Stocks and Bond Yields Hit Long-Term Highs — Where Should New Investors Invest?
Is too much of a good thing possible with successful stock returns?
The stock market has been rebounding from an early October selloff; meanwhile, U.S. Treasury bond yields remain at 5.48%, their highest point since 2004, per Reuters. For those who are new to the investing world, this bountiful scenario can nevertheless be daunting — indeed, how is an investment novice supposed to know where (and how much) to invest? Should they buy stocks while prices are on the rise or use Treasury yields near 5% to earn income with less exposure to scary market swings?
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The answer isn’t an immediate one or the other; instead, it relies upon when you will need the money, and how much uncertainty you can tolerate as an inexperienced investor.
Stocks Offer More Wiggle Room for Long-Term Growth
Ben Carlson of A Wealth of Common Sense compared the rolling 10-year returns for the S&P 500 with returns on five-year U.S. Treasuries, and found that stocks outperformed bonds in more than 83% of those periods, based on the historical data he reviewed.
The trade-off, though, is volatility.
A market decline can totally erase a substantial amount of an account’s value right when an investor needs cash. Carlson found that in years when stocks fell, their average return was negative 13.5%. Bonds, meanwhile, gained an average of 4.3% in those same years. It should be said that bonds have had losing stretches too, including 2022 when both markets dropped.
Bonds Can Offer a Predictable Return
At the same time, Treasury yields are hitting levels rarely seen in decades. In late October, the Department of the Treasury marked its 10-year yield at 5% and the 30-year at 5.31%. Those rates are very compelling for people seeking a safe, predictable income.
Treasuries are backed by the U.S. government, and their interest is exempt from state and local income taxes (though federal taxes still apply). If you buy an individual Treasury and hold it to maturity, you can generally count on receiving its noted yield.
Keep in mind, though, that bond prices drop when yields rise. Investors who buy a bond fund can see its share decline as the market rates climb, even as the fund earns interest. Longer-term bonds are especially sensitive to rate changes; The Motley Fool reported that the Vanguard Total Bond Market ETF was down 2.6% year to date, while the iShares 20-plus Year Treasury Bond ETF had fallen 8.4%.
A Mix of Both Might Make More Sense for a New Investor
Many beginning investors might be better served by holding both stocks and bonds. Carlson said that even investors who can meet their return goals with bonds might still benefit from keeping some stock exposure in their portfolio. Inflation can erode the purchasing power of fixed bond payments, and future yields may be lower when it’s time to reinvest.
Stock index funds can offer a novice investor growth exposure, while Treasuries or high-quality bonds can add income. The right balance really depends on your goal — money needed in the next few years generally belongs in less volatile holdings than money intended for retirement decades away. To determine your investment path, start with when you need the money, then choose a mix you can stick with when the markets turn.
Editor’s note: Investing involves risk, including the possible loss of principal. Always consider your individual circumstances and consult with a qualified financial advisor before making investment decisions.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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