Dear Dave,
I’m just starting to dip my toe into investing, and I was wondering what you think about bonds. I would appreciate any other advice you have on investing too.
Joseph
Dear Joseph,
For starters, I don’t buy bonds. Bonds are frequently pitched in the financial world as being much safer than the stock market, but actual data shows they’re not that much safer. The bond market, in general, is almost as volatile as the stock market because of the way bond values respond to shifting interest rates. And on top of all that, the returns aren’t nearly as good.
I’ve got millions of dollars in the market, and I don’t own a single bond. Not one. I also don’t own any single stocks, because I don’t like the risk involved. Instead, I own mutual funds. A mutual fund contains anywhere from 90-200 different stocks. Even my HSA (Health Savings Account) is invested in mutual funds. I bought an HSA right after they became available, and I’ve maxed out the contribution limit every year ever since. Now, I’ve been fortunate enough to not have to touch my HSA for a major medical event. We’ve always just paid out of pocket for those kinds of things. As a result, my HSA has basically become another retirement account that grows tax-free.
All that to say, I love mutual funds. Love them! Let’s say I put $100,000 into the market. Nothing in bonds, nothing in single stocks. All of it goes straight into a good, growth stock mutual fund. Again, we’re talking about 90-200 of some of the best companies in the world. At this point, the only real risk you’re riding is the overall, general risk of the stock market as a whole. You’re not betting the farm on one company based on your golfing buddy’s “hunch” — which is how way too many people play single stocks.
I also don’t trade stocks or mutual funds on a daily basis. I have a long-term, buy-and-hold mentality when it comes to investing. Do you remember the old story “The Tortoise and the Hare?” I’m perfectly fine to be the tortoise in my investing approach. Why? Because even though it’s not flashy or exciting, the tortoise wins every time.
Keep this in the back of your mind, Joseph. If all your broke friends are impressed with your investing, chances are you’re doing it wrong. Or at the very least, you could be doing a whole lot better!
— Dave
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