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Are you considering investing your hard-earned money into bonds?
Before you take the plunge, it’s important to understand the risks associated with this type of investment.
Bonds may seem like a safer option than stocks, but there are real potential pitfalls that come along with them.
We’ll discuss whether going all-in on bonds is really the best move for your portfolio or if there are other alternatives worth considering.
It’s time to learn why diversifying and choosing different types of investments can help maximize returns while reducing risk!
#1. No One Has It 100% Figured Out
The most important thing to understand about bonds is that the markets are unpredictable.
No one can accurately predict future performance, and there’s no guarantee that a bond will always pay out as expected.
In other words, past performance is not necessarily an indication of future results.
This means that you could be looking at losses if interest rates rise or if economic conditions worsen.
#2. Low Returns for a Reason
Bonds are considered to be one of the safest investments since they offer guaranteed income in the form of interest payments over time.
However, these low-risk investments also come with low returns which can limit your overall growth potential.
If you’re looking for maximum returns on your investments, bonds are likely not the right choice for you.
#3. Auto Purchase During a Down Market
Here’s a response that discourages what the individual is considering.
This commenter advised, “If you are relatively young, a down market is a gift as your shares auto purchase new shares through dividend reinvestment for much lower from when you bought. Then when the market goes up again, your portfolio will be even more significant.
Never sell based on market conditions when you are young. You set an age-appropriate asset allocation and sit with it. You place your dividend stock to buy more shares with the paid dividend instead of cash.”
#4. Paper Losses, Paper Wins
This wise person reminded the original poster of this bit of truth.
He said, “Remember, when your 401K dips, it is only a paper loss. When it goes up, it is only a paper win. The only time the price of any fund or stock counts is when you buy or sell it. Check your funds and be sure everything is smooth in there. If something goes under, then it will be an actual loss.
That is what they mean when they talk about the 2008 bailout. However, some of those guys should have gone to jail.”
#5. Don’t Worry, You’re Still Young
Finally, this comment was a reminder that the original person and his parents are in two different age groups and that his parents are moving toward retirement.
This canny contributor cautioned him, “Moving your portfolio out of stocks and into bonds is something you’d start to do within a decade of retirement, regardless of the state of the market.
If you’re still 20 or 30 years away and have another couple of boom-bust cycles to get through, as others have said, keep buying in slow and steady into general stock funds, and don’t try and be too clever. The S&P is 17% off its all-time high and is unlikely to drop much below 20% of its December 2021 peak unless there’s a global catastrophe. In other words, don’t worry too much!”
#6. Back In 2016
How did a similar plan to what the original poster is considering fare in the past?
A commenter who watched a friend do something similar said, “A good friend of mine went all bonds and cash in 2016 because “the market was too bull for too long,” and everyone was parroting the Recession. He thought I was crazy for keeping the investments going monthly without changing.
He finally bought back in – in late 2019 and sold on the Covid drop. I’m far, far ahead of him now with similar total investments. I timed nothing, made no changes, and have been 100% stocks, S&P, for over two decades. Good luck!”
#7. Don’t Let Emotions Control You
When was the last time you make the right decision that was based purely on emotion?
Chances are it was never. And this is what does most investors in.
They allow their fear or greed decide to invest or not. You are your greatest enemy when investing. Have a plan and stick with it for the long term.
#8. Identify Your Goals
Before you invest in anything, you need to identify your goals.
Why are you investing in the first place? How long will you be invested? What is your risk tolerance?
Answering these critical questions will guide you when it comes time to select the investments that are right for you.
#9. Set Up A Play Account
Some investors take 5% of their money and actively trade with it.
This solves two problems. First, it gives them a sense of control, or an outlet for their fear.
They feel better making moves based on emotion.
The second issue it solves it that it shows you how bad you are at making investment decisions.
Most people who actively trade will lose most of this money. This is why you should only use 5% of your wealth.
Ideally, once you see that you did worse than the rest of your portfolio, you will be more inclined to ride out the market.
#10. Stick to Shorter Term Bonds
If you must put some money into bonds, it is recommended you stick with shorter duration bonds. In other words, bonds that will mature in five years or less.
These are less sensitive to changes in interest rates, which is important since the Federal Reserve might continue to raise interest rates.
#11. Get Good Advisors
This plan is something that many people overlook. They don’t see the benefits of having an impartial mind considering everything for you.
A forum member stressed the need for this impartiality and lack of emotion in financial decisions.
They said, “You should hire someone to make these decisions. Hiring a financial counselor may seem silly as you can read and learn the same as a Financial Advisor.
Still, emotions can get in the way since you are human and dealing with your own money. You’ve mentioned several hazardous potential options when investing with your feelings. Go all to cash, face reinvestment rate risk, and potentially miss out on the upswing in the market.”
#12. The Future Isn’t Written
While many people have opinions on what will happen in the future, it’s impossible to be right 100% of the time. A person who does not believe in prognostication stated, “No human alive knows the exact direction in the market will move with 100% certainty—anyone who pretends to be foolish or lying to you.
Proper Asset Allocation, following modern portfolio theory, and investing for the long run are the ways to deal with that uncertainty.
There are zero guarantees that the stock market will become cheaper relative to bonds in the future, even if a recession does happen. We have witnessed a fair amount of inflation over the last year or two. Inflation means dollars are worth less; when that happens, the prices of everything – including stocks – will tend to rise.
Suppose there’s enough (and unpredictable enough) inflation that economic activity goes down. In that case, corporations become worth less, creating downward stock pressure, but that low pressure may not be greater than the upward pressure from inflation.”
#13. Bonds Aren’t Risk Free
Man investors assume when they invest in bonds, they cannot lose money.
This is far from the truth.
The value of bonds change over time and if you sell before a bond matures, you can lose money.
It is important to know how bonds work so you can minimize your risk of losing money.
#14. Individual Bonds are Better Than Bond Funds
Bond funds are the easier choice for most investors.
Investing $100 will give you a diversified portfolio from the start.
But there are risks of bond funds.
As other investors sell, you might get burnt.
A better option, though more time consuming, is it invest in individual bonds.
You have complete control the whole time.
#15. The Market Goes Up And Down
An important lesson that all investors have to remember is that the market goes up and down.
In the short term, these swings down can cause you to lose money. But over the long term, the market goes up.
This is why is it critical to take a long term view of investing.
If you are only investing for 5 years or less, there is a good chance you will lose money.
But if you are investing for 10, 20, or even 30 years, you will make money.
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This thread brought you this post.
I have over 15 years experience in the financial services industry and 20 years investing in the stock market. I have both my undergrad and graduate degrees in Finance, and am FINRA Series 65 licensed and have a Certificate in Financial Planning.
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