Some investors may have felt in the finances of its assets to the new year melancholy. Because anyone who has followed the incentives of the long-term low-interest-rate policy of Central banks and its equity ratio has increased significantly, could have found the end of 2018, the carrying value of its assets is the percentage has dropped still lower than during the Great financial crisis of 2007 to 2009. But to complain about instead of the supposed loss, he should be happy about the profits that are incurred by the reallocation of previously.
we Consider the case of an investor that has created a to be assessed in euros assets to 60 per cent in seven-to-ten-year global government bonds (according to the FTSE Global Government Total Return Index) and 40 percent in global equities (FTSE All World Equities Total Return). Since its most recent high point in September 2018, the carrying value of the assets has fallen by 11 per cent, year-on-year rates translated almost as strong as in the financial crisis. Because after all, the value of bonds has risen by 4 per cent, has reduced the book value of the portfolio by a total of 2.1 percent.
This is less than the decrease in the same portfolio of 3.8 percent during the financial crisis. But some investors have reacted since the crisis, the low interest rate policy of Central banks with an increase in the proportion of equities in its Portfolio. Suppose that the proportion of bonds was reduced in 2009 to 20 per cent, and the proportion of equities to 80 per cent, then the investor must cope with the end of 2018, a book loss of its assets from around 8 per cent. Even worse, it caught investors in German securities. The book value of a 60 per cent German government bonds (FTSE Total Return of German Government Bond Index 7-10 year maturities) and 40% from German stock (Dax) existing portfolio, the value of a “20:80”-portfolio fell to 7.7 percent, even by 17.4 percent.
you Should include the fact that it was wrong to increase the share proportion? The answer would be Yes, if the popular Hypothesis would agree that the low interest rates of recent time would not have been by the Central banks enforced, but a lower growth of the world economy would reflect. As for the valuation of shares, the interest rate, but the differential between interest and growth is paramount, would not have increased the share prices, if both interest and growth by the same amount would like. In the “20:80”-Portfolio, it would be the end of 2018, now deep in the Minus as compared to the last low point of the stock prices in February 2009. However, the development of the market disproves this Thesis.
in February 2009, is equal to the total return on global equities until the end of 2018, with an annual rate of 13.7 percent. Since the bonds yielded a return of only 4.2 percent per year, amounted to the total income of a “60:40”-portfolio to 7.3 percent, that of a “20:80”-portfolio, in contrast to 11.2 percent per year. This means that the value of the global “20:80”-portfolio, despite the downturn in the fourth quarter of 2018 compared to its value in February 2009, almost tripled. The value of “60:40”-portfolio has doubled, while the value of the global bond portfolio is only increased by half. As in Germany, the share yielded a slightly lower yield of 10.8 percent per year and bonds with a 4.5 per cent per year, slightly more yielded increased values of the portfolio with a share slightly less than at the global level.
Who goings-on of the low-interest-rate policy of the Central banks in the past few years in equities, you should be so grateful, instead of complaining about the paper loss in value of its assets in the fourth quarter of 2018. Because of the interest rate decline has not been caused by the decline in the growth of the economy, but of the Central banks was forced, the increase in stock prices and caused the stock owners good profits.