Read This If You are Investing In a Bond
***Disclaimer – I’m not a financial advisor, just a normal guy with financial success. The information shared here is purely for educational purposes only***
There was a time when bond investment returns were lucrative. That time is not now and hasn’t been recent. Bonds have historically hovered around 3% returns in the last 15 years or so. The last time bonds were averaging over 4% was in 2007, and the last time it was over 5% on average was in 2001. In contrast, the S&P 500 typical yield is easily between 7-9% historically.
I say most likely but hard to say never in the investing world. There was a time when bonds averaged over 10% during the 1979-1984 years when inflation was out of whack. The inflation is out of whack today but most likely it will be short-lived so I don’t expect to see 10% or 5% bond yields.
Risk
How you invest obviously also depends on how much risk you’d be willing to stomach and how much day-to-day fluctuations in your investment bother you. Bonds tend to be very stable over time so it appears to be low risk, but that also means lesser returns. Inflations in most years typically run between 2-3%, so if you as an investor are only getting a 3% return, then your wealth is not really growing by much.
To put it another way, if you invest $10,000 today and you are only getting around 1% new return on average for the next 10 years, you would only gain $1,046, or about 10.5% growth and that’s assuming inflation is only 2% a year so you have net growth of 1%.
If you invested $10,000 into the stock market and get 7% return on average with 2% inflation, you would have $16,288, which is nearly 63% growth, and that is a conservative number. You can more likely expect 8-9% average returns.
Any financial experts and advisors will tell you, of course, there are no guarantees in getting great returns with investment, but history is definitely on your side as an investor. With the stock market, the fluctuations can be exciting as well as brutal at times, but if you are not retiring in the near future, then the day-to-day fluctuations should not be something that bothers you.
Time and Timing
Time is one of the biggest factors besides how much you put into your investment. You need time, lots of time for your investment to grow. Get rich quick and people who won the lotteries are few and between, but you don’t need either to become financially stable and successful over time. Whether you choose to invest in bonds, stocks, or a combination of both, your money isn’t going to explode overnight.
Timing is also important on how much risk you might be willing to take. If you are young and can wait 20-40 years for your money to grow if a recession or market slow down hits, it would seem also irrelevant to you since you are not planning to use your investments for living expenses any time soon, thus you can take more risk and be more aggressive with your investment strategies (like going 80-100% stock).
If you however are planning to retire soon, you may not want to take as much risk and want to have a bigger portion of your investments in bonds instead of going 80 or 90% stocks in your portfolio. Personally, for me, there is still a better investment strategy even in my retirement than turning to bonds, but that is a topic for another day. The point is, that you have to personally evaluate where you are at your life stage and how much risk you want to take.
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***Disclaimer – I’m not a…