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If you are investing, or have invested while you were in your twenties or even earlier, that is an excellent first step. However, if you have invested in the wrong things, you have missed out on excellent opportunities for your money to grow. In this post I will explain what to avoid investing in when you are just starting out your adult life.
Regretfully, I am giving you this information from personal experience, not from “book-smarts.” In other words, I made this investment mistake and I am telling you this so you don’t have to make the same mistake. I invested money into these types of investments over ten years ago. I had purchased thousands of dollars of these investments. Eventually, I had cashed in many of them but have kept $200 to try to accrue higher interest.
Altogether the investments have accrued around $80 over more than 10 years. This may sound like a decent investment. Keep in mind that I have brought up that a 7% interest rate would double your investments over ten years. I commonly use this number because the lifetime return of investment of the S&P 500 is just less than 10%, and the inflation rate is just less than 3%. With only about 40% return over 10 years, that would mean I have an interest rate of around than 2.6%. Keep in mind, with an inflation rate of less than 3% my investment was not beating inflation. It was not even breaking even. This investment was a set of series I US savings bond.
Savings Bonds Are Overrated
Savings bonds are a form of investment where the government issues these bonds for a set amount that investors loan to them. The savings bonds can receive interest for up to 30 years, but can be redeemed before maturation. They usually make great gifts and savings, but not great investments.
Many people see savings bonds as safe investments. They are, but they are what you should avoid investing in when you are young. They have too small of a return to invest in the long term, although you can cash out your savings bonds before 30 years, the interest they accrue is too small to make up for the lack of risk.
Where Bonds Are Acceptable
Just because individual savings bonds do not make very good investments does not mean they cannot find a place in finance. Savings bonds still make great gifts, especially to young children. Children could see the value of saving and investing from these alone. Savings bonds are safe and have some return so a child would be excited to see money grow, and would want to learn how to make it grow more. Sure, the investment may not beat inflation, but what ten year old knows or cares about inflation? They will just see it as money growing. Furthermore, bond funds are useful in balanced funds to control risk, and to diversify investments. More importantly, bonds should be utilized when you are close to retirement.
Where To Invest Instead
If you are in your 20s – 40s, you should at least be considering investing in funds that are mostly invested in equities (at least 60% equities). You should avoid investing in bonds too much. Your portfolio will lean more towards growth so your money can work harder for you than the other way around. Your investments may be more prone to losses. However, unless you are planning on retiring early, you could expect your portfolio to recover within 10 years and grow further.
If you need money saved within the short term, it may be better to save your money. Savings are almost completely liquid and at least your money will be collecting a little interest instead of dust. Furthermore, there are high interest savings accounts with comparable interest to savings bonds.
Investing in bonds may not be the best financial strategy when you are young. But they make better investments than most things. Most people could spend their money as it comes or “invest” in black jack. However, if you want to forge your wealth, you need to give your wealth a little more heat. Investing in equities, real estate, or other high return of investment assets will do more for you in the long run than bonds. Besides, if you are just starting to invest in your 20s – 40s, you will be surprised at how quickly you will have to change gears to preserve your wealth.