3 Things 6-23-25

A Letter From Grandma

The following is a letter a grandmother wrote to her grandchild (with the some help from her financial adviser):

"My dearest grandchild, my heart overflows with love and pride as I write to celebrate your high school graduation. You’ve grown into such a remarkable person, your laughter and kindness lighting up every moment we share. I want nothing but the best for you—a life brimming with opportunity, joy, and success. To honor this milestone, I’m giving you a $1,000 gift, a small token of my love to help you plant the seeds for a bright future.

I’ll confess, darling, I never knew much about investing or fancy terms like index funds. Money always felt like a mystery to me. But thirty years ago, I made the smartest choice of my life: I hired a financial adviser who guided me to invest in an S&P 500 index fund. It was a game-changer, giving me security I never thought possible. This fund tracks 500 of America’s biggest companies, spreading your money across many industries to keep it safer. It’s simple, has low fees, and historically grows about 7-10% a year after inflation.

I hope you’ll take this $1,000 and invest it in an S&P 500 index fund, just like I did. My adviser explained that it’s a wise choice because it’s diversified, not betting on just one company, and its low costs let your money grow more. I also suggest putting $50 a month into the fund while you’re in college for the next four years. After you graduate, try boosting it to $50 a week. Starting at 18 with $1,000, adding $50 monthly for four years, then $50 weekly until you’re my age, 66, could grow your investment to around $250,000, assuming a 7% annual return after inflation. That’s compound interest at work—your money earns more over time, even through market dips.

This habit is about patience and planning for the long haul. My adviser showed me how starting early, even with small amounts, can build a foundation for dreams like buying a home or retiring comfortably. I didn’t understand the numbers back then, but following that advice gave me peace of mind. I hope you’ll either find a trustworthy adviser or learn enough to start this yourself, knowing it’s a path that worked wonders for me.

I dream of you passing this wisdom to your own grandchild someday, maybe with an even bigger gift, teaching them to look ahead. You’re my pride and joy, and I know you’ll make the world brighter. Keep shining, my love, and know I’m always in your corner. 

With all my love, 

Grandma"

Thing Two

Why Bonds Can Be Riskier Than Stocks

Bonds are often viewed as a safer investment compared to stocks due to their predictable interest payments and return of principal at maturity. When you buy a bond, you’re lending money to a government or company, receiving regular coupon payments until the bond matures. Stocks, on the other hand, represent ownership in a company, offering returns through dividends and price appreciation tied to business performance. While bonds appear stable, they carry significant risks, particularly interest rate risk, which can make them riskier than stocks in certain scenarios.

Interest rate risk is the primary reason bonds can lose value. When market interest rates rise, existing bonds with lower yields become less attractive, causing their prices to fall. For example, if you hold a bond paying 3% and new bonds offer 5%, your bond’s price drops to align its yield with the market. Long-term bonds, like 30-year Treasuries, are especially vulnerable; a 1% rate increase can reduce their price by 10-15%, while a 5-year bond might drop 4-5%. This sensitivity, measured by duration, led to 20-30% losses for long-term bonds in 2022 when the Federal Reserve raised rates from near 0% to over 4%. Stocks, while volatile, don’t face this direct inverse relationship with rates.

The potential for significant losses makes bonds riskier in rising-rate environments. If rates climb, bond prices can plummet, and selling before maturity locks in those losses. Holding to maturity avoids price declines but means accepting below-market yields, which may not keep pace with inflation. Stocks, by contrast, have historically recovered from downturns through corporate earnings growth. The S&P 500, for instance, has averaged 7-10% annual returns (after inflation) over decades, despite crashes. A diversified stock portfolio spreads risk across many companies, reducing the chance of permanent loss compared to a bond hit by rate spikes.

Inflation, often linked to rising rates, further erodes bond returns. A bond paying 3% loses real value if inflation is 4%, and fixed payments can’t adjust. Stocks, however, can act as an inflation hedge, as companies pass on higher costs through price increases or earnings growth. In the 1970s, high inflation and rising rates crushed bond returns, while stocks, though volatile, eventually outpaced inflation. Additionally, bonds face reinvestment risk—when rates fall, callable bonds may be redeemed, forcing reinvestment at lower yields. Stocks have no such constraint, as they lack fixed payouts or maturity dates.

Bonds also offer limited upside compared to stocks. A bond’s return is capped at its coupon and principal, while stocks have theoretically unlimited growth potential. Over long periods (1928-2024), U.S. stocks returned ~10% annually (nominal), versus ~5% for long-term government bonds. In rising-rate periods like the 1980s or 2022, bonds underperformed significantly. For long-term goals, like saving for retirement over 40 years, stocks in an S&P 500 index fund are less risky due to their growth and resilience against rate fluctuations. For example, $1,000 invested at 7% real return could grow to ~$150,000 in 48 years, far outpacing bond returns.

Despite these risks, bonds have a role in portfolios. They’re less volatile in stable or falling-rate environments and provide reliable income for short-term needs, like funding college in a few years. However, for long-term wealth-building, stocks are often safer due to their ability to outpace inflation and avoid interest rate risk. In June 2025, with rates elevated (~4-5% Fed funds rate), bonds remain vulnerable to further hikes, while stocks benefit from corporate adaptability. Investors should weigh their time horizon and risk tolerance, but for long-term growth, stocks often present lower risk than bonds exposed to rate swings. 

Thing Three

Just A Thought  

"Belief creates behaviors" - Neale Donald Walsch