SGS Bond vs Endowment Plan

[teckgamer]

From MAS website, SGS Prices and Yields - Benchmark Issues. The yield for 15 year SGS bond is about 2.39 ( I am planning to keep it until maturity)
Whereas, most endowment plan also generate roughly 2% return (For a 15 years endowment term).

I am looking at way to diversify my portfolio (SGS Bond will reduce my standard deviation of return and so does endowment.) and leaning towards SGS bonds. But more research about bonds market has to be done.

What are your opinion?

 

[Epps_Sg]

If you keep a 15 year bond for 15 years till maturity, within that time you run the risk of experiencing interest rates increase, in which case newer bond interest start to rise and you may see new 15 years bond issued with 4% or 5% returns. In case of interest rate rising, endowment returns should rise also because they also invest in bonds.
On the other hand, if bond interest falls further (means bond prices rise), you are unable to benefit from capital icrease in bond prices if you dont sell existing bodns.
IMO holding medium to long term bond (10~30yr) till maturity runs high risk of meeting unfavorable interest rates rising. In current environment, such hold bond till maturity method should apply for short or shorter term bond, such as 5 to 10 years bonds, as Bill Gross recommended, if i recall correctly.

Instead of holding longer trem bonds till maturity, another way to diversify portfolio is to take advantage of rebalancing portfolio yearly. It works this way: If a portfolio has 50% stock index fund/ETF, 50% long bond (30 years), at end of next year this ratio would have changed. eg. 40% equities, 60% bonds due to stock price dropping and bond price rising inversely - in this case at end of one year the investor should buy more cheaper stocks with fresh cash such that portfolio becomes 50% stocks 50% bonds again. Do such portfolio rebalancing once every year. This is called passive investing with diversified portfolio - it's a no brainer way to invest for people who cannot or do not want to pick stock or market time. Stock/bond ratio varies according to individual preference/strategies. Note that the 30 years bonds mentioned here need to be replace with fresh 30 years bond once the existing bond is left with 20 years till maturity.

Another note, if you are running long term diversified portfolio, it is most important to keep running cost low (eg. annual management fees). Compounding effects of high running fees can reduce portfolio returns a lot over a long time.

Last note, IMO bonds are better than endowment plans for diversification. Bonds can be cashed out anytime you need the cash, with or without losses (if stock losing you can cash out some winning bonds, or if bonds losing, you can cash out some winning stocks instead), but endowment early cash out sure get confirmed penalty loss.

 

[teckgamer]

Instead of holding longer trem bonds till maturity, another way to diversify portfolio is to take advantage of rebalancing portfolio yearly. It works this way: If a portfolio has 50% stock index fund/ETF, 50% long bond (30 years), at end of next year this ratio would have changed. eg. 40% equities, 60% bonds due to stock price dropping and bond price rising inversely - in this case at end of one year the investor should buy more cheaper stocks with fresh cash such that portfolio becomes 50% stocks 50% bonds again. Do such portfolio rebalancing once every year. This is called passive investing with diversified portfolio - it's a no brainer way to invest for people who cannot or do not want to pick stock or market time. Stock/bond ratio varies according to individual preference/strategies. Note that the 30 years bonds mentioned here need to be replace with fresh 30 years bond once the existing bond is left with 20 years till maturity.

So that means I am holding a 30 year old bonds for 10 years to minimize the risk of rising interest rates? hmm. Looking at the current market situation. I think interest rates do will rise as US Fed will taper their QE. Thanks for your input.

Any other comments or thoughts?

 

[Epps_Sg]

So that means I am holding a 30 year old bonds for 10 years to minimize the risk of rising interest rates? hmm. Looking at the current market situation. I think interest rates do will rise as US Fed will taper their QE. Thanks for your input.

Any other comments or thoughts?

No,No, holding 30yr bonds for only 10 years do not reduce interest rate risk at all. The longer the time till maturity of the bond, the more the bond's price will lower in reaction to rising interest rate.

Just saying some people invest with stocks and bonds together, to be rebalanced at fixed interval. If their strategy uses long bonds, then they need to sell off the 30 year bond when the bond reaches 20 years. If their strategy uses 3~5 years bonds, then probably they will hold the short bonds till maturity.

Another way to put it, when you invest in bonds, don't just look at how bonds do by itself separately from stocks. You can look at the stock/bond portfolio as a whole, see how bonds react opposite direction to stocks, and use a yearly stock/bond ratio rebalancing strategy to benefit from buy low sell high...it probably seems a bit abstract the way I describe...but if you are interested, you can do more research into passive investing with stock index funds and govt bonds.

 

[evets]

How can we get assess to the SGS bond?

 

[genie47]

How can we get assess to the SGS bond?

Buy from your broker. They are traded in SGX. For example the SGS 30yr bond is by the code of PH1S.

For the codes of the other bonds go to SGS website to check.