Why Invest in Stocks When Bond Yields Are Higher?
Bonds are finally yielding worthwhile interest rates. Should you take the comfortable return of a treasury bond instead of taking risk in stocks?
Why Invest in Stocks When Bond Yields Are Higher?
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SPEAKERS
Alex Okugawa 0:00
Bonds are finally yielding worthwhile interest. So should you take a comfortable return on a treasury bond instead of taking risks in stocks? Higher interest rates are better for your retirement portfolio. But the funny thing is, even when interest rates were much higher than they are today, investors weren’t dumping their stocks for bonds. Hey there, it’s Alex and Anthony, from One Degree Advisors, and we help you gain confidence in your retirement. So, Anthony, interest rates were so low for so long that many retirees started taking on more risk to try and seek some meaningful returns, and they were seeking those primarily in stocks. But now that interest rates are higher, I think some people are asking themselves a question, Should I start dumping some of my risky stocks for a more comfortable and stable rate of return, maybe in Treasury bonds that are actually giving me some decent yield?
Anthony Saffer 0:51
Yeah, it’s a good question. And Ben Carlson had a great post in his Wealth of Common Sense blog, I want to read a quote here, it says 15%, for 30 years, $1 million invested at that time would have been paying out $150,000 a year in interest for three decades, can you imagine how much demand there would be for bonds yielding 15%? For that long today, the funny thing is, when bond yields hit these levels in 1981, no one wanted to buy them.
Alex Okugawa 1:18
And for context, I mean, nowadays, you can lock in bond returns somewhere in the neighborhood, depending upon the type of maturity that you’re looking for maybe three and a half, to 4%, perhaps even more, which is crazy for shorter-term bonds, that shouldn’t be the case. But those could change by the time folks are watching this video. And admittedly, it’s one of those things where it’s actually kind of exciting now to earn some interest on some safe investments like bonds, where we were never able to do that, at least in the past decade or so.
Anthony Saffer 1:49
Yeah, it’s definitely a good thing that bonds are yielding more. So we pulled out some reasons of why people didn’t just dump stocks and go into bonds from Ben’s post. Number one is that rates can always go higher. People don’t want to necessarily invest all their money at three and a half to 4%. When next week, they could be up to 5%.
Alex Okugawa 2:08
Well, I’m thinking about when interest rates were at 15%. You have to imagine, don’t look back and think, oh what would I have done? Think about the moment when rates are 15%. What is your state of mind at that time? I mean, you probably saw rates continuing to increase in the slope upwards, and people are going, they’re just going to keep going up. And then if they slightly come down, they’re going to come back up again, eventually. So hindsight is 2020, I think everyone would love to have locked in a 15% bond. But you have to look at the environment today. Right now we’re sitting at three 1/2 and 4%, there are plenty of people saying rates are actually going to go a little bit higher. So maybe you don’t want to lock in a bond. There’s never a clear-cut solution to this.
Anthony Saffer 2:49
And it’s the same thing with reason number two is that stocks offer a reward that bonds just can’t always give. And there is that FOMO Fear Of Missing Out mentality because even like this year, where 2023 has started out pretty strong in the stock market. I mean, most stock investors have already earned so much in their stocks that they can earn treasury bonds for the rest of the year, they want that.
Alex Okugawa 3:08
In less than a month that’s been earned. So I mean, the other big thing here, though, is inflation. Inflation has been the talk of the town for the past year. Who knows what it’s continued to do if it’s coming down? But inflation is a big piece when we think about returns that after inflation return.
Anthony Saffer 3:24
So comparatively, the three-a-half percent on the 10-year rate for a bond compared to the latest inflation reading, it’s six and a half percent. So you are losing real value there. That is something to definitely consider. Ben wrote this an old quote from 1946 to 1980, long-term government bonds lost an astonishing 60% of their value after accounting for inflation.
Alex Okugawa 3:45
Yeah, and I think that’s what a lot of people fear. So even when we’re running retirement projections, and you incorporate an inflation amount in a financial plan is what are your rates? What’s your rate of return relative to inflation, if your investment returns aren’t even keeping pace with inflation, over time, you just start to lose real value.
Anthony Saffer 4:05
The fourth reason why people don’t just dump stocks to go into bonds is hindsight. It’s always easy in hindsight to say what you should have done, how often I’ve heard from people Oh, you know, I was going to invest in Amazon or Starbucks when it was this, but actions speak louder than words. So that’s not a saying go out and do it, and just be really bold. You do want to be careful with that. But it’s never always really clear until afterward.
Alex Okugawa 4:30
Let’s be real. These higher interest rates could definitely entice people to start incorporating more and more bonds into their portfolios, but getting rid of stocks has really not been a popular choice historically.
Anthony Saffer 4:45
So let’s look at solutions. Number one is diversification things always change market cycles change. So going really extreme or concentrated on one area is rarely a good idea. It’s hard to predict the future is spread out having different asset classes, what some people may do that has maybe increased their risk more towards stocks is maybe they are pulling back a little bit to say, hey, I’ll take some of those bond yields. But dumping everything is rarely a good idea.
Alex Okugawa 5:10
And the second thing here is to invest for your specific timeframe, not just based on what’s out there in the market.
Anthony Saffer 5:16
That’s right. So this is where planning and really coordinating your investment plan with your financial plan that looks at timeframes and your objectives is really important. Cash can be there for the short term for those emergency needs. Bonds can be that second layer for stability and for income, and then stocks and other equity-type investments are there for the long term.
Alex Okugawa 5:36
Now again, not all bonds are made equal. There are different types of ways to invest in bonds and we’ve recently posted a video on individual bonds versus bond funds. In that video, we take a deeper dive into the pros and cons and helping folks to determine whether or not they should invest, let’s say an individual bond or a bond fund, folks can watch that above. Once again, this is Alex Okugawa from One Degree Advisors, and if you’d like to learn how we can help you with your retirement, visit our website at onedegreeadvisors.com/getstarted.
Transcribed by https://otter.ai
The One Degree Blog
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This does not constitute an investment recommendation. Investing involves risk. Past performance is no guarantee of future results. Consult your financial advisor for what is appropriate for you. Disclosures: https://onedegreeadvisors.com/solutions/#disclosures
