Bond portfolio: yield, dynamics analysis, portfolio management

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

Bonds have been and remain the most reliable and at the same time profitable alternative to bank deposits. People who are accustomed to making their money work invariably invest in debt securities and receive a guaranteed income. How to build a portfolio of bonds in such a way that with minimal effort it brings competitive income and minimizes risks? Read more about it below.

Portfolio investment advantage

Any experienced investor will confirm that the main component of success in the stock market is a competent approach to the formation of a securities portfolio. If you know for sure that the securities of a particular company will give a good return, you can invest all your free funds in bonds or shares of this company. At the same time, no one will give you a guarantee of income. You act at your own risk. And with an equal degree of probability, you can both increase your capital and go broke.

But if youIf you buy the same papers as part of the portfolio, then your other investments, especially if they are diversified, will easily cover the possible loss in the event of an unfortunate set of circumstances. Investing in stock instruments of varying degrees of return and risk is called an investment portfolio. And if you dream of building a successful career as an investor, you need to learn how to form it competently.

Portfolio and Investor

In a broad sense, the investment portfolio involves investing in a wide variety of assets: securities, bank deposits, real estate, art, jewelry, intellectual property and much more. In the most simplified and life-like sense, a portfolio means investing free funds in assets that do not require your time or money, but at the same time bring a stable income.

If you are the happy owner of your grandmother's apartment, which you rent for a small rent, and a bank deposit, and in your desk drawer is a collection of 1992 commemorative coins, then you can quite rightly call yourself an investor, albeit a passive one. This example shows how our ideas about investors as celestials on snow-white yachts somewhere in the Mediterranean Sea are mythologized, and also how close each of us is to receiving passive income. Another thing is that the amount of income largely depends on the amount of initial capital that you are willing to spend on investments. And of course, if it is with great difficultyaccumulated a small amount of money, then most of us are absolutely not ready to invest it in any risky enterprise. That is why we are talking about a portfolio of bonds - the best tool to start in the business of investing in securities.

Bonds and stocks

For a novice investor, it is best to form a portfolio of bonds and shares of the most reliable companies. At the same time, if you do not have a large deposit, the basis of your portfolio will be debt securities. It is for bonds that the lowest level of price decline during their "life" on the market, especially when it comes to short-term bonds with a maturity of up to 1 year.

Stocks are more suitable for active speculation. An analysis of the dynamics of price changes in the stock market shows that this tool requires a sufficiently high financial literacy and understanding of all the mechanisms that operate not only in the stock market, but also in the global economy.

What makes up a portfolio

But let's get back to the formation of a bond portfolio. The most common scheme for a conservative investment portfolio is to distribute funds in appropriate proportions among all types of bonds available. In this case, a balanced conservative bond portfolio would look something like this:

• A third of the capital purchased OFZ so-called federal loan bonds. They are the most reliable, and their profitability is at the level of the profitability of deposits of leading banks.
• Another third of the money goes toacquisition of corporate bonds of leading Russian mining and energy companies or banks. These securities have a higher yield compared to OFZs and are reliable at the same time.
• About 20% of the deposit can be invested in municipal bonds with an average yield, if you are not ready to take risks. If you want to increase the profit from your portfolio and for this you will not spare your nerves, this part of the capital can be invested in bonds of young, little-known companies that offer high returns. In this case, it is important that you understand the area in which the company whose securities you purchased operates.
• The remaining funds can be used to speculate with shares or put on a deposit. The choice, again, depends on your attitude to risk.

Which bonds to buy

How do you know which bonds to buy? With OFZ, everything is clear: the main thing is to choose the maturity and the size of the coupon income. In the case of federal debt securities, it is more profitable to purchase medium-term and long-term bonds. First, OFZ holders are exempt from income tax on these securities. Second, the coupon yield on federal bonds is fixed for the entire holding period. Therefore, for example, buying a paper with a maturity of 10 years and an income of 6.3%, you will receive this percentage annually, regardless of the reduction in the key rate of the Central Bank. And according to forecasts, it will continue to decline.

The yield of a bond portfolio can grow significantly if it is formed from securities withdifferent maturities, and reinvest the proceeds in the same portfolio, gradually expanding the list of instruments. Thus, after a few years, it is quite possible to achieve a solid passive income. This is the strategy followed by all the world's leading investors.

Corporate bonds

Returning to the bond portfolio, let's remember that it will not be superfluous to have corporate papers of both well-known and stable companies ("blue chips") and "dark horses".

In order to buy bonds of large companies, it is enough to rank the most reliable corporations by financial indicators, correlate this information with the size of the proposed coupon income and the nominal price of the paper at which it is currently traded on the market. The face value of most bonds is 1000 rubles. for 1 debt paper. If you see that the paper is traded on the market at 105% or 112% of the value, this is a sure sign that the corporation is doing well and its paper is in price. However, before acquiring such bonds, think about whether this price will start to fall soon, because it has nowhere to go any further. In this case, there is a high risk of monetary losses, because the paper will be redeemed at its face value, and you have already laid out much more for it.

Risk Bonds

Despite the fact that the debt market is considered the most conservative, managing a portfolio of bonds involves a certain degree of risk. And here we will talk about the bonds of little-known youngcompanies. Their securities in terms of market price and coupon income may seem the most attractive. In comparison with OFZ, the coupon for them is sometimes even twice as large. Include such securities in your bond portfolio and the risk of losing your investment will automatically increase. Therefore, newcomers are not recommended to purchase securities of little-known companies on attractive terms in the amount of more than 20% of the total portfolio.

Investment in banks

Among corporate bonds, banking papers are traditionally in demand. The reliability of the largest financial institutions is undeniable, and the conditions for investing in securities are more attractive than in the same banking products.

Including banks in your list of companies for a portfolio of bonds, it remains only to track the state of affairs on the credit ratings of independent agencies. Considering the frequency of revocation of licenses from banking organizations in our country recently, even a completely reputable organization, and therefore your funds, can be hit. It is recommended to give preference to securities with a maturity of up to 3, maximum 5 years.

Yield and duration

In investing in securities, there are two key concepts that characterize the financial attractiveness of an instrument. In the case of the debt market, this is the yield and duration of the bond portfolio. And if the concept of profitability is familiar to everyone, then the second term can scare a novice investor. In fact, if you look at it, this concept is extremely simple, andits value contains key information about the investor's benefit.

If the yield is calculated in percent or rubles, then the duration is determined by days. In other words, this term means after what period of time the investor will return the funds spent on the purchase of paper, that is, it will go to zero. The duration of a portfolio significantly characterizes its effectiveness, because the sooner an investor covers his expenses and returns the amount of money spent, the sooner he will start receiving net income, from which only a percentage of tax will remain to be deducted.

The conclusion that suggests itself after a brief acquaintance with portfolio investment in debt securities is simple and unambiguous: every financially literate person can become an investor. This does not require colossal capital, armies of advisers and analysts, or watching financial news on three screens 24 hours a day. Simply choose a reliable financial broker and use your common sense.

Don't expect lightning-fast cosmic profits from investing in securities, don't be tempted by the mountains of gold that an unscrupulous broker can promise, don't panic and don't take risks in vain. Then step by step you will become a we althy and successful investor.