Right now is the perfect time to buy investment-grade corporate bonds. Although many of you may think stocks are too attractive to pass up at the moment, this kind of thinking is going to cost you dearly.
Why Stocks Aren't Your Friend Right Now
Conventional wisdom seems to be that stocks are always a good place to put your investment budget. However, the current condition of the stock market should give you plenty of reasons to question this kind of advice.
To me, it's as clear as day, which is why corporate bonds yield are so much more attractive. The price earnings ratio ("P/E") right now for the stock market is extremely overvalued. Currently, it's sitting at 20. Compare that to 10 in 1980. This means that most of those who own stocks are probably in for a rude awakening pretty soon.
Again, see why I'm excited about what corporate bonds yield right now over investing in stocks? I can't imagine anything worse for someone-especially a Millennial-to do right now than buy stocks when they are most likely at their height in terms of price.
Corporate Bonds Besting S&P 500
Investment-grade corporate bonds further support my optimism. Right now, they are providing a yield that is comparable to the S&P 500. In fact, in many cases, the corporate bonds yield is actually besting this index.
There are two reasons that explain this increase in what corporate bonds yield right now. The first one is rising credit spreads. The second one is rising interest rates.
Interest Rates May Continue to Raise
No one knows for sure what the Fed will do with interest rates in the near future, but the smart money is on it hiking them up. When this happens, it is likely that investment-grade corporate bonds will see improved yields as well. I think that there is a lot of room to the historical mean of between 5% and 6%.
Examples of What Corporate Bonds Yield
To further drive home my point, let's look at some examples of what corporate bonds can yield today:
|Coupon||Maturity||Yield to Maturity|
Those were concrete examples, but let's look at a hypothetical now of what could happen. Let's say you have $10,000 you want to put to work for you by investing. Then, let's say you're getting 4% back on it; that's a very realistic amount given the returns we just saw from investment-grade corporate bonds-and, remember, those really happened.
After 10 years, you'd be looking at $14,802.44 after compounding interest is applied. That's obviously a substantial amount. However, after 20 years, that investment would have more than doubled, totaling $21,911.23.
For you Millennials, it may be realistic to have your investment period be 30 years. In that case, you would more than triple your initial investment, ending up with $32,433.98.
While stock market valuation is high at the moment, even long term investors like Millennials could use a bond ladder investment approach (with three to five years being used for the length of the ladder) to save for retirement until the stock market's valuation drops to an attractive level. If someone has a time horizon up to five years (e.g., a Millennial, who is saving for their children's education or baby boomers at 65 who must begin withdrawing funds from IRAs accounts ), investing in individual bonds is might be the only available option for them. In either case, you'll be much better off than buying stocks when they're most likely at the height of their values.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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