Should I invest in bonds or money market?
Key Takeaways:
Money market funds will generally outperform bonds in a rising interest rate environment. If interest rates are falling or unchanged, an investor will generally experience better performance from owning bonds.
Bottom Line. Moving 401(k) assets into bonds could make sense if you're closer to retirement age or you're generally a more conservative investor overall. However, doing so could potentially cost you growth in your portfolio over time.
High-quality bond investments remain attractive. With yields on investment-grade-rated1 bonds still near 15-year highs,2 we believe investors should continue to consider intermediate- and longer-term bonds to lock in those high yields.
Historically, bonds have provided lower long-term returns than stocks. Bond prices fall when interest rates go up. Long-term bonds, especially, suffer from price fluctuations as interest rates rise and fall.
Money markets are extremely low risk, with a typical par value of $1. Short-term bonds carry a greater degree of risk depending on the issuer, which may be a company, a government, or an agency.
Low Risk and Short Duration
As stated above, money market funds are often considered less risky than their stock and bond counterparts. That's because these types of funds typically invest in low-risk vehicles such as certificates of deposit (CDs), Treasury bills (T-Bills), and short-term commercial paper.
Vanguard's active fixed income team believes emerging markets (EM) bonds could outperform much of the rest of the fixed income market in 2024 because of the likelihood of declining global interest rates, the current yield premium over U.S. investment-grade bonds, and a longer duration profile than U.S. high yield.
Diversify Your Portfolio
Bonds, on the other hand, are safer investments but usually produce lesser returns. Having a diversified 401(k) of mutual funds or exchange-traded funds (ETFs) that invest in stocks, bonds and even cash can help protect your retirement savings in the event of an economic downturn.
- Money market funds.
- Mutual funds.
- Index Funds.
- Exchange-traded funds.
- Stocks.
- Alternative investments.
- Cryptocurrencies.
- Real estate.
Do bonds outperform in a recession?
In every recession since 1950, bonds have delivered higher returns than stocks and cash. That's partly because the Federal Reserve and other central banks have often cut interest rates in hopes of stimulating economic activity during a recession.
If sold prior to maturity, market price may be higher or lower than what you paid for the bond, leading to a capital gain or loss. If bought and held to maturity investor is not affected by market risk.
If bond yields rise, existing bonds lose value. The change in bond values only relates to a bond's price on the open market, meaning if the bond is sold before maturity, the seller will obtain a higher or lower price for the bond compared to its face value, depending on current interest rates.
| Face Value | Purchase Amount | 30-Year Value (Purchased May 1990) |
|---|---|---|
| $50 Bond | $100 | $207.36 |
| $100 Bond | $200 | $414.72 |
| $500 Bond | $400 | $1,036.80 |
| $1,000 Bond | $800 | $2,073.60 |
- Values Drop When Interest Rates Rise. You can buy bonds when they're first issued or purchase existing bonds from bondholders on the secondary market. ...
- Yields Might Not Keep Up With Inflation. ...
- Some Bonds Can Be Called Early.
Bottom line. I bonds, with their inflation-adjusted return, safeguard the investor's purchasing power during periods of high inflation. On the other hand, EE Bonds offer predictable returns with a fixed-interest rate and a guaranteed doubling of value if held for 20 years.
There is no direct way to lose money in a money market account. However, it is possible to lose money indirectly. For example, if the interest rate you receive on your account balance can no longer keep up with any penalty fees you may be assessed, the value of the account can fall below the initial deposit.
Bonds, particularly government bonds, are often seen as safer investments during a recession due to their regular interest payments and the fact that they are less volatile compared to other assets like stocks.
If the interest earned is low enough and the fees for the account are high enough, you may lose money. Although money market accounts aren't subject to the ups and downs of the stock market, they may come with higher fees than other savings products.
Two solid alternatives to money market or savings accounts are certificates of deposit (CDs) and U.S. Treasury bonds. They can yield a bigger payout due to the higher interest rates they pay.
What is a better investment than a money market account?
Money market accounts (MMAs) and certificates of deposit (CDs) are types of federally insured savings accounts that earn interest. But their rates and ease of access differ. CDs tend to have higher rates than money market accounts and give no access to your money until a term ends.
Many accounts have monthly fees
Another drawback to remember is that while they have high yields, money market accounts can also come with cumbersome fees. Many banks and credit unions will impose monthly fees just for the upkeep of your account.
Yields to Trend Lower
Key central bank rates and bond yields remain high globally and are likely to remain elevated well into 2024 before retreating. Further, the chance of higher policy rates from here is slim; the potential for rates to decline is much higher.
I bonds are great, safe investments, but they're paid out at the end of their 30-year maturities. You can cash them in after 12 months. But if you redeem an I bond within five years of purchase, you give up the last three months of interest.
As for fixed income, we expect a strong bounce-back year to play out over the course of 2024. When bond yields are high, the income earned is often enough to offset most price fluctuations. In fact, for the 10-year Treasury to deliver a negative return in 2024, the yield would have to rise to 5.3 percent.
