I am not a big fan of bonds and bond mutual funds, but I am not like most people though. While I understand the benefits of bonds to diversify an investment portfolio, they should only occupy a small sliver of your portfolio and nest egg…especially for young investors. I have decades to go until retirement, and I personally want the increased returns that stocks and stock mutual funds provide over the long run. That is also why I am investing in peer to peer loans through Lending Club and Prosper with a small portion of my investment portfolio. I want the bigger returns stocks and other investments give that bonds cannot give.
No Profit Sharing With Bonds. Lets say that Company XYZ has a stellar year with record sales and profits. What do bond holders get as a result? Nothing! They continue to get their promised interest payment and hopefully their principle they loaned the company back when the bond is repaid. That is essentially what a bond it…it is a loan. You are the bank. Nothing more, nothing less. Now, lets shift focus to common stock shareholders. Many of them share in the profits of a company through dividends. Even companies that do not issue regular dividends can issue a one time special dividend. Microsoft (Stock Symbol: MSFT) did that a few years ago before it started issuing regular quarterly dividends.
Paid To Wait. The great thing about dividends in a reputable company is that you are often paid to wait on a company’s share price to appreciate in value. The historic rate for stock prices is an 8% annual increase. When a company pays a 3% dividend, you are earning money while you wait for the share prices to go up in value. It is a great deal. Bond holders are locked into their rate of return that their bond coupon allows them if they hold it to term.
Bond Issuers Do Not Love You. A share of a stock is a small portion of ownership in that company. As a stock owner, you have voting rights in what that company does and how it operates. Of course, most individual investors only have a very small say, but you may have a much larger voice if you invest in a large mutual fund that owns a lot of shares of a particular company. By owning shares in a company, you can attend shareholders’ meetings and annual meetings where you can be woo’ed on the company’s future outlook, etc.
These are not an all inclusive list of the benefits of investing in stocks and mutual funds over bonds. Bonds do play a good role in a portfolio when you are close to retirement. But, for investors like me who are decades away from retirement, bonds can weigh your average rate of return down more than the safety it provides.