Stick with mutual funds
Becky calls in from Vicksburg, MS. She has her emergency fund in place and has been investing in mutual funds. Recently, a financial planner suggested that Becky invest in bonds. Dave isn't a fan of the idea.
QUESTION: Becky from Vicksburg, MS, has been following Dave’s plan. She has her emergency fund in place and is investing in mutual funds, but a financial planner has recommended bonds to her. She asks Dave for his opinion. As you will hear, he is not a fan.
ANSWER: I’m not a fan of bonds, and I don’t own any. The bond market is almost as volatile as the stock market, and it doesn’t pay nearly as much on average. On top of that, bond prices work at an inverse of interest rates. In other words, as interest rates rise, bond prices go down.
Long-term interest rates right now are extremely low, and bonds are how mortgages are funded. You know how cheap mortgages are? If you were to buy a bunch of Fannie Mae bonds, as an example right now, and interest rates went up one percent, you’d lose your shirt!
If I were ever going to buy bonds, it would not be now — because of low interest rates. I’m not a fan of bonds in general, but I’m really not a fan of them right now. It doesn’t take much of a move in interest rates for bond prices to go down dramatically. It’s a serious, serious problem for the bond market right now.
I don’t recommend that at all right now. I recommend mutual funds and good growth stock mutual funds. There are always some bonds mixed in with a growth and income fund, and I’m not opposed to that to some degree, but it’s not my favorite. The bond market is really dangerous right now.