Tuesday 13 March 2018 by Guest Contributor At FIIG

Back from the brink: how bonds helped one couple recover from the GFC

We look at how investing in bonds helped Kevin and Marie Macdonald rebuild their portfolio following the devastating aftermath of the global financial crisis

Retirees Kevin and Marie Macdonald at Brighton Beach, Australia

When the global financial crisis hit in 2007, many unsuspecting Australian investors found themselves in hot water. For most, a financial crisis of this proportion was completely unfathomable, unforeseen and unprecedented.

Kevin and Marie Macdonald were no exception. The Melbourne retirees had long enjoyed investing in the share market, so much so that 80 to90 per cent of their portfolio was allocated to equities at the time disaster struck.

Placing their faith in the market, the couple felt the full force of the GFC.

“We were away in London at the time and there wasn’t really much we could do. When we got home and had a look at things, we realised just how exposed we were to equities,” said Kevin.

Alongside their property investments, Kevin and Marie had a mixture of Australian and international shares but this diversification wasn’t enough to withstand the GFC’s blast.

“It was a catastrophic blow. Our equities and hybrids all crashed. Even assets that weren’t meant to be correlated went down. For example, one of our property trusts was completely wiped out,” he added.

The couple lost a significant portion of their investment capital and it was clear a change in approach was needed.

“We reviewed our investment strategy and realised we needed to diversify away from equities. We were lucky in that we were still alive and kicking post-GFC but we knew we needed an investment allocation that would provide a safe haven for us, should things go to cactus again,” said Kevin.

“That’s when we discovered FIIG.”

Kevin and Marie came to FIIG in 2010 where they met with Melbourne office chief, Peter Curtin, and have been happy investors in corporate bonds ever since.

“We knew nothing about corporate bonds at the beginning, but Peter gave us a real understanding of the asset class and how bonds can anchor your portfolio when things go bad.”

“We licked our wounds and started to rebuild our portfolio, this time with a 50 per cent weighting towards bonds.”

The Macdonald’s foray into corporate bonds got off to a strong start. Reserve banks around the world were dropping their interest rates, which meant they were able to invest in very high-rated bonds at quite low prices, with interest rates yielding 8 or 9 per cent.

“Moving into bonds has been one of the best things we’ve ever done. It has provided us with the level of financial security we need and it would be great to see more investors, retirees in particular, consider bonds.”

Marie, a retired academic and Kevin, a former medical professional, took great interest in developing the portfolio, working closely with Peter to expand and sophisticate it. 

Today, the Macdonald’s have 20 corporate bonds in their portfolio, almost a quarter of which are US bonds. Investing in international as well as domestic bond markets has helped to further diversify their portfolio and improve returns whilst mitigating risk.

“The yield on our corporate bond portfolio at the moment is about 7.5 per cent. It’s balanced towards high risk for high return but we stress test it regularly to ensure that we are comfortable with the investment risk and it means we’re always generating enough income for us to live comfortably,” Kevin said.

“Unlike equities, you can actually predict what income and cash flow you’re going to receive from a bond and as retirees that’s invaluable,” he added.

“As retirees, if we want to remain financially independent we need to establish a cash flow that not only meets our budget but protects us against inflation.”

Kevin, who is now the chairman of his local Australian Investors’ Association discussion group has found that other investors his age know little about the asset class.

“Most people like to stick with what they know and for many, that’s equities and term deposits. The sad thing is that many of those people are getting such low returns, and it’s not enough when you’re retired and wanting to sustain your lifestyle.”

“Moving into bonds has been one of the best things we’ve ever done. It has provided us with the level of financial security we need and it would be great to see more investors, retirees in particular, consider bonds.”

“It really has made a world of difference.”