I’ve been struggling to understand why bonds are so blatantly recommended in a balanced portfolio, but virtually nobody is talking up HISA, which often seem to have a higher return, without any risk to capital: win-win. I believe I’ve now developed some insight into why this oversight exists.
Most treasury and municipal bonds in the US are tax free (for US citizens). I know. Crazy talk! Whereas HISA would be taxed at the marginal rate. So of course, if you read investing advice given by Americans, you may not realize that advice may be biased (due to their tax law), and that doesn’t apply to you as an Australian.
You don’t have to go back too far before HISAs didn’t exist. “Online only banks” etc are a recent development. So “traditional advice” will always recommend bonds, simply because people keep repeating the same advice without modernizing it.
Bond Price Appreciation
I read in a forum how that the coupon rate isn’t that important, since the majority of your return come from the bond price appreciation. Very true…at the moment. While interest rates keep falling, exiting bonds you hold will capital appreciate. But that’s short term thinking. When interest rates go up, existing bonds drop in value. And if you plan on holding bonds as a permanent percentage of your balanced portfolio, guess what – we’re at historically low interest rates. Over the next 30 years, there’s so much more room for you to lose value on bonds than there is to gain from it. And when interest goes up, HISA benefit!
Investing advice from rich people
One limitation to HISAs is there’s typically a limit to the amount you can place in them. Up to a million dollars, for instance. So for someone like Warren Buffett or (insert your favourite wealthy person here), of course they’re not going to recommend HISAs, because it wouldn’t apply to them.
So these are my recent thoughts into why bonds are held as the Holy Grail of fixed income, and often better HISAs get overlooked by most investment advisors.