Just because something is cheap doesn’t mean it’s good value – or that you should buy it. We all have stuff in our cupboards that seemed too cheap to pass up and later proved a waste of money. At the same time, if something is cheap you may have a bargain. When you’re an investor, it can be hard deciding what to keep and what to sell, or what is a bargain and what was a mistake. Spring is the traditional time to clean up at home – getting rid of the dross cluttering our lives. An investor has to do that, too – including admitting defeat on those bargains you were sure were the next best thing, but have languished. Just like those jeans that no longer fit, you need to say goodbye to the investments you were hoping would one day prove their worth. Ignore what you paid – that money has been spent – ask yourself honestly what are the chances the acquisition will grow in value from its current level.
It’s a bit like when you order food or drink and you don’t like it or can’t finish it. Get over it – you’ve spent the money, so you don’t need to consume it, despite what your parents told you about the starving millions when you didn’t want to eat your broccoli. When you are doing the big tidy-up, you’ll need to think about your mix of investments. Economic experts think there is a poor outlook for the worldwide economy and that doesn’t bode well for activity driving company profits and sharemarket returns. There is not a lot of good economic news out there. The world is stuck in a fairly depressed environment, with China, Europe and the US battling low activity, and the last two mostly facing high debt and high unemployment. New Zealand is doing relatively well, with our exports still getting reasonable returns; we’re lucky to be in the most buoyant part of the world – Asia Pacific.
Some experts are saying while quality shares are still generally modestly priced, you should take profits where you can and reinvest in safe, low-risk investments. This normally means fixed-interest securities, including term deposits and bonds, as the most preferred. As with any investment, the quality is usually reflected in the price; you get what you pay for, so the lower the risk, the lower the return. Having said that, there is a huge choice – globally, the capital invested in bonds is more than twice that in shares. And there is the chance to make capital gains – or losses. Trying to pick the right one is complex – considerations include risk, type (subordinated, convertible, secured, capital), term and whether you should trade before maturity. If it looks too hard to choose an individual bond, then a fund is a good idea. That way you get a mix of investments to spread risk and access to international funds, and you can hedge against currency fluctuations. Remember, fees charged by the advising firm will affect your overall return. New issues often have limited public pools, which is another reason for going for the spread offered in a fund.
When you are buying and selling on the secondary market, the capital value will vary, depending on what interest rates are doing, and other factors such as the company’s credit rating. So, if you buy a bond and interest rates rise, its market value will fall. Conversely, if you buy a bond before interest rates fall, its value will go up. The great thing about buying bonds in the secondary market is they are tradable – you can sell quickly if you need the money; you don’t need to wait until the bonds mature. But a lot of people buy bonds because they know the dollar amount they invest will be the same (ignoring inflation) when the term matures. No bargain, but no boo-boo, either.