Pardon the newbie question.
I’ve always read that 7% is the average annual growth amount when investing in a standard mutual fund account.
Given that the latest government bonds are 7.12%, why would someone choose a riskier stock investment vs. a guaranteed income of the same value?
Is there something I’m missing?
The I bonds inflation adjustment changes every 6 months. They’re currently paying 7.12% due to a surge of inflation. If inflation goes back to normal levels, I bond returns will adjust and fall to the normal 2-3% per year range.
Mutual funds is 7% long term. Mostly until liquidated in retirement.
The 7% bond is just now so high because of high inflation. Usually the bonds yield has been around 2%. It is designed to just barely beat inflation. The APY will also be adjusted every 6 months so the interest will presumably drop back down to the regular 2% is has been over the years.
Here the historical data from the official website: https://www.treasurydirect.gov/indiv/research/indepth/ibonds/IBondRateChart.pdf
Edit: the current 7% is not fixed. Your interest rate will change on your current bond you are holding.
Stock growth on average is 7% after inflation. Newly purchased I Bonds earn a guaranteed 0% after inflation (unless inflation goes negative, in which case they earn 0% nominal).
>7% is the average annual growth amount when investing in a standard mutual fund account
yes, over long periods. decades. year to year can be very different.
> why would someone choose a riskier stock investment vs. a guaranteed income of the same value?
it’s a bit more complex.
the bonds are more stable, so that can count for a lot in some situations. but the flip side is bonds will *never* pay more than the ‘coupon’ when you sign up for them. never in 4,000 years of recorded history have bond issuers paid more than the contractual amount. also, bonds can have negative yield after adjusting for inflation.
in contrast, stocks (as a group) tend to appreciate in value over time. stocks pay dividends, and many companies will gradually increase dividends over rime. but stocks are not guaranteed like bonds, bonds will always pay unless there’s a default (which does happen!).
The 7% is after inflation in reality the gross return is higher.
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