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Is investing in bonds the answer to beating inflation?

09 Jun 2022

Is investing in bonds the answer to beating inflation? | VI

Inflation has always been a constant in our lives. However, the last year has brought a steep rise now that the world is opening up again after 2 years of the pandemic.

Even though it is expected that people will spend more with the economy reopening, they have also become increasingly fearful that the price of things will keep going up. Everyone is now scrambling to look for ways to earn more money just to catch up.

And one of the "safer" options people have been opting for for years is investing in bonds.

The cost of living has become very expensive, especially when you look at what people used to pay for things like eggs or rice. Prices of food and other basics are becoming higher and higher and are just beyond our means.

It's a real threat too, because if inflation keeps going up, eventually people will be unable to pay for anything they want or need, and they'll start defaulting on their debt, which may cause a different kind of global financial crisis and at the same time, increasing poverty rates around the world.

This explains why there's been an increase in investment activities, products, and schemes globally in the last decade. Everyone needs more and more money just to survive, now even more urgently than before.

One thing you might’ve noticed is that there seems to be an increased interest in this particular investment tool called bonds.

What are bonds?

According to Investopedia, a bond is simply a loan taken out by a company. Instead of going to a bank, the company gets the money from investors who buy its bonds. In exchange for the capital, the company pays an interest coupon, which is the annual interest rate paid on a bond expressed as a percentage of the face value. So you're generally earning from the interest.

If you're talking about government bonds, the same concept applies, except, in this case, it will be between the government and you, the investor, instead of a company.

Government bonds are especially well-received in Singapore, because why wouldn't they be? These bonds earn you money, backed by the government and MAS (Monetary Authority of Singapore)-approved.

But, are bonds good investments?

Bonds as investment tools

If you're looking for something to give you high returns, investing in bonds is not the way to go for now. Yes, you read that right.

Let's talk about the current situation for example.

The headline inflation for the year 2022 is 3.8% whereas the government offers a bond with only a 2.71% return on average, which means if you invest in this, you're not even caught up on the inflation rate.

Is investing in bonds the answer to beating inflation? | VI
Source: MAS

The whole point of investing is to get returns and use your existing money to earn more instead of only depending on your day job. So if this can't even help you overtake inflation, there's not much point in doing it.

That said, bonds are a good portfolio balancer or "cushion". If you're one of those who invest using robo-advisors, for example, bonds are great to have in your portfolio as they balance out your losses.

Imagine having 1 stock and 1 bond in your portfolio, and the stock happens to lose 8% that year. Your bond, however, reliable as it is, gave you the 2% yield it promised. This means you only suffer a loss of 6% overall.

If you're looking to roll and grow your money, investing in bonds might not be the best idea for now but these might be better options:

1. Robo-advisory

For those of you who don't know, robo-advisory is an investment software which helps you allocate your investment into different products to ensure that you have a profitable portfolio.

Before you begin, you will be asked to answer a set of questions to determine your preference and risk tolerance, then the software will allocate your money accordingly.

It's a very easy way to invest and you can set up an automatic monthly investment plan so you don't have to worry about it. And due to it being automated, you won't need to worry about how much you should be allocating to each product.

2. ETFs

Exchange-Traded Funds or ETFs are also often referred to as a basket of stocks.

An ETF is a fund that holds a collection of securities, such as shares of companies, bonds, commodities and a mixture of other assets which revolves around a "theme". This could mean a particular sector, an index, or even a particular investment strategy. For example, an ETF which tracks SPACs (Special Purpose Acquisition Companies).

So by investing in an ETF, you're investing in ALL the assets included in it and as with robo-advisors, investing in a collection of assets makes this a safer investment. Your gains and losses are balanced out by the fluctuation of each stock, which means you are highly unlikely to suffer great losses.

That said, because of this balancing act, you're also unlikely to gain exponential returns on investment as a part of your gains are used to balance out your losses.

3. Stocks

Stocks are another popular investment. They are often seen as the most volatile and risky of the three, but they do offer the highest potential returns.

You're probably familiar with the phrase "buy low, sell high" and this is where it comes from. You buy stocks at low prices and sell them when they increase in price.

When you buy a stock/shares in a company, you're buying a piece of a company. The more shares you own, the more percentage you own in the company.

Sadly, stock investment has been viewed as a gambling tool by most in the past. A lot of investors don't do their homework and instead put their money in blindly while hoping for the best. This then leads to massive losses which give stocks a bad rep.

Bonds are the safest form of investment. In fact, they are one of the safest forms of investments out there. But it is a fact that a government bond yields a lower interest rate than other investments like bank accounts and money markets.

Investing in bonds can give you a small return on investment for your money in the short term. But it is not a great way to increase your wealth in the long run nor will it help beat hyperinflation.

To know more options on how you can beat inflation, join our free two-hour masterclass today.