Should I add bonds to my portfolio?

For investors outside the US. Personal investments, personal finance, investing news and theory.
Sister forums: Canada, Spain (en español)
---------------
Post Reply
Topic Author
ishindelytho
Posts: 6
Joined: Sat Sep 25, 2021 1:16 pm

Should I add bonds to my portfolio?

Post by ishindelytho »

Hi all,

I am 29 years old and I am currently working as a factory operator in Switzerland, but I am originally from Spain.

I don't have much financial knowledge and I have always distrusted the stock market. Luckily some months ago I discovered this forum which made me look at the stock markets differently and encouraged me to start investing.

For this reason, three weeks ago I invested all my savings (except 6 months of living expenses) into VWCE. I am investing for the long term (for a period between 20 and 25 years).

In about 2 years I plan to return to Spain. This means that if at that point I have unrealized losses, Spain will not take them into account and will consider the value of my shares at that moment as the initial value (which would be lower than the price I paid for them) for the calculation of capital gains (when selling stocks).

Given this risk, would you recommend me to reduce the risk of my portfolio by investing in bonds, for example? Or given that my portfolio is intended to be at a pretty long term would you advise me to still stay 100% stocks? (I am also open for other suggestions and comments)


PS: The reason why I initially decided to only invest in stocks is because my long term horizon and also due to the current low interest rates. However if you have different views or you have reasons why I should allocate money to bonds, I would love to hear your opinion/view.
Nomar
Posts: 21
Joined: Sun Oct 21, 2018 9:54 am

Re: Should I add bonds to my portfolio?

Post by Nomar »

Congratulations on establishing a retirement fund and overcoming your fears of investing in stocks. If your time horizon is 20-25 years then any short term benefits to your tax basis by buying bonds would most likely be minimal.

What you are proposing is a form of market timing. I am not familiar with Spain's capital gains tax structure. (As an aside I think there is at least as likely a chance that over the next two years bonds would decline more than stocks). But regardless, the adage that has served many well has been "it is not market timing that matters most, but time in the market." Low cost, diversified equity funds, continuous reinvestments and patience while compound interest works its magic. The long term benefits overcome the tax drawbacks even in more confiscatory tax systems.
Topic Author
ishindelytho
Posts: 6
Joined: Sat Sep 25, 2021 1:16 pm

Re: Should I add bonds to my portfolio?

Post by ishindelytho »

Nomar wrote: Sat Sep 25, 2021 4:06 pm Congratulations on establishing a retirement fund and overcoming your fears of investing in stocks. If your time horizon is 20-25 years then any short term benefits to your tax basis by buying bonds would most likely be minimal.

What you are proposing is a form of market timing. I am not familiar with Spain's capital gains tax structure. (As an aside I think there is at least as likely a chance that over the next two years bonds would decline more than stocks). But regardless, the adage that has served many well has been "it is not market timing that matters most, but time in the market." Low cost, diversified equity funds, continuous reinvestments and patience while compound interest works its magic. The long term benefits overcome the tax drawbacks even in more confiscatory tax systems.
Thank you for your helpful response! (the tax impact would be approximately 20-21% of the unrealized losses once recovered).
It's good to know that I am on the right track and that I should stick to the plan.
Laurizas
Posts: 519
Joined: Mon Dec 31, 2018 3:44 am
Location: Lithuania

Re: Should I add bonds to my portfolio?

Post by Laurizas »

It is a tough question to answer. Generally, you have about 20 % probability of loosing money in 2 years time (see the chart is section Expected return at https://occaminvesting.co.uk/is-investing-gambling/). On the other hand, market is at all time high. I guess I would make it simple and just go with 100 % stocks.
Topic Author
ishindelytho
Posts: 6
Joined: Sat Sep 25, 2021 1:16 pm

Re: Should I add bonds to my portfolio?

Post by ishindelytho »

Laurizas wrote: Mon Sep 27, 2021 2:56 am It is a tough question to answer. Generally, you have about 20 % probability of loosing money in 2 years time (see the chart is section Expected return at https://occaminvesting.co.uk/is-investing-gambling/). On the other hand, market is at all time high. I guess I would make it simple and just go with 100 % stocks.
Thanks for your response, I am happy to know that you would make the same decision that I have made!
User avatar
galeno
Posts: 2653
Joined: Fri Dec 21, 2007 11:06 am

Re: Should I add bonds to my portfolio?

Post by galeno »

Investment grade bonds are VERY expensive.

The net nominal yield on our UCITS TWBM ETF (AGGG) = 1.3%.

USD CPI YTD = 5.3%.
KISS & STC.
Swiss Bee
Posts: 92
Joined: Mon Dec 07, 2020 10:03 am

Re: Should I add bonds to my portfolio?

Post by Swiss Bee »

I agree that bonds are very expensive. In addition: If interest rates go up, bonds will go down. If interest rates remain, inflation is eating up your positions.

The question then remains: what do we do with the bonds part? Do you just hold cash or go to other asset classes like gold? This part of the asset allocation is more wealth protection than chasing returns.

I am also very interested in this topic 🤷‍♂️
Swiss Bee
Posts: 92
Joined: Mon Dec 07, 2020 10:03 am

Re: Should I add bonds to my portfolio?

Post by Swiss Bee »

By the way, if you go back to Spain in 2 years, just save up cash and take it with you when you leave 😉
Valuethinker
Posts: 49031
Joined: Fri May 11, 2007 11:07 am

Re: Should I add bonds to my portfolio?

Post by Valuethinker »

ishindelytho wrote: Sat Sep 25, 2021 2:38 pm Hi all,

I am 29 years old and I am currently working as a factory operator in Switzerland, but I am originally from Spain.

I don't have much financial knowledge and I have always distrusted the stock market. Luckily some months ago I discovered this forum which made me look at the stock markets differently and encouraged me to start investing.

For this reason, three weeks ago I invested all my savings (except 6 months of living expenses) into VWCE. I am investing for the long term (for a period between 20 and 25 years).

In about 2 years I plan to return to Spain. This means that if at that point I have unrealized losses, Spain will not take them into account and will consider the value of my shares at that moment as the initial value (which would be lower than the price I paid for them) for the calculation of capital gains (when selling stocks).

Given this risk, would you recommend me to reduce the risk of my portfolio by investing in bonds, for example? Or given that my portfolio is intended to be at a pretty long term would you advise me to still stay 100% stocks? (I am also open for other suggestions and comments)


PS: The reason why I initially decided to only invest in stocks is because my long term horizon and also due to the current low interest rates. However if you have different views or you have reasons why I should allocate money to bonds, I would love to hear your opinion/view.
As the other poster points out, at today's interest rates, cash deposits at a bank are a viable alternative to holding bonds. Risk to your capital value is zero. Bond yields are actually, in some cases, below what term deposits at a bank will pay (Americans call these Certificates of Deposit, there are other names).

You still will not beat inflation, at least in the Eurozone. However in the CHF zone, it might be that inflation is lower?
tomsense76
Posts: 1428
Joined: Wed Oct 14, 2020 1:52 am

Re: Should I add bonds to my portfolio?

Post by tomsense76 »

Mostly people hold bonds for safety and liquidity. They tend to bounce around less than stocks, but they don't tend to return very much. At this particular moment in time people are unhappy with bond returns (though this has happened before as well), but I wouldn't spend too much time thinking about that and instead focus on the safety aspect.

At 29, with 20-25 years, one could look at target date funds that are a similar distance away like 2040 or 2045. They have 10-15% in bonds. Not huge, but that would provide a starting point for bonds if you wanted to add them. It's worth noting target date funds start with 10% bonds. Though leaving them out if you can live with the volatility of the stock market, would also be fine.

Something else to consider. Does your company provide a pension? Also do Switzerland and/or Spain provide some retirement benefits? In the US we have Social Security, maybe you have something similar? In any event these programs effectively act like bonds. So you may need less bonds than others with a different situation.
"Anyone who claims to understand quantum theory is either lying or crazy" -- Richard Feynman
Swiss Bee
Posts: 92
Joined: Mon Dec 07, 2020 10:03 am

Re: Should I add bonds to my portfolio?

Post by Swiss Bee »

Very good point - I have never looked at the pension annuity (SS or company) as a bond-like investments. Many thanks 🙏
pseudoiterative
Posts: 575
Joined: Tue Sep 24, 2019 6:11 am
Location: australia

Re: Should I add bonds to my portfolio?

Post by pseudoiterative »

another way to help frame the decision might be to ask "for the total amount of cash i will invest during my lifetime, how much of that will be before i move back and how much will be after you move back?". if for example you were planning to retire at the old age of 31 and move back to spain, so that your investments before moving back would be roughly your total lifetime investments, then you might want to plan this very carefully. if you expect to be working and continuing to invest for a few more decades, then perhaps that leaves you more margin to correct for any less-likely short term events
helloyou
Posts: 222
Joined: Sun Apr 26, 2020 6:09 am

Re: Should I add bonds to my portfolio?

Post by helloyou »

Have you considered IGIL for your bond portfolio? It is inflation protected and tracks top tier government bonds.

+6.75% in 2021, +2.80% in 2020. +10.04% in 2019. As of today 43% of it is US, 30% UK (risky in my opinion), 8% France, 5% Italy etc

I am no fixed income expert but it seems like a good bond product? https://www.justetf.com/en/etf-profile. ... 00B3B8PX14
User avatar
galeno
Posts: 2653
Joined: Fri Dec 21, 2007 11:06 am

Re: Should I add bonds to my portfolio?

Post by galeno »

IGIL is VERY expensive. Compared to AGGG. The insurance against UNEXPECTED global inflation will cost you 0.60% in yield.

The net nominal yield on IGIL = 0.70%.

So the net REAL yield = -4.6%.

The net nominal yield on AGGG = 1.30%.

The net real yield on AGGG = -4.0% (see above).
KISS & STC.
helloyou
Posts: 222
Joined: Sun Apr 26, 2020 6:09 am

Re: Should I add bonds to my portfolio?

Post by helloyou »

galeno wrote: Mon Oct 04, 2021 9:18 am IGIL is VERY expensive. Compared to AGGG. The insurance against UNEXPECTED global inflation will cost you 0.60% in yield.

The net nominal yield on IGIL = 0.70%.

So the net REAL yield = -4.6%.

The net nominal yield on AGGG = 1.30%.

The net real yield on AGGG = -4.0% (see above).
How do you calculate the IGIL cost at 0.60%? I can see its expense ratio is 0.20%.

Also it seems that the annual performance (valuation and including dividends) has widely outperformed AGGG for a number of years now.

I am very poorly educated when it comes to fixed income and how bonds generally work when it comes to performance but looking at the justetf link I shared above it seems that IGIL could be interesting if it really protects against inflation?
Topic Author
ishindelytho
Posts: 6
Joined: Sat Sep 25, 2021 1:16 pm

Re: Should I add bonds to my portfolio?

Post by ishindelytho »

Swiss Bee wrote: Mon Oct 04, 2021 12:31 am By the way, if you go back to Spain in 2 years, just save up cash and take it with you when you leave 😉
Thanks for your response :)

What do you mean? Do you mean that I should not be investing right now and only saving cash?

Valuethinker wrote: Mon Oct 04, 2021 1:21 am
ishindelytho wrote: Sat Sep 25, 2021 2:38 pm Hi all,

I am 29 years old and I am currently working as a factory operator in Switzerland, but I am originally from Spain.

I don't have much financial knowledge and I have always distrusted the stock market. Luckily some months ago I discovered this forum which made me look at the stock markets differently and encouraged me to start investing.

For this reason, three weeks ago I invested all my savings (except 6 months of living expenses) into VWCE. I am investing for the long term (for a period between 20 and 25 years).

In about 2 years I plan to return to Spain. This means that if at that point I have unrealized losses, Spain will not take them into account and will consider the value of my shares at that moment as the initial value (which would be lower than the price I paid for them) for the calculation of capital gains (when selling stocks).

Given this risk, would you recommend me to reduce the risk of my portfolio by investing in bonds, for example? Or given that my portfolio is intended to be at a pretty long term would you advise me to still stay 100% stocks? (I am also open for other suggestions and comments)


PS: The reason why I initially decided to only invest in stocks is because my long term horizon and also due to the current low interest rates. However if you have different views or you have reasons why I should allocate money to bonds, I would love to hear your opinion/view.
As the other poster points out, at today's interest rates, cash deposits at a bank are a viable alternative to holding bonds. Risk to your capital value is zero. Bond yields are actually, in some cases, below what term deposits at a bank will pay (Americans call these Certificates of Deposit, there are other names).

You still will not beat inflation, at least in the Eurozone. However in the CHF zone, it might be that inflation is lower?
Thanks for your message! Yes, inflation is lower in the CHF zone, it is around 0.9% right now.
tomsense76 wrote: Mon Oct 04, 2021 2:04 am Mostly people hold bonds for safety and liquidity. They tend to bounce around less than stocks, but they don't tend to return very much. At this particular moment in time people are unhappy with bond returns (though this has happened before as well), but I wouldn't spend too much time thinking about that and instead focus on the safety aspect.

At 29, with 20-25 years, one could look at target date funds that are a similar distance away like 2040 or 2045. They have 10-15% in bonds. Not huge, but that would provide a starting point for bonds if you wanted to add them. It's worth noting target date funds start with 10% bonds. Though leaving them out if you can live with the volatility of the stock market, would also be fine.

Something else to consider. Does your company provide a pension? Also do Switzerland and/or Spain provide some retirement benefits? In the US we have Social Security, maybe you have something similar? In any event these programs effectively act like bonds. So you may need less bonds than others with a different situation.
Thanks for all the information! In Spain I will have a public pension plan, which is usually 81% of the gross annual salary (a pretty good amount).

pseudoiterative wrote: Mon Oct 04, 2021 3:21 am another way to help frame the decision might be to ask "for the total amount of cash i will invest during my lifetime, how much of that will be before i move back and how much will be after you move back?". if for example you were planning to retire at the old age of 31 and move back to spain, so that your investments before moving back would be roughly your total lifetime investments, then you might want to plan this very carefully. if you expect to be working and continuing to invest for a few more decades, then perhaps that leaves you more margin to correct for any less-likely short term events
Actually I plan to work until the age of 55-60 years old. My assumption is that in Spain my saving level will be significantly decreased in comparison to Switzerland (to 1/4 or even 1/5), which means that what I have saved in these 2 years, plus what I will save in the incoming two years will be a big portion of my portfolio.
(And a note to that, in Switzerland I don't have an amazing wage, it's only a bit higher than the minimum wage. But in the place I live housing is very cheap and I am able to save a big part of my wage because of that.
On the other hand, in Spain housing is a much higher expense in relation to the wage I will have there and taxes are also much higher, that means that I am not able to save much there).
tomsense76
Posts: 1428
Joined: Wed Oct 14, 2020 1:52 am

Re: Should I add bonds to my portfolio?

Post by tomsense76 »

ishindelytho wrote: Mon Oct 04, 2021 1:20 pm Thanks for all the information! In Spain I will have a public pension plan, which is usually 81% of the gross annual salary (a pretty good amount).
Yeah that sounds pretty good. Guessing that would cover your needs comfortably in retirement?

Normally people hold bonds to make sure their needs expense-wise are covered in retirement. As it sounds like (though feel free to correct me), that is the case in your situation, wouldn't worry about bonds.

The only other reason people may hold bonds is for near term expenses that they might not be able to cover other ways. Like home repairs, car maintenance, etc. Things that might not happen for a few years, but when they do come up one really wants the ability to cover them. Depending on the yield of cash vs. bonds, it is possible cash is a better holding for these. Idk to what extent you have these expenses. If renting and taking the train to work, it might not be worth worrying about bonds. Also if you are saving enough in stocks, it's possible the volatility of stocks won't be a real factor and you can just sell some stocks to cover any needs that come up.
"Anyone who claims to understand quantum theory is either lying or crazy" -- Richard Feynman
Topic Author
ishindelytho
Posts: 6
Joined: Sat Sep 25, 2021 1:16 pm

Re: Should I add bonds to my portfolio?

Post by ishindelytho »

tomsense76 wrote: Mon Oct 04, 2021 2:07 pm
ishindelytho wrote: Mon Oct 04, 2021 1:20 pm Thanks for all the information! In Spain I will have a public pension plan, which is usually 81% of the gross annual salary (a pretty good amount).
Yeah that sounds pretty good. Guessing that would cover your needs comfortably in retirement?

Normally people hold bonds to make sure their needs expense-wise are covered in retirement. As it sounds like (though feel free to correct me), that is the case in your situation, wouldn't worry about bonds.

The only other reason people may hold bonds is for near term expenses that they might not be able to cover other ways. Like home repairs, car maintenance, etc. Things that might not happen for a few years, but when they do come up one really wants the ability to cover them. Depending on the yield of cash vs. bonds, it is possible cash is a better holding for these. Idk to what extent you have these expenses. If renting and taking the train to work, it might not be worth worrying about bonds. Also if you are saving enough in stocks, it's possible the volatility of stocks won't be a real factor and you can just sell some stocks to cover any needs that come up.
Thanks again for all the info, much appreciated!
Yes, with what I would get from the public retirement fund I should be able to live comfortably. Furthermore, in the near future there is a low likeliness that I could have some extraordinary expenses: I have always used public transport + in the short-mid term I will live in rented appartments (as I still don't plan to settle in a specific place). Thus, from what you said, I shouldn't worry about bonds at least for now, which is great!
Valuethinker
Posts: 49031
Joined: Fri May 11, 2007 11:07 am

Re: Should I add bonds to my portfolio?

Post by Valuethinker »

ishindelytho wrote: Mon Oct 04, 2021 2:32 pm
tomsense76 wrote: Mon Oct 04, 2021 2:07 pm
ishindelytho wrote: Mon Oct 04, 2021 1:20 pm Thanks for all the information! In Spain I will have a public pension plan, which is usually 81% of the gross annual salary (a pretty good amount).
Yeah that sounds pretty good. Guessing that would cover your needs comfortably in retirement?

Normally people hold bonds to make sure their needs expense-wise are covered in retirement. As it sounds like (though feel free to correct me), that is the case in your situation, wouldn't worry about bonds.

The only other reason people may hold bonds is for near term expenses that they might not be able to cover other ways. Like home repairs, car maintenance, etc. Things that might not happen for a few years, but when they do come up one really wants the ability to cover them. Depending on the yield of cash vs. bonds, it is possible cash is a better holding for these. Idk to what extent you have these expenses. If renting and taking the train to work, it might not be worth worrying about bonds. Also if you are saving enough in stocks, it's possible the volatility of stocks won't be a real factor and you can just sell some stocks to cover any needs that come up.
Thanks again for all the info, much appreciated!
Yes, with what I would get from the public retirement fund I should be able to live comfortably. Furthermore, in the near future there is a low likeliness that I could have some extraordinary expenses: I have always used public transport + in the short-mid term I will live in rented appartments (as I still don't plan to settle in a specific place). Thus, from what you said, I shouldn't worry about bonds at least for now, which is great!
It's only if you plan to buy a property in Spain in the next few years. The money for the downpayment for that (I assume you will have a mortgage for the balance) should be in low risk bank deposits (government guaranteed) or conservative bond funds.

If CHF inflation is 0.9% and its possible to invest in Swiss bank deposits paying somewhere between 0-1%? Then that's where I would store a downpayment that I needed in the next 1-5 years. Totally safe and keeps up with inflation (just about). Over time I would move that into Euro bank accounts (to eliminate currency risk, given in Spain I would be buying in Euros). Always staying within government insurance limits on deposits**.

** I don't remember the details, but Spanish financial institutions were selling products which were *not* guaranteed, to depositors. Which then went horrible wrong in the Global Financial Crisis that began in 2008 (and ran in the Eurozone, with Greece, to 2012). There was at least one very public suicide by a depositor who had lost most of his money, in protest. These were either bonds or preference shares (preferred shares pay a fixed dividend, usually). Italian banks have been guilty of the same thing - depositors want a little more yield, so they sell them a product which does not have the same guarantees, and the depositors don't really understand the differences or the risk.
mary1492
Posts: 716
Joined: Thu Oct 17, 2019 3:02 am

Re: Should I add bonds to my portfolio?

Post by mary1492 »

.....
Last edited by mary1492 on Thu Sep 29, 2022 8:14 am, edited 1 time in total.
Swiss Bee
Posts: 92
Joined: Mon Dec 07, 2020 10:03 am

Re: Should I add bonds to my portfolio?

Post by Swiss Bee »

Well, I don’t think bonds are a good option currently so no thank you to a target date fund with bonds 😉
User avatar
mrpotatoheadsays
Posts: 546
Joined: Fri Mar 16, 2012 2:36 pm

Re: Should I add bonds to my portfolio?

Post by mrpotatoheadsays »

Bonds can lose money too.

At your age, statistically, it's best to be 100% in stocks. But if you can't handle that much risk, a portion in government bonds is OK.

VWCE is categorized as a large cap blend fund. The smaller cap stocks it holds are such a small percentage that they are insignificant. At your age, if you can handle wild ups and downs, small cap stocks historically performed 2 to 3% annually better than large caps. I would dedicate all, or a portion, to small cap blend/value US/international.
Topic Author
ishindelytho
Posts: 6
Joined: Sat Sep 25, 2021 1:16 pm

Re: Should I add bonds to my portfolio?

Post by ishindelytho »

mrpotatoheadsays wrote: Thu Oct 07, 2021 8:49 am Bonds can lose money too.

At your age, statistically, it's best to be 100% in stocks. But if you can't handle that much risk, a portion in government bonds is OK.

VWCE is categorized as a large cap blend fund. The smaller cap stocks it holds are such a small percentage that they are insignificant. At your age, if you can handle wild ups and downs, small cap stocks historically performed 2 to 3% annually better than large caps. I would dedicate all, or a portion, to small cap blend/value US/international.
Thank you for your reply!

Actually I feel pretty comfortable with the amount of risk that I have right now. So maybe following your advise may be wise. However by investing in different ETFs I am concerned that my portfolio would not be as simple and I may not have a strong criteria to rebalance my portfolio when needed. But I will think about it a bit more! :)
Post Reply