Investing

Investor Survey FAQs

Thank you for completing our recent investor survey. The responses drew out a number of excellent questions which we’ve respondend to below.

Q1: I don’t understand how to invest in XTBs
Q2: My online broker does not have XTBs.
Q3: I don’t know where to start.
Q4: Seems a high cost getting in and out due to brokerage.
Q5: I do not have confidence in the capital preservation side of things.
Q6: I’m not sure how to measure XTB returns.
Q7: I’m not comfortable with the time periods involved in the higher interest bonds?
Q8: XTB’s are not printed/listed in the Australian Newspaper with the other Share Listings, maybe I am looking in the wrong section?
Q9: I’m trying to achieve a steady & desirable income yield, how do I do that?
Q10:I’m trying to maintain income without reducing my capital, how do I do that?
Q11: I’m not sure what the appropriate action plan for a good retirement plan is – where do bonds fit in?
Q12: I want to maintain an adequate income flow from my investment portfolio.
Q13: I want to find yield and not take unrealistic risks. I worry about another GFC event in the next few years.
Q14: I want to manage for over 5% yield but within acceptable risk parameters?
Q15: How do I get the right balance between risk and return?
Q16:I have difficulty at the moment finding any investment that will provide a return and also preserve capital value, what do I do?
Q17: With low interest rates I’m looking for safe reliable returns with returns better than current term deposit rates.
Q18: How do I find good returns with low volatility.
Q19: I’m entering retirement phase and need to balance risk vs returns.
Q20: Most asset classes look fully valued, so I’m trying to find pockets with good returns.
Q21: I’m looking to generate consistent income (min $500 to $1,000 per month).
Q22: I’m looking for protection against a major stock market fall.
Q23: I need to earn about 6% with very low risk. This seems hard to do if you also want to be protected from inflation.
Q24: What are the potential consequences of (rising) interest rises and reversing of quantitative easing.
Q25: I want to achieve low risk yields above 3%.
Q26: I want to invest at a reasonable price for an income return of 4% without losing 15-20% of the capital in a future financial crisis.
Q27: I’d like to find reliable high income producing investments that preserve & grow the capital.
Q28: At my age (84) I need to keep my money safe while earning income.
Q29: I’m being forced up the risk ladder to achieve reasonable income returns as a retail investor – what do I do?
Q30: How do I transition from capital growth to income in a low yield environment?

 

Q1: “I don’t understand how to invest in XTBs.”

Investing in XTBs is like investing in any other ASX-listed investment such as shares, ETFs, property trusts and listed investment companies.  Each XTB has a 6 character ASX trading code. For XTBs the first three characters are always ‘YTM’.

The second 3 characters of the trading code signify the bond issuer.  One BHP bond XTB’s code is YTMBHP and a Telstra bond XTB’s is YTMTLS.  Some companies have multiple bonds with different maturity dates.  If there’s more than one BHP or Telstra bond that XTBs cover, then the second XTB will be YTMBH1 or YTMTL1 and so on.

There are about 50 XTBs (more will be issued on a regular basis) and all the ASX trading codes can be found on our Available XTBs page.

You can buy XTBs via your online or full-service broker, or financial adviser in exactly the same way as you buy anything traded on ASX.  You pay brokerage when you buy and sell on ASX (or your adviser takes a fee based on your assets), but you don’t pay brokerage if you hold XTBs to maturity, as the XTBs simply mature and you get paid the final dividend and the principal.

If you do your own investing via an online broker – once you decide which XTB(s) you want and the amount you wish to invest – then you divide the dollar amount by the XTB offer price (from the online broker website), which gives you the number of XTBs you need to buy.  This is exactly like buying shares or ETFs.

On the online broker website, you’ll generally see either a ‘bid’ and ‘offer’ price.  Or a ‘sell’ and ‘buy’ price.  The ‘offer’ and/or ‘buy’ price is the price you can buy the XTBs at right then.  The ‘offer’ or ‘buy’ price is always higher than the ‘bid’ or ‘sell’ price.  These prices are mostly provided by the market makers, but they can also be other brokers putting prices into ASX.

If you are unclear how to decide on which XTBs to buy, you can seek advice from a broker or financial planner, or you can choose an XTB Starter Pack. Starter Packs are portfolios picked by the XTB Chief Investment Officer, Ian Martin for the purposes of helping investors make that decision.

If you need help call us on 1800 995 993.

Q2: “My online broker does not have XTBs.”

All online brokers have XTBs because they’re traded on ASX.  But the ASX trading code does not begin with XTB, so you will not find them by typing ‘XTB’ into the ASX trading code field.  XTB is the brand name of the security.

Each XTB has a 6 character ASX trading code.  For XTBs the first three characters are always ‘YTM’.

The second 3 characters of the trading code signify the bond issuer.  One BHP bond XTB’s code is YTMBHP and a Telstra bond XTB’s is YTMTLS.  Some companies have multiple bonds with different maturity dates.  If there’s more than one BHP or Telstra bond that XTBs cover, then the second XTB will be YTMBH1 or YTMTL1 and so on.

There are about 50 XTBs (more will be issued on a regular basis) and all the ASX trading codes can be found on our Available XTBs page.

Q3: “I don’t know where to start.”

Looking at 50 different XTBs over 50 different bonds can be daunting, which is why we developed XTB Starter Packs.

The best place to start becoming familiar with bonds and XTBs is to go to the XTB Insights Centre and start learning more about bonds and where they fit in your portfolio. There are many dozens of articles and videos that will give you a good sense of why investors have fixed income in their portfolios.

You can then use the XTB Cash Flow Tool, which is a calculator on the website that allows you to see exactly the cash flows that will be generated if you invest in one or more (the calculator can take up to 10 XTBs, and has all the Starter Packs included – it only takes 3 clicks).  This shows you what to expect from an XTB investment.

There is also a price and yield calculator that allows you to see what price a certain yield equates to and vice versa.  Please feel free to call our helpline number, 1800 995 933 to talk to someone who can help you understand the different aspects.

Q4: “Seems a high cost getting in and out due to brokerage.”

Some full-service broker’s brokerage may seem high if you’re not also getting other services, such as research or access to equity IPOs.  Many people use a full-service broker for some things but also have an online broker for simple things where they’re not looking for research.  Then the brokerage is much lower.

Online brokerage can be as low as 0.1% compared with some full service offering from 0.5% to 1%.  Keep in mind that if you’re holding to maturity, which most XTB investors do, then you only have brokerage on the way in.  When the XTB matures there is no brokerage as you’re not “selling” the security. You get the principal and final coupon back at no additional cost to you

Q5: “I do not have confidence in the capital preservation side of things.”

All new investment types take a while before we become comfortable with them and corporate bonds and XTB are no different.  But to help address this, let’s break this concern down, because an investor not having confidence in the capital preservation of XTBs could mean three distinct thing

  1. Worried about the bond issuer?

First, you may be worried the bond issuer will not pay the coupons and principal, which is the biggest risk to capital preservation.  If a company collapses it has a very significant impact on all its securities.

This is called ‘credit risk’.  All XTBs cover ASX top 100 companies and this risk, while clearly not zero, is a much lower risk compared with much smaller companies.  Only two investment grade bond issuers have failed to meet their obligations in recent years, being Pasminco and Babcock and Brown in the 2000s.

According to S&P, the historical default rate globally for investment grade 3 year corporate bonds is 0.3%.  When investment grade bond issuers do default and the company is put into administration by the major bond holders, the average historical recovery rate has been 50% globally.

The reason bond investors get 50% when you always hear equity investors get wiped out, is because ‘senior’ bonds are closer to the top of the capital repayment stack while equities are at the bottom.

For example, if a company in administration owes senior bond holders $1 billion, and it has $1 billion of equity holders, and $1 billion cash to pay out, then assuming it has already paid the ATO and its employees etc., and bonds are next – then the administrator pays the lot to the bond holders and the equity holders will get nothing.  That’s the deal with senior bonds versus equity.

Bond issuers cannot alter or defer their coupons.  They must pay them or face default and administration.  These are senior bonds, not hybrids.  They cannot alter or defer the date for principal repayment either.  You will get the coupons and principal on the dates set at issue otherwise the bond issuer is in default.

  1. Worried about the XTB structure?

An investor might be happy the bonds will deliver, but worried the XTB structure might not.  This is the very point of, and the strength of the listed managed investment scheme structure used in Australia for ETFs and products like XTBs.

XTBs are issued by a listed managed investment scheme called Australian Corporate Bond Trust.  This trust has an independent Responsible Entity (RE) whose role under the law is to protect XTB investor interests – independent from the XTB manger’s interests.

The bonds are the source of the XTB income and principal repayment.  There is always a 1 for 1 relationship between the bonds and the XTBs, meaning there is always $100 of bonds in the XTB trust for every $100 of XTBs issued.

The bonds are at all times held in trust by an independent custodian, a prudentially regulated entity charged with safekeeping of the assets for end investors.  The custodian for XTBs is Australia’s oldest custodian – Australian Executor Trustees, which is owned by the IOOF group, one of the top 6 financial services firms in Australia along with the 4 major banks and AMP.

The custodian holds the bonds in Austraclear (the CHESS of bonds), which is owned by the ASX Limited.  At no time can the XTB manager touch the income or principal coming from the underlying bonds.  The custodian and RE controls the bank accounts and they organise the registry to pay income and principal straight to XTB holders.

If the XTB manager failed for some reason, the bonds underpinning the XTBs remain in safe keeping and the RE would replace the XTB manager as governed by the Corpoarations Act.  If the RE collapsed, then the law stipulates ASIC would step in and appoint a new RE.

At all times the bonds would remain in trust held by the custodian to protect XTB investor interests.

  1. Worried about the principal versus price paid?

The third possible reason for this question is the fact that while a bond and its XTB matures at $100, you might have to pay say $109.50 to buy it and that’s a capital loss.  You might think why would you do this?  But professionals do buy these bonds so there’s obviously a logic to it.

The reason you’d have to pay $109.50 is the fact that some bonds were issued when interest rates were much higher, and so they have very large coupon rates compared with interest rates today, such as 6.5% p.a (a live example I chose in October 2017).  That bond still pays $6.50 per $100 face value and so the market price of the bonds goes up because the coupon rate is so high (you can’t expect to earn 6.5% on a top 50 ASX company bond in 2017).

If you pay $109.50 and the coupon is $6.5 p.a., then the coupon payment rate for that price is $6.5/$109.5*100, or 5.94% per annum.  This is called the ‘running yield’.  But this is just the rate of income payment, not unlike the dividend yield on a share.

Its sounds great and you do get this rate of income every year to maturity compared with say a 2.5% rate from a term deposit, but you also know for certainty that the bond/XTB will also mature at $100.

Therefore the only measure you should focus on in terms of your ‘total return’ of income and capital, is the Yield to Maturity of the bond, which for this bond on 31 October 2017 was 2.6%.  Yield to maturity or just Yield, takes into account both the 5.94% income you get each year plus the $9.50 capital loss at maturity.

So yes you’re getting income at a rate that’s way above a term deposit income, but you need to account for the capital loss at the end.  The reason you’d invest in the first place, is your total annual return is still 2.6%.  In other words the hefty coupons will outweigh the capital loss giving you a positive annual return each year.

The capital loss can be offset against other gains in that tax year.  All bonds globally issued when rates were much higher have higher coupons and so they all trade at a premium to $100, so this is a constant feature of bond market globally.  Some people see it as getting some of their capital back early in the form of the higher coupons.

Bond investments should be thought of in terms of their overall Yield to Maturity as the gain or loss of capital at maturity is dependent on whether rates are higher or lower now, compared with when the bonds were issued and their coupon rate was set.  Bonds issued in 2017 with 3% coupons, will be trading in the $90s and $80s if rates go back up to say 6-7% but they’ll still mature at $100.

Note this makes the price of a bond somewhat meaningless as a guide of ‘worth’ or risk.  For example, assume Telstra is the same company from a risk perspective in 2010, 2017, and 7 years hence in 2024.

A 10 year Telstra bond issued in 2010 when the cash rate was 6-7% had to have had a very high coupon and its trades at $117 today.  A 10 year bond issued by Telstra today when the cash rate is at 1.5% would have a low coupon – say 3%. It might be trading at say $90 in 7 years’ time if rates were much higher than today.

Economically they would be very similar propositions in terms of ten year loans to Telstra, which we’ve assumed is the same risk proposition to me the investor.  The fact they’re trading at significantly different prices actually says nothing about Telstra and the investment proposition of that bond – they were just issued when interest rates were at significantly different levels and so their prices act accordingly.

Q6: “I’m not sure how to measure XTB returns.”

One fantastic feature of bonds compared to many other investment types is that their returns are predictable, because their payment amounts are known and payment dates are known.  You actually know before you invest what the return is going to be.  For most investments you have to wait until after your investment.

This is obviously subject to the issuer not defaulting but let’s take that as a low level known risk for investment grade bond issuers.  So if you buy and hold an XTB to maturity, the total return you will receive should be very similar to the Yield to Maturity you bought the XTBs for.  This is how to measure returns for bonds or XTBs you hold to maturity.

The reason your actual return may be somewhat different to the Yield to Maturity is that the Yield calculation assumes all coupons are also reinvested at the same yield.  If you spend the income rather than reinvest it, then your actual return will be lower than the Yield to Maturity you bought the bonds for.

You should also read the comments above about Yields from coupon income (running yield) being very different to the Total Return from your investment that the Yield to Maturity is telling you.

ASX and brokers only show XTB prices rather than the Yield that price equates to.  When you buy XTBs, or before you buy them, you can put any XTB price into the Price/Yield calculator to see what that price means in Yield terms and vice versa.

If you don’t plan to hold to maturity, and you sell the XTBs on ASX, then like all other ASX securities that you buy and sell, you need to compare your XTB buy price and your sell price over the period you held the XTBs for.  You need to take any coupons you received into account (and annualise this for a per annum total return).  This is the same exercise in measuring total returns for any security you buy and sell.

Q7: I’m not comfortable with the time periods involved in the higher interest bonds?

What we’re talking about here is interest rate risk or Duration risk.  The risk the price of the bonds (for fixed-rate bonds) will be impacted by interest rate rises, with longer-dated bonds being more sensitive to changes in yields than shorter-dated bonds.

XTBs cover corporate bonds that are short dated with the average term being 3.5 years.  The price of a 3 year bond should fall about 0.75% for a 0.25% increase in yields (about 3 times the yield increase).  Whereas a 6 year bond would fall about 1.5% in price for a 0.25% increase in yields (about 6 times the yield increase).  So if you look at a government bond with a ‘duration’ of 20 (they do exist) – its price would fall 20 times the 0.25% or 5%.  Three yield hikes totalling 0.75% in quick succession would mean the long duration bond would fall 15% in price.  So bond duration matters a lot.

But remember that if you were planning to hold the bond or XTB to maturity, then the bond/XTB will mature at $100 no matter what (assuming no default).  Interest rate changes impact bond market prices, not the principal you receive at maturity or the coupons for fixed rate bonds.

If you bought a 6 year XTB (fixed rate) for a Yield of 3.5% and interest rates went up – then its market price would fall, but not the $100 at maturity and fixed coupons.

If you’re simply worried about holding an investment for a long period (i.e., not about rate rises per se), then remember a six year bond is not like a 6 year term deposit.  The benefit of holding any ASX traded security is you can sell them on ASX every trading day.  With a term deposit you’ve locked your money away and if you break it, you risk losing some or all of your return and even potentially some capital

Q8: “XTB’s are not printed/listed in the Australian Newspaper with the other Share Listings, maybe I am looking in the wrong section?”

The Australian and Australian Financial Review only take a selection of ASX securities these days.  Editorial space is expensive and nobody pays the press for printing prices of securities.  Sometimes they cover XTBs and sometimes they don’t.  Newspaper are no longer a reliable source for security prices.

You’re much better off going onto one of these websites:

The ASX website and putting the XTB’s ASX trading code into “find a price” (YTMxxx, with xxx being the three characters for that XTB’s particular underlying bond). These prices are 15 min delayed prices. Find the correct code on the Available XTBs table.

The XTB site: has all the ASX trading codes and yesterday’s closing prices and yields (a day behind live prices like any newspaper).

Any online broker’s website will have all XTBs with live prices at which you can buy or sell XTBs at that point in time.

Q9: “I’m trying to achieve a steady & desirable income yield, how do I do that?”

Bonds and XTBs over them provide steady and predictable income because their coupons (the interest paid) are known before you invest.  Fixed-rate bonds are 100% predicable because their coupons are fixed (set) when they’re issued (e.g., 4% per annum until they mature), and these coupons cannot be changed and must be paid by the company or else it is in default.

Company dividends are unpredictable and can be changed whereas bond coupons cannot. Floating-rate bonds have coupon rates that adjust each quarter with respect to a floating benchmark.  In this low yield world with low volatility of interest rates, the rate of change of floating rate coupons has been very low for the last 18 months.

Q10: “I’m trying to maintain income without reducing my capital, how do I do that?”

A key ethos of bond investing is getting your principal back.  Bond investing is all about return of capital, so it’s an asset class designed to provide stable predictable income with low risk to capital.

A bond and its XTB will mature at $100.  Changes in interest rates doesn’t impact the dollar value of principal repaid or the coupons from fixed-rate bonds.  The coupons of floating-rate bonds do move as interest rates change (which means the prices stay stable), because their floating benchmark does move up and down with rate changes or expectations of rate changes.

When you invest in a fixed-rate bond you know what your return will be if you hold it to maturity.  The Yield to Maturity tells you that you will have a total return of x% by buying a bond and holding it to maturity.  There are not many investments that give you this predictability before you invest.

The caveat to this is firstly, it assumes no default by the issuer (a low risk if you stick with investment grade bonds) and the Yield calculation assumes you reinvest the coupons.  As many investors will spend the coupons, then the Yield to Maturity and actual return will be slightly different because the income on the coupon reinvestment is missing.

Q11: “I’m not sure what the appropriate action plan for a good retirement plan is – where do bonds fit in?

As a general rule, we’d support the good counsel of getting good advice from a good adviser, but we’re also aware that many millions of investors are self-directed.

Retirement time obviously means the end of regular income from wages or salary.  It means investment timeframes need to take account of the stage of life one is at.

The founder of global asset manager Vanguard John Bogle said – your bond investment should equal your age.  By that he meant that as we move through life, we should have more of our investments and savings in safer assets such as bonds.

Bonds are safer than shares and hybrids because they sit higher in the capital ranking of a company if a default occurs, meaning they get paid back first.  This results in bonds having much lower price volatility during their life compared with equities and hybrids.

Bond are also safer because they mature on a known and fixed date and pay back their principal, which is a known amount.  This all leads to a very high degree of predictability.

Corporate bonds of investment grade companies sit just above Term Deposits in Risk-Return terms.  They have a little more risk for a little more return.  You are lending Woolworths, Telstra, Lend Lease etc., money when you buy a bond, instead of lending it to a bank when you invest in a Term Deposit.

The world’s professional pension and superannuation managers use bonds as a key part of their retirement investments, and if that’s where your super is, then chances are you’re already invested in bonds.

But self-managed super funds (SMSFs) is where the problem is.  It’s now the biggest single sector of the Australian Super sector and it has a very low allocation to bonds and a very high allocation to cash (about 25% over the last few years).  This money will be in term deposits and cash management accounts not earning very much.

Bonds fit in here because they offer a bit more return than terms deposits for a bit more risk.  Instead of putting saving into a bank account earning 2.3% or 2.5%, you can invest in a number of bonds, or XTBs on ASX earning 3% or 3.5%.

Q12: “I want to maintain an adequate income flow from my investment portfolio.”

Investment grade bonds and XTBs allow you to add a highly predictable and steady income flow to your portfolio.

A bond with a coupon rate of 4% will pay a 4% coupon per $100 of face value until it matures at $100. If it doesn’t, the issuer will be put into administration by the institutional asset managers such as AMP and Colonial.

Shares also provide an income flow, but as dividends can be cut or not paid, you cannot be sure you will get predictable and steady income, and future share prices may be lower than when you bought.

For example, for years it seemed safe to assume Telstra would keep paying great dividends.  But Telstra had to cut the dividend this year for the reasons they’ve stated.  They have six senior bonds on issue.  They cannot cut the coupons on the bonds.

Equity returns can be higher than bond returns, but they’re not when equities fall significantly in value, which happens on a regular basis (Asian crises, Tech wreck, GFC, and all the subsequent post-GFC waves of global economic uncertainty).

Bond returns have beaten equity returns over the last 10 years because of the GFC.  While this may not be repeated over the next ten years, many professional investors invest in both bonds and shares to be diversified across asset classes that complement each other because they’re generally not correlated (don’t move in the same direction as each other).

The idea behind bonds is to have a source of very steady and predictable income alongside your growth assets like shares.

Q13: “I want to find yield and not take unrealistic risks. I worry about another GFC event in the next few years.”

The risk of a significant market decline is real and downturns happen intermittently, particularly for shares.  Therefore having too much exposure to equities unduly exposes your savings.

Another GFC event cannot be ruled out, and even one half as bad will be very detrimental to investors.  Therefore investors need to think about what types of investments are impacted the most when such a crises hits.

All growth assets are impacted more than defensive assets, which is why it’s better to be diversified across asset classes, not just diversified within equities because that’s not the sort of diversification that will protect you when a major equity market disruption occurs.

Corporate bonds actually appreciated in value along with government bonds in the GFC because there can be a flight to the safety of bonds when these events occur.

It might be hard to imagine when you remember how bad the GFC was, but if you had $1m in a portfolio of corporate bonds in Jan 2008 (the worst year), your portfolio value would have gone up, not down by the end of that terrible year.

There is always the temptation to look at equity dividend yields and “hope” there won’t be an issue, but the world’s superannuation and pension funds will diversify across equities and bonds so that if the worst happens, their bond exposure will protect the overall value of their combined portfolios.

It’s not just share prices but dividends that can be impacted as Telstra’s recent cut has reminded us.

Bonds provide predicable reliable yields that are only impacted by an “event” if it causes the company to default.  Let’s recall the GFC.  Some companies with far too much balance sheet debt compared to income did get into trouble.  But in terms of Investment Grade companies with bonds on issue, only Babcock and Brown collapsed during the GFC.

The rest of the ASX 100 were able to raise a total of $140 billion in equity capital (the biggest year of capital raising ever on ASX) to avoid getting into trouble.

The relative safety of investment grade bonds during a crises makes sense.

These next three questions from investors were related, so I’ll respond to them together:

Q14: I want to manage for over 5% yield but within acceptable risk parameters?

Q15: How do I get the right balance between risk and return?

Q16: I have difficulty at the moment finding any investment that will provide a return and also preserve capital value, what do I do?

These questions are at the heart of equity returns (growth assets) v bond returns (defensive assets).  This is about risk versus return.  There is always a tension between risk and return.  These questions are about getting the yield you want, realising the risks you have to assume to get it.

Getting 5% plus yield isn’t impossible.  The question is what risk you will take to get it.  In October 2017, Term Deposits, government bonds, and investment grade corporate bonds have yields that are between 2% and 4+%.  So they are not able to deliver a 5% plus Yield result.

5% plus can be achieved (potentially) with equities of course, but that is the risk question.  What level of risk is associated with this possible return?  Equities are volatile.  They can and they do suffer major swings.  So investors should think about what they really mean when they say “acceptable risk parameters”.

If you’re chasing yield at any cost, then growth assets like equities may deliver 5% plus and even more.  But the risk is they may not, and if there’s a downturn you might get -5% instead as share prices tumble and dividends are cut.

For example, even though equities should have higher returns than bonds as a general proposition (because you assume more risk with shares), if you looked at actual total returns over the last 10 years (which included the GFC), then bonds actually beat equities because of the impact of the GFC.

Let’s assume you’re not looking for 5% at any cost.

You’re looking for yield from defensive assets that won’t behave like equities in a downturn.  Then you either have to be satisfied with the lower returns of key defensive assets like term deposits and investment grade corporate bonds, or once again take on more risk, which may be defeating the purpose depending on what you think “acceptable risk parameters” means.

Some funds may promise returns north of 5% and they may seem like they’re defensive or based on fixed income.  But you need to be aware that a fund manager cannot conjure extra returns from thin air.  If a fund promises 5%+ yield from “fixed income”, then that’s telling you something:

  • Perhaps the yield has been “juiced up” by the fund investing in higher risk bonds or other assets. For example, there are companies well outside the ASX 200 that issue bonds, but is a bond from a company with an $80m market cap really that “safe” compared with the shares in the same company?
  • Maybe the fund has invested in leveraged assets or mortgages or portfolios of loans to borrowers well below investment grade. These are technically fixed income but there are obvious additional risks they need to assume to juice the yield up.  This is similar to just investing in shares, because with both you’re taking on more risk for the extra return.  For example, if you loan money to a friend for 8% – of course you know you’re taking on far greater risk than an investment grade bond or Term Deposit.

Note that “Yield” is forward looking measure of the returns you will receive if you hold to maturity.  Backward looking “returns” is an entirely different measure.  Returns is a measure of what actual returns you received if you bought the asset at the beginning of the period the return is measuring and sold it at the end.

So you may see funds that report 6% returns annually for say the last three years, and yet they invested in investment grade or government bonds.  Be aware that return will have been generated because the bonds increased in price as interest rates were cut, or as professional investors sought the safe haven of government or investment grade corporate bonds which drove the price up.

For example, the XTB high yield portfolio had a 6% total return from 1 Aug 16 to 1 Aug 17 for these reasons – the XTB prices went up.  But the forward looking Yields of the individual bonds is in the vicinity of 3.2%.

So beware of funds that focus on backward looking returns and not forward looking Yield to Maturity.  For example, a fund or ETF tracking the AusBond Composite index (Australia’s most well-known bond index), may have delivered 5% plus or more over the last 3-5 years.  But of course they did – rates were cut and bond yields were falling globally.

But over the same Aug-Aug year the index’s return was minus 0.66% and going forward that index’s Yield to maturity struggles to get out of the high 1s to low 2s.

Q17: “With low interest rates I’m looking for safe reliable returns with returns better than current term deposit rates.”

Term Deposit rates in Nov 2017 range from high 1s to mid 2s with some investors able to get a bit more.  You can always get a little bit more from TDs by locking your money away for 3-5 years, but the differences are small and publically released bank data shows the vast majority of TD money is in TDs <1 year with most money in 3 month TDs.

“Safe reliable returns”, by definition means you’re not taking about investing in equities or hybrids because of the risks.  Most investors will have an equities portfolio for growth as well as income. But you should think about diversifying with assets such as bonds that are not correlated with shares (they won’t crash if shares crash).

Corporate bonds can deliver 2.5% to 3.5%, which is a bit more return for a bit more risk than a Term Deposit offering 2.3%.  If you have a bond or XTB on ASX over it and it yields 3.3%, then while its only 1% more, its 40% more return (1% is more than 40% of 2.3%).  The added risk is the risk of lending the money to say Qantas or Downer, compared to lending it to the term deposit bank.

If you need higher returns, then you need to compromise on the standard of “Safe reliable returns”, by investing in equities or hybrids, where the risks increase substantially.  But if this is money you feel you need to have a similar level of risk as the TD, then you need to be thinking of TDs, with corporate bonds being the next step up on the risk-return spectrum of assets.

Bond Funds and ETFs also have investment grade bonds, but you lose the predictability of income and capital returns when you put maturing bonds into a non-maturing fund or ETF.

As funds and ETFs don’t mature, you can’t hold to maturity so the surety of getting your principal back is gone.  If interest rates go up, the unit prices of funds and ETFs will fall.  Whereas with bonds in your hand, you can hold to maturity (assuming you’ve invested in shorter-dated corporate bonds (XTB average term is about 3.5 years).

Fund and ETF income is also not predictable, because bonds mature all the time and are replaced with new bonds that are unknown so the income is currently unknown. If TD-like predictability is important to you to plan your outgoings around, then bonds held individually give you that predictability (particularly fixed rate bonds), whereas funds and ETFs cannot.

This isn’t to say funds or ETFs are bad.  It’s just a fact that you lose key aspects of maturing bonds (utter predictability and hold to maturity even when rates have risen) when you put them into a non-maturing funds or ETFs.

Q18: “How do I find good returns with low volatility”

Volatility is a measure of the variability of the price of an asset over a period of time.  The actual technical calculation is one thing, but essentially high volatility asset prices move around a lot over a period and low volatility assets do not.

Shares are high volatility – in the region of 15% per annum since the year 2000, whereas $100 in a bank account has no volatility, assuming the bank doesn’t collapse.

All assets that can be bought and sold have some level of volatility in their prices. I think the important point here is there’s usually a direct correlation between what the questioner asks about “good returns” and volatility.  The higher the possible returns are for an asset, the greater the volatility you generally get.

Good returns with low volatility may be a conundrum if you mean yields of 6%-8% for volatility around the 2% per annum mark.

Taking a more extreme example, you could invest in a junior resource exploration company and be lucky it discovers gold and its share price goes up 500%.  That’s a massive return and massive volatility (share prices shooting up is also volatility – it’s just the kind we like).

Of course there are many hundreds of these speculative shares and dozens fall dramatically as well on a regular basis.  Such is the nature of resource exploration.  You can’t find fantastic returns like this without taking on massive risks.  That’s life.

Volatility from shares in the ASX 200 is still quite high and couldn’t be described as low volatility.  If capital preservation and low volatility of prices are important for you, as they are for many investors (and they should be important for every investor for at least part of their portfolio), then you can’t take these risks on.  Therefore you need to look at low volatility assets such as term deposits and corporate bonds, which will be lower return than equities.

Fixed-rate corporate bonds volatility was in the region of 2.5% annually since 2000 with floating rate bonds in the region of 0.6% over the same period.  Bond are low volatility assets.  You get a bit more return than a TD and some more volatility is the consequence.

But remember, if you hold to maturity, then any price volatility in the meantime is irrelevant to you because the bond will mature at $100 and the coupons will be exactly whatever the rate for that bond is (which is more certain for fixed-rate bonds).

So if you need low volatility and capital preservation, then you need to include fixed income in your portfolio.  Many Australians already do with Term Deposits, but are looking for a little bit more without jumping to the volatility of shares or hybrids.

Q19: I’m entering retirement phase and need to balance risk vs returns

When you’re 20, time is your friend and volatility is your friend (because volatility will mean price going up as well as down) and interest rate sensitivity (Duration) of bonds can be your friend during rate cut cycles.

You can afford to have a 30-40 year investment horizons in your 20s, particularly for Superannuation.  Markets can recover, and growth can return and over the longer term you should benefit when you have that sort of time horizon.

But volatility can really harm your portfolio if it goes against you when you’re entering retirement phase.  You can’t afford your portfolio value to fall 20% or 30% when you’re about to stop earning.

A portfolio overweight equities can be unlucky enough to have that happen and if dividends are then cut, then the retiring investor has been hit for six as both capital and income declines.  This is what they call sequencing risk.

This is why global fund manager Vanguard’s founder John Bogle said ‘your bond allocation should equal your age’.  Whether its bonds or term deposits, fixed income assets have very low volatility compared with equities and other growth assets, and you can hold bonds to maturity to receive exactly what you bargained for when you bought them.

As we move through the different stages of life, Bogle is suggesting we should all take less risk with our assets and have an increasing amount in fixed income assets that are very predictable if you hold them to maturity.

But note, the practicality of holding any bond to maturity depends on how long dated it is.  1 year bond – easy, 30 year bond – practically impossible for many investors.  So long ‘duration’ is definitely not your friend as you head towards retirement in the current environment.

Long-dated government bonds can be 10, 20 and 30 years to maturity.  The longer they are, the more sensitive they are to interest rate changes.  Rate increases or expectations of them will have a very negative impact on long-dated bond prices.  Holding them to maturity after they’ve fallen in price is a very, very long-term proposition.

Corporate bonds tend to be shorter-dated bonds.  The average XTB life is 3.5 years, which means two things:  first, their market prices will be far less sensitive to any rate increases that occur, and second, you can always hold a three year bond to maturity and the $100 returned is interest rate impervious principal.

If you’re sitting on an equities heavy portfolio, think about this and the risks you’re taking as you head into retirement phase.  With more fixed income assets such as corporate bonds available on ASX (in XTB form) there are other lower-risk options that are also far more predictable.

Q20: “Most asset classes look fully valued, so I’m trying to find pockets with good returns.”

If this is your view – and it’s not an uncommon one at all these days – then you may also be of the view that a correction may be coming if everything is fully valued.

A major equity market correction around the world could wipe 20% 30% or 40% off the value of equities.  Dividends could also be impacted if a market downturn flows through to lower economic, which often happens.

Often when that happens to equities, the bond market can hold up as there would be a flight to the safety of bonds.  For example, bonds actually appreciated in price terms during the GFC.

By holding both bonds and equities you’re actually defending your portfolio should the worst happen.  Then you can also sell bonds (which store their value) after the equity downturn if you think certain equities are now looking cheap.  Selling bonds that have held their value to buy cheap equities, is far better than selling one depressed equity to buy another depressed equity.

What if the opposite occurs?  If that equity correction doesn’t happen and say 2018 heralds in major economic growth globally and very strong recovery all around the world, so equities rally very hard and interest rates start increasing in Australia and across the world.  So instead we see bonds falling in price (yields rise), because interest rates are rising, wages and inflation are on the rise and professionals are selling bonds to buy equities.  What then?

If you’re holding shorter-dated corporate bonds in this current environment where cash rate increases may be forthcoming, then the corporate bond prices will not be as impacted by the increase in yields compared with much longer dated government bonds.

But also, because they’re short dated, if you were already planning to hold these bonds to maturity in 1-4 years, then the total return you’ll receive will be the Yield you bought the bonds for in the first place, because yield increases don’t impact the $100 principal you get at maturity, or the fixed amount of coupons for fixed-rate bonds.

Q21: “I’m looking to generate consistent income (min $500 to $1,000 per month).

Bonds and XTBs over them are designed with this sort of regular and consistent payment profile in mind.  Regular and stable income is a basic role of fixed income investments.  Bond coupon rates are set when the bonds are issued and they can’t be changed by the bond issuer unlike equities and hybrids, which are both discretionary.

Fixed-rate bonds pay fixed coupons every six months, and floating-rate bonds pay coupons every quarter that will move up and down when their floating benchmark changes, which is usually when interest rates move up and down.

You can select a portfolio of fixed-rate bonds that delivers 100% predictable income and you can stagger the bond coupon payment dates to get more regular income.

There is also an XTB Starter Pack that has three floating-rate XTBs (these have quarterly income payments).  The Starter Pack has been chosen so the bonds have overlapping payment dates such that there’s a cash payment made every month.  Because they’re floating rate, the coupon rate will rise if interest rates increase in the future, and vice versa.

Q22: “I’m looking for protection against a major stock market fall”

Corporate Bonds and XTBs are generally not correlated with shares, meaning they generally don’t rise when equities rise and generally don’t fall when equities fall.  For example, they rose during the GFC when equities were tumbling, which shows they’re often negatively correlated to shares.

Corporate Bonds are just loans to the companies issuing the bonds.  A company is obligated to pay the loan back with interest (the coupons).  So if the company is healthy financially, then the day to day movements of the share price will have little impact on that company’s ability repay its debts.

A major stock market decline by say 25% could be driven by global macro events or simply a major collapse in confidence based on concerns the market is far too overpriced.  Even that sort of major event won’t necessarily have an impact on an ASX 100 company’s ability to pay its debts.

If Woolworths for example is still generating cash from its businesses, then its ability to service its bond obligations won’t be impacted.  Of course if a particular event hits Woolworths directly with material impact to its cash flows, then that can have a direct impact on its bonds.  But that’s reasonably rare for investment grade bond issuers.

Therefore it’s very common for shares of any given company to wax and wane, even significantly, without any major change to the prices/yields of the bonds issued by the same company.

For example, Qantas’ share price fell around 40% some time ago based on fuel price concerns.  There was no impact on Qantas bonds.  Also, Telstra’s share price fell significantly when they announced the dividend cut earlier this year.  There was no impact on its 6 series of senior bonds.  The bond market would have formed a view that these announcements had no impact on these companies’ abilities to service their debt.

Therefore buying shares and bonds in a portfolio tends to protect the overall value of the portfolio and it should provide more reliable income because the bond income cannot be cut by the company’s board.  This is asset class diversification and it’s what professional managers of pension money do so that they’re not impacted as much when the inevitable happens to growth assets like shares.

Q23: “I need to earn about 6% with very low risk. This seems hard to do if you also want to be protected from inflation.”

Unfortunately if this question truly means “very low risk”, then this is simply not possible to achieve with the cash rate where it is.  You have to choose between risk and return.

The RBA cash rate has been at 1.5% for over a year and may stay there deep into 2018 and perhaps even beyond that.  Returns from all other asset classes stem from that rate.

Most commentators would agree that individual investors are overweight equities.  Equities can provide you with the 6% part of the equation above.  But they cannot provide the very low risk part because equities are volatile and dividends can be cut.  Equities are directly exposed to the next major downturn and more dividend cuts like Telstra’s.

Hybrids also can’t deliver the very low risk part because if there is a major downturn for equities, that’s exactly the time hybrids will become more volatile and much more correlated with shares, which is actually the job they were designed for.

You can solve for the very low risk part with government bonds and TDs, but they’re yielding high 1s to mid 2s.

In the middle, between equities and TDs is corporate bonds and XTBs over them on ASX.  Corporate bonds are a bit more risky than TDs, because lending money to an ASX 100 company is a bit more risky than lending it to a bank.  Yields are up to about 3.5%, which can be a significant lift in return from a TD on a relative basis.  3.5% from a bond is 40% more than 2.5% from a TD, which is meaningful if you’re a retiree living off their TD income.

A bond trading fund might say they’re aiming for 6% by actively trading bonds and similar securities. You could be tempted to think this is a ‘very low risk’ because they’re trading a low risk asset like bonds.  But it’s not.  Buying and holding low risk bonds to maturity is low risk.  Actively trading assets introduces new trading risks.

This is just a bond version of any hedge fund that actively trades securities.  If they get it right, you get the 6% or perhaps more.  If they get it wrong you may end up will minimal or even negative returns.  Very low risk means you’re not taking on active trading risks like that.

As an investor you need to decide which is more important to you – the 6%, or the very  low risk.  If you can’t afford to take the risks associated with investments that might deliver 6%, then you need to compromise somewhat on the 6%.

On inflation, do be aware that it’s currently low with very weak wage growth in Australia and overseas.  There are no inflation signals that’s causing the RBA to indicate rate rises are coming.  So the impact of inflation right now isn’t as bad as when inflation is 3% or more.

If inflation starts heading back towards 3%, it will be because the economy is strong and getting stronger and so the likely response will be the cash rate will be increased and we get a “steeper curve”, which means you will be able to find 6% from lower risk investments like corporate bonds.

In 2010 for example, when the cash rate was in the 5s and 6s, Telstra issued a bond with a coupon at 7.75%.  Therefore a low risk Telstra bond was trading at 7-8% yield back in 2010, which would meet both your yield and risk tests.  Today the same bond would be issued at around 3% yield.  The yields of bonds and rates of TDs is all relative to where the cash rate is and how local and global economies are travelling.

Today investors need to decide between taking on much more risk to get that sort of return, or accept a lower return (in a low inflation world) to stay with the very low risk.  Corporate bonds are a sensible compromise.

Q24: “What are the potential consequences of (rising) interest rises and reversing of quantitative easing”

Rising interest rates mean fixed-rate bonds fall in price (yields rise).  The longer-dated the bond is the more sensitive they are to yield increases.  The prices of shorter-dated bonds such as the corporate bonds covered by XTBs are not as sensitive to yield increases as 10, 20 and 30 year government bonds.

Investors can also hold these shorter dated bonds/XTBs to maturity to receive the $100 principal, which does not change because interest rates change.  Holding much longer-dated bonds to maturity is a much longer term proposition.

But does this mean you don’t buy fixed-rate bonds if you think rates are going to rise?  Well no, otherwise the 300 year old bond market globally would have switched to floating rate bonds years ago.

There are ways to use fixed-rate bonds to take advantage of a rising rate environment.  One of these is called the ‘Maturity Ladder’ approach.  A Maturity Ladder is just a name for an investment strategy that means you buy different bonds with staggered maturity dates, such that there’s one bond maturing each year.

For example, a 5 XTB portfolio with one maturing each year from 2018 to 2022 is a maturity ladder.  You might take this approach if you thought rates were going to rise over the next 5 years.

You buy the five XTBs in 2017 and if you’re right and interest rates have increased by the time the first bond matures in 2018, then you can reinvest the $100 principal (which is interest rate impervious) from the first bond to buy the next 5 year XTB (your original 5 year XTB is now a 4 year XTB etc).

The next 5 year XTB you’re adding is cheaper (it has a higher yield) than it was before the interest rate rise.  So you keep rolling your ladder forward.  In 2019 if you were right again and rates have risen, then when the $100 principal is repaid from your 2019 bond, you again buy another 5 year bond that is cheaper again because there has now been two rate rises.

The more interest rates have been increased, the cheaper the next 5 year bond is each time and this allows you to take advantage of rising rates.  In fact the more rates rise the better. This strategy turns rate rises into your friend with fixed rate bonds because it uses the fact you get a fixed $100 back at maturity to buy bonds whose market prices have fallen.

But you have to hold the bonds to maturity for this to work.  If you sell your bonds rather than hold to maturity, you’re crystallising the fall in price.

Quantitative easing

“Quantitative easing” is one of the post-GFC central bank approaches to try to stop the world’s post-GFC economies moving into very deep recessions that become depressions with massive unemployment and social unrest.  It’s experimental and even controversial.  But the logic was you don’t want a repeat of the 1930s depression. Whether that’s right or not is in the realm of the political and economic debate around the response to the GFC.

The central banks have essentially printed new money and bought bonds in the many billions of dollars.  This pumps stimulus into the system and keeps yields very low.  It’s obviously meant to be a temporary measure that will be withdrawn when things ‘return to normal’, if normal means what we had before the GFC.

The question really goes to the concern that central banks could rush out and reverse quantitative easing too quickly, such that they stop being a buyer of bonds suddenly and bond prices collapse, yields rise dramatically and there’s a major knock on impact into the world’s equity markets, which may trigger the global recession they’re hoping to avoid.

The central banks know this and so they talk about tapering the programs slowly, rather than stopping them anything like suddenly.  This tapering is very slow and I’ve heard one commentator describe it recently as like watching paint dry.  Such a massive interventionist move needs to be unwound very cautiously as economies recover and the need for such stimulus abates.

The US, Europe and Japan had/have programs in place and tapering is only in the early days for Europe.  Australia didn’t need to go there (as yet and hopefully we won’t ever) because we had higher interest rates to begin with so there was more room to move on monetary policy (cutting rates).  And we started the GFC with a strong surplus that could be used for the more traditional stimulus we saw post the GFC.  What history will conclude on quantitative easing remains to be seen.  But unwinding it slowly is surely the wisest approach.

Q25: I want to achieve low risk yields above 3%

It’s hard if not impossible to get a term deposit above 3% in 2017, particularly for TDs of 1 year or less.  But investors can buy a portfolio of XTBs with an average yield above 3%.  The risk is low relative to equities and hybrids, and just above the risk of TDs.

The range of XTBs are available here.  You can select XTBs with yields above 3% from the circa 50 XTBs on issue.

Q26: I want to invest at a reasonable price for an income return of 4% without losing 15-20% of the capital in a future financial crisis

One benefit of bond investing is the fact bonds mature and you get the $100 principal back.  You do not need to lose capital if there is another financial crises or major market downturn for the portion of your portfolio that’s invested in corporate bonds (or XTBs over them), TDs or Government bonds.

Inevitably there will be significant downturns in equity markets as that’s the nature of equities globally.  Nobody can rule out another financial crises.  Equity markets are impacted the most by these disruptions because of their inherent volatility and position at the bottom of the capital ranking of their issuers.

The bond market held up in the GFC and bond prices actually rose.  So even if you’re not holding to maturity and need to sell bonds after a major equity market collapse, you may find that the bond market has held up again given that bonds are either non-correlated to equities and sometimes negatively correlated (they go up when equities go down), particularly when there’s a flight from equities to the safe haven of bonds.

Bonds maturity is subject only to no default, which for investment grade issuers is a low risk.  According to S&P, the historical default rate globally for investment grade 3 year bonds is 0.3%.  And when investment grade bonds issuers do default and the company is put into administration by the major bond holders, the average historical recovery rate has been 50% globally.

So bonds can deliver the steady income and capital stability part of this question.  The 4% return is harder in this world of low yields.  You can go for more risky investments such as hybrids and equities, but you’re sacrificing the capital stability part.  Corporate bonds and XTBs over them can deliver up to 3.5% and 4% in some instances, but they provide the stability of capital you’re looking for.

Investors know what will happen to equities in any future crises, but what’s possibly lesser known is the fact that when a crises hits equities, then that’s when hybrids become much more strongly correlated to equities as they did during the GFC.  A problem with hybrids is they can appear to be low volatility when equities are powering ahead, but when equities collapse, then that’s exactly when the structure of hybrids will mean they will collapse as well.

Some people sell hybrids as defensive (because they’re safer than equities is the sales pitch).  But are hybrids defensive?  Defence means standing up when your growth assets are going down.  But by design hybrids perform the worst when equities are crashing because the probability of conversion, or dividends being cut, or the call date being deferred increases when their issuer’s equities are stressed.

Defensive assets do not crash when equities crash or become more correlated to equities at exactly the wrong time.  Hybrids fail your test of not wanting to lose 15%-20% during a major equity downturn.  You might not see that now because equities are not stressed, but you just need to look at the GFC to see what happens.

Q27. I’d like to find reliable high income producing investments that preserve & grow the capital

This question is actually something of a conundrum because arguably it’s not really possible to achieve all these things at the same time with the same investment.

Fixed income investments such as bonds and TDs aren’t growth assets, so the concept of “growing your capital” as well as “preserving capital” are actually at odds with each other.

On the other hand, growth assets such as shares and property can “grow your capital” and may even preserve it over the longer term (20-40 years) if you’re well diversified in quality companies.  But there is also a much higher risk that they will not actually deliver on either growth or capital preservation because they get hit by another crises and dividends are cut.

This is the conundrum.  Bonds will give you the “preserve capital” and “steady reliable income” parts you’re looking for, but not the “capital growth” parts.

Equities may give you “high income” and “capital growth”, except when they don’t and you end up with strong negative returns.  The answer to this conundrum is invest in both bonds and equities.

The shares will provide some income (possibly higher but less reliable compared to bonds), and they may deliver capital growth.  The bonds will provide utterly predictable income and absolute preservation of capital, subject only to the health of the company.  A portfolio of bonds and equities is less risky than a portfolio dominated just by equities

Q28. At my age (84) I need to keep my money safe while earning income

The founder of global investor Vanguard, John Bogel had a saying “own your age in bonds”, suggesting as we move through life we need safer investments.  This would suggest 84% in bonds at this stage.

Bonds or XTBS over them will deliver steady and predictable income while preserving your capital.  But if like many Australians you’ve actually got 84% in equities and you’re worried about the next downturn or dividend cut, then it’s actually a good time to make a switch to a safer asset class because the shares can be sold at a relative high point.

If you hold these shares in superannuation and you’re in draw down phase, then check with you accountant as you may be able to switch from equities to bonds/XTBs without incurring tax, but if that is your situation, then get some good advice.

Corporate bonds or XTBs over them on ASX also keep the term of the bonds you buy down to 2-4 year duration.  Very long dated bonds are too price sensitive to interest rate changes and they don’t mature for 10, 20 and even 30 years.

If you select XTBs then you can use the XTB cash flow tool that will show you exactly what income you will receive and on what dates, plus the principal amounts you will receive over the life of the investment in XTBs.

This gives you a similar level of predictability as term deposits.

Q29: I’m being forced up the risk ladder to achieve reasonable income returns as a retail investor – what do I do?

This is the problem.  Nobody wants the risk of course, but we all want the higher returns. And in the end, this can’t be solved.  You need to make a compromise on either risk or return.  If you’re older, you can’t afford to take the risk with your capital as you may not be able to recover.

Term Deposits may not be enough income but they are very safe, particularly for the major banks.  Equities will give you the income, but the risk is a major downturn and dividend cuts, which is a real risk.

Corporate bonds and XTBs over them, sit in the middle between TDs and equities and can deliver a 40% uplift in income (A 3.5% XTB is 40% more income than a 2.5% TD).

Q30: “How do I transition from capital growth to income in a low yield environment?”

This question could come from an investor coming up to, or in retirement who thinks they’ve had enough capital growth and now want to preserve the capital they have and live off the income.

There may be tax consequences moving from one asset to another depending on whether you’re talking about superannuation or non-super investments and whether you have an SMSF.  Get advice on your particular circumstances before you take any action.

Equity asset prices are high right now, so if you were looking to move some of the portfolio away from equities, selling at higher valuations is obviously a good start subject to the tax side of things.

Moving into high dividend paying stocks from growth stocks will transition you to income, but it doesn’t preserve your capital because if a shock happens to equities, or we get another big downturn, then all equities will fall as that’s the nature of equity markets and this could be followed up by dividend cuts if an economic downturn follows the market shock.

Fixed income is not correlated to equities generally and can also be negatively correlated like bonds were in the GFC when they rose while shares plummeted.

Bonds and XTBs over them provide steady, predictable income that can is an uplift over TD rates.  A 3.5% XTB provides a 40% uplift in income to a 2.5% TD.

Assuming you’re not getting out of equities all together, you could set your portfolio up with a blend of solid dividend paying equities and higher yielding corporate bonds or XTBs, which will pay the highest income and be a defensive asset in the portfolio if an equity downturn occurs.

Corporate bonds and XTBs are short-dated and so they’ll mature in the next 1-5 years.  If the global economy recovers and interest rates start rising all around the world, then you’ll be able to reinvest the principal at maturity of your short-dated corporate bonds or XTBs in newer bonds/XTBs that will be higher yielding once rates start increasing and we slowly move out of the low yield environment.

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