Hi, all...
I made the plan to put 40% of my investments in CDs (they currently give 3.8% interest for 10 years, where I live, I don't think I need the money until 15 years from now) and put 35% in bonds. (The rest in stocks).
So far I have hardly any money in bonds, so now I'm supposed to put lots in bond (funds), at least if I'm following my own plan. However, it feels weird to do so, considering the average profit in bonds has been something like 2.5% to 4% in recent history in the Netherlands. Can I defend putting money in bonds, accepting some risk and then getting less/possibly equal return compared to putting the money away safely in a CD?
Asset allocation: bonds or CDs?
I think it sort of depends on how you are looking at the bonds and the bond/stock mix. If you are just planning on holding the bonds to maturity (i.e., for the income) you might want to create a bond ladder -- but it won't look much different than the CDs at least in the next few years.
But if your idea is to have a classic mixed stock/bond portfolio, where one is likely to do well when the other is doing poorly, you will want to be able to rebalance your portfolio periodically by buying or selling bonds as the case may be. Long term government-backed bonds are highly volatile and usually move the opposite way from stocks, assuming both are denominated in the same currency.
Note that different types of bonds perform differently, and I have found "bonds" as a broad category to be the most confusing kind of investment. For example, mortgage-backed securities and corporate issues are traditionally more correlated with stocks and may move up and down with them at times. Long-term government issues are usually the least correlated and move the opposite way. This effect can be "goosed" if you are investing in so-called zero-coupon bonds. Short-term bonds will perform more like your CDs and won't be very volatile.
Take a look at this chart comparing long-term US treasury bonds with the US stock market:
http://www.marketwatch.com/investing/fu ... style=1013
You can see how when one goes up, the other generally goes down, and sometimes dramatically so. This is the primary reason for having both -- you don't know which one will be best next year. But note again that if you chose a different kind of bond fund it might not perform that way.
I would consider taking your stock/bond mix and making it 50/50 for those (i.e., each 30% of your portfolio with the CDs at 40%). You already have a very conservative allocation anyway with the large CD component.
But if your idea is to have a classic mixed stock/bond portfolio, where one is likely to do well when the other is doing poorly, you will want to be able to rebalance your portfolio periodically by buying or selling bonds as the case may be. Long term government-backed bonds are highly volatile and usually move the opposite way from stocks, assuming both are denominated in the same currency.
Note that different types of bonds perform differently, and I have found "bonds" as a broad category to be the most confusing kind of investment. For example, mortgage-backed securities and corporate issues are traditionally more correlated with stocks and may move up and down with them at times. Long-term government issues are usually the least correlated and move the opposite way. This effect can be "goosed" if you are investing in so-called zero-coupon bonds. Short-term bonds will perform more like your CDs and won't be very volatile.
Take a look at this chart comparing long-term US treasury bonds with the US stock market:
http://www.marketwatch.com/investing/fu ... style=1013
You can see how when one goes up, the other generally goes down, and sometimes dramatically so. This is the primary reason for having both -- you don't know which one will be best next year. But note again that if you chose a different kind of bond fund it might not perform that way.
I would consider taking your stock/bond mix and making it 50/50 for those (i.e., each 30% of your portfolio with the CDs at 40%). You already have a very conservative allocation anyway with the large CD component.
Highest one currently pays 4.5% http://www.vanspaarbankveranderen.nl/sp ... optijd=120
@Dragline. Thanks. Indeed I'm quite conservative anyway
@Dragline. Thanks. Indeed I'm quite conservative anyway