Why should you hold bonds in your investment or pension
Unprecedented levels of quantitative easing have created an environment of negative real rates of return for investors (pension investors, AMRF and ARF pension fund holders).
Investors seeking returns are opening their investments to potential high levels of volatility.
One of the critical success factors for an investment portfolio to prevail against market volatility over the long-term is diversification. When you diversify, you are ensuring your entire portfolio is not at risk of simultaneously under-performing, due to isolated or unexpected circumstances.
Since bonds are not as extensively reported on by the financial press and media, this asset class can be overlooked by the retail investor.
What is a bond?
The buyer of the bond lends money to the Government or Company for a fixed period of time. Depending upon the agreement the interest (coupon) will be paid at agreed intervals (i.e. annually) and the initial capital investment/principal will be returned at the end of the term. A Government Bond is issued by a national Government and is usually issued in that countries own currency. A Corporate Bond is issued by a company.
Typically, Corporate Bonds offer a higher yield than Government Bonds. Generally, they carry a higher level of risk.
Multi-Asset investment
Multi-asset funds invest in a range of assets (Equities/Shares, Bonds, Alternatives and Cash), countries and market sectors, diversifying your investment across many different asset classes.
Portfolios built upon traditional asset allocation - offer poor asset allocation, limited diversification and risk management.
At Nelson Life, we believe that Bonds offer a stabilising effect on a portfolio min periods of high volatility. In a period of economic downturn the stock market (Equities/Shares) may be effected by increased volatility. The stock market may fall in value. During this period, the bonds issued by Governments and Companies (higher grade) may become more attractive to investors. As the demand increases the value of the bonds held will increase (ceteris paribus). An investment into a bond is consider less risky than an investment into a stock/share/equity.
How to access a bond investment?
Nelson Life have access to Government Bonds, Corporate Bonds, Savings Bonds, Diversified Bonds Funds and Multi Asset Funds that include bonds as a principal asset.
Please not investing into Bonds is not without risk:
1. Credit risk: Bond prices can be volatile and capital may be lost, in the event that the issuer defaults.
2. Interest rate risk: How sensitive a bond is to interest rates is measured by Duration, the higher this figure then the more sensitive a particular bond is to a given change in interest rates.
3. Inflation risk: Increasing inflation will reduce the bond holders future income (coupon) payments in real terms. However, the coupon can be reinvested into higher yield bonds.
4. Liquidity risk: Bonds have a fixed term to maturity. If you require access to your principal before this date the bond may have to be sold at a significant discount to the initial purchase price.
Want to know more? We are available to discuss your options, and we look forward to hearing from you.
Our job is to help you choose a product and structure that will help you meet your goals.
telephone | 091441188 and/or email | office@nelsonlife.ie
RETIREMENT & PENSIONS | INVESTMENTS | FINANCIAL PLANNING | LIFE INSURANCE
Nelson Life Limited trading as Nelson Life is regulated by the Central Bank of Ireland.
WARNING: Past performance is not a reliable guide to future performance. WARNING: The value of your investment may go down as well as up. WARNING: You may lose some or all of the money you invest. WARNING: These funds may be affected by changes in currency exchange rates. WARNING: If you invest into this product you will have access until you retire (Pension Products). WARNING: The above content does not constitute investment advice, as it does not take into account the investment objectives, knowledge and experience of financial situation of any particular person. Prospective investors are advised to make their own assessment of the information contained herein and to obtain professional advice suitable to their own individual circumstances. WARNING: The information contained in this document is based on our understanding of current tax legislation and the current Revenue Commissioners interpretation thereof and is subject to change including retrospectively without notice. This is intended as a general guide only and is not a substitute for professional tax, legal and investment advice.