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

Long-term bonds

Long bonds are certainly more volatile than short bonds, but less so than stocks. They are interesting in a portfolio because, in principle, they are 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 phases ofinflation.

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 traditional to mix your portfolio between stocks and bonds. The traditional allocation in investment funds is often 40% in stocks and 60% in bonds. This works quite well, offering attractive returns without too much risk. The funds LPP limit the share of shares to a maximum of 50%.

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, without gold. Many of these funds are also composed of a small portion of raw materials... Harry Browne is therefore never very far away. However, most investment funds easily charge you 1 to 2% in management fees, which is quite enormous if you expect a result of around 5% (given that approximately 2/3 of the assets are bonds).

Therefore, it is always better to take care of it yourself or to use ETFs. For long-term Swiss government bonds, we find theETF CSBGC0, with fees of only 0.15%. With an average maturity of only 9 years, these aren't short-term bonds, but they're 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!