1. Different entities have different purposes for investing in bonds: Financial Institutions vs Individuals
Financial institutions and individuals, these two different types of entities, have different purposes for investing in bonds.
For financial institutions: Besides obtaining a stable cash flow and high-quality bonds etc cash substitutes can also be used to combat inflation.
For individuals: Due to the fixed distribution of dividends and repayment of principal at maturity, often referred to as ‘fixed income’, bonds are negatively correlated with the stock market during periods of panic, providing a defensive effect.
2. Who are the Suitable Candidates for Bond Investment?
2.1 Those who are concerned about the risk of volatility and do not seek high returns
More conservative investors and beginners in investing are suitable to start with products that have low volatility and high stability. Similarly, those nearing retirement age without a stable source of income are generally more concerned about volatility and risk. In such cases, investing in bonds is more appropriate than stocks.
It’s important to note that if you are someone seeking high returns, bonds might not be suitable for you;
Compared to returns, if you place greater importance on risk management, or if your total assets have reached a certain level and you do not wish to endure significant fluctuations.
2.2 Those with asset allocation needs
Stocks and bonds exhibit low correlation at certain times, and in some instances, they may even move in opposite directions (though not universally). However, both asset classes tend to generate positive returns over the long term. During bear markets in stocks, the profitability of bonds can act as a complement, helping to reduce overall portfolio value volatility.
Balanced funds also serve the purpose of asset allocation. The advantage lies in the fund management company controlling the balance, eliminating the need for individual adjustments. However, the downside is the relatively higher management fees associated with balanced funds.
We will delve further into the role played by bonds in asset allocation in subsequent discussions.