There are literally thousands of well-articulated philosophies about long-term investing. After all, there are many thousands of investing firms that espouse distinct ideas about investing in order to attract different classes of clients. Despite the united front that most of these firms attempt to present, deep philosophical and practical divisions may exist within them. In other words, the financial world is fragmented and often contradictory. It has been this way for generations.
One of the biggest flash points in the ongoing argument about the merits of long-term investing has involved the dichotomy between stocks and bonds. As two of the most popular types of asset classes, these investment vehicles are responsible for the creation of untold trillions of dollars of collective wealth. Of course, they also carry substantial risks. Many investors have been completely wiped out by ill-advised stock or bond transactions.
If you're thinking about cashing in your child's savings bonds and moving the funds that this transaction produces into a basket of mutual funds, you're wrestling with the age-old stock-bond dichotomy. Although the "wrong" choice probably won't bring you to the brink of financial ruin, it's possible that one course of action could produce better returns than another. Before you cash in your child's savings bonds, you must determine whether the mutual funds that you're considering can outperform them.
First, determine the exact annual yield of your bonds. This will be expressed as a percentage and should be displayed prominently on the bond's face. If you don't have a physical copy of the bond, you can look up this information online or through your brokerage.
Next, determine the projected annual yield and return values for the mutual funds that you're considering. This information is also expressed as a percentage and should be available from the funds' issuers. If you're purchasing your funds through a brokerage, you should be able to see a chart that lists the yields and returns for all of the funds that it offers.
Compare the yields that your child's bond is expected to produce with the information on your mutual fund issuer's website. If the mutual funds appear to offer higher returns, you may wish to proceed with the transaction. If the funds don't appear to offer higher returns, you may wish to hold onto your bonds for the time being. It's important to note that whereas mutual fund yields can fluctuate, bond yields generally remain constant.