TSI #42: Bonds are hot stuff now, but are they the right investment for you?
Apr 16, 2023Hello Stoic Investors,
Today I want to introduce another investment option. Younger investors don’t talk about it that often. But that doesn’t mean it’s any less important.
You have probably heard of stocks before. With every stock, you buy a piece of a company.
How about bonds?
Bonds work a little differently. With every bond, you buy a piece of debt.
Let’s go just a little bit deeper.
What are bonds really?
It's like if your friend asks to borrow some money from you and promises to pay you back later with some extra money on top of what you lent them.
When you buy a bond, you're basically lending your money to the bond issuer and they promise to pay you back with interest after a certain amount of time.
I know what you’re thinking.
How much money can I make?
Well, that depends on the type of bond.
There are three major groups of bonds.
U.S. Treasury bonds:
These are issued by the U.S. government and are considered to be the safest type of bond. They typically offer lower returns compared to other types of bonds, with an expected average annual return of around 2% to 3%. This is lower than the historical average annual return of the S&P 500, which is around 10%.
Corporate bonds:
These are issued by companies to finance their operations. They typically offer higher returns than U.S. Treasury bonds, with an expected average annual return of around 4% to 6%. This is still lower than the historical average annual return of the S&P 500.
Municipal bonds:
These are issued by state and local governments to finance public projects. They offer tax benefits and are considered relatively safe, with an expected average annual return of around 2% to 4%.
Are bonds a good choice for me?
That depends. What is your goal?
Do you want to multiply your money?
Then bonds are probably not the way to go.
Do you want to preserve your money?
Then bonds might be a good fit for you.
In short, with bonds, you risk less and gain less.
If you are still unsure. Here is something to help.
Pros and cons
Pros:
-Bonds offer a relatively stable source of income, as they typically pay interest at fixed intervals.
-Bonds can help diversify a portfolio and reduce overall risk, as they tend to be less volatile than stocks.
-Some types of bonds offer tax benefits, such as municipal bonds.
-Bonds can be a good choice for investors who are more risk-averse and prefer a more conservative investment strategy.
Cons:
-Bonds generally offer lower returns than stocks
-Bond prices can be affected by changes in interest rates, which can impact returns.
-Some types of bonds, such as high-yield or junk bonds, can be more risky and volatile.
-Inflation can erode the purchasing power of bond returns over time.
So, note down these points and start investing today:
- With every bond, you buy a piece of debt.
- There are three major groups of bonds (treasury, corporate, and municipal)
- With bonds, you risk less and gain less
