Growing up I always heard of the wonders of bonds and how great they can be, however; in a modern-day environment I believe bonds are the worst possible investment. Here’s why:
- There are competitive assets like reits and stocks and peer-to-peer lending that greatly outperform the small return on bonds
- Banks currently offer risk free cd’s at 2% interest and you can take your money out for a small 6 month interest penalty
- If inflation kicks in your bonds can because a massive sink hole to your money, whenever the market offers a risk free return higher than your bond you would have to sell your bond at a price substantially lower than you bought it for; the real return over the entire life of the bond can become negative because of inflation
To better explain how inflation effects bonds you can think of it this way: when you have a fixed amount of money coming in such as bonds it will never increase or decrease, that means at the end you will have a precise predictable amount. For example: a 1 year bond at 4% that you buy for 1000$ will end up giving you $40. Now if savings account interest rates go up to 6% then your bond will pay $40, yet people without bonds will make $60. This doesn’t sound like a very bad deal, however; if you compound the money you will quickly realize that you can lose massive amounts of money from bonds. Especially if there is inflation causing your buying power to go down.
As well, if interest rates raise too quickly then the price of gas can go up 10%, yet you only get 4% from the bonds; so when you buy gas you’ll end up with a lot less money. Meanwhile, if you choose to invest in stocks they will tend to do great with inflation because the goods and services that they sell will tend to go up with inflation. You will not only get the growth they offer, but also the inflation.
Please note that this article is purely my opinion and should not be used or considered as financial advice. This article is intended to help others think about investment concepts. If you are interested in concepts mentioned in this article I recommend that you consult a certified professional to better understand the many risks including loss of entire investment or even greater than your initial investment from leverage.