If you look at that again, before taxes historical bond returnsThere have been some long periods where returns have been very poor, as you can see in the table below.
The yield on US government bonds
| Time period | Annual return | |
| Before inflation | After inflation | |
| 1926–2024 | 4.9% | 1.9% |
| 1926–1980 | 3% | 0.1% |
| 1980–2020 | 9.1% | 5.9% |
| 2020–2024 | -5.8% | -9.6% |
Given that historical context and knowing that between 1980 and 2020 we were in a falling interest rate environment, ideal for bonds, why invest in bonds today?
Your question reminds me of a book I read about 10 years ago: Why bother with bonds? The author, Rick Van Ness, suggests that there are four reasons to consider bonds: 1. Stocks are risky, 2. Bonds make risk more tolerable, 3. Bonds can be a safe bet, and 4. Bonds can be an attractive diversifier in your portfolio. I’ll go through each of these, but consider how each of these would apply to your portfolio needs.
1. Stocks are risky
I assume you’ve read that stocks become safer over time. That is true and false. Of course, if you invest $1 in stocks today, you’re more likely to earn positive returns the longer you hold them. You can see this by looking at the historical data. Great! But does this mean that stocks have become safer? No!
If you have a $100,000 portfolio and the stock falls 40%, bringing your portfolio to $60,000, do you feel good that the $1 you invested 10 or 20 years ago can still produce a positive return? No, you think you just lost $40,000. Will it get worse, will you get your money back and how long will it take? What if you had a million dollar portfolio that totaled $600,000?
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Stock markets are always at risk of falling. What if they drop while you’re taking income out of your portfolio or spending money? The reason for holding bonds or a bond alternative is to protect the money you want to spend in the short term against market downturns and to provide liquidity for spending needs.
2. Bonds make risk more palatable
Holding bonds can prevent you from buying high and selling low. Imagine you have a $1 million portfolio that quickly drops to $600,000; what are you going to do? Buy, sell or hold? Some people panic and sell, which is the real threat to investment success. Volatility in itself is not a problem. It only becomes a problem when it is combined with a recording.
What typically happens when a panic sale occurs? You’re waiting for the right time to get back into the market, if you ever get back into the market. A fearful investor doesn’t wait until things get worse to invest so he can buy low. Instead, they wait until the markets recover, things feel good, and then buy high.
In this case, the reason for holding bonds or a bond alternative is to anchor your portfolio so that it only drops to an amount you can tolerate before panic selling. Liquidity is not necessarily a requirement to make risk more bearable.
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3. Bonds can be a safe bet
In its basic form, a bond is a simple interest-only loan. You lend money to a government or company and in return they promise to pay you a return. At the end of the term they give you your money back. There are some risks associated with bonds, which are often related to changes in interest rates, length of maturity, the strength of the originator, and the ability to buy and sell bonds. However, in general they are safer than stocks when it comes to protecting your capital: capital that you can use for expenses. Stocks are intended to protect your long-term purchasing power and match or beat inflation.
If you are considering an alternative to bonds, ask yourself: is the investment as safe as a bond?
#bonds #Money #sense