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Bonds Smooth Out Stock Volatility

This article is reproduced with permission from
Normandy Advisory Services Sdn. Bhd (Licensed Investment Advisor)
15th Floor Menara Multi-Purpose, No 8 Jalan Munshi Abdullah, 50100 Kuala Lumpur
Tel : 03 - 469 5560 Fax : 03 - 294 5561


This article is copyright and no part of it may be reproduced in any form without the prior consent of Normandy Advisory Services


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The very recent local stockmarket's tailspin prompted many investors fleeing for shelter. The never-ending series of negative news caused the local stockmarket to fall so sharply that the key composite index effectively broke the 1,000 psychological level two weeks ago. A bearish stockmarket should be a good lesson for stock players that anything rises on one day will just as easily plummet on another.

Although we agree that stocks are ideal for real long-term growth as discussed in our issue last week, one should not overly-concentrate on stocks. Smart investors, who look well beyond rising stock prices, protect their money by diversifying appropriate portions of their money into fixed-income securities.

Fixed income securities otherwise known as bonds, generally perceived as dull and less glamorous investment medium are certainly the shinning stars so far this year. Stock players who diversify to include bonds for a more balanced investment portfolio is more likely to minimize the impact of a heavy beating in the stockmarket.


Bonds-an alternative when stocks fail to shine

It is not usual to see local retail players diversify into fixed-income instruments. Not many people recognize the benefits of investing in bonds which originated in the U.S. at the turn of the century. Bonds are universally not favored among investors as their long-term returns are mostly lower than stocks.

For those local unit trust investors who invest in bonds, they will be glad to note that bond performance figures are in the positive territory as compared to equity funds which generally have not been performing well in light of the magnitude of the current market downturn.

Table 1 depicts the performance of some Malaysian bond funds for the first half of the year.

Table 1. Performance Analysis (01/01/97 - 01/07/97)

Malaysian Bond Funds

First-half 1997 (%)

1996 (%)

AUT Malaysian Commerce

0.00

16.67

CIMB The Malaysian Bond

4.08

9.90

KL Bond Fund

4.90

-

Mayban Income Trust

4.95

-


Source: Normandy Research
Note: Calculations based on bid-to-bid
Investors are advised to study the real entry cost before investing



The benefits of bond investments

If you are a new investor planning your asset allocation, it is wise to consider instruments other than stocks regardless of your investment profile. Learn how bonds can be a viable investment tool particularly during times when the stockmarket is volatile - buying a bond fund is not necessarily a bad thing to do. Bonds deserve some respect as they offer diversification for a stock-heavy portfolio.

Table 2 shows the correlation between U.S. stock and bond returns. Notice that any correlation coefficient less than 1.00 between two sets of returns indicates diversification potential.

Table 2. Correlation Analysis of Historical Annual Returns (1926-1993)

 

Large firm stocks

Small firm stocks

Large firm stocks

1.00

0.81

Small firm stocks

0.81

1.00

Long-term corporate bonds

0.22

0.10

Long-term Treasury bonds

0.14

-0.01

Intermediate term Treasury bonds

0.06

-0.06

Treasury bills

-0.05

-0.10


Source: SBBI 1994 Yearbook (Chicago: Ibbotson Associates, 1994), 105.

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