Why All Americans Should Be Investing In Bonds - YouTube

INTRO: Over the past few decades,  

bonds have fallen out of favor. The average  person isn’t even aware of what exactly bonds are  

while investors avoid them like the plague.  This is quite ironic given that the biggest  

companies in the world often do the exact opposite  holding tens of billions if hundreds of billions  

in bonds. For example, we often hear that Apple  has nearly $200 billion in cash on hand, but this  

is rather misleading because they don’t actually  hold anywhere near this amount in cash. Apple  

actually only holds $28 billion in cash. The  rest of Apple’s money is held in what are called  

marketable securities which are basically  just bonds and other fixed income assets.  

Apple currently has $23 billion in short  term marketable securities and $141  

billion in long term marketable securities. In  fact, a few years ago, Apple was the 23rd largest  

US treasury investor in the world beating out most  countries. And if you take a look at the other  

leading companies in the world, you’ll find a very  similar story. Google, for instance is currently  

holding $113 billion in marketable securities. So,  here’s why these companies hold the vast majority  

of their cash in marketable securities and why all  Americans should be investing in bonds as well.

BONDS EXPLAINED: 

Before we jump into why bonds could be a favorable  investment, let’s first recap what exactly bonds  

even are in the first place. Bonds are basically  IOU statements handed out by governments and  

corporations around the world. Whenever these  entities need money to build a road or a new  

factory, they’ll issue these IOU statements  and they’ll promise to pay a certain amount of  

interest rate until they pay back the full amount.  So, you as the bond holder are basically a loaning  

agency to these massive entities. Usually, the  vast majority of bonds are sold to institutions  

like pension funds and other countries like  China, but this isn’t on purpose. In fact,  

governments around the world would prefer to  issue their bonds to their citizens. This way,  

they’re paying interest to their citizens instead  of China or Russia. Most governments actually go  

out of there way to ensure that their bonds  are easily accessible to the average person.  

The US government, for example, guarantees that  they’ll offer you atleast $5 million worth of each  

bond every single time they issue bonds. In other  words, you don’t have to compete with the big  

institutions and countries unless you’re buying  more than $5 million worth of treasury bonds on  

a regular basis. It’s not just the federal  governments that are issuing bonds either.  

Usually, most areas will issue their own bonds  to fund a local dam or highway. These are called  

municipal bonds and they’re a great way to earn  money while supporting your local communities.  

Also, interest payments earned from municipal  bonds are exempt from federal income taxes and  

sometimes also state and local taxes as  well. And if you live in a high tax area,  

this could make the interest earned from  these bonds far more valuable. For example,  

if you’re taxed 40%, a municipal bond that pays  back 3% would actually be equivalent to a regular  

investment paying back 5%. Anyway, moving onto  corporate bonds, this is where you’ll face the  

most amount of competition because companies  generally offer the highest interest rates and  

they issue a limited number of bonds. But if  you stick with large corporations like Apple  

who regularly issue billions bonds, it shouldn’t  be too hard to get your hands on these either.

SECURITY: 

Alright, now that we’ve discussed the basic  premise of bonds, let’s take a look at why they’re  

worth owning. By far the biggest advantage  of bonds and especially US treasury bonds  

is their safety. In fact, treasury bonds are so  safe that the interest earned from these bonds are  

considered risk free. I mean, this shouldn’t be  that surprising given that a country like the US  

has virtually no risk of default because they can  just print money to pay back their bond holders.  

This means that you’re basically guaranteed to  make money if you simply hold till maturity. And  

this is why marketable securities are generally  just considered cash. Now, if you try to exit your  

investment early, you may be looking at a loss  depending on how the bond market is doing at the  

given time. But, if you hold till maturity, it’s  basically like earning interest from a savings  

account which is unfortunately non existent  nowadays. Corporate bonds on the other hand  

are by no means risk free, but one positive is  that their risk is always clearly defined. You  

can look at a companies annual earnings, their  profit margins, and their balance sheet to get  

a pretty good idea of how likely they are to  pay back their debt. And, if you don’t want to  

do that, you can take a look at risk ratings from  reputable companies like S&P or Moody’s. Usually,  

these ratings separate corporate bonds into  two sections which are investment-grade bonds  

and non-investment grade bonds. For our purposes,  we’re mainly going to focus on investment grade  

bonds. These ratings are super stringent and AAA  ratings are basically never handed out. In fact,  

there’s only 3 corporations in the entire world  that have a AAA rating which are Apple, Microsoft,  

and Johnson & Johnson. Also, Apple didn’t  even join this list till the end of last year.  

Something else to note is that if these  companies due collapse for some reason,  

you’re one of the first people who are paid out  after liquidation. According to section 507 of  

the bankruptcy code, the first people who are paid  out are secured debt holders who have collateral.  

But, after these guys are paid out, bond  holders are next in line. Meanwhile,  

shareholders are last in line and they’re  usually not paid very much if anything. So,  

if you’re looking for safety, stability, and  security, bonds are definitely the way to go.

YIELD: 

One of the biggest criticisms against bonds is  that their yields aren’t that high nowadays,  

but I don’t this is exactly true. Sure, bond  yields will never be as high as stock returns,  

but that’s because you’re taking on substantially  more risk and volatility by investing in stocks.  

All assets are directly correlated to the risk  they carry, so it’s not fair to say that bonds  

as a whole are not worth it simply because they  offer lower returns than stocks. Not to mention,  

there’s plenty of bonds that offer great  yields if you do your research. Likely  

the most underrated bond in the entire  world is I-series bonds. I-series bonds  

are inflation protected bonds that are  issued by the US government, and they’re  

specifically designed to ensure that you make  a return even after accounting for inflation.  

And given that inflation is sky high right now,  so are yields on I Bonds. Right now, I Bonds are  

paying out a whopping 9.62% and you have up  until October to buy at these interest rates.  

If you didn’t notice, that’s literally higher than  the average return of the S&P 500. Now of course,  

if inflation goes down, so will the returns  on I-bonds, but you’ll never be losing money  

to inflation. In other words, this is a prefect  store of value that’s backed by the US government.  

The only catch is that you can only buy $10,000  worth of I-bonds every calendar year. But, for the  

average person, if you’re also maxing out your  401k and Roth IRA every year and building up a  

larger emergency fund, like any responsible person  should do, this limit is likely more than enough.  

Also, if you do want to buy more bonds, there’s  plenty of solid options if you do some digging.  

Take this Oracle bond for instance. This bond  matures in May of 2025, and at current prices,  

you can lock in a yield over 4%. And that’s just  for holding 3 years. If you’re willing lock in for  

a longer period like 20 years, you can buy this  2039 Oracle bond that currently offers a 5.79%  

yield. Some other high yielding investment  grade issuers include McDonald’s, AT&T, Boeing,  

and Fedex. So, clearly, if you look deep enough,  you can still find bonds that yield over 5%.

USE CASES: 

One of the biggest shortfalls  of most arguments against bonds  

is that they almost always compare bonds to  stocks or real estate. But, the flaw with this  

argument is that bonds don’t have to be treated as  a replacement to stock or real estate investing.  

Rather, they could be treated as a replacement to  cash. After all, basically every major corporation  

out there holds the vast majority of their cash in  marketable securities. Also, regardless of how low  

bond yields go, they will always be higher than  the yields offered in savings accounts. Now, I’m  

not suggesting that people hoard cash just so they  can invest in bonds. The number 1 thing that the  

average person should be doing with excess savings  is investing in S&P 500 in my opinion. However,  

this doesn’t mean that there’s no room for bonds.  There’s plenty of use cases in which bonds make a  

lot more sense than cash. One example is saving  up for a house. Right now, the median price of  

a house in the US is $428,000. Let’s say this is  your first house and you’re looking to buy right  

underneath the median at $400,000. To come up  with a 20% down payment, you would need $80,000.  

There’s also closing costs, moving  costs, and new furniture expenses,  

so let’s say you budget out $100,000 for this  new house. And to achieve this, you’re looking  

to save $20,000 per year for 5 years. If you were  to simply leave this money in a savings account,  

you might be able to earn 0.5% per year.  At this rate, you would earn about $1200  

in interest by the time you buy the house. Now,  what if you invested in Boeing bonds instead?  

Boeing obviously isn’t going anywhere in the next  5 years, and you can earn about a 5% yield with  

this Boeing May 2027 bond. This yield will slowly  fall with time as we get closer to maturity.  

So, while you may be locking in a 5% yield during  your first 12 months of saving, you’ll probably  

only be locking in 1% during your last 12 months  of saving. To keep things simple, let’s just say  

that you average a 3% yield throughout the next 5  years. At this rate, you would earn $7,600 by the  

time you’re ready to buy your house. That itself  could be enough to pay for your closing costs.  

And this logic doesn’t just apply to saving for  a house either. It makes sense whenever you need  

money on a set date or whenever you have excess  cash reserves. Maybe you have $50,000 set aside  

for a car, but you’re waiting for the next model  to release in 6 or 12 months. Putting this money  

in reliable bonds would be way better than just  holding cash. Clearly, while bonds may not be  

a great substitute for stocks or real estate,  they can be a phenomenal substitute for cash.

OPPOSITION EXPLAINED: 

Despite all these benefits, many people including  even Warren Buffett claim that bonds aren’t that  

useful in the current market environment. But, the  thing to note about virtually everyone who claims  

this is that they’re not comparable to the average  person. Warren Buffett has averaged 20.5% per year  

from his stock investments since 1965. So, he’s  obviously not going to be thrilled about a bond  

that’s paying 5% per year. But, for the average  person who isn’t a stock market genius and may  

not even have any investments at all, bonds could  be a great alternative to just having all of their  

money in a savings account. Also, bonds could  be a great introduction to investing in general.  

The everyday person is usually intimated by the  stock market because earnings reports and balance  

sheets seem complex and hard to understand.  But, bonds are extremely straightforward. You  

loan money to the government or the most reputable  companies in the world, and they pay you back with  

interest by a certain date. As long as you hold  till maturity, you don’t have to worry volatility  

or fluctuating interest rates or any of that.  And starting to earn money through bonds may be  

exactly what the average person needs to make  the plunge into stocks and take investing as  

a whole more seriously. And that’s why I think  all Americans should be investing in bonds, but  

that’s just what I think. Would you guys invest in  bonds? Comment that down below. Also, drop a like  

if you think I bonds are underrated. And of course  consider joining our discord community to suggest  

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