Guest Blog by Roelof Meijer of My Personal Finance
Whole generations have been raised on it: bonds are risk-averse investments. And yet, we recently saw a disturbing news item about Yarden. Things were not going well, so all investments were shifted as much as possible into bonds. And what happens to bonds when interest rates rise? They decrease in value. And, can you get into trouble because of that? Of course, you can. If you don’t have enough assets to cover all your current and future expenses, then you have a huge problem. Can this also happen with your own pension provision? You bet. Can you defend yourself against this? Absolutely. Let me tell you more about it now. And if you really want to delve deeper? In the Masterclass “Expand your Growth Capacity” on June 8, I’ll tell you even more about it.
If you don’t care where you are, you’re never lost
I once had a girlfriend whose grandfather invested his entire life in Dutch government bonds. That was a time when interest rates fluctuated between 4% and 6% per year. With stocks, you could then average between 6% and 10% per year, if you averaged that over a period of twenty years or so. He didn’t like the fluctuation of stocks. And he especially didn’t like it when there were years where he suffered losses. The bonds gave him peace of mind. They often had a maturity of about ten years. In the meantime, he received 40 guilders in interest per year and after ten years he got his 1,000 guilders back. The fact that he missed out on returns of sometimes 100 guilders on 1,000 guilders if he had invested in stocks didn’t bother him.
Do you want to receive income or pay insurance premiums?
Let’s translate this to today. Returns on Dutch government bonds are negative. The reasons for investing in Dutch government bonds are often twofold: you want to receive income (the interest) and you want to be sure that you will get your money back. The first doesn’t work: you have to bring money to lend. So, in essence, you are paying an insurance premium for depositing your money with the government. The second probably does work: you will get your money back, the Dutch state is not likely to go bankrupt soon. However, the question is: does it benefit you if you want to invest to finance your future expenses? Read: to be able to pay your pension later?
What are the chances that I will outperform bonds?
So what should you do? If you look at investment research and the returns of, for example, stocks, you come across all sorts of things. Figures for US stocks, for example, show an average annual return of 8.2% in the period 1900 to 2020. Figures from Credit Suisse. But hey, who invests for 120 years? If we look at Dutch stocks, after inflation, in the period from 1950 to the present, we are at about 5% per year. However, that’s not a quiet picture. In 2008 alone, 38% of value disappeared. And yet, if you can hold an investment for longer than twenty years, various statistics show that your chance of a higher return than the risk-free rate is almost 100%.
How do I become financially independent?
What use is that knowledge? If you want to work on your pension or become financially independent, you will need to know the instruments that can help you improve your pension or become financially independent. I will provide you with these instruments during the Masterclass “Expand your Growth Capacity” on June 8. I give this Masterclass together with Gwen Dudok van Heel, we focus on your personal growth capacity (how to make money work for you) and your business growth capacity (how to make your company function optimally).
Early Bird offer: for smart entrepreneurs who want to become financially independent
If you sign up before May 15, you will receive the two books “How to become Awesome” and “In 10 Steps Grip on Growth and Volatility” by Roelof and Gwen as a gift! Read more about the contents of the Masterclass and registration here.
Want to hear more about this Masterclass? Listen to the radio broadcast from Tuesday, May 4
Listening time: approximately 6 minutes
