Warren Buffett has recently stated that bonds are “not the place to be these days.” It doesn’t sound too ominous, but once you take all the factors and issues that are plaguing the market right now, inflation chief amongst them, Buffett’s warning makes more sense.
The rationale behind Buffett’s statement is the overall low interest rates, which have undermined the value (and returns) of bonds. The fixed-income investment attracts a lot of investors because it offers the safety of capital and, in some cases, better returns than what the banks provide for their savings accounts. But if that balance is tipped and inflation might negatively impact your capital in both situations, what should you do?
One of the best things you can do in this situation is to try and make your investment portfolio relatively safer without relying on bonds.
The three things
Buffett always preaches that you invest in what you understand and choose profitable business. If you do that, the stock will naturally follow. You might have a different perspective on what a “good” company is. Still, there are a few things you should look for: a strong balance sheet, a dominant or relatively safe place in the industry, good management, revenue streams, and a growth-oriented management team.
If you follow Buffett’s investment methodology, you should consider holding good companies (as long as they stay profitable holdings) for a very long time. If you measure your returns in decades and not years, you will see how inconsequential dips and temporary spikes can become in the long run. But they have their own value. Dips might give you an excellent chance to add to your holding, and spikes might be right for partial liquidations.
Diversification is not part of Buffett’s advice for making your investments safer. He doesn’t like diversification, but for retail investors who don’t have the investment “shrewdness” nor the time and resources to develop it, diversification can be a great strategy to spread out risk over multiple securities.
One stock to consider
One stock you may want to consider and that fits the bill for all three is Fortis (TSX:FTS)(NYSE:FTS). It’s a utility giant and the second-oldest aristocrat in the country. It has millions of utility consumers (both gas and electricity) in the country and in the United States. The consumers make its revenue streams significantly safer. It has a dominant position in the industry and is taking measures to enter the “green energy” future.
Fortis lacks a bit in the growth department, but its generous 4% yield balance it out. A consequence of the relatively slow year the company has been through (in terms of capital growth) is that it’s relatively reasonably priced. The stock has grown well over 400% in the last two decades, and the probability that it might do so again is higher than its chances of sinking in the long run.
You should heed Buffett’s warning if a significant portion of your investment portfolio is composed of bonds. You have factored them into your portfolio growth as well (no matter how little they might contribute), and you are not using them purely as a safety anchor for your portfolio.
Speaking of Warren Buffett’s views on bonds...
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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Adam Othman has no position in any of the stocks mentioned. The Motley Fool recommends FORTIS INC.