Why a bond is not like a term deposit

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We continue to receive questions from readers about the fixed-income asset class, and this week I will address a common one: why would I buy bonds when I am getting high returns from my term deposits?

This is a great question, and the answer shows how with a little bit of knowledge about fixed income, you can customize your investment portfolio to best suit your needs – which is what self-managed super funds (SMSFs) are all about.

Allocating your assets

First, I think it is worth stating that all investment portfolios should have an exposure to ‘cash’, through a term deposit, an on-line high interest account, or both. However, because of the historic structure of the bond market in Australia, people have tended to think of fixed income as only being term deposits. This has led to very lopsided asset allocations in most investment portfolio’s, reliant heavily on equities, with term deposits making up the rest. This structure proved largely disastrous for people approaching or in retirement when the Global financial Crisis (GFC) hit and has more recently been highlighted a risk of economy-wide instability by highly-respected commentators including Ken Henry, David Murray; and Lindsay Tanner.

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