Doesn't cash beat bonds for individual investors?

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dustytown
Posts: 13
Joined: Sun Feb 22, 2015 5:57 am

Doesn't cash beat bonds for individual investors?

Post by dustytown » Thu Jul 11, 2019 11:40 am

Am I overlooking something with regards to safe/government bond funds in Belgium?

Euro-government bonds with a 10y duration have a negative interest.
Government insured savings accounts (only available to individual investors) at least still yield 0,11% per year (legal requirement).
Both yield less than inflation, so There Is No Alternative to (at least some) stocks in our portfolio.


Assuming most individual investors don't need to invest hundreds of millions (like an institutional investor) but rather -at most- have a few hundred thousand EUR, why would any individual prefer negative-interest government bonds over government insured savings accounts yielding at least 0,11% ?

I understand institutional investors have no other choice, but for an individual investor: what am I missing?
From what I understand cash has got bonds beat in all aspects (yield, liquidity, stability, ..).

Is that correct or am I missing something?

Schlabba
Posts: 55
Joined: Sat May 11, 2019 9:14 am

Re: Doesn't cash beat bonds for individual investors?

Post by Schlabba » Thu Jul 11, 2019 12:44 pm

dustytown wrote:
Thu Jul 11, 2019 11:40 am
Assuming most individual investors don't need to invest hundreds of millions (like an institutional investor) but rather -at most- have a few hundred thousand EUR, why would any individual prefer negative-interest government bonds over government insured savings accounts yielding at least 0,11% ?
Those are not the only options. The usual suggestion is to buy global bonds hedged to your local currency.

For instance: iShares Core Global Aggregate Bond UCITS ETF
Or: Vanguard Global Aggregate Bond UCITS ETF EUR Hedged Accumulating

That solves the negative yield problem. Another function of government bonds is to have a negative correlation to stocks. Often safe bonds go up when the markets are crashing.

Chris K Jones
Posts: 211
Joined: Sat Jan 20, 2018 6:54 pm

Re: Doesn't cash beat bonds for individual investors?

Post by Chris K Jones » Thu Jul 11, 2019 12:59 pm

I guess another thing to consider is what is the maximum amount you can have insured in a Belgian money market in sured account? In the US, the limit is $250,000. You can get around this by using different banks and titling accounts in your name, spouse's name, jointly, etc. In the Cyprus Financial crisis, I think everyone with over 100,000 euros took a haircut. Best wishes.

DJN
Posts: 367
Joined: Mon Nov 20, 2017 12:30 am

Re: Doesn't cash beat bonds for individual investors?

Post by DJN » Thu Jul 11, 2019 1:09 pm

Hi,
have a look at cash equivalents on Wiki for non-US investors: https://www.bogleheads.org/wiki/Cash_eq ... _investors
Also this new page on Wiki on bonds for non-US investors has some other alternatives to global aggregates: https://www.bogleheads.org/wiki/Bond_ba ... _investors
These pages might have some interesting information.
DJN
Yah shure

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alpine_boglehead
Posts: 322
Joined: Fri Feb 17, 2017 9:51 am
Location: Austria

Re: Doesn't cash beat bonds for individual investors?

Post by alpine_boglehead » Thu Jul 11, 2019 3:30 pm

Schlabba wrote:
Thu Jul 11, 2019 12:44 pm
dustytown wrote:
Thu Jul 11, 2019 11:40 am
Assuming most individual investors don't need to invest hundreds of millions (like an institutional investor) but rather -at most- have a few hundred thousand EUR, why would any individual prefer negative-interest government bonds over government insured savings accounts yielding at least 0,11% ?
Those are not the only options. The usual suggestion is to buy global bonds hedged to your local currency.

For instance: iShares Core Global Aggregate Bond UCITS ETF
Or: Vanguard Global Aggregate Bond UCITS ETF EUR Hedged Accumulating

That solves the negative yield problem. Another function of government bonds is to have a negative correlation to stocks. Often safe bonds go up when the markets are crashing.
As far as I understand it, hedging translates the interest rates into the interest rates of the target currency. So if you hedge 10-year US treasuries into EUR, these would also have about the same yield as 10 year Eurozone government bonds. But without hedging, you get the currency volatility you might not want for the safe part of your portfolio.

Around here in Austria you can still get government-insured CDs/savings accounts e.g. with a duration of 2 years at 0.8% (before taxes, so effectively 0.6%).

For "safe" investments, you're between a rock and a hard place. With an inflation target of at 2%, but safe investments yielding only 0.5%, you're in for a real yearly loss of 1.5% (if the inflation target is achieved). Some people I know now fuss a lot about this, but when inflation was 10% and interest rates were also 10%, you were worse off with taxes eating 2.5%, so the real loss is not so bad now.

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