Your Portfolio is Probably Missing Something Important and You Don't Even Realize It

Updated: Jun 16, 2021

If you don't own bonds directly, you are missing an important asset in your portfolio.

Bonds improve risk-adjusted portfolio returns.

Highlights:

  • What do you even know about bonds?

  • You can't really buy and sell bonds today, Arthur.bond will change that.

  • Your Bond-layer helps reduce portfolio risk.

  • Bonds are predictable.

 

What is a Bond?


A bond is a promise to pay. The promise is defined by a written contract with specific terms. The contract establishes the rules between the investor and the entity. Typically, the contract will state the loan amount, the interest charged, length, and all the other conditions that the borrower must meet or risk losing everything to the bondholder as a result of a default.


Typical investors who buy bonds include mutual funds, pension funds, hedge funds, central banks, and really wealthy individuals. Most individual investors could benefit from directly investing in bonds, but the bond market is pretty inaccessible because of the minimum trade sizes and illiquidity of the retail secondary market. What makes matters worse is the complete lack of transparency around spreads and markups because bonds trade over the counter (OTC). This has historically made owning individual bonds impractical for most, but has made it easy for bond shops to obfuscate massive profits.

As a result, most retail investors are directed towards ETFs or mutual funds or even separately managed accounts, but those carry expenses that tend to eat up significant portions of total return and aside from some made up ESG screens, don't really offer any personal connection to your investment.

The best thing about bonds is that they are predictable, you know when, down to the day, that you will get your money. That let's you plan better and earn more .

Equally important to you, bond funds are different than bonds - when a bond matures you get your money back - that doesn't happen with a bond fund - particularly in the event of a rising interest rate environment. The problem with most bond funds is that you're always long a nearly constant duration and you never get your money back.

Don't even get us started on industry benchmarks, which incorporate so many unforced errors in their methodology, that it's not magic that these big bond shops outperform - it's all an illusion. Buying index strategies can even be worse because they just follow the same dumb methodologies that incorporate built-in inefficiencies that erode benchmark performance and allow bond mangers to outperform!


If you were able to buy bonds directly, one really great thing is that regardless of size, all investors are treated equally. So those big institutions, who typically charge as much as 20% of your returns, now stand next to you in line; their work still benefitting you...but for free!


Main Purposes of Bonds


Historically, governments issued bonds to fund war efforts or build substantial infrastructure projects or corporations issued bonds to fund the enormous capital requirements of long-term projects. In return to investors they promised interest payments and a return of their money at a specific date.

The nature of bonds where the amount of capital and interest is mainly fixed gives predictability to both investor and borrower. For companies, they can invest in long-term and riskier projects with predictable returns while individuals can ensure their future income needs without the stock market's extreme volatility.


Many Types of Bonds


Bonds are like snowflakes, no two are ever the same. Each bond is unique with regard to its maturity and capital position and other special characteristics, but the major distinctions are:

  • Issuer - Typically government or corporate

  • Credit Quality - Investment grade or Junk

  • Interest rate method - Variable Interest Rate or Fixed Interest Rate bonds

  • Currency - US dollar or foreign currency

  • Convertibility - Bonds that can turn into stock

There are not many ways to buy Bonds.


The easiest way to buy bonds directly is from the US Treasury who will gladly sell you bonds from the US Government. All positions are held at Treasury and Investors can only buy those bonds during specific days, through an auction system. While there is no size restriction, yields are pretty paltry.


For more attractive yields, investors need to look to corporates and municipals. Access to these markets require the use of a broker and you will have to make a sizable minimum investment. Plan on holding the bond to maturity, because, most of the time, you will not be able to trade efficiently in the secondary market. There is a definite lack of liquidity in the secondary market as middlemen make their month on the backs of retail bond position liquidations.


Arthur.bond will make bonds accessible to everyone.

The Founders of Arthur come from the investment management industry. We witnessed the restricted access to direct bond investment firsthand and understand just how much money is being made on the backs of retail investors.

That is why we created Arthur. We are simplifying the process of purchasing a bond in order to offer you easy access to the bond market. We're building Arthur as a community so, together, we can learn how the $50 trillion bond market can be harnessed to fund every single one of our future cash flow needs without paying for the packaging.


Soon, Arthur will eliminate the need to wait for auctions, substantial per-security minimum investment amounts and the enormous spreads in the retail secondary market. Once we do that, there is no longer any need for a bond fund wrapper, or manager to build a completely customized, diversified portfolio of bonds. That will save you a ton of money over your lifetime.

That's all the Bond Kings & Queens have, their ability to keep you out of the bond market - it's the only way they can maintain their enormous fees.

Sign up for early access here and be a fundamental part of the democratization of the institutionally-restricted bond market.

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