Let me start by saying that stocks and bonds are not mutually exclusive. Indeed, a smart investor keeps a balanced and diverse portfolio that reflects their age, attitude to risk and personal set of circumstances. That said, as we go into 2020, if your portfolio is sitting heavy in equity investments you may wish to look at redistributing some of that towards bonds. Now, let me explain why…
A year into writing this blog and the global recession many (including myself) expected still hasn’t arrived. As a result, the stock market remains a happy place for investors, with the FTSE 100 up 13.5% in 2019. Apparently, this longest-ever bull cycle has something to do with all the quantitive easing that took place during the last recession in 2008. This teamed with central banks holding interest rates below 1% for a decade now has seen money poured into the stock markets over bank savings accounts.
I’m no economist but when respected hedge fund managers like Ray Dalio say we’re now in the seventh inning of this economic cycle, I’m inclined to listen. Frankly, I’m nervous because, at the time of writing, a significant portion of my savings are still invested in the stock market. Whilst that’s not a big deal for my SIPP (as I’m still 30 years from retirement), it’s much more troubling for savings that I may need access to over the next few years.
Recently, I have started looking at alternative ways to invest. Already, some of my savings are held in cash in my Monzo savings pot. On the plus side, holding cash is risk-free and the Monzo pot makes it highly convenient to dip into if I overspend in any given month. On the downside, I’m getting an interest rate of 1%, which is well below inflation, and so I’m effectively losing money in “real terms”.
I’ve been looking for that happy medium of asset classes, something between stocks and cash in terms of risk but offering an above-inflation interest rate, and that has led me to bonds. More specifically, I have been researching corporate bonds which can be invested in via the Wisealpha platform.
What are corporate bonds?
Put simply, a corporate bond is a loan from an investor to a company for which the investor receives a fixed income which is the interest the company has agreed to pay on that loan (known as the “coupon”).
In a very similar way Freetrade are democratising investing in the stock market by making it easier to understand and more accessible, I see Wisealpha, another relatively new fintech, as doing the same for bonds.
I have been educating myself in the world of corporate bonds using their free Bond Academy. This three-part module is a useful feature that Wisealpha offer because I have discovered there is a fair amount of jargon when it comes to bonds.
There are a wide range of high yield bond offerings with some very large companies and, since these are fractional bonds, an investment can be made for a little as £100. Furthermore, Wisealpha have a secondary market meaning, in the event you need to access the funds before the maturity date of the bond, you can sell your bond on to another investor.
Caveats to investing in bonds
I think the main two things to understand before investing in bonds are:
1. The associated risk that the bond won’t be repaid e.g. the company goes into administration.
2. The factors that bear on the value of a bond going up or down, which include changes in base interest rates, rates of inflation, and changes in the bond’s credit rating.
Bonds can be less risky than equities, particularly when there is speculation of a global recession. High yield, corporate bonds might be riskier than government bonds/gilts and are certainly more risky than holding cash but offer investments the opportunity of a higher return.
The world of bonds is full of jargon so a bit of self-learning is vital and I have highlighted two areas to particularly focus on above.
In my view, if you look into all of the above and consider that a global recession is likely on the horizon then bonds held with financially strong, well-established companies are an attractive proposition for investors in 2020. Personally, I will start by investing £1,000 into a couple of different bonds via Wisealpha very soon.