I was asked “why would you invest in bonds? It pays so little”. Here is my response.

I often write answers on Quora, where I am the most viewed writer for investing, wealth and personal finance, with over 239.8 million views in the last few years.

On the answers below, taken from my online Quora answers, I focus on a range of topics including:

  • Why would you invest in bonds? It pays so little. At least that is what some people say. I explain why you shouldn’t expect low returns for bonds forever.
  • What is hedonistic adaptation and how can you avoid it? I look at the relationship between money and happiness, and how you can increase happiness by making the right choices.
  • What is the best financial advice you could probably be given?

If you want me to answer any questions on Quora or YouTube, or you are looking to invest, don’t hesitate to contact me, email (advice@adamfayed.com) or use the WhatsApp function below.

Why would you invest in bonds? It pays so little.

Source: Quora

Consider this incredible fact. From 1900 until 1960, UK property prices were pretty much stagnant for 60 years adjusted for inflation.

In 1961 or 1962, I imagine the average British person thought it was stupid to buy property.

Richer Britons bought land, stocks and shares and some other assets.

Land was preferred over residential property for richer people as it could produce cashflow.

In the subsequent decades, UK property prices have done much better than historically has been the case, at least from 1960 until 2008, despite some blips in the middle.

In fact, if you look at the average price rises in real terms from 1900 until 2021, the majority of the rises would have been during those time periods.

The point is, just because an asset is performing badly now, doesn’t mean it always will.

That is why it makes sense to look at ultra long-term graphs, not because the past is always a guide for the future, but because “recency bias” can distort our picture of how assets have historically performed.

Historically, bonds have actually done better than cash, property in most cities and some other assets like gold:

If our great great great great great great grandad had invested equal amounts in all the assets in the world, and we only just discovered it today, we would have made more from bonds than property or many other assets.

I am not saying it will pay 3.5% above inflation on average in the next two hundred years, but it come make a comeback.

Also remember that:

  1. The Nasdaq has been the best performing stock market in the last few years but was completely stagnant from 2000 until 2014.
  2. The Japanese stock market has performed almost as well as the US one if somebody had held it for 100 years, or indeed bought in 2009 or during numerous time periods, yet somebody who bought at the peak would have only made money if they had reinvested the dividends.
  3. The South Korean stock market was the world’s best performing stock market of 2020, and Taiwan and China were in the top ten. All three have performed relatively poorly in the last decade.
  4. Emerging markets have done almost as well as developed markets in the last 50 years (it is a misconception they have beaten developed markets due to high GDP growth). Yet they have been pretty stagnant for 12 years.
  5. The US stock market apart from the Nasdaq, such as the S&P500 and Dow Jones, have done extremely well ultra long-term. $10,000 invested in the S&P500 in 1942 would be worth over $50m today. Yet the market was stagnant from 65–82 and 2000–2010. Such was the worry that some media publications announced “the end of stocks”. They encouraged fixed income investing.
  6. The UK stock market, the FTSE 100, has been stagnant in capital value terms for 20 years, apart from a brief period in 2018, unless somebody reinvested the dividends. Over 100 years it has performed almost as well as the US Markets, and the FTSE250 has done very well in the last two decades, as has the FTSE All Shares.
  7. Shanghai property was one of the world’s best performing assets from 2008 until 2018, but was stagnant for half a century not so long ago.
  8. Gold has barley moved adjusted for inflation since the times of Christ, and as per the graph above, has only done about 0.5% above inflation long-term. It is also well below its 1980s inflation-adjusted peak and for that matter its 2011 price. Yet somebody who bought at the lowest point in 2000 would have almost 10x their money in just over a decade until 2011.
  9. Property prices have been in the UK as a whole are below their 2008 peak adjusted for inflation (but not in nominal terms). London bucked that trend. Then Covid hit and prices in London have failed to keep pace with some of the regions as more people can work from home.
  10. Commodities have been long-term losers but did fantastically from 2000 until 2011, with silver and oil (until 2008 at least) leading the way.

The point is, nobody can predict the future, and today’s losers can be tomorrow’s winners.

Bonds offer diversification as well, and the short-term ones tend to do well during crisis like 2008–2011.

There is nothing wrong with ignoring bonds when you are young but they are a key tool as you approach retirement.

How can you avoid hedonic adaptation?

Source: Quora

According to Wikipedia “The hedonic treadmill, also known as hedonic adaptation, is the observed tendency of humans to quickly return to a relatively stable level of happiness despite major positive or negative events or life changes”:

I am no psychologist but I have read a lot of money and its relationship to happiness.

It is an important question as many people build up wealth in the hope of achieving more happiness.

I am not sure this can be completely avoided, but it can managed by:

  • Focusing on experiences, especially new ones, rather than only on things/objects. If you buy a new phone or object, you get a sugar rush and then it fizzles out. If you spend your life engaging in new experiences, it can help. People are also less likely to compare themselves to others if they engage in experiences together. If you go to the mountain or hiking with friends you don’t tend to focus on who has the best gear.
  • Focus on creating security through investing rather than on only materialistic things. Security is above materialistic needs on Maslow’s Hierarchy of needs
  • Have strong relationships with people you love . Create strong connections with them. If needed, focus on time more than money, especially if you already have enough money
  • Engage in community activities, like volunteering, which makes you feel like you are making a difference.
  • Exercise more and control your diet.
  • Don’t care about things you can’t control like how random people think about you, and risks you can’t control, and focus instead on what can be controlled.
  • Don’t let society tell you what will make you feel happier, or your friends, family etc. Only you can realise that and living a life true to your character is more likely to make you feel more satisfied long-term.
  • Practice being grateful for what you have.
  • If you want to buy a material good, that is fine, but always do it because you yourself want it. Don’t try to keep up with the Jones’ or care about showing off on social media.
  • Build anticipation. This might sound silly but a lot of research has shown that building anticipation for a purchase or experience is more likely to bring happiness than the event itself, especially if it is linked to a target you have hit. In other words, you only do the activity or buy the thing if you have achieved something at work, home etc.

Doing those things is more likely to increase your base level of happiness.

It isn’t that money can’t increase your chances of being happy. It can if you make the right choices.

Have zero money is also a huge contributor towards depression, divorce, the breakdown of relationships and anxiety.

Yet money isolation won’t bring happiness, if the wrong choices are made.

Which one is the best financial advice to receive, and why?

Source: Quora

It is difficult to say just one thing. If you forced me I would say live below your means and invest the surplus well.

No matter who you are, you won’t get wealthy if you don’t follow that rule.

If you are earning millions but spend those millions, you are high-income, but broke.

There are even loads of people in debt who are high-income. Yet people have this certain image of a “wealthy person”

High-income, living the high-life and wealthy at the same time.

The pandemic and lockdown has exposed those lies even to people who didn’t know these facts before.

How many previously high-income people were living so close to the maximum of their capacity, that they got into trouble once their income dried up?

I was watching a documentary over the weekend which showed that some people on previously great incomes are now using food banks in some rich countries.

They spent as they went along, and then couldn’t sustain their lifestyle once the pandemic struck.

That doesn’t mean you shouldn’t focus on income-producing skills as well.

Of course, it is much easier to create a surplus in the first place if your income is middle, high or very high.

But once you get to that point, knowing how to manage money depends more important.

Knowing how to make money isn’t very useful if you don’t know how to manage it.

Beyond that, I would also say:

  1. Be careful with debt and leverage. Yes it works on the upside. Most successful businesses use it. Just use it correctly .
  2. Have a balance between risk and return. If you are too cautious, you will ironically take more risks and lose in the end. Most people think they are taking less risk having cash than investing money, but that just isn’t true.
  3. Read a lot. If you learn more, you will earn more, if you actually implement what you learn. All the best business people spend time on reading, thinking and doing, and not just one aspect. In addition to that, reading more can make you understand how to use money to increase your happiness and not just bank balance as well. 
  4. Focus on having positive influences in your life, and getting hid of toxic people who will try to drag you down.
  5. Take action and don’t procrastinate. Everybody procrastinates, yet if you can get better gradually at this, it can have huge results.
  6. Don’t let negative people and criticisms hold you back.
  7. Scale your ambitious if you achieve success and never become complacent.
  8. Be willing to do what others won’t. Everybody wants to open the glamorous and sexy business, often focusing on the next best thing out there. If you are willing to do things that most people find boring, too difficult or risky, then you have a clear advantage.
  9. Double down on your strengths and delegate your weaknesses. After a certain age, you can only improve your weaknesses up to a point. 
  10. Focus on leveraging time. It is much easier to get wealthy by starting small but now, rather than big and later.

What is the one commonality between all of these things? Keeping things simple, but implementing, is important.

You don’t need to have the highest IQ in the world, or some incredible idea, to get wealthy.

Taking consistent actions for decades is more effective.

Pained by financial indecision? Want to invest with Adam?

Financial Planner - Adam Fayed

Adam is an internationally recognised author on financial matters, with over 239.8 million answers views on Quora.com and a widely sold book on Amazon

Further Reading

In the answers below, taken from my online Quora answers, I speak about:

  • Is it better to own gold or gold stocks? I explain why gold stocks is the worst of a bad bunch.
  • Would Donald Trump now be wealthier if he had invested his inheritance in the stock market rather than become a businessman?
  • Which stocks are likely to skyrocket after the end of the pandemic?
  • How can you get wealthy at a young age?

To read more click on the link below:

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