Under 30? Buy bonds, not stocks...

[REWahoo]

Here is a guy who turns conventional wisdom on its head:

I would tell a young investor to avoid stocks altogether and invest in a carefully selected portfolio of corporate bonds. Not bond funds, but individual corporate bonds.

Here's the reasoning. Because there is a significant chance that investment returns could be virtually nil, or even negative, over the next decade, a young investor should seriously consider seeking the next-best alternative. Ideally, this alternative would be characterized by a reasonable chance of capital preservation while returning a rate closer to the historical return on stocks. It isn't likely going to be found in the debt of sovereigns, but it might well be found in the investment-grade debt of corporations.

Youngsters should buy bonds now, stocks later

He's pretty gloomy about the anticipated return on equities, quoting Bill Gross and his prediction of sub-two percent annual returns over the next decade.

In case these prognosticators are wrong (as they usually are), I'd advise any young investor to follow a balanced AA including both stocks and bonds.

 

[ziggy29]

Sounds like a "Death of Equities" moment.

 

[MasterBlaster]

If I were to make a bet for outcomes some 10 or more years out...

I would bet that bonds are losers as the interest rate environment normalizes.

I would also bet that equities, especially well managed companies, will do very well.

- But what do I know. I suppose we'll find out... place your bets.

 

[traineeinvestor]

Putting all your investment eggs in one basket is a highly risky strategy IMHO in that it (largely) ignores:

default risk
inflation risk
diversification and rebalancing risks
(in some cases) higher tax burden

 

[FUEGO]

If I were to make a bet for outcomes some 10 or more years out...

I would bet that bonds are losers as the interest rate environment normalizes.

I would also bet that equities, especially well managed companies, will do very well.

- But what do I know. I suppose we'll find out... place your bets.

I would anticipate exactly this as well. Bonds are fairly easy to predict over the next 10 years. They will probably give you roughly zero real return. You may squeeze out a percent or two real return per year if you pick the perfect combo of corporate bonds that don't default. I doubt it though since rates are extremely low (historically) right now and the coupons barely cover inflation (or fail to do so in shorter term issues).

Then there are equities. Getting 2-3-4% yields on major indexes isn't that hard any more. If profitability of companies grow zero over the next 10 years (in real terms) and they keep paying the same 2-3-4% dividend those 10 years, then you have earned 2-4% real return. Sure, the share prices may drop over the next 10 years, but there are good odds the earnings and share prices will increase.

It's a gamble either way but I know which way I am betting.

 

[audreyh1]

He's pretty gloomy about the anticipated return on equities, quoting Bill Gross and his prediction of sub-two percent annual returns over the next decade.

Uhhhh - and he thinks bonds can do better? Amazing!

 

[FUEGO]

Uhhhh - and he thinks bonds can do better? Amazing!

After reading the article in detail, it appears even more ridiculous. 7.48% nominal return in exchange for holding these bonds an average of 25 years, and hoping that none default OR call the bonds early.

A few calls or a partial default or two could significantly lower the returns and in the case of default eliminate principal. Not to mention your principal could be impaired as rates change over the 25 year period. That is a long time to tie up capital to get a chance at a max of 7.5% nominal return.

 

[ziggy29]

It's possible that someone can believe equities are going to suck for a few years. But if one is going to advocate market timing along asset classes, it seems odd that they would steer you into an asset class that has NEVER been this overvalued relative to its mean. I wonder if he would have recommended real estate in 2006 or equities in 1999.

 

[Animorph]

And if inflation heats up, the real return could be negative for those bonds.

 

[Chuckanut]

If some under 30 person wants to be 100% in bonds, then why not go whole-hog and buy some Greek sovereign debt which is currently yielding 24%. Then he/she would have bonds and the risk of equities!! What a deal!

 

[LeavingOhio]

Sounds like a "Death of Equities" moment.

That's exactly what I was thinking! 1978 all over again!

I remember a lot of people saying to be out of stocks (saying to be out of them for decades or maybe even for ever) back in 2009. Man I'm glad I didn't listen to them. My stuff is up BIG since March 2009.

 

[foxfirev5]

I can remember back in the early 80's my company had a savings plan which turned into a 401K. I was making over $100/month interest on less than 10k invested in the time deposit option. At my young age I figured I could make about $2500/month in interest if I hung around for about 20 years. Anyway the stock and bond options weren't even mutual funds and very expensive so I stuck with those until 1985. The company then began offering Fidelity and finally Vanguard Inst Funds.

 

[Gumby]

Here is a guy who turns conventional wisdom on its head:

Youngsters should buy bonds now, stocks later

And it appears that's just what they're doing -- at least the first part. Who knows if they'll come to their senses?

News Headlines(Generation Y Shuns Stocks, Opts for Mattresses)

 

[RISP]

When will people understand that the world is not black and white? It's not "either or". Forget about market timing, maintain a balanced AA incl. stocks AND bonds, and you'll do fine. Of course there is "a significant chance that investment returns could be virtually nil, or even negative, over the next decade"! There alway is. If it turns out that way, I'll be happy to buy cheap. There is also a much bigger chance that stocks will do great.

 

[EvrClrx311]

If you need the money in 10 years... maybe, but if you're talking about retirement for someone in their 20s... there has never been a period in history where Bonds were smarter than equities over those longer periods.

As if that weren't enough... inflation is the deal breaker for Bonds IMO. Equities have a certain level of inflation protection built into them... while Bonds get pummeled. IMO, the risk of inflation hitting over the next 10 years is much larger than the risk of equities continuing to trail their historic average.

 

[marko]

Anyone remember when CDs were paying 15%? Sweet!

I think this is an interesting idea. I've not fully investigated it buy my equities went from -24% and back to +30% during the crash. Meanwhile, my bond fund only lost 8% and my bond 3,5, 10 and 15 year averages are better than equities (as a result?)

 

[RISP]

@Marko: Remember when inflation was in double digits, too? Not sweet.
Re: your other comment, you are looking at a tiny sample here.

 

[imoldernu]

Seems like a slight difference of opinion here.

My friend, farmer Bill is sitting on top of 1500 acres of farmland, bought @ an average of $1500/acre... Now selling for $17,000... Excellent ROI, considering that he's been farming much of it for the past 35 years.

Do IBonds count? Because of my confusion about investing, we bought in back in 2001 through 2003... Not getting rich, but the 6% return beats the .23% that my bank uses to entice me into an interest bearing checking account.

Would anyone care to weigh in on the future of Municipal Bond values, when Credit Default Swaps kick in?

What about SanBernadino. San Vallejo, Stockton or Mammoth Lake Bonds?

Am thinking perhaps, a fireproof mattress?

 

[marko]

@Marko: Remember when inflation was in double digits, too? Not sweet.
Re: your other comment, you are looking at a tiny sample here.

The point I was thinking of is that even if bonds funds don't do as well as equities, they don't go down as much in a down cycle. That means that they don't have to recover as far up.

Seems to me that some funds win by just not losing.

If by 'tiny sample' you mean my own personal situation, yeah, you're right. If you mean a 15 year average is a 'tiny sample', I'm not sure that's a good point.

 

[packrat44]

The author's article is a good example why a person should not take mind-altering drugs.

 

[packrat44]

Seems like a slight difference of opinion here.

My friend, farmer Bill is sitting on top of 1500 acres of farmland, bought @ an average of $1500/acre... Now selling for $17,000... Excellent ROI, considering that he's been farming much of it for the past 35 years.

Do IBonds count? Because of my confusion about investing, we bought in back in 2001 through 2003... Not getting rich, but the 6% return beats the .23% that my bank uses to entice me into an interest bearing checking account.

Would anyone care to weigh in on the future of Municipal Bond values, when Credit Default Swaps kick in?

What about SanBernadino. San Vallejo, Stockton or Mammoth Lake Bonds?

Am thinking perhaps, a fireproof mattress?

The ROI on an investment of $1,500/acre that is valued at $17,000/acrce after 35 years is 7.18% annualized. This is good, but not unusual. FIL has ranch land he purchased 63 years ago at $9.50/acrce. The value is considerably higher now.

The author of the article is recommending 30 year-olds buy bonds today. While you are receiving 6% on IBonds purchased in 2001-2003, a buyer today would not receive those higher rates. With our government overspending, it is easy to see high inflation in the future. When that comes, I would not want to be holding a large portion of my portfolio in long-term bonds that I purchased in todays market.

 

[RISP]

The point I was thinking of is that even if bonds funds don't do as well as equities, they don't go down as much in a down cycle. That means that they don't have to recover as far up.

Bonds fluctuate less than stocks, that's right. Traditionally, they are therefore considered less "risky". However, variance is just one measure of risk. It has been used in economics a lot because it fits nicely into mathematical models, but it is by no means the only thing you should take into account.
In other words, maybe bonds don't go down nominally. What counts are real returns. At this point in time, you are almost assured a real return (after inflation) of +/- zero if you buy investment grade bonds. If capital preservation is your priority, that maybe fine for you. But you will most certainly not make any money. (This is an opinion, but I'm willing to put my money where my mouth is.) Where do you think interest rates are headed in the mid-term - down or up? Where do you think inflation rates are headed? Hint: There's not too much "down" left. What does this mean for bonds?

If by 'tiny sample' you mean my own personal situation, yeah, you're right. If you mean a 15 year average is a 'tiny sample', I'm not sure that's a good point.

I was indeed referring to the time period. 15 years is nothing compared to the several hundred years during which stocks have outperformed bonds. Bonds have done well over this most recent period because interest rates have declined to historic minimums. Unless you believe we will soon see negative interest rates, there is just no way this trend will continue.
In addition to that, bonds carry default risk very similar to stocks, but the returns are capped. While there are certainly not many things to be sure of in the investment world, I believe the following is a universal truth: Going 100% bonds is a suckers bet.

 

[Chuckanut]

What about SanBernadino. San Vallejo, Stockton or Mammoth Lake Bonds?

Am thinking perhaps, a fireproof mattress?

Don't forget the sovereign Greek bonds at 24%!!!!!