Bonds aren’t all bad – they are liquid, may appreciate enough to cover inflation, and are not a very risky investment. However, since they aren’t very risky, they also don’t deliver as competitive returns as other investments. Don’t get me wrong, bonds may be good to stabilize some portfolios – but I believe they don’t belong in the portfolio of a young person. If you disagree (or agree, for that matter), read on to figure out why bonds should not be part of a young person’s portfolio.
The main advantage of bonds is they are relatively safe. This can also be a disadvantage because it means they don’t give returns that are as good. For example, over many years, the stock market as a whole returned more than the bond market. That means that if you had invested the same amount of money in stocks and bonds, you would have made more money with the stocks. Because of that, if you have a long time before you plan to use the money (for example, if you were 20 and plan to retire at 65), you would have gotten significantly less money from your bonds because of compound interest.
Earlier, I said bonds aren’t good for a young person to invest in, but this logic only applies to someone with a long time before they withdraw their money, since if you are close to the time when you sell whatever you bought, you might want to consider having bonds as a significant part of your portfolio because they are less volatile, and you would need that reduced volatility, since a market fall could impact you severely – and if you took the money out when the market is down, you would have sold more shares than you would have needed to before the market went down.
However, none of these conditions apply to people with many decades before they withdraw their money, since they would have a long time to recover from any downturn that may hit them. That is why bonds shouldn’t be in the portfolio of someone who has a lot of time before they cash in: they provide inferior average returns to stocks (the market as a whole, not just one company). So if you have a long time before you cash in on your money, you should seriously consider taking bonds out of your portfolio so as to provide you with the maximum returns possible. Remember, starting early is very important because in investing (unlike many others) time is on your side.