Much is being reported about the seemingly unstoppable increase in popularity of fixed-interest investments such as corporate bonds and gilts.
Presumably, this is mainly down to advisers recommending them as an alternative to equities. This is a dangerously short-term approach and may lead to more upsets, given that the present stage in the price cycle of fixed-interest investments must be comparable to that of equities in the late 90s.
First, if, as is being widely predicted, the Government issues substantially more gilts and supply increases by more than demand, the price of gilts will fall.
Second, when life companies and pension funds start buying equities again, this will see a resurgence in their prices matched by a decline in the prices of bonds as they sell them in exchange for equities. The fall in bond prices could be the most severe yet seen.
Bonds are not the cast-iron guarantee against volatility that too many people seem to think they are. They have their place in a properly balanced portfolio and can offer a relatively safe haven in times of an equity bear market but balance is the key.
When discussing tech funds with clients, I make the point that they should not be put off by the severe price falls of recent years. Those are history.
Formulating medium to long-term investment strategies is at least as much about looking forward as looking back. Yet I gain the distinct impression that far too many portfolios are currently being put together on the basis of the latter with far too little regard for the former.
The critical question to ask is where are the markets most likely to be in 12 months time? My view is that over the short to medium term, equities are set for a comeback – and fixed-interest instruments may lose much of their present shine.
WDS Independent Financial Advisers, Bristol