Gilts and bonds

1  2  3  4  5  6  7  8  9  10  11  12  13  14  15  16  17   

11. Are bonds for you?

The downturn of late 2001 shook confidence, but many investors cling to the belief that stocks consistently offer the best returns at all times.

To an extent, history supports this view: over the long term stocks have provided much better returns than bonds. According to the Barclays Capital study, £100 invested in equities in 1918 would have been worth £43,891 in 1997. If invested in bonds, the figure would have been worth £528.

Click here for a graphic illustration of the relative return of shares compared to gilts and RPI.

So, game, set and match to stocks?

No. Those figures fail to disclose that in the short term, shares can be very risky indeed. According to 'The Bear Book' by John Rothchild, bear markets occur every 4-6 years and can be deeper and longer than people imagine.

For all these reasons, bonds can be a good place to hibernate when the stock market is having a rough ride. If you think:

• Shares are trading on too-high P/E ratios
• Dividend yields are falling
• The economy is turning down
• Inflation is under control
• Interest rates are likely to fall

A shift from shares to bonds may make sense. The key is to know when it's worth your while taking the extra risks that stocks pose, and when discretion is the better part of valour.

One rough-and-ready approach may be to invest a percentage of your capital in bonds that is equivalent to your age. If you're 30, you may decide to put 30% in bonds. If you're 70, you could make it 70%. The reasoning behind this is that a thirty year old may take a long-term view on his investments and afford to ride out the bumps in stocks. A 70 year old, on the other hand, may want security of income and capital, and minimum volatility.

1. What are bonds? 2. Different types of issuer 3. Different types of bond 4. Bonds compared to shares 5. Bonds as tradeable instruments 6. Nominal yield 7. Calculation of current yield 8. Capital gains on gilts and bonds 9. Calculating the redemption yield 10. Factors which affect bond prices 11. Are bonds for you? 12. Selecting gilts and bonds 13. How to buy gilts and bonds 14. Unit trusts and bond funds 15. Keeping track of your bond investments 16. Tax 17. Conclusion

• First Steps in Bonds
• Beating the Dow with Bonds
• Pricing Convertible Bonds