A few weeks ago I wrote about volatility in investment markets and how we should be prepared for a rollercoaster. This wasn’t meant to put people off from investing, rather to make sure that you are investing at the right time for the right reasons. If you need to buy a house next year or to pay school fees in September, then having the money that you have set aside for this invested in the stock market could well lead to sleepless nights.
The Financial Times money section last weekend reported that in 2017 Britons piled in more money than before into funds – more than £46bn! To put this into context, in 2016 private investors invested £6.9bn. The thing that surprised me is that of this £46bn of investment, £14.3bn was invested in bond funds.
So what are bonds? There are two main types of bonds:
- Government Bonds (aka Gilts) This is when the government needs to raise money so they offer you a fixed return on your money for a certain amount of time e.g. a 30 year UK Gilt is currently trading at 1.5%. So if you invested £100 then you would get £1.50 each year. These gilts can be bought and sold too. If a country that is seen as higher risk (i.e. they won’t pay your money back) then they will have to offer a higher annual return (coupon) to tempt investors.
- Corporate Bonds – this is exactly the same as above, but rather than governments who are asking to borrow money it is companies.
So why the title of this blog?
Bull markets are characterised by optimism and investors feel that markets will continue to rise. The opposite of a bull market is a bear market. So given that we have had great 10 years of investing, why are private investors flocking to bonds? Bonds are seen as a safe haven in a bear market so presumably these investors were spooked by the BREXIT vote in 2016. The problem now is that in recent months have been adversely affected by interest rates rises and also inflation.
So what’s my point?
I am not sure that these private investors are investing for the right reasons or the right time frames. It seems that they are making kneejerk reactions to political (and economic) news rather than sticking to their chosen course. It is a common theory that “time in the market” is far more important to long-term investment returns rather than “market timing”.
So don’t panic, reread my valentine’s “Fall in Love with Volatility” blog and carry on regardless.
Lots of Love
P.S – I’ve been approached to write a book and would love to have your feedback about what should be included. Please could you take this 3 minute survey to help me out? https://www.surveymonkey.co.uk/r/9TTHSGF
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