3.3 Bonds: Why Boring is Beautiful

Why are bonds so much safer than stocks in the short run, but so much worse than stocks in the long run?

Even if we have bad inflation, you will likely lose far less money investing in bonds because of how they work.

We had the highest inflation in 40 years in 2022, yet bonds fell about 12% while stocks fell about 19%.

The reason is that stocks get hit harder because future earnings of companies are worth a lot less in today's dollars when interest rates are higher (it's a math thing).

We are exiting a period of decades long falling interest rates. Whether interest rates will remain steady from here or continue to go up is anyone's guess.

But they could also go back down again. In 2023, bonds saw modest returns of about 5.7%.

Regardless of what happens, it makes sense to have bonds as part of your long term investment plan.

You might add them now or wait if your risk tolerance is high enough to invest only in stocks.

Stocks are priced above average compared to historical norms in 2024 because bonds still don't yield that much by historical comparison.

Even so, bonds finally yield something significant for the first time since the 2008 financial crisis. They definitely deserve a closer look.

And investors in high income tax brackets (individuals earning over $185,000 and couples earning over $370,000) should consider tax-free bonds due to interest income being taxed at ordinary income rates.

NOTE: the excel below is fully updated for 2024, and the video below gets the necessary points across so we decided to keep it as is.

-Comprehension check: What's the worst recorded one year bond market return in history going back to 1871?

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