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Should investors put
their money into
Advisa Financial Services
bonds or equities?
Investors have a dilemma. For the first time in a at the moment, he has already had the return. He
while, the yield on the All-Share Index is will also have a defensive equity portfolio. It is still
significantly greater than the base rate. So should right to buy things like power companies and food
investors be seriously looking at the stock market manufacturers which link into the real economy.”
again – with all its attendant risks – or rely on the In the middle of the risk range, the investor will
perceived safety of bonds, which after all have had a hold some cash but will have a higher proportion in
pretty good run over recent years? bonds. He will be investing in high-yield corporate
bonds. He will certainly have more in equities than
The most important thing in planning your asset bonds and will be taking more risks with his
allocation is that you have realistic expectations of equities by going into overseas markets, particularly
what you might receive in a period of low inflation Asia.
and low interest rates. Investors’ expectations
should be much lower than in a high inflationary It is only those investors with a high tolerance of
period. If you want a higher yield, you need to take risk that will go all-out into the stock market. At the
more risk. top of the risk scale, the investor will be in equities,
and these will be stock-picking funds.
For example, there are plenty of corporate bonds
offering 8 to 9 per cent, but these will be of lower Don’t be greedy, if you are looking for income, you
quality. It is a question of whether you are prepared will be looking at bond funds and high-yielding
to take more risk to get a higher return or keep the equity funds, Don’t necessarily go for the highest
risk under control and settle for a lower yield. yield, as that will invariably mean risk. Look at the
history of dividend payments on the fund – has it
Then there is the question of risk,the starting point been consistent, preferably steadily increasing, or
for asset allocation should be your risk tolerance, not has there been a lot of volatility of payments? One
the level of income or growth you are seeking. If rule of thumb is that you should have the same
your risk tolerance is zero then you are going to be proportion of bonds in your portfolio as your age.
in cash anyway, whether you need 7 per cent income So a 20-year-old would have 20 per cent in fixed
or not, and you have to accept that your target is not interest, a 50-year-old 50 per cent and an 80-year-old
going to be met. 80 per cent. Whilst the basic theory of putting a
greater proportion of your investments into lower-
Portfolio construction risk assets as you get older certainly holds true, it is
So how should the investor, concerned not to take rarely that simple in practice.
too much risk, go about constructing a portfolio? If
you are looking for security, you would buy gilts The basic approach should be moved into a shorter
first for safety, then corporate bonds, then equities, time frame. “The older you get, the less time you
and I see good reasons for having at least a little in have to cope with the volatility of the equity
both the equity and the bond camps. Economists can markets. If you have more than 20 years to go to
point to all sorts of dangers to warn you off the retirement then you can probably afford to ignore
equity market but the important thing is to the volatility of stock markets, but as you get older
maintain a balance. you have less time, which is why you should have
more in bonds as you have a shorter time-horizon to
The investor who is risk-averse will have a make up any losses. Within this reduction of risk,
proportion of money in cash and a fairly limited and, of course, depending on your age, you should
exposure to bonds. Although they give him a yield then invest in whatever gives the best value.
20/20 eighteen
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