Traditional wisdom has it that everyone should have a proportion of corporate bonds and gilts (government bonds) in their portfolio. The weighting should vary according to your age, risk profile and market conditions.
But in recent months there has been barely a mention of bonds (also known as debt securities here in New Zealand) in the national media. We're all too concerned with what is happening in stock markets worldwide.
But it's worth giving a thought to where the bond markets are headed. They could directly affect your wealth. And it's not all good.
As the National Business Review put it a couple of weeks back citing a Russell Investments survey: "….investment managers are sniffing for equity bargains….but have turned their noses at government bonds…"
The survey found pessimism about bonds – in particular government bonds with three-quarters of managers bearish on them.
Part of the problem is that every man and his dog is predicting high inflation to deal with the western world's debt problems. And inflation isn't great for fixed interest products.
One thing famed investor Warren Buffett has to say about bonds in the current market is that you should expect bond yields to rise. The influential Wall Street Journal said last week that although bond markets were inching back from the credit crisis, they had a way to go.
I'm no expert on bonds. But it's worth looking closely at what experts like Buffett have to say – of course remembering that they're interested in the US and international markets, not li'l old Godzone.
Regardless of what's happening bonds always have some place in a well diversified portfolio. It's just that you might lighten the load in inflationary times – preferring equities and property.
There are bond funds for those who don't want to pick individual bonds. They include several on Raboplus that are either largely or partially invested in corporate, government and local authority bonds. There are both NZ bond investments from Asteron on offer and a global one from AMP.
Just a note of warning. Private investors started piling into bonds issued on the NZDX market in recent years after they lost faith in finance companies and some other investments such as CDO funds.
But not all bonds are created equal. It's a good idea to consider each bond's rating from ratings agencies S&P and Moody's. And remember that even highly rated bonds from rock solid New Zealand companies aren't necessarily all they're cracked up to be. Just take a look at how my fellow New Zealand Herald writer Brian Gaynor tore into Fonterra's giant bond issue earlier this year by reading this article.