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The very recent local stockmarket's tailspin prompted many investors fleeing for
shelter. The never-ending series of negative news caused the local stockmarket to
fall so sharply that the key composite index effectively broke the 1,000 psychological
level two weeks ago. A bearish stockmarket should be a good lesson for stock players
that anything rises on one day will just as easily plummet on another.
Although we agree that stocks are ideal for real long-term growth as discussed in
our issue last week, one should not overly-concentrate on stocks. Smart investors,
who look well beyond rising stock prices, protect their money by diversifying appropriate
portions of their money into fixed-income securities.
Fixed income securities otherwise known as bonds, generally perceived as dull and
less glamorous investment medium are certainly the shinning stars so far this year.
Stock players who diversify to include bonds for a more balanced investment portfolio
is more likely to minimize the impact of a heavy beating in the stockmarket.
It is not usual to see local retail players diversify into fixed-income instruments.
Not many people recognize the benefits of investing in bonds which originated in
the U.S. at the turn of the century. Bonds are universally not favored among investors
as their long-term returns are mostly lower than stocks.
For those local unit trust investors who invest in bonds, they will be glad to note
that bond performance figures are in the positive territory as compared to equity
funds which generally have not been performing well in light of the magnitude of
the current market downturn.
Table 1 depicts the performance of some Malaysian bond funds for the first half of
the year.
Table 1. Performance Analysis (01/01/97 - 01/07/97)
|
Malaysian Bond Funds
|
First-half 1997 (%)
|
1996 (%)
|
| AUT Malaysian Commerce |
0.00
|
16.67
|
| CIMB The Malaysian Bond |
4.08
|
9.90
|
| KL Bond Fund |
4.90
|
-
|
| Mayban Income Trust |
4.95
|
-
|
Source: Normandy Research
Note: Calculations based on bid-to-bid
Investors are advised to study the real entry cost before investing
If you are a new investor planning your asset allocation, it is wise to consider
instruments other than stocks regardless of your investment profile. Learn how bonds
can be a viable investment tool particularly during times when the stockmarket is
volatile - buying a bond fund is not necessarily a bad thing to do. Bonds deserve
some respect as they offer diversification for a stock-heavy portfolio.
Table 2 shows the correlation between U.S. stock and bond returns. Notice that any
correlation coefficient less than 1.00 between two sets of returns indicates diversification
potential.
Table 2. Correlation Analysis of Historical Annual Returns (1926-1993)
| |
Large firm stocks
|
Small firm stocks
|
| Large firm stocks |
1.00
|
0.81
|
| Small firm stocks |
0.81
|
1.00
|
| Long-term corporate bonds |
0.22
|
0.10
|
| Long-term Treasury bonds |
0.14
|
-0.01
|
| Intermediate term Treasury bonds |
0.06
|
-0.06
|
| Treasury bills |
-0.05
|
-0.10
|
Source: SBBI 1994 Yearbook (Chicago: Ibbotson Associates, 1994), 105.
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