This is another email from a reader enquiring about the bond component in the Singapore Permanent Portfolio. I will publish these emails as FAQs which I believe will be useful for other readers.
I have attended your talk in April 2013 concerning the Singapore Permanent Portfolio.
[Free Ebook] How should you invest your first $20,000?
We asked 14 Singapore finance bloggers to share what they would do if they could go back in time and invest their first $20,000. They can no longer rewind time, but you can learn from their experience and hopefully start with a better footing.
Would appreciate your advice concerning the following bond matter.
Concerning the Bonds portion of the portfolio, I remembered your recommendation is 30 year SGS Bonds. However I noted that the one currently available is NA12100N 420401 10 @ 2.75%. Currently this bond is selling in the market at around $95 or so and thus effective interest at most is 2.8% which is lower than the inflation rate in Singapore (inflation is around 3.5% to 4%?).
I also note that there is another bond issued by LTA which is paying 4.17% (LTAn4.17% 160510 10K. This bond is of a shorter duration (3 years) and is currently selling at a premium costing $1.09 there about. With the premium the effective interst will work out to around 3.8%. Wouldn't this bond be better than the SGS bond as this bond enables me to at least break even with inflation and thus my funds will not be “depreciated”?
1) Permanent Portfolio is not about dividend or coupon rate
You should buy a long term bond because the price is more volatile. When the stock market crashes, you want your bonds to spike up in price to counter the loss in stocks. If you choose a short term bond, the price is less volatile, and the gain in bond price may not be sufficient to cover the losses in stocks.
2) Safety First
You should stick to government bonds because they are the safest. Permanent Portfolio is designed based on safest options. Which is “safer”? LTA bond or Singapore Government Bonds? The risk is priced into the yields of LTA bonds. That is why LTA bond yields are higher than SGS bonds. Of course, you can mix and match the bonds if you think the yield is too low for your liking. But like what I said in point 1, your returns might be affected if LTA bond price is not volatile enough.