Bonds are for Morons

“I read your article on bonds and also the reply you posted to a comment. I think you are full of yourself and quite possibly the biggest idiot I have ever met online. It’s ironic you take yourself so seriously, yet only post replies to e-mails you have a rebuttal to. Full info: I am 36, married with kids and I paid my house in cash. I have 75% of my money in bonds right and only 10% in stocks. You are an idiot to recommend a 100% stock allocation because if the market crashes 50%, well, you can guess what’s going to happen. By telling people not to buy bonds and purposely feeding them false information, you are exposing them to potentially very large losses. Bonds are much safer and when stock crash, which I have no doubt they will soon, then I’ll have money to grab shares on the cheap. Every single financial expert agrees that even a 50/50 stock/bonds allocation is high-risk, so 100/0 stocks is purely nuts. Enjoy losing money and being a total moron.”

For some reason, in the latter days, I’ve been receiving a lot of hate mail. I’m no stranger to hateful tirades such as the one above, but for some reason, my recent article on “why you should invest 100% of your money in stocks” angered a lot of people. I understand it’s difficult to understand that 100% of what you’ve learned is wrong, but the fact remains that those “experts” as you call them are wrong, period. Let me make it clear once and for all:

Bonds are for morons

Only morons invest in bonds, period. Especially with returns averaging 2% and sometimes lower. I wouldn’t bitch so much about them if you still had bonds paying 8-10% (even there, they would still suck) but with interest rates so low, and in fact interest rates about to increase, only complete morons buy bonds. Once again, to repeat myself: this doesn’t apply to large funds or companies. But for individuals, I repeat that going for a 100% stock allocation is the only portfolio strategy that makes sense.

Now, let’s get to the pith of your e-mail. Here’s the deal, FP: you mention what might happen if the stock market crashes. Okay, fair enough. But have you ever wondered what might happen if the stock market doesn’t crash?

Today, it seems that everyone just “assumes” the market will crash. But why? I mean, it’s absolutely “nuts” as you say that everyone just assume the stock market is about to crash 50% tomorrow morning. Sometimes, they even boast it’s “due” to happen much like a slots machine is “due for a giant jackpot.

Spoiler for you: the market is not “due” for anything.

I’ve heard that kind of garbage in 2016, 2015, 2014 and probably every year before that since 2009. I’ve heard it all: the 200-day moving average crosses the 50-day whatever, the schiller ratio is too high, companies buyback too many shares, or not enough shares, profits growth second derivative blah blah blah… Every day, if not every hour, some random moron somewhere finds some random piece of data that supports their garbage theory that “this time, guys, the market will crash.”

Why? Because I guess it gets views. I suppose that a bullshit clickbait title such as “BREAKING: The last two times this happened, the stock market crashed 85%” get the click in. And, with it, the advertising revenue. And in the very, very, very, very unlikely chance that they are right, they get to look like a genius. “I called the stock market crash, OMG! Now subscribe to my newsletter! Only $199 per year!” It’s a bit like someone winning the lottery and writing a book on how he managed to “foresee” the winning numbers.

People call for a market crash every day…

The stock market crashes very rarely, okay? In fact, it only happen twice in the last twenty fucking years, so don’t lose sleep over it. And even if it does, it’s an opportunity to grab more shares on the cheap, so where’s the problem? I still remember the financial crisis: I invested in rock solid companies such as CM or CHE.UN that paid dividends upwards of 10%.

You may mention that the stock market might crash sooner or later. This is true: one day, the S&P 500 will drop 20%, 30% or 40%. But the question is: when? In two years? Three? Five? Ten? How many years of 2% return will you accept when the general market moves 10%+? Even if the market crashes 30%, if it doubled before then, where’s the problem?

I’m repeating myself, but it’s annoying how people assume the market is about to crash at any time. If anything, the market is as far from a crash as can be. With new regulations, laws and computers, the market is the least volatile it has ever been. Now, that doesn’t mean it won’t ever crash again, but there’s no particular reason it should crash any time soon. In fact, a market crash is no more likely today than it was a year ago, two years ago or five years ago.

There’s no particular reason the market should crash this year, the next one or the year after that, for that matter

In a way, I understand idiots like you, FP. Over the past 8 years, I’ve basically grown my portfolio by a factor of 5. If you have been short on the market ever since, well, LOL, you missed the boat, to say the least. Those people, I think, get frustrated, that they quite literally missed one of the greatest bull market of all times. They were so convinced the market was going to crash again after the financial crisis they held up investing, waiting for that crash. And here we are in 2017, with the market still going up and those people still waiting their chance to “get in.”

It’s a bit like my economy article where I argued that people who tried to time a market crash to buy a house were idiot: you plain and simply don’t know when or if the housing market will crash. Yes, house prices could crash 50% tomorrow, but they could also keep rising for a decade. You don’t know that.

About two years ago, someone sent me a long missive telling me that the market was going in cycle and that it crashed every seven years or so. The 2000-2001 dotcom bubble, the 2007-2008 financial crisis, so we were due for a crash any time in 2014-2015. The person insulted me for recommending to buy BABA and such companies when the market was “obviously about to crash.” Well:

People who try to time market crashes are idiots, period. Huge companies with some of the smartest financial minds can’t predict them, so why do you think you can? Well, here’s a hint for you: you can’t.

But to talk about bonds again: I just don’t understand why people love them so much. Yes, if the market crashes, your money will be significantly safer in bonds. But you know how you can be even safer than that? By not investing at all!

If you invest, you have to be able to take a -30% year, period. If you’re not ready to possibly lose 30% of your money in a year, then don’t invest. Or invest a smaller amount. The market could crash 30% tomorrow morning and while I wouldn’t be happy over it, I would still be okay, realizing that I made far, far more than that in the last 8 years. How much have you made with your bonds over the past eight years?

I don’t get why people are so afraid to temporarily lose money. If you don’t need the money any time soon, why does it matter? Why would you even care if a stock goes down? Because you could have timed your investing better and bought at the bottom? Well, nobody can do that; in fact, the market is extremely good at making you sell when you shouldn’t (panic!!! PANIC!!!!) and making you buy when you shouldn’t, so plain and simply don’t bother trying to time your stock purchases. Invest when you have money to invest, preferably periodically, and never sell. That’s how investing should be done.

Take one of my favorite companies, for instance:

It was down by quite a lot in 2015 – nearly 33% from its top. Did I give a damn about it? Did I cry and panic and claimed the next big financial crisis was upon us and that BNS was going to $0? Hell no! In fact, I bought more! And all during that time, I made a nice 5% return under the form of dividends. And the dividends were increased twice. How much have your bonds been paying you?

Why would I care about a stock going down? As long as you invest in solid companies, the risk is much lesser than one might think. The only person who lose money with a 100% stock allocation are people who buy garbage : microcaps, pharmas, that kind of thing. But you shouldn’t invest in that crap in the first place (you can, however, trade them) except MAYBE a very small portion of your portfolio.

Then, you always have the moron who claims stocks can go to $0. Yes, they can, but it’s very rare. In my entire investing life, I think I’ve held perhaps two or three companies that went to $0. It hurts, it’s not pleasant, but it’s part of investing. Sometimes, you invest in a company that you think is solid, but it fails anyway. Can BNS go to $0? It’s very, very, very, very unlikely, but even if it does, I have plenty more stocks. Yes, a massive scandal can hit even the seemingly most solid companies, such as Nortel. And this is why you diversify and go for 30-35 companies in your portfolio (or an index fund). Again, on average, stocks go up. And much more than bonds.

And by the way, bonds can go to $0 to, FP.

Anyway, I don’t see how anyone can disagree with my position that 100% stock is the only portfolio strategy that makes sense. In terms of returns, it crushes anything. Are people really that afraid of that one year in a decade where they might lose a bit? I mean, you’ll get it back eventually, you know?

Even if you had invested 100% of your money the very day before the financial crisis started, at the very top of the market, your return would have crushed bonds by a WIDE margin

And that was the worst crisis in decades.

Similarly, I don’t get how people don’t understand that bonds are for morons. There is literally no benefit for an individual in investing in bonds. People talk about “reduced risk” like it meant something. For individuals, it doesn’t.

Risk has several definitions and “losing your investing money” is only one of those definition. What about “I’m going to make a 16% return in eight years while some people make 140%?” That’s also a risk, you know? As a general rule of thumb, you can assume you will make 8-10% per year over the long term; thus, making less than that is also a risk because you will underperform and, after many years, have much less money thao thers. Some people claim that “any profit is good profit.” But it’s a bullshit saying. Would you invest your money in something paying you a 0.00001% return per year? “But my money is safe from losses!!” Yes, but people around you will double and triple their money. If you can’t stand any loss, then don’t invest, but don’t bitch at people doubling and tripling their money while yours does nothing.

Yes, I know the textbooks recommend buying bonds. But the textbooks are written by the same morons who promote technical analysis or paying a 3% fee to someone to manage your money. These idiots have an agenda and a general narrative to promote. When you study things logically, you’ll see that bonds are a complete waste of time.

TLDR: Over the long term, the stock market always goes up. You cannot time a crash and bonds, especially right now, are a garbage investment. The rates are too low and your capital won’t grow. Once again: you have no idea if the market is about to crash or not and if it does crash, then you should simply buy more stock. Yes, it’s that easy.

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