Staff Reporter
By Peter Dougherty
WE’VE all heard of stocks and bonds, and most of us have a basic understanding of what they are. Stocks represent ownership in a company, while bonds are essentially loans to a company or a government.
It’s widely recognised that it’s wise to hold both in your investment portfolio. Why? Because putting all your financial eggs in one basket is rarely a good idea – diversification helps manage risk.
Even better, stocks and bonds are often negatively correlated. When stock markets dip, investors tend to seek the relative safety of bonds – which pushes up bond prices. By holding both, you can reduce volatility, aim for the same returns with less risk, and avoid emotional investing pitfalls like panic selling.
But how much of each should you hold? That’s where opinions differ.
The big question in investing – known as the asset allocation decision – has many answers. Strategies include:
- Time horizon-based: The longer you have until retirement or needing the money, the more stocks you can hold. Shorter time frames favour bonds or cash.
- Goal-based investing: Allocate different stock/bond mixes to different goals. For example, a child’s university fund might be 50/50, while a short-term house deposit could lean 20/80.
- Target-date funds: These adjust your portfolio based on when you plan to retire, gradually shifting from stocks to bonds over time.
- Age-based: A classic rule says subtract your age from 100 (or 120) to determine the percentage to hold in stocks, with the rest in bonds.
At BISSAN Wealth Management, where I work, we take a goal-based approach. First, we learn about your financial objectives – retirement, children’s education, a property purchase – and then quantify these using our optimisation model. We calculate expected future cash needs and place those funds in bonds to shield them from market swings. The remaining capital is then invested in stocks.
You might say: “Goal-based investing has arrived in Spain.”
But there’s another wrinkle – your mortgage.
If you still owe on your home, your asset mix might not be as balanced as you think. A mortgage is essentially a bond in reverse – instead of receiving interest, you’re paying it.
Let’s say you own €200,000 in bonds and €200,000 in stocks. On paper, that looks balanced. But if you owe €150,000 on your mortgage, then the interest from a large chunk of your bonds is simply going to cover that debt. Your net bond position is only €50,000 – meaning you’re more heavily invested in stocks than you might realise.
Some may take this as a sign to buy a cheaper home in Spain and avoid a mortgage altogether. My view? Find a trusted financial advisor in Spain who can help guide you through these decisions, so you don’t have to navigate it all alone.
Same facts. Smarter conclusions.
Peter Dougherty is a Financial Planner at BISSAN Wealth Management in Spain. He holds an MBA in finance from Columbia University in New York and an MS in Spanish taxation (Máster en Fiscalidad y Tributación) from Nebrija University in Spain. He is certified as a European Financial Planner (EFP) in Spain and as a Chartered Retirement Planning Counselor® and Investment Adviser Representative in the United States.
For more information: https://www.financial-planning-in-spain.com
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