I have several ideas if I were investing $10,000 into ASX shares today.

One of the great things about investing in shares is that prices are constantly changing. That presents different opportunities over the weeks and months.

Looking at the current prices, these are the ASX shares that I’d love to buy today:

Citadel Group Ltd (ASX: CGL) – $2,500

Citadel is an ASX software business with a lot of international growth potential. In FY20 the ASX share acquired UK healthcare business Wellbeing. That acquisition turned Citadel into the software market leader for radiology and maternity in the UK.

The ASX software business thinks there is significant cross-selling market opportunities valued at between $250 million to $350 million in total contract value revenue in tenders over the next two to three years.

Citadel now has a high level of recurring revenue and a pro forma gross profit margin of more than 65%. The company thinks it’s well placed to benefit from an increase in digital health spending on the next few years.

In its software divisions it’s targeting long-term organic revenue growth of more than 15% per annum. In the services divisions it’s aiming for organic revenue growth of 5% to 10% per annum.

The ASX share plans to diversify its technology into new verticals and building contracts. It’s looking for further opportunities for acquisitions as well as investing into research and development.

At the pre-open Citadel share price it’s priced at under 12x FY23’s estimated earnings.

Brickworks Limited (ASX: BKW) – $2,000

Brickworks nearly always looks good value to me when you consider the various elements of the ASX share.

One key long-term asset is the share holding of Washington H. Soul Pattinson and Co. Ltd (ASX: SOL). Brickworks owns almost 40% of the investment conglomerate, which itself is a quality investment with diversified businesses in its portfolio like TPG Telecom Ltd (ASX: TPG), Brickworks, Clover Corporation Limited (ASX: CLV), Bki Investment Co Ltd (ASX: BKI) and Milton Corporation Limited (ASX: MLT).

Brickworks owns a 50% stake of an industrial property trust along with Goodman Group (ASX: GMG). Over the next couple of years both Amazon and Coles Group Limited (ASX: COL) will be tenants at large warehouses that are being built by the trust. 

The pre-tax value of the above two assets alone support the current Brickworks market capitalisation.

It also has both an Australian and American building product division. Obviously COVID-19 is hurting construction at the moment, but hopefully economic conditions will go back to (a new) normal sooner rather than later. I think it’s a good time to buy a somewhat cyclical ASX share like Brickworks whilst there is uncertainty.

At the pre-open Brickworks share price it offers a grossed-up dividend yield of 4.6%.

Pushpay Holdings Ltd (ASX: PPH) – $5,500

Pushpay is an electronics donation business. It helps facilitate digital giving to organisations like large and medium US churches.

There is a large amount of money donated to churches each year. COVID-19 is causing more of that money to be given digitally, which is helpful in bringing forward the adoption curve for Pushpay. The company is aiming for annual revenue of US$1 billion per year, which would turn it into a much larger business.

In FY21 the ASX share is aiming to double its earnings before interest, tax, depreciation, amortisation and foreign currency (EBITDAF) to US$50 million to US$54 million.

It’s the scalability of the business that is very exciting. In FY20 alone it grew its gross margin from 60% to 65%.

At the pre-open Pushpay share price it’s valued at 30x FY22’s estimated earnings.

Foolish takeaway

I think each of these ASX shares are attractively priced, particularly Pushpay and Citadel after the recent falls. I believe they can both deliver market-beating returns over the long-term. It’s hard to pick a winner because I believe both ASX tech shares can deliver good profit growth.

More reading

• 3 small cap ASX shares I’d buy with $3,000 right now
• 3 quality ASX shares that could provide monster returns
• Where to invest $10,000 into ASX shares
• 2 top ASX shares I’d buy with $2,000
• 3 ASX shares I’d buy to quickly add diversification

Tristan Harrison owns shares of Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Clover Limited and PUSHPAY FPO NZX. The Motley Fool Australia owns shares of and has recommended Brickworks and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia owns shares of COLESGROUP DEF SET. The Motley Fool Australia has recommended Citadel Group Ltd and PUSHPAY FPO NZX. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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The Zip Co Ltd (ASX: Z1P) share price has been smashed in recent days as investors have sold out of ASX tech shares.

Heavy sell-offs in the US markets are continuing and we’re seeing similar moves on the ASX. That’s not good news for shareholders in some of the hottest tech shares right now.

The Zip share price is down 8.9% since Tuesday morning and could be heading even lower today. So, is now a good time to buy the dip and enter the buy now, pay later (BNPL) share?

Why the Zip share price is under pressure

There’s no denying 2020 has been a strong year for global and domestic tech shares. Many of the biggest shares have been surging in value since the bottom of the March bear market.

That has all been against a backdrop of intense economic stress and recessionary conditions. Investors are a bit spooked right now and we’ve seen heavy sell-offs in US tech stocks this week.

Much of the value in ASX tech shares like Zip is based on future growth expectations. That’s a hard thing to value right now, which has left investors wondering how high is too high for these tech shares.

The Zip share price is still up a whopping 81.4% for the year. I don’t think it’s panic stations by any means but is now a good time to buy in?

Is now a good time to buy?

The lofty valuations are an obvious concern for investors. Zip increased full-year revenue by 91% to $161.0 million as transaction volumes also jumped 91% to $2.1 billion.

However, the company still posted an adjusted loss before tax of $44.9 million. That can be beneficial for tax reasons but the point stands that the Zip share price is high for a company that isn’t turning a profit (yet). 

Regulatory risk is also always a concern for the BNPL operators.

There’s also increasing competition in the BNPL space. Major banks like Commonwealth Bank of Australia (ASX: CBA) and National Australia Bank Ltd (ASX: NAB) are wading in.

Both of these big four banks announced yesterday that they were introducing no-interest, flat monthly fee card options.

That could open up the market and potentially entice merchants to go to the bank rather than pay fees to Zip.

Foolish takeaway

The Zip share price has been under pressure in recent days but is still up strongly in 2020. I don’t think there is any cause for alarm just yet but I won’t be entering as a first-time buyer right now.

More reading

• Tech shares lead ASX rebound but Afterpay (ASX:APT) faces mounting competition
• Why the CBA (ASX:CBA) share price has fallen 26% since February
• ASX 200 up 0.7%: Nearmap (ASX:NEA) launches capital raising, Afterpay (ASX:APT) rebounds
• ASX 200 drops over 2%, tech and oil fall
• Why the Laybuy (ASX:LBY) share price is tanking today

Ken Hall has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of ZIPCOLTD FPO. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The post Is the Zip (ASX:Z1P) share price a buy in the tech crash? appeared first on Motley Fool Australia.

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The Australian Securities and Investments Commission (ASIC) wants everyone to know its holding onto $1.1 billion for Australians to claim.

The “unclaimed money” stash includes dividends and shares that have lost touch with their rightful owners.

“This can happen when people change address or go overseas and forget to update their details with a financial institution or company,” states ASIC.

“Or people may be unaware there is money to which they have a rightful claim.”

Lost bank accounts, insurance payouts and investments are also in the pool, officially called the Commonwealth of Australia Consolidated Revenue Fund.

“Bank accounts become unclaimed after 7 years if the account is inactive,” the corporate regulator states.

“Life insurance policies become unclaimed 7 years after the policy matures and is not claimed.”

Amazingly, the government will pay interest for any period your money’s been parked in the unclaimed fund after 1 July 2013.

The interest rate is based on the consumer price index, so you could get as much as 2.93% for the 2015 financial year. The current financial year will earn you 2.19%.

That’s not bad, considering banks will only pay you a fraction of a percent in a savings account these days.

How to claim your piece of the $1.1 billion pie

Luckily it’s easy to check whether you have unclaimed money, as ASIC hosts a search engine for exactly that purpose.

“It is available to be claimed at any time by the rightful owner and there is no time limit on claims,” states the corporate watchdog.

If you find money from a lost bank account, you should approach the financial institution directly to get your hands on it.

But if you have lost shares or other investments showing up, your next step will depend on the situation:

• If the shares are marked “company money”, ASIC is holding it. So you’ll need to provide proof of ownership to ASIC.
• If the shares are marked “company gazette”, the company is holding it. So you’ll need to contact the company.
• For other circumstances, such as when a deregistered company or a deceased person is involved, refer to further advice from ASIC.

Don’t ever pay someone to search for unclaimed money

ASIC warns of third party agents that will offer to find unclaimed money on your behalf for a commission or flat fee.

But any ‘middleman’ service provider is probably just using the same ASIC database.

“If a private money search company approaches you to find money for you for a fee, remember that you can search unclaimed money for free on the Moneysmart website.”

More reading

• Where to invest $10,000 into ASX shares today
• Is the Zip (ASX:Z1P) share price a buy in the tech crash?
• Why Afterpay (ASX:APT) and Domino’s (ASX:DMP) are smashing the market in 2020
• This ASX tech share is still cheap to buy
• 5 things to watch on the ASX 200 on Friday

Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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With the Australian share market coming under pressure recently, a number of shares on the S&P/ASX 200 index are trading lower year to date.

But not all of them are. Some shares on the benchmark index have carved out strong gains this year despite the market volatility.

Here’s why these ASX 200 shares are flying high in 2020:

Afterpay Ltd (ASX: APT)

The Afterpay share price has rocketed 158% higher since the start of the year. Impressively, this is despite the payments company’s shares trading 21% lower than their 52-week high. Investors have been fighting to get hold of Afterpay’s shares this year following a very impressive performance in FY 2020 and particularly during the pandemic.

Furthermore, the company announced its expansion into the European market and advised that it is testing the waters in Asia. Given the seismic shift to online shopping, this appears to have positioned Afterpay to deliver further strong growth over the coming years.

Domino’s Pizza Enterprises Ltd (ASX: DMP) 

The Domino’s share price has risen a sizeable 57% higher year to date. The catalyst for this gain has been a very positive performance by the pizza chain operator during the pandemic. At a time when many companies were struggling, Domino’s delivered strong growth in FY 2020 despite the temporary closure of some of its stores. It reported a 12.8% increase in sales to $5,624.9 million and a 7.3% lift in earnings before interest, tax, depreciation and amortisation (EBITDA) to $303 million. In addition to this, management revealed that it plans to grow its store network to 5,500 stores by 2033. This will be more than double the 2,668 stores it had at the end of June.

Is it too late to invest? Despite its strong share price gain in 2020, I don’t believe it is too late to invest and feel Domino’s would be a fantastic buy and hold option. This is due to its bold expansion plans and its increasingly popular pizzas.

More reading

• This ASX tech share is still cheap to buy
• The biggest threat to tech shares
• Tech shares lead ASX rebound but Afterpay (ASX:APT) faces mounting competition
• ASX 200 up 0.7%: Nearmap (ASX:NEA) launches capital raising, Afterpay (ASX:APT) rebounds
• Why Afterpay, Clinuvel, IDP Education, & Saracen shares are charging higher

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of AFTERPAY T FPO. The Motley Fool Australia has recommended Domino’s Pizza Enterprises Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The post Why Afterpay (ASX:APT) and Domino’s (ASX:DMP) are smashing the market in 2020 appeared first on Motley Fool Australia.

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Wilson Asset Management equity analyst Sam Koch has revealed one tech stock that’s a good buy at the moment.

Technology companies have gone gangbusters this year, so most are inflated in value. But Koch reckons Tyro Payments Ltd (ASX: TYR) still has legs.

Wilson sold out of Tyro in February, and the share price was subsequently hammered during the COVID-19 downturn.

“What the market is missing, however, is the structural shift towards card payments away from cash, which will drive Tyro’s earnings growth,” Koch told an investor call.

“Currently trading at a 40% discount to international peers, we believe this evaluation gap will close as we emerge from lockdown and more people use card over cash.”

Wilson currently has a price target of $4.30 to $4.50 for Tyro, which closed at $3.30 on Thursday.

Tech shares to stay away from

Wilson Asset Management lead portfolio manager Oscar Oberg said its flagship fund WAM Capital Limited (ASX: WAM) had sold out of the tech industry this year, going from 10% of its portfolio down to about 6%.

WAM Capital had done pretty well out of stocks like Appen Ltd (ASX: APX), but it sold the company this year because “expectations were just sky-high”.

According to Oberg, it and Afterpay Ltd (ASX: APT) are typical of the current hype around technology.

“You can’t just look at companies like Afterpay, which went from $8 to $90, and think that’s the new normal,” said Oberg.

The Appen share price was up 3.21% to close the day at $32.51 on Thursday.

When asked about Kiwi software maker Xero Limited (ASX: XRO), Oberg said he would stay away.

“Xero is an exceptional global growth story,” he said.

“At this stage we believe Xero is probably fair to overpriced… Unfortunately at the [current] valuation, not attractive.”

Xero’s share price is up about 17% from the start of the year, even after a correction the last 8 days.

More reading

• Why Afterpay (ASX:APT) and Domino’s (ASX:DMP) are smashing the market in 2020
• 2 exciting ASX growth shares to buy in September
• The biggest threat to tech shares
• Tech shares lead ASX rebound but Afterpay (ASX:APT) faces mounting competition
• Why you shouldn’t be concerned by the high PE multiples of ASX tech shares

Tony Yoo owns shares of AFTERPAY T FPO, Appen Ltd, WAM Capital Limited, and Xero. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Tyro Payments and Xero. The Motley Fool Australia owns shares of AFTERPAY T FPO and Appen Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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The S&P/ASX 200 Index (ASX: XJO) was back on form on Thursday. The benchmark index rebounded from Wednesday’s sell off and recorded a gain of 0.5% to 5,908.5 points.

Will the market be able to build on this on Friday? Here are five things to watch:

ASX 200 poised to slide lower.

The ASX 200 looks set to end the week on a disappointing note. According to the latest SPI futures, the benchmark index is expected to slide 78 points or 1.3% lower at the open. This follows a poor night of trade on Wall Street which saw the Dow Jones fall 1.45%, the S&P 500 drop 1.75%, and the Nasdaq tumble 2% lower.

Oil prices drop lower.

Energy producers such as Beach Energy Ltd (ASX: BPT) and Santos Ltd (ASX: STO) could end the week in the red after oil prices dropped lower. According to Bloomberg, the WTI crude oil price is down 2.6% to US$37.07 a barrel and the Brent crude oil price has fallen 2.4% to US$39.83 a barrel. Traders were selling oil after inventories started to build again.

Nearmap downgraded.

The Nearmap Ltd (ASX: NEA) share price is fully valued according to analysts at Goldman Sachs. This morning the broker downgraded the company’s shares to a neutral rating with a $2.95 price target. Goldman made the move following the announcement of its capital raising and a sharp rise in the Nearmap share price over the last few months.

Gold price softens.

Gold miners Newcrest Mining Ltd (ASX: NCM) and Northern Star Resources Ltd (ASX: NST) will be on watch today after the gold price edged lower. According to CNBC, the spot gold price is down slightly to US$1,953.90 an ounce. The precious metal started the day strongly but gave back its gains late in the last session.

Cleanaway goes ex-dividend.

The Cleanaway Waste Management Ltd (ASX: CWY) share price is going ex-dividend this morning and could trade that extra bit lower. The waste management company’s shareholders can now look forward to being paid this dividend on 6 October. Elsewhere, shareholders of Bapcor Ltd (ASX: BAP) and JB Hi-Fi Limited (ASX: JBH) will be getting paid their dividends later today.

More reading

• ASX 200 rises 0.5%, gold miners glitter
• Why the Rio Tinto share price is outperforming its peers
• Why I would buy Telstra (ASX:TLS) and 1 other ultra-cheap ASX share today
• Is the Wesfarmers (ASX:WES) share price a quality buy for ASX dividends?
• ASX 200 up 0.7%: Nearmap (ASX:NEA) launches capital raising, Afterpay (ASX:APT) rebounds

James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Nearmap Ltd. The Motley Fool Australia owns shares of and has recommended Bapcor. The Motley Fool Australia has recommended Nearmap Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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I believe that one of the best ways for investors to grow their wealth is to make long term investments in quality shares with strong business models and positive outlooks.

Two ASX growth shares that tick a lot of boxes for me right now are listed below.

Here’s why I think they could provide outsized returns for their shareholders over the 2020s:

Appen Ltd (ASX: APX)

The first ASX growth share that I would buy right now is Appen. It is the global leader in the development of high-quality, human-annotated training data for machine learning and artificial intelligence. Appen has a very strong position in the industry thanks to its team of over 1 million crowd-sourced workers spread out across the globe.

This sizeable team allows the company to collect and label high volumes of image, text, speech, audio, and video data that is used to build and improve artificial intelligence models. Given the growing importance of artificial intelligence and machine learning for businesses and governments, I expect demand for its services to grow rapidly over the coming years. This should put the company in a position to continue growing its earnings at a strong rate long into the future.

PolyNovo Ltd (ASX: PNV)

Another ASX growth share to consider buying is PolyNovo. It is an exciting medical device company behind the increasingly popular NovoSorb technology. NovoSorb is a biodegradable material that was developed and CSIRO and is used to aid the repair of bone fractures and damaged cartilage, and also in skin grafts.

I believe the NovoSorb Biodegradable Temporising Matrix (BTM) product will be the key driver of growth in the future. It is a wound dressing intended to treat full-thickness wounds and burns and has a massive $1.5 billion market opportunity. Management also has plans to expand its use into other markets and has its eyes on the hernia and breast treatment markets. These would add a further $6 billion to its addressable market if successful.

More reading

• Why you shouldn’t be concerned by the high PE multiples of ASX tech shares
• ASX 200 up 0.7%: Nearmap (ASX:NEA) launches capital raising, Afterpay (ASX:APT) rebounds
• ASX 200 drops over 2%, tech and oil fall
• ASX 200 down 2.4%: Afterpay (ASX:APT) and Oil Search (ASX:OSH) sinking lower
• 3 ASX tech shares to buy for the long term after the Nasdaq selloff

James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of POLYNOVO FPO. The Motley Fool Australia owns shares of Appen Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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If you’re struggling to generate a sufficient income by using term deposits, then I would suggest you consider switching to ASX dividend shares.

This is because there are a good number of companies on the Australian share market paying dividends that offer yields which are vastly superior to those on offer with term deposits.

But which ones should you buy? Here are two ASX dividend shares I would buy:

Coles Group Ltd (ASX: COL)

The first ASX dividend share to consider buying is this supermarket operator. I think it is a great share to own during the pandemic due to its defensive qualities and strong market position. It was thanks partly to these that Coles was able to deliver an impressive full year result last month. At a time when most other companies were reporting sharp profit declines, Coles reported strong sales and profit growth. It posted a 6.9% increase in sales to $37.4 billion and a 7.1% lift in net profit after tax to $951 million in FY 2020.

The good news is that Coles has started FY 2021 in a positive fashion and appears to be in a position to deliver another solid result next year. I expect this to allow the company to reward its shareholders with another generous dividend in FY 2021. Based on the current Coles share price, I estimate that it offers a forward fully franked 3.2% dividend yield.

National Storage REIT (ASX: NSR)

A second dividend share to consider buying is this self-storage operator. I like National Storage due to its strong market position and positive long term outlook thanks to its growth through acquisition strategy. It was this strategy that helped the company overcome the negative impact of the pandemic and deliver underlying earnings of $67.7 million in FY 2020. This was a 9% increase over the prior corresponding period.

And while the company’s earnings are likely to be flat at best in FY 2021, I’m confident that it will return to growth once the pandemic passes. For now, the company is forecasting earnings of 7.7 cents to 8.3 cents per share this year and a dividend pay out ratio of 90% to 100%. Based on the current National Storage share price, the middle of this range implies a 4.1% distribution yield.

More reading

• Is the Wesfarmers (ASX:WES) share price a quality buy for ASX dividends?
• Should you buy Bega Cheese (ASX:BGA) shares at near an all-time high?
• ASX 200 Weekly Wrap: Friday crash pulls ASX back below 6,000 points
• 2 top ASX dividend shares in the buy zone for income investors
• Why I would buy these quality ASX shares for a retirement portfolio

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of COLESGROUP DEF SET. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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Luckily for investors the ASX is home to a good number of shares which I believe have the potential to grow strongly over the long term.

But which of these ASX shares should you buy and hold? Three top ASX shares that I think would be great long term options are listed below:

Altium Limited (ASX: ALU)

I believe Altium is a perfect share to buy and hold. This is due to the electronic design software company’s exposure to two markets which are growing at an explosive rate – the Internet of Things and artificial intelligence markets. These markets are expected to underpin strong demand for its Altium Designer platform and cloud-based Altium 365 product over the 2020s. Management expects this to support very strong revenue growth over the next five to six years and for the company to achieve market domination.

Cochlear Limited (ASX: COH)

Another share to consider buying and holding is Cochlear. I believe the hearing solutions company is perfectly positioned for strong long term growth thanks to the ageing populations tailwind. By 2050 there are forecast to be 1.5 billion people over the aged of 65. This will be almost triple the number of over 65s in 2010. I expect this to underpin a sustained increase in demand for its cochlear implantable devices over the next few decades. Especially given its world class products and high level of investment in research and development.

REA Group Limited (ASX: REA)

A final buy and hold option is REA Group. It is a leading property listings company with real estate websites in Australia, Europe, Asia, and the United States. While trading conditions are not easy at present because of the pandemic, REA Group has still been a positive performer. I believe this demonstrates the strength of its business model. It also bodes well for the future and I expect its earnings growth to accelerate when the headwinds ease.

More reading

• Why you shouldn’t be concerned by the high PE multiples of ASX tech shares
• 2 ASX shares I’d buy if this crash gets worse
• Where to invest $10,000 into ASX shares
• 3 ASX shares that are trading at bargain prices
• 3 ASX tech shares to buy for the long term after the Nasdaq selloff

James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends Altium. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Cochlear Ltd. The Motley Fool Australia has recommended Cochlear Ltd. and REA Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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Bonds are an asset class that you don’t hear too much about these days. For the uninitiated, a bond is an investment the same way a share is. Many investors build what’s known as a balanced portfolio using a combination of shares and bonds. Why? Well, bonds are perceived to have a different risk profile to shares. They tend to respond to market events in different ways. In this manner, bonds can provide a portfolio ‘protection’ against share market crashes and other volatility that shares have a habit of bringing into one’s portfolio.

The name’s Bond…

That’s because (unlike a share) a bond is essentially a loan. It doesn’t represent an ownership stake in a business. Instead, it’s an obligation to be repaid a certain amount of capital (or principal), along with interest. That’s why bonds are sometimes referred to as ‘fixed interest investments’.

Bonds can be issued by all manner of institutions, including corporations and municipalities. But the most common and popular form of bonds are public or government-issued bonds. These are popular because the government of an advanced economy is considered a ‘risk-free’ lender. Since a government can’t really go broke or bankrupt (a privilege that owning currency printing presses allows for), there is no real risk that if you lend your money to the government, it won’t be repaid.

It’s relatively easy to access these bonds as well for any ASX investor. There is a plethora of bond or fixed-interest exchange-traded funds (ETFs) on the ASX. Some popular examples include the Vanguard Australian Fixed Interest ETF (ASX: VAF) and the iShares Core Composite Bond ETF (ASX: IAF).

So this all sounds pretty good, right?

Well, I think there are a 2 very good reasons why you should avoid bonds and bond ETFs today.

Shaken, not stirred

Firstly, the interest you can expect from a fixed-interest ETF is paltry. Because interest rates are at record lows right around the world (0.25% in Australia right now), the interest governments have to pay on their loans are also very low. Consider this – an Australian Government 10-year bond is today offering an annual yield of 0.93%. That’s less than what you can conceivably get from a bank savings account these days. Thus, having a large chunk of your portfolio in bonds right now is essentially dead money.

Secondly, interest rates are at record lows. Whilst this seems similar to what we just discussed, there’s another way interest rates affect bonds. Bonds are priced according to interest rates. If a government issues a 10-year bond at 0.93% per annum, and the following year issued one at 2% per annum because interest rates rise, the latter bond becomes more valuable than the former. Thus, because interest rates are virtually zero, anyone holding fixed-interest investments today will see their value decline significantly if the government started raising interest rates at any time over the next few years. And because the Australian cash rate is at 0.25%, there’s a lot more ceiling than floor – and thus a lot of risk, in my view.

Foolish takeaway

Bonds used to be an effective asset class to diversify your portfolio, but the current financial environment makes them essentially impotent as an investment, in my view. Instead, it’s my opinion that investors should be looking to diversify their portfolios in other ways for the foreseeable future. Perhaps a mix of sturdy dividend-paying shares is a good place to start.

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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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