This is part 9 of my posts on passive investing for Europe based investors. I will discuss the current bond yields and why, in my opinion, the current levels support more than ever the case that many long term investors should avoid this option altogether.
Is allocation to bonds an outdated option?
As explained in part 8, these comments are relevant to long term investors as investors in need of funds in the short term might have other considerations – something I might come back to earlier but in general the closer you are to the retirement age (or any age when you are in need of your funds) the higher balance you need to have in liquid and stable assets.
Having said that, as explained earlier, in my opinion, there is a very strong case to disregard the idea of splitting your portfolio between stocks and bonds at any level of yields for long term investors.
The case for Europe based investors gets even stronger if current yields are taken into account. At the moment the German 10 year government bonds delivers a guaranteed yield of -0.525%. Yes, you will lose 0.525% each year, guaranteed.
As of now, there seem to be political and other issues that prevent many banks from passing on negative rates on savings accounts, making even a savings account a better alternative to government bonds!
And this is before considering any costs (transaction and other) related to adding bond ETFs into your portfolio.
Note that we are discussing nominal yields, i.e. not even adjusted for inflation. If there is a spike in inflation, which can happen due to various unforeseen possibilities, you will incur steep real losses on your bond portfolio.
Let me know what you think! I do agree that certain more active approaches to investing might see value in holding bonds, e.g. in a steep decline, bonds can be swapped for relatively much cheaper stocks but it’s hard to see any such argument for a passive investor.