Bonds have been and remain the most reliable and at the same time profitable alternative to bank deposits. People who are used to making their money work invariably invest in debt securities and receive a guaranteed income. How to build a portfolio of bonds in such a way that with minimal effort it brings competitive income and minimizes risks? Read about it below.
Portfolio Investment Advantage
Any experienced investor will confirm that the main component of success in the stock market is a competent approach to building a portfolio of securities. If you know for sure that the securities of a particular company will give good returns, you can invest all your available funds in bonds or shares of this company. In this case, no one will give you a guarantee of income. You act at your own risk. And with an equal degree of probability, you can both increase your capital and go broke.
But if you purchase the same securities as part of a portfolio, then your other investments, especially if they are diversified, will easily cover a possible loss in the event of an unsuccessful combination of circumstances. Investing in stock instruments of varying degrees of profitability and risk is called an investment portfolio. And if you want to build a successful investor career, you need to learn how to shape it competently.
Portfolio and investor
In a broad sense, an investment portfolio involves investing in a wide variety of assets: securities, deposits in banks, real estate, art, jewelry, intellectual property and much more. In the most simplified and closer to life sense, a portfolio means investing free funds in assets that do not require either your time or money, but at the same time bring a steady income.
If you are the happy owner of a grandmother’s apartment, which you rent for a small rent, and a deposit in the bank, and in your desk drawer is a collection of 1992 anniversary coins, then you can quite rightly call yourself an investor, albeit a passive one. This example shows how our ideas about investors as celestials on snow-white yachts somewhere in the Mediterranean are mythologized, and also how close each of us is to receiving passive income. Another thing is that the size of the income largely depends on the amount of initial capital that you are willing to spend on investments. And of course, if this is a small amount of money accumulated with great difficulty, then most of us are absolutely not ready to invest it in at least some risky enterprise. That is why we are talking about a bond portfolio - the best tool to start in investing in securities.
Bonds and shares
It is best for a novice investor to form a portfolio of bonds and shares of the most reliable companies. At the same time, if you do not have a large deposit, the basis of your portfolio will be debt securities. It is bonds that have the lowest level of price fall during their “life” in the market, especially when it comes to short-term bonds with a maturity of up to 1 year.
Stocks are more suitable for active speculation. An analysis of the dynamics of changes in prices on the stock market shows that this tool requires a sufficiently high financial literacy and an understanding of all the mechanisms that operate not only in the stock market, but also in the global economy.
What is the portfolio of
But back to building a bond portfolio. The most common conservative investment portfolio scheme is to distribute funds in appropriate shares among all types of bonds available. At the same time, a balanced conservative bond portfolio will look something like this:
- OFZ so-called federal loan bonds are acquired per third of the capital. They are the most reliable, and they have profitability at the level of profitability of deposits of leading banks.
- Another third of the money goes for the acquisition of corporate bonds of leading Russian companies in the mining, energy sectors or banks. These securities have a higher yield in comparison with OFZ and are reliable at the same time.
- About 20% of the deposit can be invested in municipal bonds with an average yield, if you are not ready to take risks. If you want to increase profits from your portfolio and you will not regret your nerves for this, this part of the capital can be invested in bonds of young little-known companies offering high profitability. In this case, it is important that you understand the area in which the company operates, whose securities you purchased.
- The remaining funds can be spent on speculation with shares or put on deposit. The choice, again, depends on your attitude to risk.
What bonds to buy
How to understand which bonds are worth buying? With OFZ, everything is clear: the main thing is to choose the maturity and amount of the coupon income. In the case of federal debt securities, it is more profitable to purchase medium-term and long-term bonds. First, OFZ holders are exempted from paying income tax on these securities. Secondly, coupon yield on federal bonds is fixed for the entire tenure. Therefore, for example, buying paper with a maturity of 10 years and an income of 6.3%, you will receive this percentage annually, regardless of the reduction in the key rate of the Central Bank. And according to forecasts, it will continue to decline.
The yield of a bond portfolio can increase significantly if it is formed from securities with different maturities, and the proceeds are reinvested in the same portfolio, gradually expanding the list of instruments. Thus, after several years, it is quite possible to achieve a solid passive income. This is the strategy that all leading investors in the world adhere to.
Corporate bonds
Returning to the bond portfolio, we recall that the presence of corporate securities of both well-known and stable companies (“blue chips”) and “dark horses” will not be out of place in it.
In order to buy bonds of large companies, it is enough to make a rating of the most reliable corporations by financial indicators, correlate this information with the size of the proposed coupon income and the nominal price of the paper at which it is currently traded on the market. The face value of most bonds is 1,000 rubles. for 1 debt paper. If you see that the paper is traded on the market at 105% or 112% of the cost, this is a sure sign that the corporation is doing well and its paper is priced. However, before purchasing such bonds, think about whether this price will soon fall, because it has nowhere to grow further. In this case, the risk of monetary losses is great, because the paper will be repaid at its face value, and you have already laid out much more for it.
Risk bonds
Despite the fact that the debt market is considered the most conservative, managing a portfolio of bonds involves a certain degree of risk. And here we will talk about bonds of little-known young companies. From the point of view of market price and coupon yield, their papers may seem the most attractive. In comparison with OFZ, the coupon on them is sometimes announced even twice as much. Include such securities in your bond portfolio - and the risk of loss of invested funds will automatically increase. Therefore, beginners are not recommended to purchase securities of little-known companies on attractive conditions in the amount of more than 20% of the total portfolio.
Investment in banks
Among corporate bonds, bank papers are traditionally in demand. The reliability of the largest financial institutions is undeniable, and the conditions for investing in securities are more attractive than in the same banking products.
By including banks in your list of companies for a portfolio of bonds, you only need to track the status of credit ratings of independent agencies. Given the frequency of revocation of licenses from banking organizations in our country in recent years, even a very solid organization, and therefore your funds, may be hit. It is recommended to give preference to securities with a maturity of up to 3, maximum 5 years.
Profitability and duration
In investing in securities, there are two key concepts that characterize the financial attractiveness of a particular instrument. In the case of the debt market, this is the yield and duration of the bond portfolio. And if the concept of profitability is familiar to everyone, then the second term can scare a novice investor. In fact, if you look, this concept is extremely simple, and its meaning contains key information about the investor's benefit.
If the yield is calculated in percent or rubles, then duration is determined by days. In other words, this term means after what period of time the investor will return the funds spent on the purchase of paper, that is, will go to zero. Portfolio duration essentially characterizes its effectiveness, because the sooner the investor covers his expenses and regains the amount of money spent, the faster he will begin to receive net income, from which he will only have to pay the percentage of tax.
The conclusion that arises after a brief acquaintance with portfolio investment in debt securities is simple and unambiguous: every financially competent person can become an investor. This does not require colossal capital, armies of advisers and analysts or watch financial news on three screens 24 hours a day. Simply choose a reliable financial broker, and be guided by your common sense.
Do not expect lightning-fast space profits from investing in securities, do not be tempted by the golden mountains that an unscrupulous broker can promise, do not panic and do not risk in vain. Then step by step you will become a wealthy and successful investor.