Why I Still Hate Bonds (With a Few Minor Concessions)

Tyler Gardner (0:00)

Safe is not a property of an asset. It's a relationship between an asset and a specific risk. Treasuries are safe from default and wide open to inflation. Money markets are safe from rate risk and fully exposed to reinvestment risk. Nothing is safe from everything, and anyone who uses the word without a preposition after it is selling something that is pure gobbledygook.

Hello friends, this is Tyler Gardner welcoming you to another episode of Your Money Guide on the Side, where it is my job to simplify what seems complex, add nuance to what seems simple, and learn from and alongside some of the brightest minds in money, finance, and investing. So let's get started and get you one step closer to where you need to be.

One quick thing before we start, October's pre-order bonus from my book Real Wealth is now live, and it's the one I've had the most fun putting together to date. It's my 10 favorite books of all time, Finance and Otherwise. Each one comes with a note on what you'll actually get out of it, who it's really for, and my honest verdict on whether you'll actually finish it. Because important and enjoyable are two very different claims, and the finance shelf is full of the first kind. Pre-order at tylergardner.com/book. Let me know you did, and I'll send it directly to your email in early November. About a year and a half ago, I recorded an episode called Why I Don't Love Bonds as much as everyone else. I think it might have even been called Why I Hate Bonds. And roughly 13 of you heard it. I say that with genuine affection, because about 13 people were listening back when this show was me, just starting with a microphone I'd bought secondhand, and two bloodhounds who could be heard sighing in the background at what I now recognize were probably the most interesting parts. If you were one of the original 13, thank you, you were early, and being early is its own kind of correct. But here's the thing about that episode. Going back and listening to it again, you know, because that's just the kind of thing I do on my Saturday nights nowadays, I stand by about 90 percent of it. The core argument holds, what I'd change is how I packaged it, because I called it Why I Hate Bonds, which got attention but was also on reflection a pretty stupid way to frame it. Because the honest position isn't that bonds are bad, it's that bonds are one specific tool for one specific job, and the entire financial industry has spent 40 years telling you that they're a one size fits all and the safe component of someone's portfolio. So consider this a kind of do-over, a little longer, sharper, and with the benefit of a rate environment that has since made most of my points for me. But I want to set this up differently than last time because I've become increasingly convinced that the simplest, useful framework in all of investing is just two ideas. Risk on, risk off. That's it. For every dollar you have, it's doing one of two jobs. It's either trying to grow, which means it accepts volatility, or it's trying not to lose, which means it accepts lower returns. Growth or ballast? Offense or defense? Most portfolio confusion in the world comes from people owning things without knowing which job that thing was hired to do.

Today's episode is almost entirely about the risk off side. And I know that sounds a little boring, and it is the boring half. But it's also the half where people can get pretty financially hurt because the word safe is the most dangerous word in personal finance and investing, and I'd like to spend the next half hour explaining exactly why.

And as always, familiar asks before we get into it, if this show has ever been useful to you, a review on Apple or Spotify is genuinely the best thing you can do to help grow the audience. It's how new listeners find the show, and it's how I know that this entire endeavor, me walking and talking around the woods of Vermont, talking to a phone propped up on a tripod, is actually reaching anyone besides the deer and the squirrels.

Let's get into it.

Part 1

When you own fixed income, what you actually own.

As always, I never want to assume we're all at step 2 when somebody just walked in at step 1 So briefly, and then we'll move on, what exactly is a bond? A bond is a loan.

You are the lender, somebody else, a government, a company, a municipality is the borrower. They take your money, they promise to pay you a set rate of interest on a set schedule, and at the end of the term, they give you back your principal.