Should bonds be part of my portfolio?

Question: CNBC cable channel has a scroll listing Philippines 10-year bonds at 7 percent or 8 percent. Are there such bonds?

Are they Government of Philippines bonds? How does one buy them? —Thomas

Answer:

BEFORE we answer the question, let’s talk about investing in general and then bonds in particular.

Some people say investing is age-related. To a certain extent this is true. The older we get, the less time we have to recover from a loss. Thus, we tend to be more conservative with how we invest our hard-earned and limited wealth the older we get. So does this mean that rules of thumb like the “100 minus your age rule” are to be followed to the letter? The “100 minus your age rule” says that the difference between 100 and your age represents the percentage of your portfolio that should be invested in stocks.

Rules of thumb give you wisdom in bite sizes. But blindly following rules of thumb can sometimes get your “thumb bitten off.” If we were to take the “100 minus your age rule” literally, what advice can we give to the current oldest man in the world who just turned 114? And even if we are just talking about an 80 year old, should that person be 20 percent invested in stocks? Having seniors who are aggressive and living in the Philippines would indeed be few and far between.

There is a rule in investing, which is more like a law. Risk goes up the higher the potential return and the longer the time an instrument requires money to be invested. Looking at the three major categories of investment instruments, these could be ranked from the lowest to the highest risk levels as follows: money market, bonds and stocks.

But what is a bond in the first place? A bond represents the debt of its issuer. The issuer can be a company or a government. Typically, the issuer of the bond pays interest periodically each year and repays the original amount invested in the bond on the bond’s maturity date. I didn’t exactly catch the CNBC scroll listing but I am sure they were referring to bonds available in the Philippines.

There are also zero coupon bonds where the issuer does not pay interest during the life of the bond. Instead, on the bond’s maturity date, the issuer pays an amount that is higher than the original amount placed by investors.

Bonds can have a fixed maturity or be perpetual, thus behaving more like stocks, which also have no maturity. But one thing is sure and that is bonds are long-term investments.

In the Philippines, bonds are currently issued in pesos, US dollars and euro’s. RoPs (Republic of the Philippines) refers to the US dollar-denominated debt of the Philippine government. They are traded locally and internationally. A recent addition is the Global Peso bond of the government that is also traded locally and internationally.

One thing great about investing in bonds in the Philippines is that they can be tax-exempt provided their original maturity is not less than five years, that the bonds are issued by banks, that the investor of the bond is an individual and that the investor holds on to the bonds for at least five years. Individual investors can enjoy tax-exemption with bonds issued by non-banks provided they invest in these bonds through investment management accounts (IMAs) or living trusts (LTs). Now where can investors get a hold of IMAs and LTs? Why through the trust departments of banks that hold Bureau of Internal Revenue rulings that their IMAs and LTs, when invested in bonds of non-banks, are tax-exempt. Please note that there are minimum investment requirement for IMAs and LTs.

But what about buying bonds directly? Bonds in the Philippines are bought and sold through SEC-licensed and Philippine Dealing Exchange (PDEx)-accredited brokers. For a complete listing of these brokers, log on to pdex.com.ph and click on “Home,” “Trading Participants” and “Public Market.” You can also find the latest bond prices in this site. Bonds that are not traded on PDEx can be bought from and sold by banks.

Now, should bonds be part of your investment portfolio? Bonds present a great way of spreading the risk in investing. They are relatively safer than stocks and provide higher returns than money market instruments (e.g. time deposits and treasury bills).

How much of bonds at what age? That depends on your prevailing investment return objective and risk preference. There is no rule of thumb here. Plus there is more to bonds than meets the eye. This column is not intended as a recommendation to buy or sell securities. So do ask a financial adviser for help.

Happy investing.

Efren Ll. Cruz is a registered financial planner with the RFP Philippines. He is author of the bestselling books, “Pwede Na! The Complete Pinoy Guide to Personal Finance” and “Pwede Na! The Complete Pinoy Guide to Retirement & Estate Planning. For information about the RFP program, visit www.rfp.ph or e-mail [email protected]