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Bonds (or fixed income investments) can be a good option for investors looking to keep money safe for a short period of time. However, in the long term, I think there is no doubt that the FTSE 100 is a better bet.
Right now, a UK government bond (known as a gilt) with a 10-year duration is yielding 3.8%. That means someone who invests £1,000 today will receive £1,452 a decade from now.
The average return of the FTSE 100, on the other hand, is around 6%. Investing £1,000 for 10 years at this rate of return results in an investment of £1,790.
I have been buying some bonds recently. But I think stocks are a better bet when it comes to building wealth over time.
Captivity
Earlier this month, I had money in my account that I intended to use to pay a bill later in the year. As a result, he was looking to earn a return on that cash for a few months.
I decided to use it to buy some gilts that mature in September. The bonds have a yield to maturity of around 4%, so unless the UK government defaults, that’s what I’ll earn.
Since I’m going to need the money later this year, putting it in the stock market is risky. If the market were to fall sharply, I may not be able to get my investment back when I need it.
With the bonds I bought, I don’t need to worry about market volatility. As long as the issuer does not default, I will get the return I expect.
This makes fixed income investments a good place to keep money for the short term. That’s why Warren Buffett saves cash for Berkshire Hathaway in short-term government bonds.
However, over the longer term, I don’t think bonds are a good option. When it comes to building wealth, I prefer to own stocks.
FTSE 100 shares
Unlike bonds, stocks do not pay fixed returns. This means that their returns may decline, but it also means that the returns of strong companies may increase over time.
This makes stocks riskier than bonds. But in the case of the FTSE 100, it has historically made them much more rewarding and this has made a big difference in the long run.
Someone investing £1,000 a month for 30 years at an average annual return of 3.8% would have an investment of £665,300. That’s not bad, but FTSE 100 shares tend to do much better.
By contrast, earning a 6% return on a £1,000 monthly investment results in £980,500 after 30 years. The increased risk of owning stocks has tended to pay off over time.
I don’t think every stock in the FTSE 100 will do well. I expect much better returns in the future from Experian and right movement that I since International Consolidated Airlines Group and Hargreaves Lansdown.
In general though, I think having a portfolio of stocks in strong companies will yield better returns than bonds over long periods of time. That’s why I prefer stocks as long-term investments.
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