If anyone thought shares had been turbulent lately, spare a thought for the bond market. This has been sold as a safe haven for investors, yet lately it has been anything but.
Last year, bond prices fell by around 20%, the fastest drop in decades. Investors know that shares are volatile, but they don’t expect that kind of performance from bonds.
So why did bonds crash? Government and corporate bonds pay a fixed rate of interest, which made them much less attractive as central bankers repeatedly hiked interest rates to combat inflation. Investors desperate to offload low-yielding bonds were forced to slash prices as a result.
Inverse correlation
Now the process is going into reverse. Instead of paying almost no income, bonds yield between 4% and 6%. Yet this is probably as good as it gets. Interest rates have now peaked and bond yields are expected to fall.
Investors who buy bonds today can lock into those high rates of income but should also get capital growth when interest rates fall and bond prices rise.
I have taken advantage of today’s bond market opportunity to invest in a couple of gilt exchange traded funds (ETFs). In recent weeks I’ve bought the catchily named iShares UK Gilts 0-5yr UCITS ETF and iShares UK Gilts All Stocks Index ETF. I’m leaving it at that, though. From now on, it’s shares all the way for me.
While today’s high yields and low prices offer a tempting entry point, I still don’t trust bonds to offer brilliant long-term returns. As we saw last year, they aren’t necessarily safe either.
Stocks and shares certainly aren’t safe, but that’s fine by me. I understand the risks involved, but mitigate them by buying a balanced portfolio of different stocks, and hold for decades to reduce short-term volatility. The higher potential rewards make them a far superior long-term investment.
Listed companies are the engine room of the global economy. They’re how the world builds its wealth and I want my tiny corner of it.
I’d rather buy these
Equities offer far superior capital growth prospects over time, and when I look at FTSE 100 shares, I see they offer superior income too. Like bonds, many dividend stocks have been knocked by recent volatility. This also makes them cheap to buy.
My favourite portfolio holding, wealth manager M&G, currently yields 9.6% a year. Legal & General Group yields 8.52% and trades at just 5.98 times earnings.
Mining giant Rio Tinto trades at 8.23 times earnings and yields income of 7.49%. It’s next on my shopping list.
Despite all the bond market hullabaloo, iShares UK Gilts 0-5yr UCITS ETF has a 12-month trailing dividend yield of just 1.65%. As yields rise, the average yield to maturity is higher at 4.4%. I can still get double that from my favourite shares.
The classic 60/40 portfolio is made up of 60% shares and 40% bonds, but I’m having none of that. My personal ratio is closer to 90/10 in favour of equities, and I don’t expect that to change even if bonds are finally having a moment.
The post A once-in-a-decade chance to get rich from the bond market! So why am I buying shares? appeared first on The Motley Fool UK.
Our best passive income stock ideas
Do you like the idea of dividend income?
The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?
If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…
Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.
What’s more, today we’re giving away one of these stock picks, absolutely free!
Get your free passive income stock pick
setButtonColorDefaults(“#5FA85D”, ‘background’, ‘#5FA85D’);
setButtonColorDefaults(“#43A24A”, ‘border-color’, ‘#43A24A’);
setButtonColorDefaults(“#FFFFFF”, ‘color’, ‘#FFFFFF’);
})()
More reading
Waiting for a stock market crash to buy cheap shares? It already happened!
These UK shares pay 10% yields! Should I buy Vodafone now?
8.1% yields! Is Barclays of the FTSE 100’s best valued dividend shares?
If I’d invested £2,500 in Tesla stock at the start of the year, here’s how much I’d have now
Here’s how I’m capitalising on unmissable cheap shares NOW!
Harvey Jones has positions in Legal & General Group Plc, M&g Plc, and Rio Tinto Group. The Motley Fool UK has recommended M&g Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
