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Why I do not invest in bonds
05 Oct 2021 (447 views)  

Mr. Tan,
You appear to prefer investing in stocks. Is it better to have a balanced portfolio including bonds?

Reply
The yield on bonds is extremely low. For safe government bonds, the yield is 1.5% over a 10 year period. For risky corporate bonds, the yield is higher, but it carries a risk of default. 

I am able to find blue chip stocks with a price earning ratio of less than 10 times and a dividend yield of over 3%. 

The blue chip stocks are for companies with a big market capitalization and a long history of steady profits.

The risk of default for blue chip stocks are low. 

The main risk of blue chip stocks is that the profits may drop in a difficult business cycle. If the PE ratio is less than 10 times and the profit drop by 50%, the PE ratio will become 20 times. 

The company will still be able to earn a return of over 5% on the business. They will be able to maintain the dividend rate of over 3%.

The stock price may drop, but it does not matter. The stock will still give an attractive dividend yield. 

When the economy recovers, the profits will increase and the stock price will follow.

Bonds will become an attractive alternative to stocks when the bond yield is at least 3%. 

At the current yield of 1.5%, bonds are not attractive. 

Tan Kin Lian

 


Why I do not invest in bonds
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Mr. Tan,
You appear to prefer investing in stocks. Is it better to have a balanced portfolio including bonds?

Reply
The yield on bonds is extremely low. For safe government bonds, the yield is 1.5% over a 10 year period. For risky corporate bonds, the yield is higher, but it carries a risk of default. 

I am able to find blue chip stocks with a price earning ratio of less than 10 times and a dividend yield of over 3%. 

The blue chip stocks are for companies with a big market capitalization and a long history of steady profits.

The risk of default for blue chip stocks are low. 

The main risk of blue chip stocks is that the profits may drop in a difficult business cycle. If the PE ratio is less than 10 times and the profit drop by 50%, the PE ratio will become 20 times. 

The company will still be able to earn a return of over 5% on the business. They will be able to maintain the dividend rate of over 3%.

The stock price may drop, but it does not matter. The stock will still give an attractive dividend yield. 

When the economy recovers, the profits will increase and the stock price will follow.

Bonds will become an attractive alternative to stocks when the bond yield is at least 3%. 

At the current yield of 1.5%, bonds are not attractive. 

Tan Kin Lian