Dave Explains Why He Doesn't Recommend Bonds

I'm 54 and my wife and I are VERY worried about our future, gas and food prices rising daily. We have had our savings dwindle with the cost of living into the stratosphere, and we are finding it impossible to replace them. We can get by, but can't seem to get ahead. My condolences to anyone retiring in this crisis, 30 years nonstop just for a crooked system to take all you worked for.

Biggest lesson i learnt in 2023 in the Bonds market is that nobody knows what is going to happen next, so practice some humility and low a strategy with a long term edge.

Despite rising bond yields and falling stock prices, the markets remain uncertain about whether the Federal Reserve will maintain its objective of raising interest rates until inflation is subdued. As I contemplate whether to sell my $401k in equities, what's the most effective strategy for capitalizing on the current downturn in the market?

If you are very wealthy, like I'm sure Dave Ramsey is, it's true that you don't need bonds. Most retirees though can't bear another 35% drop in stocks in the next recession, and there is ALWAYS a next recession. Stocks are for making money … bonds are for keeping that money. Dave highlighted the potential problem with long-term bonds when interest rates rise, but short and intermediate term bonds are less affected. Use bonds to collect interest payments, not to make big capital gains.

"If you sell it." Uhhh.. that's the whole point of owning a bond. You don't have to sell it. If interest rates go up, you simply let it mature. Obviously 60-year-olds shouldn't be buying a lot of 30-year bonds.

I disagree. The point of buying bonds near retirement isn't completely about the value of the asset, but the income that is received from it. Money managers recommend buying bonds near retirement so that retirees can have income, without being subject to a stock market crash.

Before you take this guys advice, first figure out what he's trying to sell. Mutual Funds!!!! Why does Dave Ramsay lead people to invest with American Funds, Capital Group? One of the most expensive mutual funds companies in the industry? ....Because he doesn't make as much money selling Bonds!

Who cares about bond value if there's no intent to sell? The plan is to hold until maturity and live off the interest.

This is why I have a (bit) of a problem with Dave. He applauds and pats himself on the back for “thinking critically,” “looking at data,” and “thinking independently” but then gets mad when people don’t agree with him. He’s not the only person to think critically about money and finance.

Bonds are not only less volatile, they are less risky. The credit risk for government issuers is nil. The interest rate risk is only relevant on the secondary market. If you have a 5% interest bond and rates go up simply hold the bond. You can always buy other bonds at higher rates. Besides, creditors are payed before shareholders in the advent of a bankruptcy, thus reducing the risk of permanent and total loss of capital.

Of course the stock market outperforms the bond market. That's why it's a lower risk investment. That's the whole point. It's about the guaranteed income without being subject to crazy equity risk. There's a reason why financial planners recommend bond layering strategies for people heading into retirement, as to protect their wealth. The mutual funds are fine as long as they adjust their allocation properly, but unless you are a savvy investor who knows what they're doing, people aren't going to be able to have that kind of risk appetite when they go into retirement. The bond market wouldn't exist if there wasn't some form a decent return on the investment made.

He's being deceitful about the volatility of bonds. Intermediate term investment grade bonds ARE SUBSTANTIALLY LESS VOLATILE THAN STOCKS. Yes, it's true they don't perform as well over the long run.

The key is to hold it to maturity.

Don't conflate the RISK of an asset with the volatility of that asset.

I completely disagree. If you purchase a corporate bond today at 6% and hold to maturity you will earn the 6% plus receive the total of your initial investment. You lose nothing. Most retail investors do not purchase bonds to trade, they purchase and hold to maturity. Why does no one explain this?

The main diversification power of bonds comes from the lack of correlation with stock returns, rather than lower volatility. Thus they acts as a damper when the stock martket falls sharply as in recent days and decrease the overall return when there’s a rally.

The problem with this is, people aren't immortal. They invest in a relatively short time frame even if it's 40-50 years. While equity should theoretically outperform debt over time, there will be a lot of years when equity tanks. You have to compensate for that somehow. I guess for Dave this makes sense as he has a lot of assets which aren't stocks, but for the normal person whose entire portfolio is in a 401k I don't think this advice holds. Also, if the bond market tanks, just hold it until maturity. It's not hard.

I would like to ask Dave if he has 100% of his money invested in the stock market. Or does he keep a portion safe to live off of while the other money goes up and down with the market? Of course, he probably has so much money that a 50% drop in the market would not affect his lifestyle. If I had a net worth of $200 mil, and lost 50% I would happily live on $100 mil. The rest of us can't afford a 50% loss 3 years out from retirement.

Why is Ramsey talking about trading bonds in the secondary market when the way most people use them is hold to maturity? When you hold to maturity on non callable bonds you don’t lose money even if interest rates rise.

Oh dear God this is awful. Again, I love Dave's advice for getting out of debt, but his advice about investing is wrong.... The point of bonds is CONSISTENT INCOME. With your "growth stock" mutual funds, I only get that money if I sell as by definition most growth stocks don't issue a dividend. With a bond, I buy it, and get consistent, potentially tax advantaged income at the given rate until maturity. And simply saying "the graphs look the same" is deceitful Dave. The graphs look the same sure, but in a total bear market for bonds, the current market value of your bond may drop a percentage point or two, meanwhile your stock portfolio can have 20-30% taken away easily. The people who simply listen to this and take it as gospel could be in a world of hurt. I bet the people who were turning 65 in 2008 wish they had gotten into bonds sooner.