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What are bonds and why do they belong in every portfolio?

Bonds are debt securities that certify creditor rights, in particular the right to interest and repayment. Bonds are also referred to as fixed-income securities, debentures, obligations, or annuities. Bonds are issued by the public sector, banks, and companies.

An introduction to the asset class of bonds: What are bonds and why do they belong in every portfolio?

The debt capital is mostly used to finance long-term investment projects. Investors who purchase a bond thus assume a creditor position. Unlike shares, which are on the equity side of the balance sheet, bonds are on the debit side.
Investment graph
In the following, we present the most important characteristics of bonds.

How the bond price behaves in the event of a change in the interest rate level

The bond price and a change in interest rates are directly interdependent. When interest rates fall, the bond price rises; when interest rates rise, the bond price falls. This behaviour of the bond price is due to the fact that when interest rates fall, the old higher interest coupon becomes relatively more attractive and, conversely, that when interest rates rise, the old lower interest coupon becomes less attractive.

This is illustrated in the graph below:

Delta Value

The bond as an important element of stability in a private investor's portfolio

For private investors, the bond asset class is an essential factor in the portfolio context. It is one of the more defensive asset classes – along with equities and cash and, where appropriate, real estate and commodities – and often serves to stabilise a portfolio. The stabilisation comes about because bonds, with their interest coupons fixed in advance and their known maturity dates, generate a high and predictable cash flow. This high cash flow provides the liquidity for possible adjustments in the portfolio. In addition, bonds are either slightly negatively or only mildly correlated to the other asset classes mentioned above. Statistically, equities and bonds correlate negatively at around -0.4. This means that if the prices of the other asset classes move in one direction, there is a good chance that bond prices will move the other way.
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Find out why bonds belong in every portfolio.
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Genève Invest's four investment strategies and their bond ratios

In a classic portfolio, comprising the three asset classes of bonds, equities and cash, the equity and bond ratios determine the investment strategy. Genève Invest has defined four different investment strategies with the following bond ratios:
  • Strategy 1: Fixed income portfolio, 100 % exclusively invested in bonds.
  • Strategy 2: Income plus yield portfolio, investment of at least 70 % in bonds with an investment in equities of up to 30 %.
  • Strategy 3: Balanced portfolio, the bond quota ranges between 30 % and 70 %, usually around 50 %.
  • Strategy 4: Dynamic portfolio, the bond quota fluctuates between 0 % and 50 %.

“An experienced investment advisor from Genève Invest can discuss the differences between the investment strategies with you in detail and develop a suitable individual investment strategy together with you by asking specific questions.”

The most important key to success when it comes to strategic investment!

Numerous studies and research have shown that the determination of the investment strategy and, by extension, the bond quota is by far the most important long-term success factor for the performance of the investment.

“The investment strategy and its corresponding implementation determine around 70–80 % of the subsequent success of the investment.”

Conclusion

In further blogs, we will detail the opportunities and risks and the different types of bonds. In addition, you will find the following articles in our Blog on bonds: Corporate Bonds, High-Yield Bonds, US Bonds, Inflation-Protected Bonds, ETFs on Bonds, Green Bonds and Risk with Bonds.

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