Quora Answer: Do You Agree with David Lawrence Ramsey III That Bonds are Not a Good Investment?

The following is my answer to a Quora question: “Do you agree with David Lawrence Ramsey III (Dave Ramsey) that bonds are not a good investment?”

I do not listen to David Lawrence Ramsey III, so I cannot say I agree or disagree since I have no context.  However, in principle, bonds are not a good investment in and of themselves.  There are two major kinds of bonds: treasury or sovereign bonds, and other bonds.  Treasury bonds are issued by central banks.  They tend to be investment-grade, although there are those that are not.  Non-treasury bonds include corporate papers, municipal bonds and other forms of repackaged debt.  Again, they may or may not be investment grade.

Bonds are used in a portfolio to lower the risk profile, as a wrapper, or to balance out a portfolio that is equity heavy.  Particularly investment grade bonds, they are low risk, guaranteed and predictable.  The downside is that the safer the bond, the lower the yield.  In most cases, that yield is far below the projected inflation over the period of investment.  This means a portfolio of only bonds loses money in real terms.

Higher yield bonds tend to be of greater risk, and their default chances are exponentially higher.  This is more akin to gambling than investment, and have almost no real worth to conventional investment strategies.  These bonds are termed “junk bonds” for a reason.

This does not mean that bonds are not a good investment.  But an investment portfolio of only bonds is unbalanced, and the risk is not commensurate with the potential gain.