There have been many examples in the press of young millionaires that took big gambles on single projects or sports stars that sustained career ending injuries, and all of a sudden the funds disappear and they’re left in a bind. Setting aside enough funds into low risk defensive assets to live well for the rest of their lives should be fundamental in their financial strategy.
I recently had the good fortune to meet Matt. He’s an engineer with a graduate diploma in finance. A few years ago in his mid 30s, Matt sold his engineering and mining consultancy business to a European firm. In his words, “this left him with a chunk of cash”.
The funds stayed in the bank for about 12 months and Matt had “some fun”, but then he realised he needed to make some long term decisions.
One of those was to put a big slice – more than one-third – into bonds.
His theory was that the bonds would effectively “pay a wage for the rest of his life”, so that he didn’t have to work again if he didn’t want to.
Matt was happy to take on a little bit more risk with bonds compared to term deposits as “bonds will always give better returns than term deposits”. He estimated that bonds return 1.5 per cent to 2 per cent over term deposit rates.
How did Matt invest his funds?
Matt’s investment strategy was that his bond portfolio would be low risk and primarily investment grade. He specifically sought highly rated bonds that were very low risk but earned relatively good returns.
He would mostly leave risk-taking to his share portfolio.
The bond portfolio has 24 investments, with the largest allocation to floating rate bonds making up 48 per cent of the value of the portfolio. In Matt’s words “floating rate bonds are a no brainer, you can’t lose” as interest they pay goes up and down with market expectations.
Inflation linked bonds make up 28 per cent of the portfolio with two thirds invested in capital indexed bonds where capital grows with inflation. And the other third in indexed annuity bonds that return principal and interest quarterly, which is indexed to inflation.
The lowest allocation is to fixed rate bonds of 24 per cent. About half of these bonds or 12 per cent of the total portfolio is held in high yield bonds.
When I asked Matt if he traded his bonds, he said he intended to be a hold to maturity investor and wanted protection over the longer term. He has traded a bond on the recommendation of his dealer who changed his view of the company that issued the bond. Matt has a well-diversified portfolio including: cash, bonds, shares and five investment properties as well as his own home. No matter what happens in the market, his diversified holdings and his hold to maturity mentality should deliver the income he needs to lead the lifestyle he’s worked hard to achieve.
