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Bonds Aren’t Boring: The Psychological Benefit Of Holding Bonds
Bonds seem like a really boring investment. They’re low growth. They won’t make you rich. Plus, bond prices fall when interest rates increase. And if you use a bond ETF they usually pay a tiny monthly dividend, typically not even enough to buy another share via DRIP unless you have a lot invested.
So, why would anyone invest in bonds?!?
There are a few good reasons to invest in bonds but there is ONE reason in particular that I think is very important. It’s not a typical reason you see mentioned when people talk about investing in bonds, but I think it’s one of the best reasons. It’s based on investor psychology and behaviour and it can make a big difference during a stock market dip or a full blown downturn.
Many DIY investors may not realize it, but they are their own worst enemy. There is plenty of research around investor behavior, in particular how investors like to time the market. Timing the market means investors try to buy low and sell high, but this rarely happens, if anything they do the opposite, buy high and sell low. For most DIY investors time in the market is more important than timing the market.
Morningstar does an analysis that measures fund inflows and outflows. They use this to approximate when people are trying to time the market. Vanguard did a great summary of this analysis and they found investor returns lagged the market by 1 to 2%. They estimated that behavioral coaching can be worth up to +1.5% per year for the average investor.
So as a DIY investor how do bonds help you avoid timing the market? Let me explain…
Budgeting For Unexpected Expenses
Budgeting for the unexpected. Planning for the unplanned. It seems like an oxymoron, but it’s an important budgeting tool that can help you stay on track financially.
Unexpected expenses can be a real pain in the @$$. You can go months with a perfectly balanced budget only to have it blown out of the water by some unexpected expense.
Sometimes it’s car related, like a car repair, new tires, or annual license plate renewal. Or sometimes it’s home related, like a leaky sink, a broken window, a leak in the roof. Or sometimes it’s around the holidays when the gifts receipts are piling up.
Whatever the reason, unexpected expenses can be a real buzz kill. But are they all unexpected? Or can we budget for some of these expenses in advance?
A solid budget should include some room for these unexpected expenses. We’re not talking about adding “buffer” to your budget. Budgeting for unexpected expenses should be strategic and planned.
Many unexpected expenses fall into three buckets, vehicle related, home related, and life related.
Six Easy Ways To Track Your Spending
Tracking your spending is a foundational personal finance habit. It creates a solid base from which you can improve other parts of your personal finances. Without that strong based you’ll find that money always seems to disappear between the cracks. This makes it very hard to get ahead. Every month you’ll find yourself wondering where all the money goes.
Building a solid financial base of financial habits is the only way to improve your finances.
Tracking your spending isn’t sexy, but it’s super important. Like any tall building this is part of the foundation that sits below the surface, unloved and unappreciated, while the beautiful architecture above the surface gets all the attention and praise. The foundation is always there, carrying the weight of the building, keeping it from collapse.
Tracking your spending can be easy, and it can even be fun, you just need to find the right method for you.
Tracking your spending has a big impact. Once you know where your money goes you can decide if it aligns with your values and goals. When you start tracking your spending you’ll almost certainly find some waste. There is always some wasted spending that doesn’t align with your values and goals. But, it’s hard to see it until you see your spending summarized over a few weeks or months.
Tracking your spending lets you change your spending habits slowly over time. You can focus on one budget category for a few months and slowly see the impact of the changes your making. Without tracking your spending it’s hard to see if your efforts are having an impact.
In this post I’ll share six ways to track your spending. Try them out. Find the one that works for you.