October 3, 2019

How to Talk to Your Kids About Bonds

Here’s a great comment I received on the Bond Masterclass, from Bart B:

“I subscribed to the Bond Masterclass the first day because:

The Bond Masterclass is excellent [and] not too time consuming. A+.”

The bolded part is pretty cool. I suppose I didn’t really think about grandparents talking to their grandchildren about the Masterclass.

It also inspired this piece, which is a sequel to the How to Talk to Your Parents About Bonds issue from a few weeks back.

I’ll start with an underappreciated fact about millennials—they really like investing in real estate. Even more than stocks.

But they really don’t like investing in bonds.

Some of that is to be expected. The story goes that bonds are for boring old people, who yell at those daggone kids to get off their lawn, and then forget where they left their soup. They’re not for the urbane city-dwellers in Williamsburg.

Bonds are for everyone. The funny thing about the 35% stocks, 65% bonds portfolio is that it’s for everyone. All ages at all times.

The point of the 35/65 portfolio is that it gives you the best return per unit of risk. It also keeps you from making stupid decisions. Those decisions are less costly earlier in your investing career, but it’s still important to stay invested and keep compounding.

I do think it’s reasonable to have a higher exposure to stocks (perhaps 50%) early in your investing career and a lower exposure to stocks (20% or less) later in your investing career. But yeah, you can have 35/65 your whole life, if you want. That’s kind of the point of it.

Everyone should have bonds in their portfolio. There is not one person in this country who should have a portfolio of 100% stocks, or close to it.

Having Said All That

If you are a millennial and you are investing in real estate, a lower allocation to bonds wouldn’t be inappropriate—because exposure to real estate behaves a little bit like fixed income.

Basically, millennials came of investing age right in the middle of the financial crisis, so they don’t really trust the financial system. They like real estate, and bitcoin, and things outside the financial system.

Only a very small percentage of millennials invest in bonds. That should change—especially given where we are in the cycle.

Again, what we’re running up against here is a lack of knowledge. Millennials know about stocks, and Robinhood, and ETFs. They don’t have exposure to asset classes beyond that.

Punk Investing

I think it’s time for a little Back To The Future—time to get retro. Gold and bonds. After all, the girls are wearing high-waisted acid wash jeans again. I’m half-considering putting earrings back in. GQ says they’re coming back.

(Little known Jared Dillian fact: I had my ears pierced 7 times in high school. Yes, I was a bit of a punk.)

On The Jared Dillian Show recently, I did a few segments on being an investing punk. It’s very mainstream to buy index funds. Picking stocks is punk. ESG and virtue signaling is mainstream. Oil, guns, and tobacco are punk. Right now, bonds are punk, which is one of the unlikeliest sentences ever written.

Being a punk investor basically means to go against the grain. This takes courage.

This quote from Dolly Parton is one of the most punk things I have ever seen:

When I first saw her—being just a real country little kid, but always loving color and always wanting to be more than what I was, always wanting to have fancy clothes and to look pretty—she just had everything that was appealing to me at the time. She had all this yellow hair piled on top of her head. Red lipstick. Her eyes were all painted up and her clothes all tight and flashy and I just thought she was the prettiest thing I'd ever seen and when everybody said, “She's just trash,” I thought, “That's what I'm gonna be when I grow up, trash.”

Source: Southern Living

Maybe I’ll ditch the suit for the next SIC.

And That Is the Challenge

That is the challenge of working with millennials and their money—they are a bit conformist. They respect authority a bit too much. They have been told that investing shouldn’t cost anything and it shouldn’t involve talking to a live person. So they miss out on a lot.

By the way, this trend led to what happened this week—Charles Schwab announced that they are going to make a whole bunch of stuff free: stock trades, ETF trades, option trades. The stock is down large. That’s a bold strategy, Cotton, let’s see if it pays off for them.

You wanna talk about punk—it is punk to pay commissions and fees.

Anyway, the irony here is that the risk tolerance of the younger generation is not all that high. You would think they would flock to the volatility-reducing characteristics of bonds.

Again, and again, and again, I’m agnostic as to the direction of the bond market here. Interest rates are equally likely to go down as up.

You should hold bonds—of all persuasions—against your stocks to improve the risk characteristics of your portfolio.

At any age.

Final Call

If you want to get the Bond Masterclass at a large discount, you have until midnight tonight to do so. After that, it’s going to cost $199—still inexpensive for what you learn, but there’s not much point not taking the discount.

I can tell you one thing, thousands of your fellow Mauldin Economics readers have joined, and the feedback is amazing. If you want in before the price goes up, please follow this link.

Finally, thank you for all of your comments and input over the last several weeks of bond issues of The 10th Man. Yes, even the comments that asked me, “Are you freakin’ nuts?”

Peace.

Jared Dillian

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