INVESTMENT
DIVERSIFICATION
BONDS ARE YOUR INSURANCE
AGAINST ECONOMIC PROBLEMS
Richard, Warwick
asks:
We are about to retire and want to get
the most from our investment, should we
hold bonds in our portfolio and if not, what
alternative would you suggest?Guy says:
Most of us can remember a time when
bonds were very attractive. The return is
guaranteed if the bond is issued by the
Government and in the early 1990’s this
guaranteed return rose briefly to 16% a
year. Of course, inflation was very high at
that time, but this was still a great return.
The same bonds today would give you
only 1.5% a year which, for most people, is
less than they need to live and is therefore
unacceptable.
How did we get from the heady days of
the early 1990s to today? Firstly, inflation
was contained by aggressive central bank
action, which brought yields to around
5%. As a bond investor you could still get
a reasonable return without taking risk.
The next big change was the hangover
from the credit crunch, which saw income
yields fall to where they are today. The
economy stopped responding to traditional
monetary stimulus and Quantitative Easing
had to be introduced contributing to a
collapse in income levels. Bond prices are
set in the market and even though the
amount of income you get is fixed the
price can fluctuate. The biggest factor in
this is investors’ expectations for future
inflation and interest rates. If interest rates
are expected to rise the price of the bond
would fall and vice versa. The more ratesGuy Myles is CEO of
pension and investment
firm Flying Colours. If
you have a question for
Guy email pensionsguy@
flyingcolourswealth.com
he’s happy to answer
your questions.GOT A QUESTION FOR GUY?
EMAIL:
FOR MORE ADVICE,
CONTACT FLYING COLOURS ON:
0333 241 9919