Are AAA private-sector corporate bonds safer than government bonds?
"If you are afraid of your government defaulting, then you also have reason to fear that your country's so-called ""AAA"" corporate bonds might not be a safe investment.  When governments default, they often do things like: In these scenarios, it is not predictable whether government bonds will suffer more or less than any particular corporate bonds. You might want to diversify into precious metals, foreign currencies, and/or foreign securities.  For the most security, you might want to choose investment vehicles that your government would have a hard time confiscating.  Of course, you will face currency fluctuation risks if you do so." Haven't there been examples of governments defaulting, delaying payment and imposing haircuts on investors? Greece and Argentina come to mind. Quite a few Govt have defaulted in the past or were very of default or crisis. Most 3rd world countries or developing countries have under gone stress at some point. Greece was amongst the first example of Developed country going bankrupt. am I not better off if the fund invests solely in AAA corporate bonds, avoiding government bonds? Well that depends. Corporate bonds are not safer than Government Bonds. There have been instances of Corporate bonds not giving the required returns.
Well keep in mind until the 2007ish housing crash Fannie and Freddie MADE money, they received no help from the federal gov't. The whole idea of the secondary mortgage market was to keep money flowing to home buyers and everyone who bought a home benefited (via rates a few points lower than if banks had to keep all the capital on hand to back all the loans)  Both these institutions worked well for about 40 years, the criminality here was that ratings agency rated these bonds as AAA, when in fact they were junk, that's who failed in their due diligence and really should be held accountable. (as if they were rated junk, the banks would have no one to buy them except at junk bond interest rates, meaning they wouldn't have made these loans to people who couldn't really afford houses.) The rating agencies were *supposed* to be neutral evaluators of the debt, and instead they essentially took what amounts to bribes from the banks to rate them highly. "For political reasons, almost all governments (including the US) spend more money than they get from taxes etc.  There are a number of things a government can do to cover the difference: Most governments opt for selling bonds.  The ""National Debt"" of a country can be thought of as being the sum of all the ""Bonds"" that are still paying interest, and that the Government hasn't Redeemed. It can all go horribly wrong.  If the Government gets into a situation where it cannot pay the interest, or it cannot Redeem the Bonds it has promised to, then it may have to break its promise (""Default"" on its payments).  This makes the owners of the Bonds unhappy and means potential buyers of future Bond sales are less likely to want to buy the Governments new Bonds - effectively meaning the Government has to promise to pay more interest in the future.  Recent examples of this include Argentina; and may include Greece soon. The US is in the fortunate position that not many people believe it will Default.  Therefore the new Bonds it sells (which it does on a regular basis) are still in demand, even though its interest payments, and promises to Redeem Bonds are huge." "Negative Yields on Bonds is opposite of Getting profit on your investment. This is some kind of new practice from world wide financial institute.  the interest rate is -0.05% for ten years. So a $100,000 bond under   those terms would be ""discounted"" to $100,501, give or take. No, actually what you are going to get out from this investment is after 10 years when this investment is mature for liquidation, you will get return not even your principle $100,000 , but ( (Principle $100,000) minus (Negative Yields @ -0.05) Times ( 10 Years ) ) assume the rates are on simple annual rate.  Now anyone may wander why should someone going to buy this kind of investment where I am actually giving away not only possible profit also losing some of principle amount!  This might looks real odd, but there is other valid reason for issuing / investing on such kind of bond.  From investor prospective: Every asset has its own 'expense' for keeping ownership of it. This is also true for money/currency depending on its size. And other investment possibility and risk factor. The same way people maintain checking account with virtually no visible income vs. Savings account where bank issue some positive rate of interest with various time factor like annually/half-yearly/monthly. People with lower level of income but steady on flow choose savings where business personals go for checking one. Think of Millions of Ideal money with no secure investment opportunity have to option in real. Option one to keeping this large amount of money in hand, arranging all kind of security which involve extra expense, risk and headache where Option two is invest on bond issued by Government of country. Owner of that amount will go for second one even with negative yields on bonds where he is paying in return of security and risk free grantee of getting it back on time.  On Issuing Government prospective: Here government actually want people not to keep money idle investing bonds, but find any possible sector to invest which might profitable for both Investor + Grater Community ultimately country.  This is a basic understanding on issue/buy/selling of Negative interest bearing bond on market.   Hope I could explain it here. Not to mention, English is not my 1st language at all. So ignore my typo, grammatical error and welcome to fix it.  Cheers!" "Congratulations on a solid start. Here are my thoughts, based on your situation: Asset Classes I would recommend against a long-term savings account as an investment vehicle. While very safe, the yields will almost always be well below inflation. Since you have a long time horizon (most likely at least 30 years to retirement), you have enough time to take on more risk, as long as it's not more than you can live with. If you are looking for safer alternatives to stocks for part of your investments, you can also consider investment-grade bonds/bond funds, or even a stable value fund. Later, when you are much closer to retirement, you may also want to consider an annuity. Depending on the interest rate on your loan, you may also be able to get a better return from paying down your loan than from putting more in a savings account. I would recommend that you only keep in a savings account what you expect to need in the next few years (cushion for regular expenses, emergency fund, etc.). On Stocks Stocks are riskier but have the best chance to outperform versus inflation over the long term. I tend to favor funds over individual stocks, mostly for a few practical reasons. First, one of the goals of investing is to diversify your risk, which produces a more efficient risk/reward ratio than a group of stocks that are highly correlated. Diversification is easier to achieve via an index fund, but it is possible for a well-educated investor to stay diversified via individual stocks. Also, since most investors don't actually want to take physical possession of their shares, funds will manage the shares for you, as well as offering additional services, such as the automatic reinvestments of dividends and tax management. Asset Allocation It's very important that you are comfortable with the amount of risk you take on. Investment salespeople will prefer to sell you stocks, as they make more commission on stocks than bonds or other investments, but unless you're able to stay in the market for the long term, it's unlikely you'll be able to get the market return over the long term. Make sure to take one or more risk tolerance assessments to understand how often you're willing to accept significant losses, as well as what the optimal asset allocation is for you given the level of risk you can live with. Generally speaking, for someone with a long investment horizon and a medium risk tolerance, even the most conservative allocations will have at least 60% in stocks (total of US and international) with the rest in bonds/other, and up to 80% or even 100% for a more aggressive investor. Owning more bonds will result in a lower expected return, but will also dramatically reduce your portfolio's risk and volatility. Pension With so many companies deciding that they don't feel like keeping the promises they made to yesterday's workers or simply can't afford to, the pension is nice but like Social Security, I wouldn't bank on all of this money being there for you in the future. This is where a fee-only financial planner can really be helpful - they can run a bunch of scenarios in planning software that will show you different retirement scenarios based on a variety of assumptions (ie what if you only get 60% of the promised pension, etc).  This is probably not as much of an issue if you are an equity partner, or if the company fully funds the pension in a segregated account, or if the pension is defined-contribution, but most corporate pensions are just a general promise to pay you later in the future with no real money actually set aside for that purpose, so I'd discount this in my planning somewhat. Fund/Stock Selection Generally speaking, most investment literature agrees that you're most likely to get the best risk-adjusted returns over the long term by owning the entire market rather than betting on individual winners and losers, since no one can predict the future (including professional money managers). As such, I'd recommend owning a low-cost index fund over holding specific sectors or specific companies only. Remember that even if one sector is more profitable than another, the stock prices already tend to reflect this. Concentration in IT Consultancy I am concerned that one third of your investable assets are currently in one company (the IT consultancy). It's very possible that you are right that it will continue to do well, that is not my concern. My concern is the risk you're carrying that things will not go well. Again, you are taking on risks not just over the next few years, but over the next 30 or so years until you retire, and even if it seems unlikely that this company will experience a downturn in the next few years, it's very possible that could change over a longer period of time. Please just be aware that there is a risk. One way to mitigate that risk would be to work with an advisor or a fund to structure and investment plan where you invest in a variety of sector funds, except for technology. That way, your overall portfolio, including the single company, will be closer to the market as a whole rather than over-weighted in IT/Tech. However, if this IT Consultancy happens to be the company that you work for, I would strongly recommend divesting yourself of those shares as soon as reasonably possible. In my opinion, the risk of having your salary, pension, and much of your investments tied up in the fortunes of one company would simply be a much larger risk than I'd be comfortable with. Last, make sure to keep learning so that you are making decisions that you're comfortable with. With the amount of savings you have, most investment firms will consider you a ""high net worth"" client, so make sure you are making decisions that are in your best financial interests, not theirs. Again, this is where a fee-only financial advisor may be helpful (you can find a local advisor at napfa.org). Best of luck with your decisions!" "I'll tackle number 2. It's one which many academics dismissed as an impossibility; after all, how could that be rational? What could cause negative yields (ie effectively giving an entity cash and paying for the privilege of doing so!) is something we've experiencing currently: fear. Back in the financial crisis, investors were actually paying to store their cash in treasuries, because of the  fear that if they left it with a bank they might not get it back.   What about the FDIC Insurance you may ask quite logically. The problem is that we're talking about massive entities, like pension funds, asset managers, corporations, who normally would store some (think millions - billions) in cash and cash equivalents (bank accounts, money market funds, short-term paper), they really aren't protected. So, they do what turns out to be the rational thing, which is pay a premium on ""safe assets"" ie US Gov't bills to guarantee you get most of your money back.  The same thing is currently happening with German front-end paper, as Europeans pull their money out of banks/periphery assets and search for safety.  Hope that helped." Short-term to intermediate-term corporate bond funds are available. The bond fund vehicle helps manage the credit risk, while the short terms help manage inflation and interest rate risk. Corporate bond funds will have fewer Treasuries bonds than a general-purpose short-term bond fund: it sounds like you're interested in things further out along the risk curve than a 0.48% return on a 5-year bond, and thus don't care for the Treasuries. Corporate bonds are generally safer than stocks because, in bankruptcy, all your bondholders have to be paid in full before any equity-holders get a penny. Stocks are much more volatile, since they're essentially worth the value of their profits after paying all their debt, taxes, and other expenses.  As far as stocks are concerned, they're not very good for the short term at all. One of the stabler stock funds would be something like the Vanguard Equity Income Fund, and it cautions: This fund is designed to provide investors with an above-average level   of current income while offering exposure to the stock market. Since   the fund typically invests in companies that are dedicated to   consistently paying dividends, it may have a higher yield than other   Vanguard stock mutual funds. The fund’s emphasis on slower-growing,   higher-yielding companies can also mean that its total return may not   be as strong in a significant bull market. This income-focused fund   may be appropriate for investors who have a long-term investment goal   and a tolerance for stock market volatility. Even the large-cap stable companies can have their value fall dramatically in the short term. Look at its price chart; 2008 was brutal. Avoid stocks if you need to spend your money within a couple of years. Whatever you choose, read the prospectus to understand the risks. Well keep in mind until the 2007ish housing crash Fannie and Freddie MADE money, they received no help from the federal gov't. The whole idea of the secondary mortgage market was to keep money flowing to home buyers and everyone who bought a home benefited (via rates a few points lower than if banks had to keep all the capital on hand to back all the loans)  Both these institutions worked well for about 40 years, the criminality here was that ratings agency rated these bonds as AAA, when in fact they were junk, that's who failed in their due diligence and really should be held accountable. (as if they were rated junk, the banks would have no one to buy them except at junk bond interest rates, meaning they wouldn't have made these loans to people who couldn't really afford houses.) The rating agencies were *supposed* to be neutral evaluators of the debt, and instead they essentially took what amounts to bribes from the banks to rate them highly. "Sure, and everything you've said here is absolutely true for a fully immunized portfolio.  What the OP suggests is that it's simply impossible to effectively defease future obligations.  He is pitching not so much finance as he is a political philosophy that can be summed up by ""defined benefit plans are impediments to competition.""  In the OP's world, the business of life and casualty insurance would implode within a few years of inception.  Actuarial science would be dismissed as mathematical witchcraft.  We would see company after company laid low by overwhelming future obligations against which they have no defense.  Rather, what we have are instances of *poor financial management.*  As opposed to the fine examples set by insurers, endowments, foundations, etc. (all of which can remain successful ongoing concerns in perpetuity), what we have are businesses who decided that it would be better to cut corners and bet on risk, rather than to take the safer (but more expensive) route and effectively manage their assets in relation to their liabilities.    He then goes on to suggest that, in laying off their problems, business are simply ""doing everybody a favor.""  These business (and their highly educated financial managers) are taking their flaming piles of shit, handing it over to the guy whose expertise most likely involves the repetitive operation of a machine, and saying ""here you go, this is a good deal for you, enjoy managing your future!"""