Building a Global Portfolio

The last chapter introduced commodities as one way to add something other than equity to a portfolio. This chapter covers the second, and more familiar, addition: bonds.

A bond is lending rather than owning. You lend money to a company or a government, and in return you receive interest over a set period, with your original amount returned at the end. That structure is what makes bonds behave so differently from equity. A stock's value depends on how well a business performs, with no ceiling and no floor. A bond's return is largely set in advance, the interest rate and repayment terms are fixed at the outset, which trades away the unlimited upside of equity for a far steadier, more predictable ride.

This is why bonds typically carry lower volatility than stocks. They won't grow your wealth the way equity can over the long run, but they tend to hold their value more steadily when equity markets are under stress, which is often when a portfolio needs that steadiness most.

Bonds aren't immune to the world around them. Interest rates set by central banks move bond prices directly: rising rates tend to push existing bond prices down, since new bonds are being issued at more attractive rates. Government bonds from stable economies tend to be the steadiest kind, while bonds issued by riskier borrowers, whether companies or governments, carry a higher interest rate to compensate for the extra risk of not being repaid. None of this makes bonds risk-free. It makes their risks different from equity's, which is exactly the property that makes them useful in a diversified portfolio.

By now this should feel familiar. The same rule that applied to US-listed equity, and to US-listed commodity funds in the last chapter, applies to bond funds too. A US-domiciled bond fund is a US-situs asset, sitting inside the same $60,000 exemption and 40% estate tax exposure you've now met three times over. A bond fund domiciled outside the US, UCITS-compliant and listed in Europe, generally sits outside that exposure while offering equivalent exposure to the underlying bonds. This isn't a coincidence specific to any one asset class. It's a structural feature of where a fund is legally domiciled, and it follows you into whichever corner of a portfolio you're building.

Bonds don't have as tidy a consensus figure as gold's commonly cited 5 to 15% range, since how much stability you want is a more personal question than how much crisis insurance you want. The useful approach is to size your bond holding to your own comfort with volatility, kept clearly secondary to equity, which remains the engine doing most of the work in a long-term portfolio, rather than treating bonds as a near-equal partner to it.

Bonds round out the portfolio with something equity and commodities don't offer: steady, largely predictable returns that hold up precisely when equity markets don't cooperate. With both additions to equity now covered, and the same domicile caution following you into each one, the next chapter turns to a different kind of question entirely, not what to hold, but how the money actually gets in.