The Importance of bonds for every portfolio

The Importance of bonds for every portfolio

 

In the last 40 years, we have witnessed the appearance, expansion and almost complete domination of equities. Before that, pension funds were mostly focused on bonds and investments. This was quite a logical choice because fixed and stable income securities were the best place to keep your money. But, starting from the middle of the 20th century, things have changed drastically. The change was primarily triggered by the activities of George Ross Goobey, the fund manager of the famous Imperial Tobacco. It was his idea that equities were underpriced and undervalued and instead of investing in bonds, he started investing in equities.

It turned out that Ross Goobey was completely right. In the next period, inflation ruined the return from fixed and stable income securities and those who had invested in equities witnessed the benefits. Today, equities are considered to be one of the primary options for investment but this doesn’t mean that bonds have had their day. Far from it, here’s why we think bonds should be a part of every portfolio:

  1. Return on investment

Bonds are different compared to equities in more than one way. For example, if someone wants to realize the loss or profit on any equity, they must find a way to sell it on the market. On the other hand, if you buy a bond, the date when the asset gets back on the market is fixed. In other words, you don’t have to worry about certain changes and movement on the market. Everything is known in advance and your return on investment doesn’t depend on external factors.

  1. Security

Investors can rest assured that their investment in government bonds is safe and secure. The chance of the UK government, or any government of a developed country, to fail to repay debts is extremely low and government bonds have better quality than bank deposits. In addition, reputable multinational government bodies like the World Bank or IMF also provide safe options for investors interested.  As you are probably aware, bonds are not necessarily issued by governments. There are bonds that are issued by organizations and companies, but they are not as safe as government bonds.

  1. Diversification

A portfolio that is managed in a professional manner should include a wide range of asset classes. Government bonds, equities, corporate bonds, and property are some of the assets that make the portfolio more diversified. Every successful investor knows that you should not rely on one asset class.

  1. Income

Income related to bonds is usually much higher compared to the income related to equities. In addition, dividends from equities are not fixed while income payments from bonds are predictable.

These are just some of the reasons why people should invest. For more advice about investments, please contact us now.