There is some debate within the investment community about whether bonds are a wise investment for children and young adults. Investment is an incredibly personal decision and is dependent on the unique situation of the investor. The choice of whether bonds are the correct type of investment for an individual needs to be based on the personal and financial situation of the investor, as well as the investor’s intended use for the money down the line.
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One of the best ways for younger investors to use bonds is through short-term, conservative bonds. Conservative bond investments are bonds that are available for use within one to three years. These short-term bonds are a very good choice for younger investors who will need to use their money in the fairly near future. Short-term bonds are often a better investment than stocks for someone in this situation because they often have a lower short-term risk than stocks. Although stocks, over the long-term, often have higher returns, it is entirely likely that they will have decreases in the short-term. An investor who has put their money into stocks and needs to access it within a few years may find that, due to market decreases, their account has not maintained its value. Short-term bonds are less likely to experience these decreases.For this reason, stocks are much more of a long-term solution for investors, while short-term, lower-risk bond funds or exchange-traded funds (ETFs) are a better solution for time-sensitive goals. Investors who are looking to make a down payment on a house, buy a car, finance a wedding, or pay for a similar, time-dependent goal are best served by an ETF or a short-term bond fund.
For younger investors, long-term goals also require attention. For younger investors who are saving for purchases that are more than a decade away or long-term goals like retirement, stocks, although higher-risk in the short term, are a better choice. Over time, these investments, though they are more subject to short term fluctuation, are more likely to yield higher returns. For younger investors who have the time to withstand the fluctuations, the potential difference in yield is significant enough to make the higher risk of stocks worthwhile.
It may seem that bonds have no place in the portfolios of younger investors, but that is not the case. There are two areas of the bond market that are more akin to stocks: high yield and emerging market bonds.These bonds, in addition to having recent performance returns of between 8.5 and more than 10% also have the ever-important benefit of diversifying an investment portfolio while bringing in returns which are competitive with those of stocks.
Bonds, as an investment option for younger people, should not be disregarded out of hand. For those younger investors who are striving for short-term, time sensitive goals, bonds can be an excellent, relatively low-risk way to see some modest returns. Additionally, longer-term, higher-risk bonds, such as high yield and emerging market bonds are often excellent solutions to investors who are looking for an alternative to stocks or for another way to diversify holdings. As always, investors should consider their individual situation and goals and consider consulting with an investment advisor when debating investment strategies in order to find a solution that best meets their personal needs.
About Lawrence Meyers
Larry is regarded as one of the nation’s experts on alternative consumer finance. He consults for hedge funds and private equity via his Council Member status at Gerson Lehman Group, and as a member of Coleman Research Group’s Executive Forum. He also consults for Credit Access Businesses and Credit Services Organizations in Texas. His Op-Eds and Letters to the Editor have appeared in over two dozen major newspapers. He also brokers financing, strategic investments, and distressed asset purchases between private equity firms and businesses of all stripes. You can reach him at firstname.lastname@example.org.
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