Chatter Around the World – 10

Chatter Around the World is a weekly link update of economics, investing, dividends and personal finance articles that have caught my eye. In these weekly updates, I also capture my blog updates and news related to my holdings.

New blog post this week

Let dive into the links that caught my attention this week.

Updates from My Portfolio Holdings

Bond Allocation

Investing in bonds provides an investor with a diversified investment portfolio. Every investor’s portfolio should consist of some bond component. Bonds provide stability in the portfolio and a predictable income stream.

Asset Allocation

It has become a common advise from most advisors that the percentage of bonds in your portfolio should be ‘100 – your age’. This gives you a rough idea of the importance of bonds, but should not be followed as a hard written rule. Benjamin Graham, the father of value investing, gives a simple (and in my opinion, better) rule of thumb to follow. Relative allocation between stocks and bonds should be between 25% and 75%, one way or the other. He goes on to say “any such variations should be clearly based on value considerations, which would lead [the investor] to own more common stocks when the market seems low in relation to value and less…when the market seems high in relation to value”.

My Bond Allocation

Bond allocation in my portfolio in Aug 2013 is about 11% – a relatively low value. This is because of the historically low interest rates that we currently have. The chart below shows the US 10-year treasury yield. The yields are at their lows and are already starting to creep up. When bond yields rise, bond fund prices lose value, so I have decided to keep my bond allocation to what I consider minimal.
historical bond yields

I only hold high grade near term maturity bonds as of this writing. I hold bonds using the iShares 1-5 Yr Laddered Government Bond Fund (TSE: CLF) ETF, which is composed of Canadian federal and provincial bonds maturing between 1 and 5 years.

 
Disclaimer: The information provided here is for educational purposes only. All opinions here are my personal opinions and should not be taken as financial advice. I am not qualified to be a financial advisor. Always consult with your financial advisor before investing in any of the companies mentioned on this blog.
 

Chatter Around the World – 9

Chatter Around the World is a weekly link update of economics, investing, dividends and personal finance articles that have caught my eye. In these weekly updates, I also capture my blog updates and news related to my holdings.

New blog posts this week

Let dive into the links that caught my attention this week.

Updates from My Portfolio Holdings

Impact of Interest Rates

Changes in interest rates can have a huge impact on your portfolio. With interest rates at historical lows (in US and Canada), it is only a matter of time before they start rising. This post discusses how the rise in interest rates affects each sector.

Rising Interest Rates

When interest rates rise, credit becomes more expensive and the equity market will tend to falter a bit as a first reaction, but as the economy improves, the equities will recover.

  • Bonds: Bonds are the most sensitive asset class to changes in interest rates. Bond prices fall effectively increasing the bond yields.
  • REIT: REITs fall (initially). REITs become an alternative for income investors during low interest periods. The more interest rates rise, the less REITs make because they have to pay higher borrowing costs. REITs may later perform well after the initial fall if inflation picks up – see ‘Inflation’ below for details. Click here to read more about impact of interest rates on REITs.
  • Financial sector: The financial sector will produce winners and losers. The banks that are well capitalized perform better than others. Banks with a heavy focus heavily on mortgages could benefit from the increased earnings from mortgage payments.
  • Energy infrastructure: This sector tends to fall. The increase of debt on the companies puts a downward pressure. Exceptions include companies with high growth potential or long term contracts.
  • Utilities: Utilities fall. When interest rates are low, bond investors turn to utilities as next-best alternative for yield. With rising interest rates, investor return to the safe haven of bonds driving stock prices in the utilities sector lower.
  • Inflation: One of the motivations for the central bank to rise interest rates is the threat of inflation. If inflation is high, sectors such as REITs, commodities (gold, oil), inflation-indexed bonds etc will do well after the initial jitter in the markets.
What are your thoughts on the impact of interest rates?
Disclaimer: The information provided here is for educational purposes only. All opinions here are my personal opinions and should not be taken as financial advice. I am not qualified to be a financial advisor. Always consult with your financial advisor before investing in any of the companies mentioned on this blog.