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Why Money Market Funds Might Be More Reliable Than Bonds
As economic uncertainties loom, many DIY investors have shifted their focus from traditional bonds to money market funds, fearing the debilitating losses seen in some segments of the bond market. However, a deeper analysis reveals that relying solely on money market funds could actually hinder long-term investment returns and diversification.
Stark Comparisons: Returns on Money Market vs Gilts
Recent findings have shown that in the past five years, while both money markets and intermediate gilts (government bonds) have produced negative returns, the losses from gilts were significantly greater. Money markets suffered a -2% return, compared to the -9.2% return from gilts. A similar trend continues over ten years—with money markets losing -1.5% against gilts' -3.6%.
The 15-Year Perspective: A Balanced View
Though the five and ten-year outlooks favor money markets, a broader three-decade analysis reveals that bond holders fared better over the 15-year period. For those who held equal investments in both money markets and gilts, the returns on gilts, albeit low, outperformed money market returns of -1.8% versus -0.9%.
Future Implications for Investors
Given the current market trends, investors must be careful not to allow recency bias to sway their decisions. Striking a balance between diversified assets—including both money market funds and bonds—remains a strategic approach. With potential inflation looming, diversifying portfolios can help mitigate risks associated with market downturns, ensuring stable growth potential.
Final Thoughts: Diversification is Key
The landscape of investment is intricate; thus, opting against bonds altogether may not yield the best outcomes. Whether you choose bonds or money markets, the goal should always be maintaining a diversified portfolio that can withstand various economic environments.
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