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Diary of a Dumb Investor: being clever with bonds
I desperately want to diversify my portfolio away from commodities, shares and assets likely to be severely impacted by Europe's debt crisis. And I think I have a cunning plan.
Reading through last week’s post, it dawned on me just how skewed my portfolio is towards commodities, shares and holdings likely to be severely impacted by Europe's debt crisis.
Read Dumb Investor: the story so far.
If it were a cocktail, it would be considerably more expensive than most of the other drinks in the bar, and significantly less tasty – due to its rather oily, garlicky flavour. No doubt any bartenders who offered it would risk having the drink hurled back in their faces by enraged, retching customers.
I would like to avoid a similar fate; and, as such, desperately want to diversify my portfolio.
But I’m nervous, as I understand that the two asset classes to which I’m not exposed, bonds and property, face a potentially mortal danger in the form of interest rates, which are due to rise soonish.
This is because when rates rise, it will be harder for property firms to finance real estate acquisitions, I’ve heard. And fixed income assets like bonds will also suffer as higher interest rates make cash more attractive.
Or as my old friend gggggg hjhjkl;', a Citywire reader, put it last week: ‘As to bonds do bear in mind they provide short term stability but in the long term they are losers. IMHO the bubble will burst when interest rates rise.’
However, after scouring a number of investment websites, with little success, a City mate pointed out a way of both investing in bonds and benefiting from future rate hikes.
It’s called ‘negative duration,’ where the traditional yield-price ratio is reversed: this would mean that a bond's price increases as the interest rates go up, and decreases when the interest rates fall.
I’ve also located a fund in Citywire Selection whose portfolio is in a negative duration position: the Old Mutual Global Strategic Bond fund, run by Stewart Cowley. This fund has given total returns of 50% in the three years to the end of April, beating its benchmark, the Citigroup World Government Bond Index, by just under 11%.
According to the fund’s most recent factsheet, Cowley, a Citywire-A rated manager, also engages in currency plays, which could also boost returns and possibly mitigate losses.
I actually wanted to buy in last week, but had a brief bout of nerves last week upon reading an article about another online brokerage service, BestInvest, launching a platform that would blow Hargreaves Lansdown – the one I use – 'out of the water.'
More about this:
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- Old Mutual Global Strategic Bond
- Diary of a Dumb Investor: how I'm (not) doing so far
- Diary of a Dumb Investor: I may have made a huge mistake
- Bestinvest: new platform will 'challenge' Hargreaves
- Dumb Investor: the story so far
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