In the first part, I talked about the role played by debt instruments, both short and long term, in an investment portfolio. Also of its volatility and expected return.
I mentioned that long-term debt instruments typically have worse risk-adjusted returns than stocks of large-cap, industry-leading companies. That’s why I don’t love them or use them in my investment portfolio (although I recognize that they may be relevant to people who have different objectives and strategies than mine).
If that is my opinion, why am I adding Udibonos to my portfolio, which are long-term debt instruments?
In order to answer that question, I must first talk about the expected return of a balanced long-term investment portfolio: 60% stocks and 40% debt instruments. Why this portfolio and not others? Last year I did a series on investments and we analyzed different investment portfolios: this was one of the best. But it is also a portfolio that suits my needs (age, investment horizon and risk tolerance).
Stocks measured through the S&P 500 index (which is the most representative in the United States) have historically given a real return (above inflation) of 8% per year. Long-term bonds, between 1 and 2% annual real. That means that the expected return of a long-term balanced portfolio will be around 5 percent. Of course none of that is guaranteed. We are simply basing ourselves on historical data that may not be repeated in the future.
However, 10-year Udibonos today in Mexico are offering a guaranteed yield of 4.5% per year above inflation, which I find very attractive. That rate is fixed for all those years. In fact, the risk-adjusted return is even better than the balanced investment portfolio.
The 30-year Udibonos are offering a little less (4.40% annual real) but it is also a very attractive yield. I am not particularly considering them because it is too long a term for me (although for younger people who are not going to retire for another 30-40 years they can be very interesting). In fact, you could incorporate them because as we know, these instruments can be sold before they expire and if rates go down in the future (which is very likely) their value could go up.
The reason I’m not considering them is because I’m not interested in speculating at this point. I have nothing against it, simply because of my particular situation and my objectives, my strategy is based on holding them until maturity and reinvesting the interest generated in other types of instruments (in principle Cetes but I could decide something different in the future). .
Quite simply: it is a simple and much more “safe” way to obtain a very attractive “guaranteed” return in the long term –4.5% real (above inflation). I put those two words in quotes (safe and guaranteed) because let’s remember that no investment is 100% safe and it could happen at some point that a government no longer has the ability to meet its credit obligations. I see it as unlikely, but it is always a possibility and one has to be aware that this can happen. That is why I am NOT putting all my assets in Udibonos, they are simply an instrument that I have decided to incorporate into my long-term investment portfolio, along with many others (diversification).
Now, there are three-year Udibonos that in the last auction reached a real annual rate of 5.26% (above inflation), which I consider extremely attractive, but the term is much shorter. I prefer 10-year ones to “lock in” a good long-term rate, however for many people these can also be very attractive. In the end it all depends on our own objectives, needs, strategy and risk tolerance.
Where can you buy Udibonos? Through Cetesdirecto. I decided to do it automatically, using its recurring savings service “UDI-SAVINGS”. That way I don’t forget and I can participate in each auction. I will keep it active as long as interest rates continue to seem attractive enough to continue incorporating them into my long-term investment portfolio.
