Money, banking and financial marketsYou are sitting at the dinner table and your father is extolling the benefits of investing in bonds. He insisted that as a conservative investor ha will only...
You are sitting at the dinner table and your father is extolling the benefits of investing in bonds. He insisted that as a conservative investor ha will only make investments that are safe, and what could be safer than a bond, specially a U.S. Treasury bond? What account of his view accounts of bonds, and explain why you think it is right or wrong?
The options that can be used for investments are different for different age groups. For example a person in his 50s should invest more in bonds and a smaller percentage in the equity market.
Over a long period of time, the equity market yields are higher than those of the bond market and the level of risk is also very less. As a young person you can therefore invest a larger fraction of your investments in the equity market and other assets riskier than bonds.
Each person has has to prioritize based on factors that are unique for him/her. What is perfect for your father may not be the optimum choice for you.
I think he is right, but that a good investment portfolio has an eye towards the goals of the investor and the age of the investor. A young person has many years to lose and gain money in the more volatile stock market and should have SOME of his or her assets in high risk-high gain investments. A person who is closer to retirement and has less time to recover from market losses should be investing more conservatively, like in bonds which have a guaranteed return, but at a lesser percentage than something more aggressive.
Your father's argument would have made more sense thirty years ago than it makes today, unfortunately. There is a growing chance that the dollar will no longer be the world's reserve currency, and, if that happens, U. S. bonds will look less and less attractive. One thing we have going for us, ironically, is that economic conditions in some other countries (especially in Europe) are even worse than they are here.
What a lot of people would argue is that gold would be safer than US bonds. Yes, US bonds are generally safe, but that has been because the federal government has been pretty solvent. If that changes (with our high deficits and the coming crises in Social Security and Medicare) these bonds will no longer be so safe. This fear of a collapse is why really conservative people (think Ron Paul) invest in gold.
In the face of sovereign defaults (Greece) and massive inflation due to the printing of money, bonds may not be the safest place to be. U.S. bonds would still probably be OK, but the safer option would be precious metals (assuming there will be inflation), as post 4 states. In addition, commodities, which pay dividends might be even a better option.
I think recent economic history has shown how untrue the father's words are in this scenario. The economic collapse has shown the way that even US Treasury Bonds are not as sure and safe as often they are thought to be. At the end of the day you have to be very wise and shrewd in choosing where to invest your money.
My father is correct in that bonds are backed by a supposedly stable government and are not going to lose value, theoretically. However, they do not earn as much as stocks have the potential to earn, and something could still happen to affect them, such as the US credit rating being downgraded.
US bonds are still very safe investments, and will almost certainly be for the foreseeable future. This is precisely why foreign investors flock to them in times of economic crisis. However, as post 8 has pointed out, they are conservative investments, as indeed is gold.
I would have to agree that the argument would have made more sense years ago. While bonds are supposed to be backed, the government is printing money which is not backed by US gold. Essentially, bonds (in my eyes) are only worth the paper they are printed on.