It is a "terrible mistake" to measure the risk level of a portfolio based solely on the ratio of bonds to equities according to Warren Buffet, head of Berkshire Hathaway.
The bond market has experienced high performance for the last 35 years. The most demand for bonds is for high quality government bonds from countries such as the US and UK, resulting in high prices and low yields.
The FTSE 100 index has had a greater average yield than that of short dated paper such as 10 Year UK government bonds, which has not normally been the case in the past.
In the same vein, the level of income available on the most dependable US bonds is less than the average yield on the S&P 500 index.
With this in mind, bonds are a "dumb" investment when compared with equities according to Warren Buffet in his most recent shareholder letter. As bonds have become riskier, the traditional measure of risk when comparing bonds with equity investments no longer applies when an extended investment horizon is taken in to account. According to Mr Buffett:
"In any upcoming day, week or even year, stocks will be riskier – far riskier – than short-term US bonds. As an investor’s investment horizon lengthens, however, a diversified portfolio of US equities becomes progressively less risky than bonds, assuming that the stocks are purchased at a sensible multiple of earnings relative to then-prevailing interest rates."
Even though bonds are less attractive on paper than equities when yields are compared, bond funds were more popular than equity funds in 2017, due to the fact that some investors are anticipating a downturn in markets after the bull run of the last eight years.
Westminster Wealth Management can assist in helping you to navigate your financial future, and expert advice is valuable in complicated times just as much as in simple ones. Contact us today.
The value of investments and income from them may go down as well as up and you may not get back the original amount invested.
Information is based on our current understanding of taxation legislation and regulations which is subject to change.
Past performance is not a reliable indicator of future performance.
Warren Buffett: The ‘terrible mistake’ investors should avoid