3388: The Risks and Rewards Of International Bonds by Robert Farrington of The College Investor on Global Bond Market
Episode
10 min
Read time
2 min
Topics
Investing, Fundraising & VC, Product & Tech Trends
AI-Generated Summary
Key Takeaways
- ✓Portfolio Diversification: International bonds protect against US economic decline by providing exposure to European and Asian markets, with developed country bonds safer than emerging market bonds for core holdings.
- ✓Currency Impact: Foreign bonds denominated in local currencies like British pounds have inverse dollar correlation, gaining value when foreign currency strengthens but losing when dollar rises against them.
- ✓ETF Selection: Vanguard's BNDX offers 96.6% non-US bond exposure with 0.08% expense ratio, providing better international diversification than BNDW's 44.1% US allocation for investors seeking foreign market access.
What It Covers
Robert Farrington explains how international bonds provide portfolio diversification, examining currency risks, regional exposure benefits, and practical ETF options like Vanguard's BNDW and BNDX funds.
Key Questions Answered
- •Portfolio Diversification: International bonds protect against US economic decline by providing exposure to European and Asian markets, with developed country bonds safer than emerging market bonds for core holdings.
- •Currency Impact: Foreign bonds denominated in local currencies like British pounds have inverse dollar correlation, gaining value when foreign currency strengthens but losing when dollar rises against them.
- •ETF Selection: Vanguard's BNDX offers 96.6% non-US bond exposure with 0.08% expense ratio, providing better international diversification than BNDW's 44.1% US allocation for investors seeking foreign market access.
Notable Moment
The global bond market has averaged 79% larger than the stock market over twenty-five years, yet many investors overlook international bonds for portfolio diversification and stability.
Episode Transcript
When you're ready to start your business, Northwest's registered agent gives you access to thousands of free guides, tools, and legal forms, everything you need to launch and protect your business in one place. Northwest's registered agent has been helping small business owners and entrepreneurs launch and grow businesses for nearly thirty years. They're the largest registered agent and LLC service in The US, with over 1,500 corporate guides, real people who know your local laws and can help you and your business every step of the way. Plus, with Northwest, privacy is automatic. They never sell your data and handle all services in house because privacy by default is their pledge to customers. Don't wait. Protect your privacy, build your brand, and get your complete business identity in just 10 clicks and ten minutes. Visit northwestregisteredagent.com/ofdfree and start building something amazing. Get more with Northwest Registered Agent at northwestregisteredagent.com/ofdfree. This is Optimal Finance Daily, the risks and rewards of international bonds by Robert Ferrington of thecollegeinvestor.com. The global bond market is far larger and more liquid than the global stock market. Over the last twenty five years, the bond market has, on average, been 79% larger than the stock market, according to learnbonds.com. Bonds provide stability against the volatile nature of stocks. In a sixtyforty portfolio, 60% is allocated to stocks while the other 40% goes to bonds. As an investor approaches retirement, their allocation to bonds increases, mainly so that there's capital for them to withdraw during retirement. Foreign bonds can make up part of the bond allocation within a portfolio. Let's see why someone might consider the risks and rewards of foreign bond funds as part of their investment. Why international bonds? Where do foreign bonds fit into portfolio allocation? Foreign bonds provide another means of portfolio diversification. A well diversified portfolio protects capital against drawdowns or at least outsized drawdowns. Foreign bonds also give you exposure to other parts of the world. If you have bonds in European and Asian countries that are doing well, while The US economy is declining, your bonds will do well also, although your US bonds might not. In this case, being diversified outside of The US limits the negative impact of your bond holdings from a US decline. Of course, there are risks when investing in foreign bonds. Bonds from developed countries such as The UK, France, and Germany are generally safer than bonds from emerging markets such as Indonesia, Malaysia, and Kenya. For those reasons, bonds from developing countries should only make up a smaller portion of your foreign bond holdings, assuming you have any at all. For rebalancing purposes, foreign bonds are part of your overall bond allocation. As your foreign bonds rise in value and surpass your bond allocation target, some of those bonds should be sold and the funds reallocated to weaker areas of your portfolio. This is general portfolio rebalancing so that each area of your portfolio remains within its target allocation, such as sixtyforty. …
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