8 June 2012
The Motley Fool warns investors to beware of bonds as the Euro crisis deepens
Flight to safety is not without risk
Swapping bonds for shares may seem like a sensible thing to do when European markets are as uncertain as they are now. However, a flight to safety is not without risk warns David Kuo, European markets expert and director at The Motley Fool (UK).
Currently, bond yields have been pushed ever lower as investors pile into fixed-interest investments without the realizing the damaging impact on their wealth.
The table below provides a measure of the appalling returns on some of the bonds that the market perceives to be “safe”. US Treasuries are some of the most popular fixed-interest investments. But at 1.6%, it would take investors 44 years to double their money. In the case of Swiss bonds, it would take 139 years.
A portfolio of the eight bonds would have an average yield of 1.62%. On that basis, it would take over 40 years for investors to double their money. This would still leave them 80% worse off if inflation is eroding the value of money at 5% a year.
No. of years to double your investment
|US 10-year Treasury|
|Canada 10 year bond|
|UK 10-year Gilts|
|France 10-year bond|
|Germany 10-year bond|
|Switzerland 10-year bond|
|Japan 10-year bond|
|Australia 10-year bond|
David Kuo urges investors to beware: “It is understandable for investors to be frustrated by the apparent lack of urgency amongst European leaders to resolve the Eurozone debt crisis.
“However, while buying bonds may seem like a panacea for uncertainty it is not a cure for inflation. Bonds may appear to be safe but the risk you take is that inflation will erode the value of the investment over time. At 5% inflation, your money will only have the buying power of a tenth it has today. So even if your investment doubles, it will still only have a fifth of its value now.”
For further information and/or to arrange an interview with David Kuo, please contact: Sonia Rehill on 020 7462 4308 or Soniar@fool.co.uk
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