Most millennials have invested heavily in stocks or cryptocurrency — and that hasn’t turned out so well.
The S&P 500 Index is down more than 20% so far this year. Bitcoin, the largest cryptocurrency, is hovering around $19,000 after starting out the year above $45,000.
As many younger investors bail out of those investments, bonds may not look so boring anymore.
Treasury bonds, backed by the U.S. government, are a lower-risk option, offering returns now that many investors may find very attractive. The yield on the 2-year Treasury hit 4.351% on Monday, reaching a fresh 15-year high.
Adding bonds to your portfolio could be a smart, “tactical” play for one or two years, or less, said financial advisor Kristin O’Keeffe Merrick at O’Keeffe Financial Partners in Fairlawn, New Jersey.
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“I don’t think this should take place in your equity portfolio,” she added. “I don’t think you should be selling your equity portfolio to buy bonds.”
Yet younger investors have been closing investing accounts, making them heavy sellers over the past year — more so than any other generation. A recent survey by Ally Financial finds nearly half of millennials, or 49%, sold all or some of their investments in the 12 months through August.
Other generations of investors were more likely to stay the course.
To that point, only 21% of Gen Xers, 17% of Gen Z and 13% of baby boomers sold all or some of their investments.
There’s cross-generational interest in bonds
Another survey, conducted last summer, found investors said they are more interested in holding bonds than they were a year ago.
When asked about the preferred investment for periods exceeding 10 years, 9% of respondents in Bankrate.com’s July 2022 Financial Security Pol pointed to bonds, up from 4% last year. While Gen Xers and older boomers mostly drove the increase, millennials’ interest in bonds rose to 7%, from 5%, in the past year, said Bankrate.com’s chief financial analyst Greg McBride.
McBride attributes the surge from last year to Series I Savings Bonds paying more than 9%, “not a preference for — or understanding of — the broader universe of bonds.” The initial interest rate on I bonds has been 9.62% since May and that rate will continue through October.
Getting to know the ins, outs of bonds
Bonds can be complex, especially for less experienced investors, financial advisors say.
It’s important to understand a bond’s credit risk, as well as its duration and price sensitivity to interest rates. Yet Merrick says it’s a good time to consider a range of fixed-income assets from lower-risk Treasurys to investment-grade and high-yield corporate bonds.
“High-grade bonds have a lower default risk and as a result of lower default risk … yield less than you would in a high-yield bond, which has a lot more default risk,” she said. “You’re taking more risks, and therefore you’re getting paid a higher yield to assume that risk.”
For younger investors looking for growth, especially in an individual retirement account or a 401(k) plan, bonds are not ideal as a long-term investment, Merrick said. Yet, she added, “if you have cash to put to work,” bonds can be a temporary “placeholder” for that money.
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