Are Bonds Riskier than Stocks?

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Pepper11
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Are Bonds Riskier than Stocks?

Post by Pepper11 »

Seeing that Bonds will likely not keep up with inflation, do they not pose significantly more risk that stocks? If your time horizon is long term, it seems volatility risk is insignificant compared to inflation risk. Are Bonds riskier than Stocks?
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Nate79
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Re: Are Bonds Riskier than Stocks?

Post by Nate79 »

Pepper11 wrote: Sat Jun 12, 2021 10:55 am Seeing that Bonds will likely not keep up with inflation, do they not pose significantly more risk that stocks? If your time horizon is long term, it seems volatility risk is insignificant compared to inflation risk. Are Bonds riskier than Stocks?
What is your definition of risk?
Nowizard
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Re: Are Bonds Riskier than Stocks?

Post by Nowizard »

A primary question is why bonds are in one's portfolio. Returns have increasingly become a factor over recent years since bonds have produced equity like returns. We keep a significant bond allocation for safety reasons and to reduce the volatility of our portfolio and are, of course, pleased when they produce returns above expectations.

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Re: Are Bonds Riskier than Stocks?

Post by KlangFool »

Pepper11 wrote: Sat Jun 12, 2021 10:55 am Seeing that Bonds will likely not keep up with inflation, do they not pose significantly more risk that stocks? If your time horizon is long term, it seems volatility risk is insignificant compared to inflation risk. Are Bonds riskier than Stocks?
Pepper11,

<<If your time horizon is long term, it seems volatility risk is insignificant compared to inflation risk. >>

This statement is obviously false.

A) Unless you NEVER need to use the money, losing 50% of what you have when you need to use it is a problem. Volatility RISK is always significant. And, the bigger your portfolio is, the 50% loss is bigger.

B) Unless you NEVER need to use the the money, your time horizon would not be long term forever. So, there will be a time when it is no longer long term.

C) Unless you have perfect job security, you would not know your time horizon is long term. Aka, you do not need to withdraw from your portfolio in the coming recession.

<<Seeing that Bonds will likely not keep up with inflation, >>

D) In order for this statement to be true, you need to be able to predict the future.

E) And, we do not buy bonds anyhow. We buy bond fund.

F) Why do we need the bond to beat inflation anyhow? We are not 100% bond. We just need our portfolio to beat inflation.

G) I am enjoying my rebalancing bonus from my 60/40 portfolio. I sell bond to buy the stock in March 2020. I sell the stock to buy the bond when the stock recovers. The bond in my 60/40 portfolio do not need to beat inflation for me to make money.

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Re: Are Bonds Riskier than Stocks?

Post by dbr »

Discussions of risk should be stated as "risk of X" where you have to say what X is. Otherwise investment definition of risk is standard deviation of annual returns. Over any period long enough to get an estimate of that I don't think there are any bonds as risky as stocks. Note that in finance one assumes there is no diversifiable risk. An individual corporate or muni bond can be quite risky, but we assume this kind of risk is diversified away by holding a large number of issues.

A good example where bonds are riskier than stocks is that in safe withdrawal rate studies the worst outcomes happen when there is not enough in stocks and too much in bonds. X in this case is the risk of running out of money while still alive.

In general if X is meeting a target for accumulation of a certain amount of wealth it is possible that bond holdings would generate nearly certain failure while stock holdings would have reasonable chances of success. Mathematically an extreme example would be a zero risk investment, meaning guaranteed fixed return of 4% when the return needed to meet the target is 6%. Of course if the requirement to meet the target is 4% or less then the bond investment has zero risk of that particular X and stocks a positive risk of failing. The latter is why, for example, a person holding money for a down payment on a house next year puts that money in a bank even at 0% rather than investing it in stocks.
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Re: Are Bonds Riskier than Stocks?

Post by sandan »

Pepper11 wrote: Sat Jun 12, 2021 10:55 am Seeing that Bonds will likely not keep up with inflation, do they not pose significantly more risk that stocks? If your time horizon is long term, it seems volatility risk is insignificant compared to inflation risk. Are Bonds riskier than Stocks?
All things held equal and by law, bonds are less risky than stocks. Time horizon doesn't change anything unless you introduce the assumption that stocks will absolutely outperform bonds after X amount of years. Then again, that has very little relationship with inflation unless you want make more assumptions to support the argument.
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Re: Are Bonds Riskier than Stocks?

Post by Robot Monster »

Pepper11 wrote: Sat Jun 12, 2021 10:55 am Seeing that Bonds will likely not keep up with inflation, do they not pose significantly more risk that stocks? If your time horizon is long term, it seems volatility risk is insignificant compared to inflation risk. Are Bonds riskier than Stocks?
If your time horizon is long term i.e. you are young, then, yeah, you should be mostly in stocks. Bogle said, "So if you're 28 years old, you might decide to have, say, 10 or 20 percent in bonds and 80 or 90 percent in stock — depending on your risk tolerance." link When he says risk tolerance, I believe he's talking about one's ability to stomach volatility. If you don't mind the volatility, it might be okay to be 100% stocks in your 20's. That's Jim Cramer's opinion. link
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Re: Are Bonds Riskier than Stocks?

Post by rockstar »

If bond yields move against you, and you're not holding the actual bond to maturity, then you'll get hurt. If you want to approximate the PE of a bond, then use this formula: 100/(100*interest rate). So a 1% bond is equivalent to 100x earnings.
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Re: Are Bonds Riskier than Stocks?

Post by Valuethinker »

Pepper11 wrote: Sat Jun 12, 2021 10:55 am Seeing that Bonds will likely not keep up with inflation, do they not pose significantly more risk that stocks? If your time horizon is long term, it seems volatility risk is insignificant compared to inflation risk. Are Bonds riskier than Stocks?
At certain times in economic history, bonds are riskier than stocks.

BTW don't assume stocks are an inflation hedge. They are not, by and large. What is true about stocks is that they are very risky, and pay high real returns as a result.
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warner25
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Re: Are Bonds Riskier than Stocks?

Post by warner25 »

At a Shiller PE of 37, at least in the S&P 500, I'd question your implied premise that stocks are any better positioned than bonds to keep up with inflation over your time horizon.

And I agree, as always, with KlangFool that one never really knows their time horizon.
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Re: Are Bonds Riskier than Stocks?

Post by TheDDC »

warner25 wrote: Sat Jun 12, 2021 5:22 pm At a Shiller PE of 37, at least in the S&P 500, I'd question your implied premise that stocks are any better positioned than bonds to keep up with inflation over your time horizon.

And I agree, as always, with KlangFool that one never really knows their time horizon.
Buy and hold investors would do well to ignore Schiller PE. We invest when we get the cash to do so. A 100/0 allocation is the best inflation against risk for most. And if that isn’t good enough to give yield long term, the rotation out of stocks/bonds would happen. I don’t see that happening in the forecast however. So invest we must.

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warner25
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Re: Are Bonds Riskier than Stocks?

Post by warner25 »

TheDDC wrote: Sat Jun 12, 2021 6:10 pm Buy and hold investors would do well to ignore Schiller PE.
Sure, and they would do well to ignore interest rates too.
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Re: Are Bonds Riskier than Stocks?

Post by seajay »

Pepper11 wrote: Sat Jun 12, 2021 10:55 am Seeing that Bonds will likely not keep up with inflation, do they not pose significantly more risk that stocks? If your time horizon is long term, it seems volatility risk is insignificant compared to inflation risk. Are Bonds riskier than Stocks?
The UK has had index linked gilts (TIPS) available since the early 1980's and at/near the highs in real yields you could have bought in at around +4% real yields. Unlike stocks they're near-as guaranteed (state can always print money, increases taxes ...etc. rather than be seen to have defaulted on their bonds).

After large gains from high to low interest rate transition, stock valuations are perhaps relatively high. $500K stock portfolio value quickly doubling to $1M has a potential risk of halving back down again perhaps as real yields rise. Even at -1% or -2% real inflation bond yields if such a stock valuation halving occurred within 5 years then -5% to -10% bond losses is still way better than -50% stock losses, buys 80%+ more shares than prior to that decline.

Stocks and bonds can both be risky, but with different risks. Generally its suggested that all-bonds or all-stock is riskier than holding some of both.

Risk is subjective. If considered as maximum drawdown then Treasury bonds are safer than stocks, corporate bonds might have similar risk to stocks (could lose all value). If risk is considered as being volatility then some bonds can be more volatile than some stocks, but generally/broadly bonds tend to be less volatile than stocks. Or you might compare risk using other measures.
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Re: Are Bonds Riskier than Stocks?

Post by TheDDC »

warner25 wrote: Sat Jun 12, 2021 6:26 pm
TheDDC wrote: Sat Jun 12, 2021 6:10 pm Buy and hold investors would do well to ignore Schiller PE.
Sure, and they would do well to ignore interest rates too.
Not necessarily. Interest rates have been low for longer periods of time than the “coveted” PE has been high in US history, not that I care anyway. I care mostly about performance and long term growth and appreciation, both of which would an investor in the 100% stocks category.

It’s threads like this that make me think more here are really more in need of a financial advisor to whisper sweet nothings to them about staying invested even while taking the lumps.

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Re: Are Bonds Riskier than Stocks?

Post by Kevin M »

Pepper11 wrote: Sat Jun 12, 2021 10:55 am Seeing that Bonds will likely not keep up with inflation, do they not pose significantly more risk that stocks? If your time horizon is long term, it seems volatility risk is insignificant compared to inflation risk. Are Bonds riskier than Stocks?
For the long term, volatility is not the risk, assuming by volatility you mean short-term uncertainty of returns. The risk is that stocks significantly under-perform expectations in the long term, perhaps delivering real returns less than bonds. If you don't think stocks are risky in the long term, compared to bonds, then by all means, go 100% stocks (or more, using leverage).

The most recent 20-year TIPS yield from the treasury.gov website is -0.37%. So you have a very high degree of certainty that you will earn that real yield over the next 20 years. This is not risky in the classic finance sense, in that the expected return has very low uncertainty. You can earn a not-risky negative real return over 20 years. Yes, you will lose to inflation, but you know how much you'll lose.

Many, perhaps most, forum participants seem to think that stocks are virtually guaranteed to provide higher real returns than bonds over any 20-year period. If you are in that camp, then again, you should be 100% stocks if your time horizon is that long. For those of us who are less sanguine about the future resembling the past, a certain negative real return could be a reasonable choice compared to a much less certain real return from stocks.

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Re: Are Bonds Riskier than Stocks?

Post by HyperCat »

Kevin M wrote: Sat Jun 12, 2021 7:06 pm For the long term, volatility is not the risk, assuming by volatility you mean short-term uncertainty of returns. The risk is that stocks significantly under-perform expectations in the long term, perhaps delivering real returns less than bonds. If you don't think stocks are risky in the long term, compared to bonds, then by all means, go 100% stocks (or more, using leverage).
+1. Said more eloquently than I could manage.
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Re: Are Bonds Riskier than Stocks?

Post by Robot Monster »

HyperCat wrote: Sat Jun 12, 2021 7:36 pm
Kevin M wrote: Sat Jun 12, 2021 7:06 pm For the long term, volatility is not the risk, assuming by volatility you mean short-term uncertainty of returns. The risk is that stocks significantly under-perform expectations in the long term, perhaps delivering real returns less than bonds. If you don't think stocks are risky in the long term, compared to bonds, then by all means, go 100% stocks (or more, using leverage).
+1. Said more eloquently than I could manage.
+1 indeed! I am especially "less sanguine about the future resembling the past", there simply is no guarantee it will, and it's why, for my distant needs, I have a mix of 30yr TIPS and stocks
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Re: Are Bonds Riskier than Stocks?

Post by warner25 »

TheDDC wrote: Sat Jun 12, 2021 6:51 pm Interest rates have been low for longer periods of time than the “coveted” PE has been high in US history...
But if PE ever returns to earth from its current orbit, either sharply or gradually, our stocks sure won't keep up with inflation. The S&P 500 would need to tumble 60% to get back to the historical average for Shiller PE, or move sideways for an awfully long time while earnings catch up.

I'm not saying that people shouldn't hold stocks. I'm not even saying that people shouldn't hold 100% stocks. I'm just saying that stocks aren't positioned any better than bonds to keep up with inflation from here, and we certainly shouldn't be telling people that they are less risky.
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Re: Are Bonds Riskier than Stocks?

Post by am »

Real yields on bonds are negative in many cases at the current time , ensuring a poor return. At least stocks offer the promise of real positive returns. High stock valuations can get higher.

I kind of look at bonds like a short term patch. They’ll make you feel a bit better when stocks are crashing, but hurt you in most cases over the long term. Better to endure the crashes with more stocks then to have more bonds and pay long term with worse returns (yes, I know bonds have beaten stocks on rare occasion).
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Re: Are Bonds Riskier than Stocks?

Post by mr_brightside »

am wrote: Sun Jun 13, 2021 6:50 am

I kind of look at bonds like a short term patch. They’ll make you feel a bit better when stocks are crashing, but hurt you in most cases over the long term. Better to endure the crashes with more stocks then to have more bonds and pay long term with worse returns (yes, I know bonds have beaten stocks on rare occasion).
pretty much how I see it. but i understand older folks feel better with a higher % of bonds once they've got their net worth where they want it

(capital preservation vs. capital growth)

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Re: Are Bonds Riskier than Stocks?

Post by manuvns »

Pepper11 wrote: Sat Jun 12, 2021 10:55 am Seeing that Bonds will likely not keep up with inflation, do they not pose significantly more risk that stocks? If your time horizon is long term, it seems volatility risk is insignificant compared to inflation risk. Are Bonds riskier than Stocks?
bonds means lower risk and low return . it's a way to diversify , the higher stock prices are (higher risk) the more bonds i buy .
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