Should you still be invested in bonds?

Now that the interest rates are going up globally, should you continue to invest in bonds? The answer depends not only on what bond yields you are getting and where you live, but also on whether you own your property or not. How? Read on...

 

Beating inflation

The point of investing is to make your money to work for you. At a bare minimum, you want to ensure that the value of your capital does not erode over time. I hope to achieve that for my savings by investing primarily in stocks. However, I also have a smallish bond portfolio.

By above logic, I should be buying bonds only if I believe that the returns on my bond portfolio will beat inflation. Since I live in Hong Kong, I will elaborate using Hong Kong as an example.

Since 1981 (earliest the data is publicly available), inflation in Hong Kong has averaged 4.6% (year-on-year basis, monthly data). So I should be happy if the current yield on my bond portfolio is well above this average. (in US$. There's an underlying assumption that HK$ will maintain its peg to US$, at least for the near future).

Okay. Simple enough? Hardly. There are obvious holes in the thesis.

Illusion of averages

4.6% average does not guarantee that the inflation in the near future will not exceed the returns I am getting from my bonds. Hong Kong has a history of very volatile inflation rates, reaching a high of +16% in October'81 and a low of -6.1% in  August'99. It stayed above 4.6% for prolonged periods from 1981 to 1984, and then again in the pre-handover euphoric years of 1988 to 1996, falling below 4.6% only after the Asian crisis, as the chart below shows.

 

A Little bit of 'Samatva'

“Samatva”

-Balance, sameness, an evenness of mind, equipoise

I first came across this word at the weekly Gita classes at the Chinmaya Mission in Hong Kong. In verse 48, Chapter 2 of Gita, Krishna urges Arjun to perform actions while remaining ‘balanced.’ Actually, Sri Krishna was asking for a lot more – he wanted Arjun to ‘perform actions abandoning attachment, remaining the same to success and failure alike.’ But then Arjun was a much more ‘evolved’ disciple. For me, ‘balance’ is a good start. 

Control over time

Today marks the first anniversary of my being officially unemployed. When pressed for a reason in my exit interview, I mumbled something about wanting to leave at a high point, but mostly, I wanted to take control of my time, as this post explains.

So, what have I been up to since then? Mostly, I traveled a lot. Of the last 365 days, I was on vacation for 94 days. Besides traveling I read a lot (no, not about finance or investments or self-improvement, but mostly fiction), and attempted to write a book (and still attempting to sell it). I also set up my own fund, “Samatva Opportunities Fund.”

Blog

And finally, this blog. 

I have been thinking about blogging for at least last six months, and I would still not have put my words on paper, were it not for this excellent blog article that I came across a few days ago, A guide to young people: What to do with your life. A must read for parents of teenage children, but sensible advice for just about anybody. For one, spurred me to stop procrastinating  -- my wife wouldn't agree to such a sweeping statement -- but at least, I've made a start.

What do I intend to write about? Just about anything I wish to chew on. Everyday finance. Things that I’m figuring out. Notable posts I find on the blogosphere, and some other things I don’t know yet. How often? I don’t know. Whenever inspiration strikes.

See you soon. Until then…...stay ‘Samatva!’