Retired medical specialist Neil tells his bond story to Elizabeth Moran
EM: Neil, can you tell me how you first came to invest in bonds?
Neil: When I retired, we had put our SMSF funds into equities and managed funds. Over time I became progressively more disenchanted with Managed Funds having no control over our investments and paying quite substantial fees for what seemed like not a huge effort on the part of the managers. It is important to me to keep as much control as possible of our investments and I would rather lose money myself than have someone else do it for me.
Anyway, I read an article in the newspaper that piqued my interest in bonds. I met Jon Sheridan, one of the dealers, who spent time with me and explained the basics of bonds and sent me home with some useful reading matter. This was in late 2012 and was the start of my relationship with FIIG and investing in bonds.
EM: I know you are retired, what’s been your investment strategy?
Neil: To call it a strategy might be a bit much. It has been more random than that. My wife and I do not have a specific plan but try to live solely off the income from our investments. We have a conservative investment approach and obtain information from quite a wide variety of sources, bearing in mind that hindsight has shown that much "expert" advice is anything but.
Having listened to speakers at a number of Investor Forums and spoken to other attendees, many investment plans seem overly complicated and designed for perpetual disappointment. I can't see the purpose in making things too complicated. After all, most of us have a fixed amount of money to invest and once it is invested, unless one dabbles in trading, is likely to remain in whatever share, bond or managed fund they own for a reasonable period of time. This means that for most investors, the amount of time needed to supervise your investments is not that great; in my case three to six hours a week.
We have tried to apply ethical principles with bond and share investing avoiding, as best possible, companies associated with tobacco, gambling, armaments, coal and such like. Our aim is to maintain our capital and hopefully to increase it somewhat over time. I would say that I am reasonably relaxed, but not complacent, about our investments.
EM: How did you start investing in bonds?
Neil: We started by investing in six bonds worth about $300,000. Over time the portfolio has grown, as I've exited from managed funds and closed a term deposit, to about $900,000 in 17 bonds. I took Jon's advice on a number of the purchases but also researched the companies as best possible. Other purchases have been specifically of my choosing. Our main interest was not to incur a capital loss on any of the bonds.
Most bonds I've targeted have anticipated returns of 5.5% or more. I try to get returns at that level, although it might be argued that they are slightly riskier investments. So far, so good.
EM: What have you liked about bonds?
Neil: I liked that they provide a regular income flow at a return substantially better than term deposits and there is a chance of some capital gain but there's a risk with that as well.
I have actually found learning and investing in bonds interesting.
EM: Is there anything you haven’t liked or that you would want to warn others of?
Neil: Nothing in particular. For the first year, the language and terminology is quite confusing and it took me a while to come to grips with that.
Jon would say to me that I needed to remember I was not in the equity market. It takes a bit of time to get used to bonds but it’s certainly not insurmountable.
EM: Do you have any tips for beginners?
Neil: Use common sense. Don't necessarily pursue the most lucrative return, read research and look for other material on the company.
I’m cagey about investing in foreign currencies. I’ve had some success with investing in USD, while currency changes can be beneficial they can also be unpredictable.
Everything we have is tied up in bonds, shares and cash. The investments need to be looked after moderately conservatively. So, I’d suggest not to get too carried away with high returns which may not come to pass.
You need to be comfortable with whatever you do.
EM: What’s been your best bond investment?
Neil: The best return was from a Transfield USD bond where I made an equivalent annual return of 38%. I invested USD40,000 and sold eight months later for USD46,000 but the currency had dropped and the AUD equivalent jumped to $55,000. Coupled with the coupons (interest income) the return was 38%.
My next best investment was in Qantas, with an annual equivalent 30% gain over a five month period. A reasonable return for what had been invested.
Two of our investments have earned around the 4% mark, with everything else returning 6-10%, one other 13% and one, Payce Construction, 16% per annum.