Bonds: 2 Simple Reasons Why You Don't Need Them in your IRA.
Financial planners or retirement experts are quick to tell you how you need to maintain a balanced portfolio. They stress the importance of including fixed-income assets in your portfolio. Bond investing is a crucial fixed-income asset that experts say must occupy a portion of your 401k or IRA. But do you really need bonds?
What are bonds?
In simple terms, bonds are just debt. According to investopedia, a bond is a type of fixed-income instrument "that represents a loan made by an investor to a borrower (typically corporate or governmental). A bond could be thought of as an I.O.U. between the lender and borrower that includes the details of the loan and its payments. Bonds are used by companies, municipalities, states, and sovereign governments to finance projects and operations." A full discussion of bonds is beyond the scope of this article. But if you are interested in learning more about bonds, this video can be useful.
Stock markets are risky. Bonds give your portfolio stability and protect your investments against losses. They yield so little in returns relative to equities or stocks. If you meet these two simple criteria, you may not need them in your retirement account.
You are a young investor
If you are a young investor decades away from retirement, bonds have no place in your retirement account or portfolio. Because the yield of bond investing is basically laughable, a young investor is better off investing his/her money in stocks or equities to generate maximum returns.
Your risk tolerance is high
Stock market investing is both risky and rewarding. As an investor, you could lose a large portion of your money. On the other hand, you can also reap great financial rewards. With investing, the higher the risk, the higher the reward. If you can tolerate large stock market fluctuations and losses, bonds should have no business being in your retirement account.
The bottom line
Bonds are great fixed-income assets with guaranteed yields. But with their usual low yields, relative to stocks or equities, bonds may diminish your investment returns. If you are a young investor who is decades away from retirement and can tolerate large stock market headwinds, bonds and your retirement account should not bond together.
Are you ready to invest? Not comfortable doing it yourself? The following robo-advisors and brokers may be able to help.
- Wealthsimple. This robo-advisor will help you diversify your investment portfolio across the entire market, using low cost ETFs. They even show you how much your money can grow with their simple-to-use investment simulation calculator. Start investing with Wealthsimple today.
- Acorns. This robo-advisor allows individuals to become investors with the simple use of an app. Check out these Acorns reviews or invest with Acorns.
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