How to diversify your portfolio to avoid market risks (7/20)

Long-term bonds

Long bonds are certainly more volatile than short ones, but less so than stocks. They are interesting in a portfolio because they are in principle inversely correlated to stocks. I say in principle because correlations are not stable over time. It therefore happens that during certain critical periods, they are positively correlated, particularly during inflation phases.

The profitability of long-term bonds is not huge, especially in Switzerland, but we can still hope for something in the order of 2-3% in the long term (while it is 3 or 4x more for stocks). However, there is a big bug currently with this type of investment, given the historically calamitous interest rates that we find almost everywhere in the world, and particularly in our country. Indeed, not only do they offer a ridiculous coupon, but above all an increase in rates would mean that your current bonds become less interesting and therefore their price would drop.

For bonds, we have the choice between those issued by governments and those issued by companies. The "problem" with the latter is that they are correlated to stocks, since both depend on the success of their organization and therefore the economy more broadly.

It is quite classic to mix your portfolio between stocks and bonds. The traditional distribution in investment funds is often 40% in stocks and 60% in bonds. This works quite well, offering an interesting return without too much risk. LPP funds limit the share of stocks to 50% maximum.

Obviously, the greater the share of shares, the greater the long-term profitability, but so does the risk. The bonds that make up the so-called "mixed" types of funds are in principle mixed between short, medium and long durations.

Si l'on y réfléchit un peu, on constate qu'avec un fonds de placement 35%actions/35%obligations courtes/35%obligations longues on n’est pas très loin d'un permanent portfolio, sans l'or. Beaucoup de ces fonds sont d'ailleurs composés d'une petite partie de matières premières... Harry Browne n'est donc jamais très loin. Cependant la plupart des fonds de placement vous ponctionnent facilement 1 à 2% en frais de gestion, ce qui est assez énorme si l'on attend un résultat d'environ 5% (vu que les 2/3 environ des actifs sont des obligations).

It is therefore preferable as always to take care of it yourself or to use ETFs. For long Swiss government bonds we find the ETF CSBGC0, with fees of only 0.15%. The average duration being only 9 years, we are not in short bonds, but we are still quite far from H. Browne's idea.

If you absolutely want to follow Harry to the letter, the best thing is to buy directly "EIDG" Confederation bonds with a duration of about 20-30 years, knowing that this involves risks in the event of inflation. Personally, I find that bonds of around ten years, via the aforementioned ETF, are sufficiently suitable in terms of profitability and coverage for stocks, with a moderate risk (better Sharpe ratio). But as already said at the moment, even bonds of this duration in Switzerland offer a negative rate!