facebookShort duration bonds = lacklustre returns? Is it worth maintaiing in a portfolio? - Seedly

Terence Lee

06 Dec 2020

CPF

Short duration bonds = lacklustre returns? Is it worth maintaiing in a portfolio?

My returns percentage so far is in the decimal places. Is it even worth allocating a place for them in my portfolio?

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Equities over the long term give much higher returns over bonds (even if you went for high yield/junk bonds)

But whether you shld switch depends on your approach and your initial reason for buying bonds. If it's for diversification then you shouldn't adjust it because you wanted diversification in the first place. And many people don't talk about the downside of over-diversification... (possible reduced returns is one of them)

if you are actively managing your positions then you should adjust based on where you think bonds are valued today. This is the earnings yield of the S&P500 vs risk free rate (commonly taken as 10 year T bill yield). The blue line represents the earnings yield of S&P500 which is much higher than bonds. This signifies the yield of stocks being much more attractive than bonds.

You may hear people saying the stock market is extremely expensive now and they will compare to the dot com bubble and 2008 housing bubble. However, many people do not realise the similarities between the 2 crisis and the difference between those 2 times vs now.

As you can see from the chart, back in 2000 and end 2007 when these crisis erupted, the blue line is way below the red line which is different from today. This is something called the Equity Risk Premium (ERP). Higher the ERP, more valuable and attractive stocks are compared to bonds.

**Earnings yield of S&P 500 is opposite of P/E ratio. Which is caluclated by taking E divided by P.

ERP = (earnings yield of S&P500) - (10 year treasury yield)​​​

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If you're in for the long-term then no, go for equities

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Short duration bonds are meant as a hedge against the volatility of the stock market and also to mai...

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