Bond yields rarely hit the headlines in financial newspapers, but they are actually working “in the backstage” for a portfolio.
But why should a portfolio always have bonds in its composition? Why should even a growth portfolio that aims to achieve maximum capital appreciation in the long run have bonds in its composition?
A portfolio’s long- term profitability strongly depends on its stability and its ability to absorb financial shocks.
Stocks are the ones that aid an investment portfolio in recording high profitability year after year, but this is not enough as there are periods during which the losses are significant and therefore the recovery time is quite long.
High dependence on stocks, in fact, creates strong constraints on a portfolio as it significantly limits the funds to be invested and therefore, a long-term investment will only affect a small portion of the investment portfolio, as an investor is unable to invest a significant percentage of his balance when there are large fluctuations.
In times of regression, stocks record very disappointing returns, swaying for months in negative ground. This causes two major problems.
Α. An investment portfolio that through a 5- year period has recorded a hypothetical profit of 50%, can end up in just a few months either in negative territory or with zero profits. After all, as Warren Buffett puts it: “it might take you 20 years to make significant profits and just five minutes for them to disappear”. Investment portfolios must be created to continuously generate profits (sometimes smaller and sometimes bigger) and not to keep up with stock fluctuations.
Β. If an investor gets invested at the wrong moment, which is a very possible scenario since no one can completely predict the movements of the markets, then he will sadly witness accounting losses in his funds even from the beginning of his investment. This affects very negatively the psychology of an investor and apart from that, points out the high risk of an investment that depends mainly or entirely on stocks.
Investment portfolios need to be "built" with specific characteristics that should help to reduce negative fluctuations as much as possible and perform better in strong uptrend markets. Only a portfolio that has the above characteristics can be a reliable investment choice and create a timeless increase in an investor's capital.
“All- time round” portfolio and independent of the market cycle
It is reasonable that an experienced asset manager is constantly keeping up with market developments and undertakes to identify possible changes in long-term trends, which he then incorporates into investment portfolios. In any case, the creation of a portfolio is done to serve some very specific investment needs of each individual investor. These needs cannot wait for the right timing in the market.
An investment portfolio is purchased regardless of the market circumstances and then it can be restructured if deemed necessary. Having bonds in a portfolio, even if it is a growth portfolio, is absolutely necessary because it is the safeguard that negates the timing factor. And because, as discussed above, it offers a portfolio of low downside capture and high upside capture.
Bonds, as a safety shelter, have specific properties and characteristics. One of the main ones is that they have a steady upward trend in the long run, while in periods of recession and heavy losses for stocks, they make for a one-way street to invest your money, and as a result they record sharp upward movements. In this very feature lies the great secret of a timeless profitable portfolio. And the reason is simple, as mentioned below.
The history of stock exchanges teaches that there are times when stocks move sideways for a long period of time. This is a movement between a certain range. As this is something that cannot be predicted by anyone, if an investor is trapped in such a sideways period, then he will have a portfolio which for many years might not record any profit at all. Of course, it will have subtle profits and losses, but the investment result after years will be zero.
In a period of sideways movement, bonds are the only solution for an investor, who wants his portfolio to generate wealth. This is clearly captured in the chart below, where S&P 500 is compared to the US bond index from 1979 until today.
The statistics of a portfolio that is invested at least 80% in stocks and of another portfolio that is invested at least 40% in bonds, confirm that the achievement of the investment goal goes through the correct structure of the portfolio and not the belief that stocks pay more over time. because they have higher returns.
Growth Portfolio: Which is the unique philosophy of XSpot Wealth?
In XSpot Wealth we have chosen a truly innovative investment philosophy, regarding the composition of a growth portfolio. Having knowledge of the philosophy and theory around "building" growth portfolios and having thoroughly analyzed all existing portfolios of large fund managers, we concluded that there was a quite large "tolerance" to investment risk. For us in XSpot Wealth, this was not normal.
In XSpot Wealth, we wanted our Growth portfolios to have the following features:
1. To have, in the long run, strong returns that are comparable to those of major indices.
2. Have stronger "defensive" characteristics that will protect the investment whenever necessary.
With the above as basic principles, we have created a portfolio that achieves a specific goal: Long-term high returns with significantly lower risk exposure.
The chart below shows the performance of a "classic" Growth portfolio and the "innovative" Growth portfolio of XSpot Wealth.
The Growth portfolio has managed to perform better than the traditional Growth portfolio, with comparatively better and smoother behavior. And most importantly, having a 60% smaller drawdown, in both 2008 and 2020.
This document does not constitute and shall not be construed as a prospectus, advertisement, public offering, or placement of, nor a recommendation to buy, sell, hold or solicit, any investment, security, other financial instrument or other product or service. This document is for general information only and is not intended as investment advice or any other specific recommendation as to any particular course of action or inaction.