Understand the pros and cons of investing in bonds and consider them as part of your alternative investment options.
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It depends what you mean by bonds, but for the purposes of this question I will assume you mean government bonds.
I have partly changed my mind on this question in recent times. Don’t get me wrong, government bonds still have the following benefits:
Yet the good quality bonds do pay very little now. What’s more, stock markets (not individual stocks but the whole market) have always beaten bonds long-term:
That meant that it always made sense for younger investors to be light on bonds and heavy in stocks, before going for a 60/40 or 50/50 allocation when they are older.
There was no point in taking risks on alternative, uncorrelated, assets, when bonds could pay 6% per year.
What has changed now is that it is fairly easy to beat government bonds with alternative assets – which can include good-quality corporate bonds.
Especially for people who are more sophisticated, or have access to an advisor, have many smaller alternative investments to partially replace the bond allocation, can increase returns.
Of course, the key is increasing your risk-adjusted return, and not just return, and that takes some thought, skill, research etc.
I was reading an interesting research paper a few days ago. It spoke about how Canadian investors have behaved in the last few decades.
From 1999–2000 until the Global Financial Crisis of 2008, Canadian stocks thrashed their US counterparts.
Emerging markets sometimes did even better. Look at how the Shanghai Composite performed. – going from 1,000 to over 6,000 in a short space of time!
During this time, the number of Canadian investors who put 100% of their assets into local stocks skyrocketed, as did the number focusing on emerging markets.
However, this happened after 2008:
US stocks have beaten Canadian ones hands down, and that has continued between 2018 and today.
Now, many Canadian investors are wondering whether they should not invest in local stocks.
I use Canadian investors merely as an example. Similar studies have been done on investors globally.
I am from the UK and see much the same thing. I personally saw people getting into oil and emerging market ETFs and stocks before 2008, and fewer British people wanting local stocks due to the recent performance of the FTSE100 (and even the FTSE250 hasn’t done as well as the Nasdaq and some US indexes).
However, that won’t last forever. It is true that the US markets are some of the best, if not the best, in the world, because they attract innovation from around the world.
Look at all the European, Japanese, and Chinese firms that IPO on the exchanges.
Apple, Amazon, Starbucks and so on also sell more internationally than in the US.
That doesn’t mean, however, that US markets will always outperform. They haven’t beaten international stocks in every single time period historically:
What is true is that US stocks have beaten international ones over most 40–50 year time horizons, but there can be significant periods of time when international wins.
As US stocks have been outperforming for so long, it could be the turn of international stocks to do better.
We already saw that last year. With the exception of the Nasdaq, the other indexes that performed best were previously underperforming exchanges like Taiwan and South Korea.
There is a reasonable chance, and indeed there is speculation that he could become the world’s first trillionaire.
However, that doesn’t mean he is the richest person in the world. It merely means he is the wealthiest.
It depends how you define richest really, but I would make a number of points:
1. Unrealized capital gains aren’t the same as realized gains. The media often say that such and such has “lost” or “made” X and Y amounts of money.
That is misleading. What it merely means is that the stock price is fluctuating. If Tesla increases by 10% today, Musk hasn’t made $25 billion in a day.
Likewise, he won’t lose 20 billion when Tesla falls by 10% one of these days. It only becomes a gain or a loss once there are sales.
This isn’t just the case with large sums of money. If your income is 50k, whilst your pension asset soar by 20k and your house goes up by 60k this year, your income remains 50k…..not 130k.
2. The security of the money
There are four types of super-wealthy people
So, even though on paper somebody like MBS isn’t as “rich” as Musk, he is indirectly richer.
He has more liquid income and a whole country behind him. Even Gates and Buffett are indirectly in a stronger position than somebody like Musk or Bezos, as they have diversified away from one or two companies.
What would need to happen for somebody like MBS to go broke? The whole country would need to go down, and maybe the world economy, considering he probably has money in many countries.
For Gates and Buffett, it would take a lot for their wealth to fall by 99%. That isn’t the case with a founder who has one or two successful businesses, and most of their wealth is linked to that stock.
That doesn’t mean somebody like Musk will suddenly become 99% poorer, but it does mean he is more vulnerable than somebody who has a more diversified portfolio, to unexpected black swan risks.
The point is, the media put out a lot of misleading statistics on this.
I watched a great documentary yesterday from the former Arsenal player Paul Merson.
He lost 7 million Pounds, which is about 12–15 million in today’s money – about $20million.
That is about twenty million USD in today’s money. He mentions how gambling ruined him and many other players.
Gambling often goes together with other vices such as excessive alcohol use, and can indirectly result in divorce.
One of the reasons why people who are earning a lot of money gamble is that there always seems to be fresh money coming in.
Until there isn’t. Professional sports stars tend to earn much less in retirement unless they have a big personal brand or go into management.
That, therefore, means that financial planning is very important. If somebody’s peak earnings are in their 20s and early 30s, planning is essential to make the money last.
Even somebody who was relatively frugal might struggle. Let’s say somebody who has a net worth of $10million on the day they retire.
Realistically, they might be able to get a **safe** income of 400k-500k a year from that.
Very good for most people. Hard to get used to if you got used to tens of millions.
That is one of the biggest reasons why many sports stars, not just footballers, go broke.
A study showed that as many as 78% of former basketball players also become broke, with plenty of boxers like Joe Frazier and Mike Tyson going the same way.
1. Hangers on. When young people earn a lot of money, they attract the wrong type of people. At a younger age, it is harder for people to judge people as well. People who gradually get wealthier as they age are less likely to make silly decisions.
2. Lack of professional advice. This is changing. Clubs now set up advice, just as the lottery started to do once they saw the problems.
3. One extreme to the other. Many players come from tough, poverty-stricken, backgrounds, and then suddenly make tens of millions.
4. Unexpected events, like early injuries, and not preparing for them financially.
5. Peer pressure. If everybody else is overspending, it is difficult not to be taken in, even subconsciously. You get invited to events and other occasions. Even in a normal office environment, people get influenced by their co-workers. If you share your office with an “everyday millionaire” who got rich slowly, that changes your mentality, compared to being with people who are trying to keep up with the Jones’.
6. Professional players, like business people, are more likely to be risk-takers compared to people who become teachers or doctors. That is good if it is a calculated risk. For some, extreme risks are taken, hence things like gambling.
It isn’t just professional sports stars either. As mentioned, lottery winners often end up broke, as do many inherited wealthy people.
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