Mano Sabnani's Money Secrets by Mano Sabnani

Mano Sabnani's Money Secrets by Mano Sabnani

Author:Mano Sabnani
Language: eng
Format: epub
Publisher: Marshall Cavendish International


Find The Asset Allocation That’s Best For You

Should I put 100 percent of my investible assets in stocks? The orthodox thinking is that an investor should diversify between different asset classes, a popular model being 25-75 percent in stocks and 25-75 percent in bonds. The idea is to smooth out volatility (which is not equal to risk, as I explain below). But this popular belief does not always hold, as there are times when stocks and bonds move almost in lockstep.

It is also a popular belief that bonds are less risky than stocks, so a person with a lower risk tolerance is typically advised to put more money in bonds than in stocks, for instance a 60-40 or 75-25 split.

First, I should counsel that it is a misconception that bonds are always less risky than stocks. In the case of the former, it really depends on the credit-worthiness and resilience of the bond issuer. A US government bond comes with virtually zero default risk as the US government can always print more money to repay bond holders. But a corporate bond often carries a real risk of default, even when the credit rating is high. The rating agencies can often get it wrong, such as in the period leading up to the 2008/2009 subprime crisis in the US when rating agencies stamped high grades onto mortgage-backed securities (complex derivative investments) which were actually linked to highly risky property loans to weak borrowers. These securities ultimately turned out to be toxic, causing billions of dollars in losses around the world.

One has to do proper due diligence on the issuer of a bond, just as one would a listed company before one buys its stock. This book does not focus on bonds, but many of the criteria for evaluating the investment-worthiness of a company’s stock are also relevant to whether its bonds are a good investment. For instance, methods of assessing the integrity and capability of the directors, risk factors to the business as well as the resilience of the earnings versus the level of indebtedness on the company’s balance sheet. Once you determine the level of risk, ask yourself whether the yield on the bond is more than sufficient to compensate you for taking that risk.

The fallacy that bonds are always safer than stocks has led some investors, even high net-worth ones, to plough large portions of their assets into a bond (sometimes on the advice of their bankers) that later went bust. Sadly, even millionaires can fail to follow the Common Sense principle of doing their homework when it comes to their investments. A case that comes to mind is that of the Swiber bonds in Singapore which went into default. Many wealthy investors blindly followed the advice of their bankers to buy these bonds, without a proper understanding of the risk factors involved in the offshore and marine sector which Swiber was involved in. This sector is heavily affected by the price of oil, which had looked vulnerable to



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