios or z scores to check for company viability. Interest times covered, Debt to Equity etc. should be a lot less work for bond buyers compared to equity buyers I would have thought.

P.s. couple of additional thoughts do the NZX companies or their bonds get rated by a credit rating agency and if so how do you check this?

Is there an ASXDX list like the NZXDX one.

[Aaron]

Another thought at what point are you in the business of buying and selling bonds?

Most of the yield buying on the secondary market is purchasing the bonds for less than $1. When matured the full $1 is paid out and the difference is treated as income using the base price adjustment which deems the extra money received "interest".

The IRD say that when this deemed "interest" is a loss it is not deductible as it does not relate to the income earning process. Sounds like a lot of bollocks to me but interested to know others views.

To satisfy the general permission there must be a sufficient relationship between the repayment of the interest and the earning of assessable income. The Commissioner considers the relationship between the repayment and the interest income earned under the term deposit is insufficient to satisfy s DA 1(1)(a). As the amount of the repaid interest is not deductible at the time of repayment, it falls to be dealt with through the BPA on maturity of the deposit. However, the Commissioner considers that, where the expenditure has been incurred in carrying on a business, a deduction may be available under s DA 1(1)(b). Whether the repayment of interest satisfies the nexus test for a business will depend on the facts of each case.

I recall going over this back in the GFC when the finance companies were collapsing.