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Bonds aren’t for young people

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Bonds aren't for young people

Seriously, they’re not. Read more at All about stocks and bonds.

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29 Comments on "Bonds aren’t for young people"

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Transcendental Success
9 years 11 months ago
Bonds are wicked awesome. They are a stable income stream, plus the bonds themselves can change in value. The most conservative government bonds are the ones that pay a few percent, but corporate bonds are readily available for 7% coupon rates from chase and citicorp, and I even found one for over 12% from primus. Those are decent rates, far better than cash in the bank. The other trick is that bonds can be sold like a stock. This is fantastic if you buy a bond and then interest rates go down, all of a sudden you can sell your… Read more »
Andy H
Andy H
9 years 11 months ago

Maybe I should rethink their place in my portfolio.

I use a small position in a corporate bond ETF to balance out the stock ETFs, and also to get some nice gains in case interest rates are lowered.

Jonathan
9 years 11 months ago

Common advice is to take 100 minus your age, and have that percentage in stocks.

If you’re 25, invest 75% stocks and 25% bonds.

Of course this all depends on your risk tolerance. Some people will never invest in anything riskier than CDs, and that’s fine if it’s all they can handle. At least they’re investing something which is better than what most people do.

Another good “safe” investment is in yourself or in your home. Many people invest primarily in their own real estate.

Geoff
Geoff
9 years 11 months ago
Bonds are the new stocks. What is more convential wisdom, than stocks outperforming bonds? Who holds the most bonds, elderly, back in the 70s who held the most equity, elderly. Why do they now hold bonds more than youth because they just might be wiser and more up on the long-term stock-bond tango? Read the Four Pillars of Investing, besides being a great investement tome by Bernstien, it’ll send shivers up our collective backs with regards to our faiths in equities (as now is a period of stability, and high prices, probably not a great time to buy…) I’ve recently… Read more »
eR0CK
9 years 11 months ago

I’ve heard from various sources that with today’s lifespan growing that we should subtract our age from 120 and that percentage should be in stocks.

As far as bonds go, sure 12% is good … if the company doesn’t renig. Sure you can sell your bonds when the interest falls … if someone wants to buy it.

-Erich

Jonathan
9 years 11 months ago

Hey Geoff,

What kind of bonds are you getting 35% in?

Elderly hold the most equity because they’ve had the most time to save and invest.

SG
SG
9 years 11 months ago

Bill Gross… enough said. He’s run circles around plenty of stock fund managers.

Transcendental Success
9 years 11 months ago

Bonds can also be free money. Individuals can borrow from the bank on their homes usually for less than the bond return. Investing home equity in stocks can be very risky, but far less so with a bond. Get a mortgage at 5%, buy bonds yielding 7 or 8 with the same maturity as the mortgage.

MyNameIsMatt
MyNameIsMatt
9 years 11 months ago
Bonds are bad for basically everyone (expect for special short term needs). Bond Funds, however, are great for basically everyone. How much of your portfolio you allocate to fixed income such as bond funds or equity such as index funds is all based on your risk tolerance. The younger you are, generally, the higher your risk tolerance and hence you will hold a smaller percent of fixed income (this is more than just bonds, but usually is a majority of bonds). There are no hard set rules on what allocation a person should have really, but almost no one can… Read more »
Jonathan
9 years 11 months ago

Bill Gross? Isn’t that the guy who almost went bankrupt because of his overspending? I don’t want advice from him.

kai chang
9 years 11 months ago
Global declarations are great for aspiring gurus to shout from the mountaintops. “All X is bad. Never do Z. Always buy Y.” But on an individual basis, those ‘always’ and ‘never’ rules reveal their weaknesses. As mentioned by a commentor above, bonds are a negatively-correlated asset class to equity (stocks), which means that when the equity indexes decline, bond indexes tend to rise. According to Modern Portfolio Theory, there is an optimal blend of equity and bond exposure for each level of risk tolerance – and even very aggressive investors benefit from bond exposure by reducing the volatility for any… Read more »
Transcendental Success
9 years 11 months ago

Bonds are what they are. If you are looking to gamble and the excitement of volatility, don’t go to bonds, or go to junkier bonds where the company may go under.
I agree with some of the folks above — bond funds might be good because it is hard as an individual to build a good portfolio of bonds with various maturity dates. In general I hate managed mutual funds, but in this case they provide a service.

John
John
9 years 11 months ago

Your contrarian assertions have all the ill-considered brashness of youth. This statement about bonds is remarkably debatable. So why take an extreme view? To shock readers? I regret that you haven’t taught me anything, so far as I remember, about being rich yet.

Let’s say some joker’s in the 25% tax bracket, or higher. Treasury bills are tax free. Equities are speculative. Hey, how about that inverted yield curve! Time to jump into stocks now? WAKE UP, KID.

Carlin
Carlin
9 years 11 months ago

I think the Bill Gross he’s talking about would be the great bond investor at PIMCO, not the Idealab Bill Gross that defaulted on a $50 million personal loan. This is from Wikipedia (William H. Gross) concerning the PIMCO Bill Gross – “According to Forbes in 2004, he is the 278th richest person in America, with a net worth of over $1 billion. His annual salary from PIMCO is $40 million.” He must be doing something right.

Carlin
Carlin
9 years 11 months ago

Whoever said the stock market is pure gambling is incorrect. And unfortunately, I know a 27 year old woman who feels the same way and wants to stash all of her 401(k) money in “stable value” funds because she’s not a “gambler”. I hope she comes to her senses. I don’t think Warren Buffett has slapped together over half a decade of pure luck.

t
t
11 months 24 days ago
if your not greedy, bonds are great. i like bonds. my interst buys my stocks. no hurry, no panic. I like dividend payers too. I refuse to own any business that dostnt pay a dividend. so far, my stable value is beating the pants off the sp 500 as prices head into correction. I buy stocks when markets bear. At pe 20 today, dont expect good returns. Average is what, 15 ish… thats only the average pe. Though the market returns average is pretty good, the price you pay determines your rate of return with any business. today, the stock… Read more »
Carlin
Carlin
9 years 11 months ago

Sorry, half a decade should say half a century, which is an even more remarkable streak.

Jonathan
9 years 11 months ago

Hi Carlin,

Thanks for the info about Bill Gross.

I know what you mean about the stock market. My girlfriend is afraid to invest any money in it because her father lost some money due to some ill-advised advice. So now she wants to put everything away in measly 5% CDs. I guess that’s better than nothing, but she could do much better safely.

Transcendental Success
9 years 11 months ago

To Carlin: Stocks are not gambling to Warren Buffet, just like poker is not gambling to those guys at the WSOP final table. But to the rest of us stock picking is gambling. That’s why the sensible advice to the non-pro is buy-and-hold an index fund.

Hawk
Hawk
9 years 11 months ago
Sort of on topic: Bonds are simple. The stock market is not. I already worked hard for my money, why should I have to work hard to invest it so it ‘works for me’ ? I have money and I dont’ want to *lose* it. I don’t want to have a second job of messing around with the stock market to maximize my capital gains and whatever people do when they actually know what they’re doing. I’m not a financial advisor, I’m a technical support rep and a software tester. I thikn that’s probably where the allure for things like… Read more »
Jonathan
9 years 11 months ago

Index funds are pretty simple too, Hawk. If you have not looked into them I’d recommend it.

Carlin
Carlin
9 years 11 months ago

TS: Your previous statement was that investing in the stock market is pure gambling, and that is what I was addressing. Because Warren Buffett is a better investor than the average person doesn’t make him lucky, which is what he would have to be if the stock market was like a slot machine. He proves that people can generate consistent returns by following an investing philosophy and doing research. If you don’t speculate in the stock market, then you aren’t gambling.

finance girl
9 years 11 months ago

Wow, that’s advice I would NOT give to anyone. Perhaps bonds should not make up over 20% of a young person’s asset mix, but they absolutely do have a place in a young person’s asset mix! Perhaps you instead are referring to “bonds don’t belong in a young person’s retirement account?” which makes more since but is still a fallacy imo.

finance girl
9 years 11 months ago

Wow, that’s advice I would NOT give to anyone. Perhaps bonds should not make up over 20% of a young person’s asset mix, but they absolutely do have a place in a young person’s asset mix! Perhaps you instead are referring to “bonds don’t belong in a young person’s retirement account?” which makes more since but is still a fallacy imo.

cmadler
9 years 11 months ago
I was going to make a point about the value of negatively correllated asset classes, but several people beat me to it. The second positive point about bonds is that over the next several decades they may outperform stocks. Most bonds are offering at least 5-7%. Many experts expect that over the next several decades stocks will return about 4-6%, far lower than they have over the last several decades. Growth consists of real growth (the rise of companies earnings and dividends), inflationary growth, and speculative growth (increase in the public’s desire to own stocks). In the long run, real… Read more »
Jonathan
9 years 11 months ago

Some experts say the stock market is only gonna average 6% and some others say we’re about to hit a big boom again.

I’ll think long term and stick with index funds. I’m not in the business of guessing.

Emil Elgaard
9 years 9 months ago

I’d say bonds are okay. It depends on your temper. Although bonds are usually the saftest choice you can get in them in more or less speculative variations. Junkbonds/High Yields bonds are for example more speculative than bluechip stocks in my opinion.

Bonds however are great if you have an amount of money you wont need for a couple of years, say 2-5. Generally you get more by putting them into stocks but if you really need to make sure that you have the money when you need it, bonds are they way to go. And I mean governmentbonds, not junkbonds.

Sean Harnett
Sean Harnett
9 years 7 months ago

Hey Ramit, have you read The Intelligent Investor? Warren Buffet has called it “by far the best book about investing ever written”. The book recommends approximately an equal split between stocks and bonds, for everybody. Not just old or rich people.

hh
hh
8 years 10 months ago

Bonds are great outside of retirement accounts, especially for young people, as they will be needing that money for their downpayment on their new house.

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