I like Dave Ramsey. For those who don’t know Dave, he’s an American radio host who specialises in teaching people about debt reduction and retirement.
I like his evil cackling laugh and the way he says “I love it” after every debt free scream (video link with a record breaking stare of death by the little girl on the left). I believe Dave provides a great service to millions of people and has probably saved many lives and marriages.
I agree with Dave Ramsey on many points, but one point we disagree is on bond fund investing. Dave thinks bond funds offer poor returns and are as volatile and risky as stocks.
What he fails to explain is which types of bonds are volatile and which aren’t. Take for example corporate bonds, yes they can be as volatile as stocks so I don’t invest solely in those. I prefer Vanguard’s Intermediate-Term Bond Index Fund which holds about 59% of US Government bonds with an average maturity of 6.5 years. It also has a low cost basis of 0.2% annually and pays a dividend yield.
When I invest, I want a fund I don’t have to tinker with because when I tinker, I make poor decisions.
When interest rates rise, most people believe bond funds will fall in value, but this isn’t necessarily the case since interest rate rises are usually priced into the fund. Another point Dave misses is that an Intermediate Bond Fund can offer a hedge in protection if the stock market corrects.
I don’t expect a conservative bond fund to lose 30% when the stock market corrects. It might lose 5%, but not 30%. Let’s imagine the S&P 500 or FTSE100 drops by 50%, one strategy would be to move money from the Bond Fund into Vanguard’s Total Stock Market Fund, post correction. The Total Bond Fund in theory would hedge against large losses one might experience if the money were invested in the Total Stock Market Fund prior to the correction.
While waiting for a market correction, you could sit out and invest the money into a savings account, but then you’d miss out on any potential price increase plus the yields and dividends the Bond Fund pays. Plus no one knows when the market will correct so you could be sitting on the sidelines for years.
Bonds funds aren’t for everyone. If I were in my 20’s and 30’s I wouldn’t use bond funds as I’d have decades until retirement which is plenty of time to wait out ay stock market corrections.
If were approaching retirement, I would use bond funds to balance out risk in my portfolio.
Ask yourself, if you were 2 years from retirement and the stock market crashed by 50%, how would you feel. Not very good. Hence why you should consider your risk appetite.
So Dave Ramsey, if you’re reading this, I still love the work you’re doing, but I think you should reconsider your advice on bond funds. There is a situational case for using them to balance out portfolio risk and protect one’s portfolio from stock market corrections.
– Laurence
