+44 7393 450837


Follow on

Why does inflation make holding bonds for the long run riskier than owning stocks?

I often write on Quora.com, where I am the most viewed writer on financial matters, with over 265.3 million views in recent years.

In the answers below I focused on the following topics and issues:

  • Why does inflation make holding bonds for the long run riskier than owning stocks?
  • What is the saddest financial fact about America and some other countries like the UK?
  • Will Bill Gates’ divorce result in a falling Microsoft share price?
  • How do you turn $1million into $2million? How long do you need to wait?
  • Could target date retirement funds increase your risk and lower your return?

Some of the links and videos displayed on the original answers might not show up on here, and if so, you will need to refer to the original answers to view that.

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 does inflation make holding bonds for the long run riskier than owning stocks?

Source: Quora

Firstly, it isn’t that owning all types of stocks is riskier. If you own just one company, even a huge one, that is riskier than owning most government bonds indexes or ETF.

Likewise, as you say, short-term, bonds aren’t as risky as stocks. Yet if you are long-term, an argument can be made that bonds give lower returns AND increase the risk.

Buffett makes the argument here:Warren Buffet: Bonds are Riskier than Stocks » I am UnchainedFinancial Indpendence need to be earned. Learn how to achieve financial freedom by learning personal finance, investing, budgeting and more.https://www.iam-unchained.com/investing-tutorials/warren-buffet-bonds-are-riskier-than-stocks/

To quote “It is a terrible mistake for investors with long-term horizons- among them, pension funds, college endowments and savings-minded individuals- to measure their investment ‘risk’ by their portfolio’s ratio of bonds to stocks”.

“I want to quickly acknowledge that in any upcoming day, week or even year, stocks will be riskier – far riskier – than short-term U.S. bonds.

As an investor’s investment horizon lengthens, however, a diversified portfolio of U.S. equities becomes progressively less risky than bonds, assuming that the stocks are purchased at a sensible multiple of earnings relative to then-prevailing interest rates.”

One reason is inflation uncertainty. Short-term bonds pay even less than long-term ones.

However, at least there is more certainty about that. If you buy long-term bonds and inflation skyrockets, that can increase the risk.

There are alternative arguments though. Jack Bogle, Vanguard’s late founder, argued that traditional asset allocation methods still work.

He agreed with Buffett that stocks beat bonds long-term of course, but he felt that it still makes sense to increase your bond allocation with age, even if short-term bonds can be an alternative to the longer-term variety.

It really depends on what you want to achieve. If you want the highest possible return, being 100% in stock ETFs forever isn’t as risky as it sounds, provided you aren’t spooked by the volatility.

Buying the S&P500 or MSCI World every month for fifty years, moreover, isn’t as risky as putting in a one-off lump sum for ten.

The point being that there are many ways to reduce risk. Diversification of assets is one, but buying an ETF at regular intervals is another option, and we all need to do that as we are either salaried or have a business.

Personally, I still think that bonds have their place. Even Buffett thinks you should have 10% in short-term bonds.

In either case, one of the biggest mistakes is to confuse volatility and risk. Look at the stock markets indexes.

Falls come with the territory, but nobody has lost money by holding them for decades, and reinvesting dividends.

What’s the saddest financial statistic about America?

Source: Quora

Despite steadily rising GDP per capita in the last few decades, most don’t have any savings or investments to fall back on in an emergency:

main qimg cff596e0fc1429aeeee93e52cfc52966

This is sad because the statistics show that most millionaires are actually “everyday millionaires”.

14% of America’s millionaires are said to be teachers. Many others are managers, accountants etc.

So you could have two people living next to each one. Both families have similar incomes. On the surface, both are living similar lifestyles.

Few would notice the difference between the two families, and most would assume that the wealth levels are similar due to the fact that the income levels are on par.

Yet one family has over $3m in assets, and can retire early if they wish to do so, and another living next door is in debt with no real assets.

This isn’t just an American issue. The UK is similar:

main qimg c05b529c6137b76422e02e42c3d6b1b6

There are many complex reasons for this, including the rising cost of healthcare (a US-specific issue), and also housing in major cities across the world.

In cultures like the UK which are obsessed with housing, many people put 100% of their eggs in the basket of the primary residence.

In other words, why bother saving and investing if you can put most of your hopes on your house rising in value?

Well, there are many reasons that isn’t a good idea, which I won’t go into during this answer, but needless to say renting isn’t always dead money, nor is buying the biggest possible house always a good idea.

The bottom line is that culture and habits defiantly plays a part in this.

In many Asian cultures, saving and investing is part of the culture.

So, even in the West, most immigrants tend to find a way to save, regardless of income levels, and despite facing the same issues as the natives.

Even many second generation immigrants have had that “saving gene” passed down the generations.

In comparison, I personally know both Brits and Americans in my own network who would find a way to either spend 100% of whatever they earn, or put it all into a house, regardless of how large the pay cheque is.

Will Bill Gates’ divorce affect the stock?

Source: Quora

Many people have thought about this after Bill and Melinda’s divorce announcement.

main qimg 3c5d70a305693fcd1f2625aa8286f8eb

Let’s look at some other stocks. Here is a graph of how Apple’s stock reacted to the death of Steve Jobs.

main qimg 5098b58567a95377972bed6f6747cc90

Here is Apple’s stock long-term:

main qimg c1aa7274fd240730035d5d292d22b8e6

In the short-term, speculators speculated about what other speculators were speculating about.

You saw it on the news at the time. Interviewers asking pundits “I was speaking to so and so a few days ago and he said the sentiment on Wall Street is X, Y and Z”.

Now you might say that a death and divorce is different. The reason there is speculation about a fall this time is because Melinda will likely get a lot of Microsoft stocks as part of the divorce.

She might sell some of those stocks, but the reality is, Microsoft is a big, stable, company, which hasn’t been affected by Gates that much for a long time.

The stock might rise, or fall, short-term, and many people are speculating about that.

I don’t know what will happen in the short-term. All I know is long-term, it won’t make a difference.

Microsoft’s long-term valuation won’t be affected by this. It will be affected by how well the business actually does.

That is true of any stock or indeed stock market index. Short-term, the news or short-term speculation can result in over valuations or the opposite.

In the long-term, the cream comes to the top. So, I wouldn’t trade on the news, or worry about it.

How do I turn 1 million USD into 2?

Source: Quora

I presume you mean turning $1m into $2m and not literally two dollars. If you mean $2 I would take up gambling as a hobby!

Assuming you mean $2million, it is easy if you have $1million already. It just takes some patience.

The average return of the US stock market has been 10% per year, or 6.7% after inflation.

International has given about 4%-5.5% after inflation.

main qimg 775c93ca4abb2c1e6c7812c57ef1ddda

This means you will double your money in 7–10 years, if historical averages are repeated.

However, we can’t know if those averages will be repeated. In reality, some years and decades are better than others, and we can’t know in advance about that.

In 2009–2010, many people expected a lost decade in US stock markets. After Trump’s election in 2016, plenty of people thought the same.

Same with COVID-19. Few people expected stocks to rise during these events, or for that matter for a lost decade to occur in the 2000–2010 period.

Even fewer people expected emerging market stocks to do much worse than developed ones (especially American ones) after 2006–2007.

The markets have a tendency to behave unexpectedly, even though they rise in a big way long-term.

So, you might get there in four years or over fifteen years. Considering you already have a $1million, I would assume that you can add to the principle regularly.

In which case, you should get there more quickly. Of course, there are alternatives.

You could go into real estate if you are an expert in that area, even though it is a lot of hassles for the average person, with high fees and taxes.

If you have earned the $1million from a business, you could also reinvest that money.

Or a combination of many of these techniques. But whatever you have been doing has been working until now, so you should get there.

What would you say is the biggest problem with investing into retirement date funds instead of index funds?

Source: Quora

Most target retirement funds are based on historical “rules of thumb” such as “bonds might pay less than stocks long-term, but they are safer”.

That means the funds become more conservative over time, by increasing allocations to bonds.

However, as per another answer I wrote today, there is a debate about whether bonds do really lower risk.

Warren Buffett and some others consider long-term government bonds to increase the risk you are taking, compared to short-term ones and stocks.

That is because there is inflation uncertainty. If inflation rises a lot, you could have an issue.

These target retirement funds were also constructed during a different era, when interest rates were indeed higher, so you were compensated for that risk.

In this day and age, there is a strong argument for having a higher stock market allocation, and focusing on short-term bonds more than longer-term ones.

There is also the argument that target date retirement funds will vastly underperform the S&P500:

main qimg cd01cf4e292818962cc7dbf8d43524a1

Nobody can know the future, or predict it. Bonds will probably come into fashion one day.

But in the here and now, when interest rates are so low, stocks actually low cheap compared to bonds.

Interest rates are like what oxygen, or blood, is to the human body. That doesn’t mean stocks can only rise when interest rates fall.

But stocks, especially international ones in Europe and Emerging Markets, look very cheap relative to bonds.

So, succinctly, some target date retirement funds could be lowering your return AND risk.

This is due to making the assumption that less volatility = less risk, which isn’t true.

However, I guess some target retirement funds will change their future asset allocations, to adjust for this risk.

Pained by financial indecision? Want to invest with Adam?

Financial Planner - Adam Fayed

Adam is an internationally recognised author on financial matters, with over 265.3 million answers views on Quora.com and a widely sold book on Amazon

Further Reading 

In the article below, taken directly from my online Quora answers, I spoke about the following issues and subjects:

  • Is it better to have more money in 5 to 10 stocks or less money in many stocks? Should an average investor act differently to a professional one?
  • Does hard work really guarantee success, or are other factors, such as risk taking, more important? 
  • How do you invest in stocks? I explain a step-by-step process. I also explain how it is more important to invest productive, rather than just starting for the sake of it.
  • Is it realistic that somebody like Jeff Bezos will become broke? I look back at some of the Japanese billionaires from the 1980s. Many are now former billionaires, even if they aren’t broke. What does this tell us?

To read more click on the link below.


Top Content

Top Articles
Personal Financial Planning Investment Options Godwin Capital Review
HSBC Expat Review
Getting Money Out of China
Best Investment Options for Canadian Expats
Best Investment Options for UK Expats
Best Investing Options for American Expats
Best Investment Options for Australian Expats
Regency for Expats Review
Capital International Group Review
RL360 PIMS Personal Investment Management Service Review
Investors Trust Access Portfolio Review
Investors Trust S&P 500 Review: Should You Buy?
Novia Global Review: Do Better Options Exist?
Custodian Life Review 2023
Evelyn Partners Review: This is Why You Shouldn't Buy as an Expat
Sarwa Dubai Review 2023: Is This a Good Idea?
Dominion Capital Strategies Guernsey Review
Utmost International Professional Portfolio Plan Review
Utmost Worldwide Choice Review
Hansard International Capital Investment Bond A Review
Hansard International Universal Personal Portfolio 2023 Review
Utmost International Quilter Collective Investment Bond Review
Utmost International Collective Redemption Bond Review
Utmost International Executive Redemption Bond Review
Utmost International Managed Capital Account Review
Hansard International Vantage Platinum II Review
Zurich International Vista Savings Plan Review
St. James’s Place Review 2023: Should You Buy?
Premier Trust Review
RL360 Regular Savings Plan Review
RL360 Quantum Savings Plan Review
Friends Provident International Premier Advance Savings Plan Review
Friends Provident International Reserve Bond Review
RL360 Oracle Offshore Bond Review for Expats



Gain free access to Adam’s two expat books.

Gain free access to Adam’s two expat books.

Get more strategies every week on how to be more productive with your finances.