Everyone loves a safe bet. And in the world of investing, few things feel safer than fixed income investments, like bonds and long-term CDs. They offer guaranteed returns and a shield against the volatility of the stock market. However, in the pursuit of safety, are investors missing out on some grand opportunities?
The Allure of Fixed Income
Fixed income investments, like bonds and long-term CDs, have always been the go-to for those who prioritize safety. With set interest rates, they promise regular returns over time, irrespective of market conditions. It’s the equivalent of picking the steady, reliable route.
However, renowned personal finance expert Suze Orman cautions against putting all your eggs in this basket. The attraction of high interest rates and a natural tendency to avoid risk might be holding people back from diving into the vast ocean of opportunities that is the stock market.
“I want to buy a stock, and I hope it goes down… so I can accumulate more.”Suze Orman
The Stock Market’s “Lifetime Opportunity”
The stock market is a vast, ever-evolving landscape, with countless chances to make impressive returns on investments. Orman refers to this as a “lifetime opportunity.” Sure, there are potential risks involved, but there are also substantial rewards.
She emphasizes the idea of not passing up on the chance to invest in some stocks, stating, “Some of these stocks — how do you pass them up?” However, that’s not to say that one should impulsively throw all their money into stocks. Instead, Orman recommends the strategy of dollar-cost averaging. This involves investing a fixed amount regularly, regardless of share price fluctuations. By doing this, one can take advantage of days when prices are lower and buy more shares. Over time, this can offer a more balanced and potentially profitable investment portfolio.
Why Ditching Stocks Entirely Could Be a Misstep
Staying entirely out of the stock market can be a major mistake, as per Orman. Why? Because while fixed income investments provide safety, they can also limit growth potential.
Let’s put it this way: if you’re saving for a goal that’s 20 or 30 years away, like retirement, the returns from bonds or long-term CDs might not keep up with inflation. In contrast, stocks, though more volatile, have historically provided much higher returns over long periods.
Orman also adds that long-term investors should be prepared for the highs and lows of the stock market. It’s not always going to be a smooth ride, but the long-term potential is undeniable. As she quipped, “I want to buy a stock, and I hope it goes down… so I can accumulate more.”
The Balanced Approach
That said, Orman doesn’t recommend forsaking fixed income investments entirely. They still have a vital role in diversifying one’s portfolio, especially for those closer to retirement or for those who can’t stomach too much risk. She appreciates short-term bonds, like the three- and six-month Treasurys, and is open to exploring long-term ones, especially as the 30-year Treasury yield hovers around high levels.
In essence, it’s all about balance. Keeping some money in fixed income can offer stability, especially during uncertain times. However, veering away from the stock market entirely might mean missing out on significant growth opportunities.
The world of investments is vast and varied. While fixed income investments like bonds and long-term CDs offer security, it’s essential not to overlook the growth potential of stocks. It’s all about finding the right balance that aligns with your risk tolerance, financial goals, and investment horizon. Remember, it’s not just about playing it safe; it’s also about playing it smart.