Serious commitment there Pierre, to the NZX, and a powerful vote for imputation credits to boot! My own little rant against bonds was not entirely theoretical either. I have recently agreed to take on the role of 'lead trustee' looking after a legacy for three under age trust beneficiaries. The amount of money in question is an order of magnitude less than yours, but is nevertheless a not insignificant sum for these three young people. The money is loosely targeted at offsetting student loan debt.
After consulting with a financial advisor, and given the amount of capital involved, I was informed that the solution was a managed fund. I was given a short list to choose from and maybe mix and match. But I was informed that I should be looking at a fund with around a 50% bond / 50% share content. I was happy with the fund managers suggested, but this '50% bond' bit got to me. They say the only two certainties in life are death and taxes. But to those two, I would add a third: Losing capital if you throw a whole lot of money at bonds with interest rates at all time lows. I had this image of these honed investment managers doing great things with their share portfolio, only to be undone by the 'footshot' of collapsing bond prices!
The logic put to me for buying into a balanced managed fund was this. If we head into a recession and share prices go down, then so will interest rates and so bond prices will go up, providing a natural hedge. However the Covid-19 experience would suggest to me that the lower interest rates were more entrenched by government policy than 'market forces'. My gut feeling is that if we get a second Covid-19 recession, share prices will fall, interest rates will fall but it will once again be a government induced interest rate fall. No sane individual is going to pull their money out of high yielding shares like Spark to invest in a 1% bond. Speaking for myself, I will be doing the exact opposite. Selling my fixed interest investments to put more money into high yielding 'utility' investments at bargain prices. At some point the government will tire of supporting low interest rates and interest rates will shoot up precipitating a 'bond crash'. But IMO, this will be a 'bond crash' for 'bond investors'. Companies issuing bonds will still be able to borrow at historically low rates, even at the top of the interest rate cycle. Companies are not going to collapse because of 'higher interest rates' per se. So who are the losers going to be? Governments, who can nevertheless get their money back through the tax take as the economy eventually improves. And Mom and Dad 'bond investors' who will suffer a massive capital hair cut, and never get their money back!
My feeling at the moment is that I should dictate that 50% of the money be dripped into one or more NZX share funds ( I am a bit nervous about going offshore as the money will be required in $NZ in 5-10 years time, so money invested offshore becomes in effect a foreign exchange rate gamble) and just keep half in cash for now to 'see what happens'. Anything to avoid investing in bonds. If I had implemented my partial 'share fund strategy', then I would already be underwater as the NZX fell away during the year. So far 'possum in the headlights' has proved a good strategy for 2021, but that can't continue. The other problem I face is that the parents of these young people have always had good incomes but are not what you call seasoned sharemarket investors. Thus they see the amount of money involved as 'play money' and something I should go for 'big bets' with. They are the kind of people who would see that if I put money into a share fund and it went down over the short term, then that would make me an incompetent share manager!
I did buy some SPK shares not long ago on my own behalf (cum dividend) - it was kind of a proxy to what I thought I should be doing with that trust money - and of course the SPK share price is down about 10% since then. I personally am not worried about this, as I am a long term investor (median holding time 13 years) and despite this 'set back', my all up average holding price for my Spark shares is only $3.49. I obviously have a high positive conviction about investing in Spark at this point in the business cycle. But I remember thinking the same just before the Chorus split, and there were quite a few lean years after that, even though the dividend remained good! The lesson here is no matter how good you think you are at individual share picking, some diversification is always a good insurance policy.
You have a lower bond tolerance even than I have Pierre!Quote:
No broker will be tempting or forcing me to invest in bonds unless and until the yields are at least 3% higher than the gross yield on my dividend shares. Can't see that coming any year soon.
SNOOPY