How to Use Bonds to Enhance Your Portfolio? – Chuin Ting from MoneyOwl 

In episode #6 of Chills w TFC, we bring on the CEO of a company that has been leading the charge in the local financial social enterprise scene. In investing, stocks often steal the limelight, while bonds are often the sidekick. Most of us don’t pay much attention to bonds. However, they can actually play an important role in your portfolio.

Join me as I chill with Chuin Ting from Money Owl and dig her brain to understand how bond works. Bonds have a very different way of making money. But, how exactly do they make money? How can you pick your own bond fund? Can you make money in the current bond environment where there’s a lot of negative yield? Tune in to find out!

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podcast Transcript

Reggie: Everyone out there is talking  about stocks, whether is it to pick your own stocks or pick your own ETFs, broadly diversified, whatever. There’s always this element of stocks. And probably so, because you know, they do provide the best returns over an extended period of time, right? Based on history ah. I’m not saying that you will continue to be this way, but based on history, they have provided very good returns over an extended period of time.

But what about bonds? You know, bonds seem like this sidekick, like Batman and Robin and Robin somehow comes out because Batman must have a sidekick, like that. But actually bonds is very interesting in itself. They have a very different way of making money. How do you pick your own bond fund, how do bonds actually make money? Can you actually make money in the current bond environment where there’s a lot of negative yield? So that’s what we’re going to talk about today. 

Welcome to another Chills with TFC session. In this series, we hope to bring on interesting, relevant people to help us learn better from various perspectives. Life is not always about learning from people that you already agree with. Perspectives shape a rounder thinker, and in our pursuit of the life we love while managing our finances well, our guest today is someone who is leading the charge in the local financial social enterprise space. She has a lot more up her sleeves that is not all about holistic financial planning, you know, broadly diversified, all that rinse and repeat financial advice. 

We are going to go into her first love today, bonds. She was in the heat of it all due to 2008 mortgage bond meltdown. Donning all these experiences and battle scars from the market, let’s welcome CEO of Money Owl, Chuin Ting!

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Chuin Ting: Hi everyone. Hi Reggie. Thanks for having me on the show. 

Reggie: You know, when we’re talking about investing, a lot of people will look at stocks, right. But today we want to spend a lot more time to talk about bonds, right. Because it’s the, aiya, not so sexy one la, right. For lack of a better way to put it. [Laughs]

Chuin Ting: Bonds are my first love actually, because of where I came from.

Reggie: And that’s why we are here with you. Help us understand what a bond is. Is it the same as like loans, like what we understand, you know, as retail individuals? 

Chuin Ting: So bonds and loans are similar in that they’re both borrowings. So meaning that someone lends someone else or an entity a sum of money for a time, and then expects to get it  back with a certain compensation.

But there are some important structural differences, I would say. And I think I would like to divide it into like four differences. First is who borrows. Second is who lends, in a bond versus a loan. And third is how you repay the structure of payment. And fourth is the concept of price. 

So firstly, who borrows? When it comes to loans, generally speaking, it’s individuals, you know, like we borrow to buy a house or we borrow on a credit card, et cetera, not a great idea. [Laughs] And corporates. Companies. Of course, governments do sometimes borrow from say, World Bank or whatever, but let’s exclude them for now. So loans: individuals, corporates. Bonds: governments and corporates. 

Then who lends? Who is the lender? Who is on the other side? When it’s loans, it tends to be from banks. But when it comes to bonds, the lender is actually capital markets, right? The capital market participants, or you call them investors. Now this is important because the source of funds is different. When you issue to the capital market, the market determines whether it wants to lend to you, how much it wants to lend to you, and then the price in which it wants to lend to you.

And it’s a collective assessment of pricing your risk. So in a sense, you can say it’s a market discovery of your credit worthiness. But when you borrow from a bank, yes, the bank will also make that assessment. But the bank has to use its own balance sheet to support it. Now, what do I mean? Because in the government regulations to promote the stability of a bank, you cannot lend out all your money.

Yes. You need to set aside some capital in order to support potential losses from your book. So what this means is that when you have to set aside capital, that can not be used, it actually becomes costly for bank share holders, right? So there is then that difference. So this is really about who lends. So loans are from banks. 

And I would say that generally speaking, if you are very confident of your position in a market and you have a sound business, if you issue a bond, that market discovery process should reward you with slightly lower rates. That’s what I believe. But there is, because of regulations on bank, capital and all that, Europe corporates tend to borrow more from banks and in US they tend to issue bonds rather than borrow from banks.

So there are structural differences here. Yeah. So who borrows and who lends, those are the differences. Now, how you repay is also different in how we understand it. And this is quite important because when you have a loan, it tends to be a term loan for a time. And as individuals, we are familiar with amortizing loans, right?

You’d pay some principle and some interest. The periodic payments are level. So, so like your monthly mortgage is the same amount, but the proportion that goes towards the principal and the proportion that goes towards interest is different. But over time, then it falls to zero, right? You have fully repaid. 

Now bonds are not like that. So bonds, what you lend at the beginning, you repay at the end and in between, you pay coupon, usually semi-annually, meaning every six months, but sometimes annually. So this is the payment structure that is quite different and it does affect the way that is priced because it depends on when you’re buying the bond.

Like you have a different risk because your risk is at the back. So the interesting thing though, is that you can turn a loan into a security like a bond through a process called securitization. And this is again what happened in mortgage-backed securities. So you take basically, let’s say 100 mortgages and you package into a bond and then you have a certain cash flow and all that, that you pass on.

So, but anyway, generally speaking, nowadays we tend to be a little bit less into this structural thing. So a bond has that coupon and then a big principal at the end. Generally speaking. Now, finally, this concept of price. How do you price a loan? When you think about a price of a loan, actually, most of the time, you’re like, huh, what are you talking about? You’re talking about interest rate, right?

So you say mortgage rate is what, or you say, your company, you’re borrowing, you know, you had to borrow about 10% or 3%, or what. So this is what it is. It’s basically an interest rate. But when it comes to bonds, the concept is basically yield. Yield and the inverse of yield is price, but yield, let me just quickly explain, it’s not really the same as an interest rate or the coupon that you get, which I described just now.

So let’s just say that you bought a bond and it pays once a year coupon and it’s a 1.2% coupon. And the bond is issued at $100 par value. And at the end of one year, you get back $100, right? So in this case, your coupon is 1.2% and your yield is also 1.2%. Okay. But let’s say you bought the bond not at $100, but you bought at $120.

So you bought higher than par, which you call premium. So you bought $120, at the end of one year, you have gotten 1.2, $1.20 cents and then $100 now. So then what is your yield? 

Reggie: You actually lost, right?

Chuin Ting: It’s actually lower, right. So it’s actually more than 1% because you actually paid more for it. So what this means is that you can have two bonds of the same maturity that can have a different coupon, but yet the same yield. And this is then because of the price. So generally speaking for bonds, when yields go up, the price of the bond has fallen because it’s not equivalent to the coupon, and this is where the capital markets come in because you price according to yield. And how does some of these prices are affected is in the buying price of the bond.

So a company would come out and say, I’m going to issue this amount of bonds, the market determines where you strike final yield. So if there’s a lot of demand, then you tend to be able to issue at a discount. So that’s good. That means that the markets still have that confidence in your company. 

Reggie: So how does that discount then reflect on the price?

Chuin Ting: Oh, so let’s say you have a par value of $100. 

Reggie: So that is the issue price. 

Chuin Ting: No, that is just the value of the bond. It tends to be $100. So it’s issued at $98.70, for example. But because at the end you get $100, usually that’s how it is, yeah. So then you do the calculations in between to get the discount rate  that will bring all the cashflows to that price $98.70.

And then you know what is that yield. So if that was a 3.5% bond it means 3.5% coupon, but because it’s issued at 98.7, the yield is higher than 3.5%. 

Reggie: Because at the end of the term, you actually make that $100, right? Which is about another 1.3% more. 

Chuin Ting: That’s right, yeah. 

Reggie: Ohh. 1.3 times more, 1.3… 

Chuin Ting: You have to sort of do the discounting, the different periods, yeah, but that is how negative yields come about.

Reggie: Yeah. How do people make money in a negative yield environment?

Chuin Ting: [Laughs] We can talk about that a little bit more, but how do you even sort of operationalize a negative yield bond, right. So what happens is that it’s not that they pay you money for lending them money. Like the German government now is having negative yielding bonds. What they do is that they issue zero coupon bonds. So zero coupon bonds, generally speaking, means that they should be issued at a discount.

So $98.70 at the end is $100 and that difference actually, then you make your calculations implies a certain yield, in between, you don’t get coupons. So this is a zero coupon bond. So, but in this case, in the negative yielding bond, instead of issuing at a discount and then you get back par, they issue above par, and then you get back $100. Yeah. So that’s how the negative yield comes about. 

Reggie: Yes. So, okay. So essentially they’re not going to give you any money for holding onto the bond, to this process because that’s why it’s called zero coupon, right. And then for something that is worth $100 at the end of the time period, they sell you at like $110, $120, something like that.

But isn’t that… there’s a market mechanism behind this, right? How is that $110 or $120 priced?

Chuin Ting: Okay. So there’s a primary market for bonds and a secondary market for bonds. So for the primary market is really when the, in this case, the government issues, and then they will announce auctions. And then all the dealers would come and they will buy the bonds, and because there’s a lot of demand, they will bid up the bonds. So this means that for some reason, the confidence, perhaps be it in the banking  system or be it in the economy is so low, everyone wants to park their money into a very safe instrument, to the extent that they are willing to lend the German government money. And pay for the privilege of lending.

Yeah. So how negative yielding bonds come about. It’s quite interesting. It’s an interesting phenomenon. 

Reggie: It’s an interesting phenomenon, right. So essentially it means that the guys, they don’t want to put their money elsewhere. They’re willing to like, you know, fight for giving the money to the government.

That’s why the coupon get bids up. And at the end of the time period, they lose. And then in between, how do the people that participate in between make money?

Chuin Ting: So there’s a secondary market where people just really buy and sell bonds. So this is usually done through institutions. And so it’s quite interesting because we can think about why and how the institutions use bonds. And how do they profit? Or how do they think about bonds? 

Reggie: But like what you rightfully point out, it sounds like this only is an institutional game. Like only the institutions get access to it. 

Chuin Ting: Yes and no, but I will say that one thing that is very true is that it is largely about institutions.

Reggie: So then how do we retail guys participate in the bond space? 

Chuin Ting: So for us there are two ways. Let’s say practically speaking. 

Realistic wan, like actually can do wan. 

Yeah, can do it. Without having to be a bank la. Yeah. One is to… you can buy some that are listed. But most bonds are actually in big denominations of like S$250,000, for example. Or S$100.000.

Okay. 

Reggie: So although theyare listed that I can buy directly, but the minimum ticket is S$250,000. 

Chuin Ting: Yes, it tends to be… unless you’re an accredited investor or you have. 

There is this… iFAST has this service called Bond Express, but for accredited investors only, where can buy in odd lots la. And so accredited investors have a certain net worth, a certain income, and all that. 

For retail bond, there have been as well. And some of them are also listed, but there’re not many, right. And the higher quality ones would be the Temasek bonds. And also Astrea, which also issued a securitized instrument on underlying of private equity instruments. So they use a bit of that technology of structuring,  but this is backed by Temasek. And so I think people have more confidence in that. 

So if you look for… on CDP, I think there’re probably only about eight retail bonds right now. So SIA also has a retail bond, I think Frasers also has retail bond, but not many. The one retail bond that in recent times, it’s not… it sent retail bond reputation down is of course Hylux, right?

Yeah, so the problem with bonds for retail investors is sometimes they are sold as bonds equals safe, right? 

Reggie: Yeah. That’s what people say. 

Chuin Ting: But it’s not necessarily so, as we can say, just because something carries the word bonds. And so in the case of Hyflux, it was actually a perpetual bond. So a perpetual bond is different from say, a senior unsecured bond. And this is different from a subordinated bond. And this is to do with the capital structure of a company. 

So to understand bonds again, you remember it is actually a borrowing. But as a company, when you borrow, or even as a country, when you borrow, you have an obligation to pay the interest. And as a company, before you pay your shareholders, you have to pay your interest and your borrowings.

It’s the same as us, right. When we borrow from bank, we have to pay. 

Reggie: You pay your debtors first. 

Chuin Ting: That’s right. So if anything happens, we sell off our assets, we pay the debtors first. And so then bonds in itself, you can have a hierarchy of bonds. You can have secured bonds. And that means that it’s secured on something. So let’s say we have the mortgage bonds, will be secured on a pool on mortgages.

So the company can collateralize, basically, on their borrowing. Most common is actually your senior unsecured bond. So it depends on the cash flows of the company to pay you. And senior bonds is where you usually take the bond rating of the company rating  from. So there’re senior  bonds, then there’re subordinated bonds.

And then there are things called perpetual bonds. Now, bonds are meant to have a term, but when they’re perpetual, then it becomes a little bit more like perpetual capital, which is actually more quasi-equity. So in the perpetual bonds, you are lower down on the capital structure, what you get is a high coupon, so Hyflux had 6% coupon.

But what it means is that if something happens to Hyflux, your priority of payment is way down. So it depends on how much net worth there is, or equity there is in the company. How perpetual bonds work usually is that there’s a call date, you know, such that you wouldn’t always be holding onto a bond.

At some point they will call it back. And this is how it works. So I think many retail investors did not understand what a perpetual bond was. The perpetual bond is actually lower down on the capital structure. And I guess they also felt that, you know, Hyflux is like a Singapore darling.

Reggie: Okay la, like everybody needs to drink water, right. [Laughs]

Chuin Ting: That’s right. So it’s very sad because when bonds are sort of misused in a sense, and I’m sure they have been sold these things, saying that bonds very safe wan la. 

Reggie: Confirm, I hear this all the time. 

Chuin Ting: And then you’ve got people putting their life savings into this, which is really sad. So generally speaking, it’s very hard for retail investors to access a basket of bonds. And at Money Owl, we feel that bonds, like equities, we should be globally diversified, and we want bonds to be really performing the function of being the safer asset. So how do bonds actually feature in this whole return and risk factor? Maybe we can talk a bit about that.

Reggie: Share with us. Yes. I want to know, yes. 

Chuin Ting: So bonds return more than cash, but more volatile than cash. So a little bit riskier than cash, but they return lower than equities and less volatile than equities. So this is roughly where they are, so because otherwise, if it’s just for safety, right, then why don’t use cash? Because cash don’t return you anything, right? 

Reggie: Yeah, yeah, nowadays.

Chuin Ting: Yeah, especially nowadays.

Reggie: [Laugh] What cash? Every bank is cutting their, you know, fixed fee rates and everything.right, so…

Chuin Ting: That’s right. 

And why is that? Let’s say compare equities. Why is that so? Remember I said, it’s higher up in the capital structure, so it means in return for the safety of being paid first before the shareholders, you don’t get any upside.

So the best you can get in a bond is your principal back and whatever coupon or yield on the bond. As a bond holder directly, I’m not talking about the trading of bonds yet. So return is lower than equities, higher than cash. Volatility is lower, actually much lower than equities, but higher than cash.

So I was just looking at some data. So let’s say the US dollar version of our dimensional global core equity fund, which we have in our portfolios, over a 10 year period, returned about 8.9% per annum. 

Reggie: Wow. That’s pretty high. 

Chuin Ting: But the standard deviation, which is volatility, is 14.7%. Okay? So how do you understand this is that, within 1 standard deviation, it means that 68% of the time, you will be… say that average return  minus 14.7% or plus 14.7%. So, so you do have that variability, right. So that’s usually a measure risk volatility. So 8.9% return vs. 14.7 standard deviation. But if you look at, say, the Bloomberg Barclays global aggregate bond, and that’s the US dollar hedge, it returns around slightly less than half over 10 years, 4.2%.

But the volatility is only 2.6%. So, so that’s the, that’s the difference because it’s so much less volatile and I don’t think I need to talk about cash la. Probably just 1%, and volatility 0.7%

Then the thing is why doesn’t everyone just invest in equities? It’s because of this volatility, then you say, should I then  maximize risk-adjusted return. So risk-adjusted return, you’ll hear a lot of fund managers say that, you know, return vs. risk, chart ratios and all that, right? 

This boils down to whether 4% is good enough for you? Over the long-term, does it beat inflation? Does it meet your needs? After inflation, does it meet your life needs that I was talking about? Is it sufficient returns for you? And for most people it probably would not be because we want to increase… we have so many needs, right?

Yeah. So this is the nuance there that yes, equities will give a higher return, but we don’t all go for equities. Just now, we talked about how institutions use bonds, right. Or we referred to institutions buying a lot bonds. And this is one of the things about institutional investors, very seldom have I seen the mandate that 100% equities. Because it is always about the risk appetite. And because bonds have this lower volatility, they have that function of dampening volatility of the whole portfolio return, but better than cash. Because cash will give zero. But this one will give you a little bit.

And there’s also some negative correlation, not always, some negative correlation between bonds and equities, because when times are stressed, investors tend to run to safety, or they just want to get a little bit of return, but not zero. So they will then bid up all the other prices of the bonds. So that is correlation, but not always perfect, helps in the whole portfolio volatility. 

Reggie: Essentially when the stock market is shaking, then the bond market will come in and help you stabilize your portfolio. 

Chuin Ting: Yeah. And this has to do with the business cycle and all that. So all institutional investors have a risk appetite, and usually it’s stated down in a policy, they call it an IPS, or investment policy statement.

And it’s not that different from how we advise our retail clients. It’s around three things, it’s your need, ability, and willingness to take risks. Your need to take risks is actually what return you require. So if you’re like a foundation, you might have a spending rule. You might have, say, I am looking for how much return from this because I need to spend it on this and that.

So like, endowments, for example, they have this required return. So for us, it is like how much return do you need in order to retire, right? So that’s the need to take risks. If the need is very low. Then don’t even need to take risk la.

Yeah. Then the other is your ability. So this ability for us as individuals is the time horizon. Because over time we know that the stock market will go up, but then you can ride out the volatility. But if you only have two years left and say, sui sui, it was 2006.

And then you needed to take out some… like some people in the US, they needed to convert their pension into energy in 2008, wow, then it was down by 50%. So two years means you have very, very low ability to take risk. For institutions it’s to do with, you know, are these surplus funds? Are these working capital that I need, or is it really…? What can I do with this amount of money? Do I need it at all? Cashflow management. 

And the last is your willingness to take risk, your tolerance. And so if you tend to be, say, a government-linked body or something, you might not want to expose yourself to a lot of questions. 

Reggie: Yeah la, this year do very well, next year, why so bad, like that, right.

Chuin Ting: Do very well is okay, it’s when… [Laughs] So, if you see it, let’s say our GIC, we have our reference portfolio. It’s not really a match but our reference portfolio for the long-term investment, 65% equities and 35% bonds. So this is an asset allocation. So what happens then is all your risk appetite translates then into an asset allocation and the bonds are the staple in  this asset allocation.

Reggie: Okay. So then like just now you point out, right. Fundamentally the standard deviation is the risk factor, you know, in this, in this whole thing. And when people go into bonds, essentially you want to get something that’s lower SD, and then, you know, exchange the upside for the stability.

For lack of a better way to put it. That is what it is. Then from a bond perspective, like, from what I understand, it’s like, there is the whole grading process, like you rate the bonds,  right? So how do they rate the bonds? And at what point do they go from investment grade to junk grade?

Chuin Ting: Okay. So there are three rating agencies. 

Only three ah?

Okay, there are more, but the sort of respected ones, big three, yes. S&P or Standard and Poor’s, Moody’s, and Fitch ratings. So there are a few others and then China has one and all that, but the two among the three that are the biggest are S&P and Moody’s. So they have a scale that goes from AAA down to D.

What do these grades reflect? They reflect ultimately your ability to meet your obligations and the ability to meet obligations actually… I’m just wondering whether I should say ability because there’s actually two main components: your ability to pay and your willingness to pay. Because some companies, they can pay, but they don’t want to pay. And this actually happens.

Or some countries even, you know. There are some countries that are serial defaulters, you know, like… 

Reggie: Argentina. 

Chuin Ting: [Laughs] Argentina. But people still go and buy. And all that. So this is roughly what happens. And how do rating agencies rate these bonds? They have a set of metrics that has to do with leverage. So how much debt you have. But a lot of cash flow things. How much interest coverage you have? And how many years can you continue paying? How many maturities you have? And then whether you can refinance them. If you have some extra ordinary support, because you are a government link company and all that, then you might get an uplift. 

Reggie: Extra ordinary. [Laughs] Special kid. You are special kid. 

Chuin Ting: Yes, that’s right. So remember last time we had Neptune Orient Lines? So NOL actually on the metrics, not looking so good, and also profitability and all that, but because they were a Temasek portfolio company.

So I think the investors also gave them that uplift and I think, I believe their ratings also benefited. In Singapore you may not find that these ratings common, right? So the reason is because when you go out to issue bonds, you want to use the rating to give a handle to the investors so that the investors will price you in accordance with this rating service. 

So there is inherent there a bit of conflict of interest, right? And this is what happened during the ’08 crisis as well. So I want to issue the bond and I pay you to make the rating on me. 

Reggie: So give me a better rating, that kind of thing. 

Chuin Ting: So obviously, so there’s actually law suits filed over these things and all that, right?

There’s that conflict of interest inherent there in this rating. But generally speaking, they look at  certain credit metrics. I think besides the problem of the conflict of interest, the issue which  actually put the credibility of the rating agencies into doubt when the credit crisis hit or the financial crisis hit, it’s really that the rating agencies got it wrong, or they got it wrong especially during the crisis. 

I still remember in ’07 — and I kept that rating report for a while — there was a bunch of bond insurers in the US, and there are names like MBIA, Ambac. And what they did was they guaranteed bonds. And they were given an AAA rating as late as October 2007, but they couldn’t fulfill and they dropped to CCC and all that, like very quickly.

So this is really… like, what’s happening there, right? So there’s a bit of group think and all that. But also think about how would the rating agency know when your insurance coverage is down and all that? It’s after the fact, right? Usually it’s after you report some news. 

Yeah. And I guess in the US there’s more transparency. So it’s more common reporting, right. So, like, oh, the results, then usually after results, the credit analysts would do something. I mean, all of us would also be watching and looking. And then there’ll be a downgrade or maybe an outlook would be issued, but then it’s sort of slow, right?

So rating agencies are therefore naturally behind the curve because it’s not fair to their clients for them to act for no reason, right? Yeah, of course sometimes it’s macro factors affecting their particular outlook. So for during COVID, I guess, many companies will have some issues with their ratings.

So there is actually an alternative, which is to use market prices. So fo Money Owl, this speaks to us because generally speaking, we believe in the power of the markets, the efficiency of the markets. And bond markets are large and for–starting actually with  treasuries–and they are priced.

So they price the collective and aggregate expectations and all the information available of all the  participants in the market. So it is possible to look at where a bond is trading and to then say, what does that imply for its credit wordiness. Yeah. So for a government bond, it trades for a certain yield. So at a certain maturity it might trade say, let’s say US 10-year bond, yield is about just over 1%, 1.1%. Now, if you are rated lower than the US government, as most corporates would be, if not all. And then you would have a credit spread. You need to pay more la, right? 

Reggie: It would be pretty amazing if you are graded higher than the… [Laughs]

Chuin Ting: Generally speaking, you don’t tend to be rated higher than your government, but it has happened before, where the, let’s say, was it Petrobras or something where you are rated higher than your government, because you have more cash flow coming from the outside your country, than your government has. So it does happen, but generally speaking, yeah, so that is what you call a credit spread.

So the wider the credit spread means that the more compensation or the higher your yield is after minusing off the government yield. So you can look at then when the bonds are trading. So remember I told you the prices and the implied yield, and then you can work back that credit spread to see, oh, is this point actually trading at a BBB or AAA?

So if you are, if you then think that you should trust market prices more, then you should take your actions based on that. And during the crisis in 2008, at one point we saw Lehman was still being rated A or A+, and it was trading at a low BBB. Then it jumped to default la. Yeah. 

So, so that’s… there’s a way of like looking at, you know, is there something that someone knows or someone expecting in the markets. Our dimensional  funds also work like that. So they don’t just wait for the rating agencies, they look at what is the implied credit worthiness that the markets are telling them, and then they take the actions accordingly. 

Reggie: Ah, so you’re using price discovery to then decide how secured these bonds are  essentially the market will tell you, right, oh, this is getting bidded up, then you know something’s going on. 

Chuin Ting:That’s right.

Reggie: Okay. So then one last question, okay? So all that being said, now I think I get a better understanding of bonds. I know there’s so much more to talk. I think we can see, you know. Come back again. We’ll talk again. But then where does bonds sit in one’s overall portfolio then? 

Chuin Ting: Generally speaking, we will not depend on bonds to make you money and where it makes you money is actually in equities.

Yeah, so there’s a very fundamental economic system reason for this. Remember I said, bonds no upside, right? But equities is where all, where the enterprise of the world and you grow your products and you have production, and all that. This is where you are participating in the economic activity of the world, beyond just supplying bond capital.

We would say make your money in equities, but because not all of us can take that rollercoaster, right. Then if you press the button and you’re on the rollercoaster, you fall off, you die, right? Figuratively speaking. Because we can say all we want, but it’s not easy to stay invested. Your advisor should help you. That’s we have bionic advisor, your advisor, who is not a robot, can advise you, please remember, stay invested, but you may not have the risk tolerance.

In which case it’s better for you to not have 100% equities portfolio, even if you are very young, because if you are going to press that button, then I’d rather you be in the, say, 60% equities with 40% bonds. You still get good returns that is sufficient, but in a way with the bonds helping you to stay invested by the effect of the portfolio.

There’s a second use of bonds in a portfolio, which is actually for income. That means to actually clip the coupons and to get some kind of income distribution, right? So even institutions do, so including our GLCs and all that. They give the government some realized income. 

Now of course, this is really more when you need to withdraw and a little corollary to, it would be like dividend stocks, right. But of course the risk is lower for bonds. And this is, this is one use of bonds. Unfortunately, because of the interest environment now, this coupon don’t tend to be very high la. And so it has been coming down. So actually even for distribution, there are techniques that we can use if you need a certain income amount, you can actually also withdraw from your equity portfolio, a certain percentage.

So some of it can be funded by bonds and some of it withdrawal from your other investments. Yeah. So, but I think that’s probably a topic for another day about how to withdraw. 

Reggie: Awesome. Thank you. I think we all learned a lot of good stuff, right? So thank you for your time. I think we will come back again.

Chuin Ting: Thank you, Reggie, thanks for having me.

Reggie: Hey, I hope you learned something useful today and truly appreciate that you took time off to better your life with The Financial Coconut. Knowledge is that much more powerful and interesting when shared, debated, and discussed. Join our community Telegram group, follow us on our socials, sign up for our weekly newsletter. Everything is in the description below. 

And if you love us and want to help us grow, definitely share the podcast with your friends and on your socials. Also, if you have some interesting thoughts to share or know someone that you want to hear more from, reach out to us through hello@thefinancialcoconut.com. With that, have a great day ahead, stay tuned next week, and always remember: personal finance can be chill, clear, and sustainable for all.

Okay, wow. Hope you learned something interesting from her. She’s talked about a lot, a lot of stuff, right? From like bond yields to how bonds work, you know, when does a bond go from investment to junk, you know, so all these different elements I think are very important. So I hope you be able to get a better understanding, rather than just go into this idea of like, oh, bonds, bonds are important because you must probably diversify. So that’d be great. 

And next week, we’re going to touch on this very hot topic, right. The whole idea of Bitcoin. So we have a guest coming on next week to talk about Bitcoin and his name is Arthur, from DeFiance Capital.

And he actually believes that Bitcoin will go to 0. But what is the future of crypto then? He’s super big on the whole like DeFi or decentralized finance. And I think he has some very good thoughts and he gave us like a broad understanding, a broad lesson of like, what is Bitcoin? What is the crypto market? What are the different kinds of coins out there? And where does he see the future of the crypto industry? So next week, stay tuned for a very, very hot topic of Bitcoin and blockchain. See ya.

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