Why the traditional approach to investing isn't right for you
If you own bonds, it’s time to seriously reconsider your investments.
Stock market returns over time are mostly positive, and bond returns over time are mostly math. And the future of bond-math doesn’t look good.
The old days of using bonds as the “safe” portion of your portfolio are gone. It doesn’t matter if you own 20% or 80% bonds.
It’s time to re-think your money.
To understand bond-math, you need to know one concept: as interest rates go up, bond yields (or rates) go up, and bond prices go down. As interest rates go down, and bond yields go down, and bond prices go up.
If you listened to the news at all during the height of the pandemic, you probably heard something like “The Fed is slashing rates in an effort to boost the economy.”
According to bond math, that means bond yields are also down.
How far down?
Since March of this year, yields, or interest rates, on all 10 year treasury bonds have been under 1% and as low as .5%!
That means over the next 10 years, if you have $1,000,000 invested in treasury bonds, you will be paid $5,000 per year.
That’s brutal. Your money needs to work harder for you.
And if you look at the historical chart of Federal Interest Rates below, it’s clear our rates will either stay at rock bottom where they are right now, or over time they will increase.
Which means you are presented with two options:
1) Buy a bond today at rock bottom rates and hold until maturity, which we established will make you less than 1% per year, or
2) Try to sell your low interest bond at some point in the future when rates increase to buy one with a higher interest rate. But remember, as rates go up, the price of your bond goes down, so you’ll be selling that bond at a loss.
That’s called interest rate risk.
Neither situation works in your favor.
And to rub salt in the wound, our cost of living, aka inflation, will continue to increase at a 2-3% rate every year. If your bond grows at 0.6% but your heating bill grows at 3%, how “safe” is that?
That’s called inflation risk.
The future of bond-math doesn’t look good. And if you own bonds, the future of your money doesn’t look good.
So what do you do?
The stock market is a good place to start. What stocks to buy is a completely different conversation, but historically speaking the stock market will out-perform bonds, especially today's bonds.
And if the "safety" of owning bonds no longer looks so safe, buying while the market is still down is a great alternative.
Send me a message if you’re looking for more specific advice on transitioning out of bonds and into stocks, and as always, thank you for reading!
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