Understanding Bonds: Risk, Returns, and Smart Investment Strategies

Foreign. If you lend the government money, if you lend the British government money, they give you back a paper called the guilt. If you lend the US Government money, they give you Treasury. If you lend a company money, it's corporate bonds. They call it if you learn a company money that like Gamestop at some point, you know this company that maybe they were already dying, it's still corporate bond, but we call it junk bonds because they are high yield, they'll pay you high interest. Why are they paying high interest? They are not as attractive. They don't feel as safe. If you feel that you can get your money easily then you are quite happy to lend money to somebody. Okay, I've got a slide on bonds so we can touch that. So Suraj. Yes please. What was your question or your contribution? You.

Yeah, I think it's already been touched on. I mean what are the things that I'll consider before I borrow money is obviously the, the capacity that they can pay back.

Absolutely.

And obviously that I can. I mean I get something out of leaving my money to somebody's, to somebody's use. So what return can I get?

Of course you, you are a wise investor, Siraj. Yes. And that's what Nando was saying. How much can you give me back and how much you can give me back how much I'm willing to borrow you. The money is based on how much. I think I can get my money back if I want to lend money to the US Government. I think the US Government is considered as number one in terms of the bond credit rating. They think U. S Treasury is almost like you're almost sure you're going to get your money. So they might decide to pay less. I think U. S last night, I can't remember but I think last night I checked it was about 3 point something percent if you buy their 10 year treasury. 10 year treasury. So you give them money, they'll give you back in 10 years. But every year they will give you something, it will be 3%. 3 point something percent. I can't remember quite a figure. That's why it is currently and it does change. So when you hear about interest rates changing, it seems like it's not your business. But it affects the stock market, it affects the price of your house, affect your mortgage, affects everything. So interest rate is changing. It means this is the interest they are going to be paying on that bond. So U. S government, if you lend them money, they're going to pay you that interest. Now Venezuelan government might be willing to pay more, but should we Give them our money. The government of the people's Republic of Venezuela I don't know whether they call people's republic Maybe one day I'll end up in Venezuela and I'll have to explain all this time I've been calling their name in podcast but Venezuelan government 10 year government bond yield is 10.43 that's Venezuelan government now US treasury bond interest rate is 3.66% so U. S treasure is 3.6 is Venezuela is 10 and Venezuela is low at the moment but why would people say no no I don't want 10 which is fantastic by the way I want 3% it's because they think that US government can pay them back. There's a higher chance of US government paying them back so they the same thing. We'll come to that when we do risk premium I think we've still got like about an hour and a half to go when we get to risk premium. You see why it's important to understand these things. So you can see UK UK 10 year guild currently is is it 4.05% depending on which one you're buying 4.05% but when you look at other countries let's say Mexico Mexico is well known Mexican Argentina they've defaulted on bonds a few times so can somebody type in Mexico government bond I'm looking at it but I just wanted to see it as well Mexico government bonds how much is their interest? Always use the 10 year old and I'll tell you why when you use the 10 year on they can compare your bond yield to your stock valuation so you can know when you're getting a good deal has somebody money to find Mexico bond interest rates I saw 9.5, 9.5 within that range. Can you see that it's at the same level with the brother Venezuela and let's take Argentina bond rate I'm not. You're not going to buy Argentina boundary But if you understand if you get a deeper understanding of this thing so you know what risk you are taking each time because there are times that the market will turn I will park in bonds we're just waiting bonds and when the market is better I'll come back and buy shares again. If you are buying index one you have to don't have to worry about all that. Okay so Argentina, what do you say 10 year bond Argentina is 8.28% I'll tell you one I know, I know you might have checked it but maybe you don't want to check it but let's do it. Let's, let's just do it. What's Nigeria 10 year? 10 year government bond. What's the yield is offering? Just type in Nigeria 10 year bond yield. I spent 19.7, 19.4. Yeah, isn't that something? So a lot of times I know that Nigerian government has just recently released them a dollar denominated bond that went for 9% or thereabouts. If they denominated in naira, that's the local currency in Nigeria. For those of you who are, who don't know Nigeria's local currency, they might decide to give you 2019. But denominated in Naira currency that is actually going down. So that's another thing to also think about. What currency is this bond denominated? Is it in dollars? If it's in dollars, okay. Then you start looking at it. So you can see that countries that seem like they might not be able to pay back, they tend to have more, they tend to have to pay more. So the, the morale of this is not yet bond calculation is for you to understand that whenever you take more risk, you should demand more return. If you're just buying index fund, okay, it's fine, you might get 10, 9% but if you're investing in individual stocks, I am not making far more than that. Then why are you taking the risk in the first place? If you are buying bonds from US government, okay, fine, you're happy with 3% even at some point was zero or 0.1 in 2020 to 0.1. If you're buying from another risky, let's say you're buying from a company somewhere in Austria, then you should be demanding more return. So anytime you're going to borrow money to somebody, they are starting a company, they are buying house, they are building house, whatever, you should always check what is the extra risk you're taking. Risk premium is another different calculation altogether. But you should always sort of like do a napkin calculation. Why am I giving this guy or this lady my money? If I put it in the stock market, I'm going to get 9% or 8% or whatever it is. Index fund has returned over the last 10 years. But if I give it to this person, he said it's going to give me 10% so get out of here. I've had people approach me to ask for money but like to invest in their business and then they're offering me something I can get without even taking the risk with them because they're a bit more risky. Apart from the fact that they, I believe they should be honest. But they might not be. They're not government regulated. Nobody's seeing what they're doing. The other thing could also be if it turns out that they make a mistake or they did, they have no experience in that area. So they are more risky. That's why sometimes you want more premium if you're going to invest money in a startup. That's why startups also, people tend to get a bit more money from them. Does that make sense? Yeah. Okay, right now, a little interactive activity there. Obviously we've been talking about different investment vehicles all day long. And I'll tell you, because of how in depth went with each of them, we've covered quite a lot of the rest of the slides. So be able to fly through. There's obviously we've talked about fixed income assets. There's guilt, that's UK Treasury, Treasury, UK treasury bonds. There's bond, there's treasury bills. There's other things like mutual funds, index funds and ETFs, which has a different slide for it. And there's real estate and other alternatives like gold. Some people buy whiskey and some people buy oil. So you see all those adverts to buy whiskey and you jump and give them your money to buy whiskey. Are you a whiskey seller? Do you know about whiskey? I always ask people, what do you know about whiskey? How your grandparents produce whiskey. If you don't know anything about whiskey, why are you going to buy whiskey? And if the risk is going to give you 12%, but the government bond is going to give you 4%, you have to still think carefully. Say, am I, am I being adequately compensated for the extra risk I'm taking? So those are alternative investment that people do. I'm going to give you a little exercise. I'm giving everyone, every single one of you here on this call, a hundred thousand pounds. I thought I should be getting some more gratitude. Every single one of you. £100,000 for you, every one of you. Now, how would you allocate the hundred thousand pounds portfolio? You have five minutes. So seeing the investment portfolios we've looked at. So tell me, you can just use paper napkin, it's not complicated. But tell me, based on the investment class we've talked about, tell me what percentage would you allocate to what and how much and we'll come back again in five minutes. So this is my percentage for 1 million. My percentage was slightly different. Okay, I'm going to keep it at 100,000 because I feel like as doctors, healthcare professionals, I'm not saying they are not doctors that earn 1 million per month. But I believe that 100,000 is relatable. So thank you. That was a good job. So, yeah. Siraj, I'm interested to hear what you've done with your own.

I haven't. I definitely haven't done anything genius, to be honest.

Tell me.

What I can say is that, you know, again, my allocation will be different 10 years ago if you gave me the hundred thousand to where I am today. Now.

Okay.

Like in allocating answers, generally speaking, I kind of like to think about, I mean, no, the cliche around your 100 minus your age and then what. Yes, you divide that into. Into bonds and yes, stock accordingly. So, okay, taking that lead, I have just held a little. Just small cash. So 10 is what I've held in cash.

10,000. Okay.

10,000 is what I heard in cash. I've put in common stocks at 20%.

That's individual stocks. Okay. Okay. Because I was going back to ask Chi about that. But don't worry. Carry on.

I have put preferred stocks, if I have the opportunity at 10%.

Okay. A sophisticated guy, sophisticated investor. Okay, let's go.

And I've put in fixed asset investments at 20.

Right.

So that's bond, guilds, everything, skills and that.

Okay.

And then I've put in 20 into real estate.

20 in real estate. Okay.

The last 20 into mutual funds and ETF and.

And the rest of them, index funds, basically. Mutual fund. Okay. So that's quite a nicely well diversified portfolio for some people. Their portfolio will be as simple as what she said, stocks. But yes, you're sort of like you've touched different, different vehicles. Can I ask why? Why do you decide to put any money at all in.

So basically my approach is just trying to split things around. Capital appreciation and of course income. Income, obviously as you near. As I near retirement, of course I'll be looking at what are, what is the investment vehicle that gives me more stable income.

Okay. Even when is that, how far away is that? You don't have to say the exact years, but just roughly. Is it in 10 years, 20 years? 30 years?

Well, so if, if just going by the normal retirement age. So that, that would be in 20 something years.

Okay. So obviously when you're coming closer, you want to start going.

Exactly. I start going towards more fixed income assets that I can get more predictable returns, if that makes sense. And that can help plan retirement a little bit better.

I love what you've done. I mean, I like cheese on Chison is simple, but in your zone as well. It seems like you're thinking in a bit more. You're thinking a bit more different options. You're thinking about diversifying a bit further. I think that's good. The allocation is not bad at all. You're putting 20 into fixed income, is that correct? 20%. Yeah. But that's because you're 20 something years from retirement. But if you were 15 years from retirement, you might consider moving a little bit more, reducing your risk. We are going to go and look at risk now, reducing your risk by moving more into bonds and treasury bills and things that you can predict that your money will not just disappear. Well, it doesn't disappear, but the value stays about the same, the price stays about the same. Okay.