Stock that can act like bonds

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ConfusedUKGuy
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Stock that can act like bonds

Post by ConfusedUKGuy »

Hi - This question may not make sense but ill ask it anyway.

Are there stocks I could buy that act like bonds (in terms of stability). I am not looking to buy bonds for personal reasons and would like to provide the "right mix" for my investments with stock that may provide the same benefit.

Thank you!
aristotelian
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Re: Stock that can act like bonds

Post by aristotelian »

There are low volatility ETF's. Some see Utility sector as especially defensive. That said, low volatility stocks are more like less volatile stocks than bonds.
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Re: Stock that can act like bonds

Post by Grt2bOutdoors »

No. A bond is contractually guaranteed to pay back full principal and interest, a stock is dependent upon the good fortune of the company. If the company fails to pay the bond coupon or the principal they will be on default and a court can remedy that situation, if a stock fails to pay - tough luck Charlie...you sit last in line to get paid. First come the creditors, equity holders are dead last.
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Re: Stock that can act like bonds

Post by Grt2bOutdoors »

aristotelian wrote: Sun Aug 30, 2020 12:30 pm There are low volatility ETF's. Some see Utility sector as especially defensive. That said, low volatility stocks are more like less volatile stocks than bonds.
Sure, defensive like PG&E in California.
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Re: Stock that can act like bonds

Post by Robot Monster »

Grt2bOutdoors wrote: Sun Aug 30, 2020 12:33 pm No. A bond is contractually guaranteed to pay back full principal and interest, a stock is dependent upon the good fortune of the company. If the company fails to pay the bond coupon or the principal they will be on default and a court can remedy that situation, if a stock fails to pay - tough luck Charlie...you sit last in line to get paid. First come the creditors, equity holders are dead last.
What about, like, preferred stocks?
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Re: Stock that can act like bonds

Post by ChinchillaWhiplash »

REITs? Not a secure, but pay back at least 90% of company profits to shareholders in the form of dividends. Share value can fluctuate greatly though. Also, company can cut or kill dividends when profits wane.
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Re: Stock that can act like bonds

Post by TheTimeLord »

Grt2bOutdoors wrote: Sun Aug 30, 2020 12:34 pm
aristotelian wrote: Sun Aug 30, 2020 12:30 pm There are low volatility ETF's. Some see Utility sector as especially defensive. That said, low volatility stocks are more like less volatile stocks than bonds.
Sure, defensive like PG&E in California.
Seriously.
On July 1, 2020, PG&E emerged from Chapter 11, successfully completing its restructuring process and implementing PG&E's Plan of Reorganization (“Plan”) that was confirmed by the United States Bankruptcy Court on June 20, 2020.
https://www.pge.com/en/about/newsroom/n ... chapter_11
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Re: Stock that can act like bonds

Post by Grt2bOutdoors »

Robot Monster wrote: Sun Aug 30, 2020 12:35 pm
Grt2bOutdoors wrote: Sun Aug 30, 2020 12:33 pm No. A bond is contractually guaranteed to pay back full principal and interest, a stock is dependent upon the good fortune of the company. If the company fails to pay the bond coupon or the principal they will be on default and a court can remedy that situation, if a stock fails to pay - tough luck Charlie...you sit last in line to get paid. First come the creditors, equity holders are dead last.
What about, like, preferred stocks?
You won’t be last in line, but you certainly aren’t first or second either. You takes your chances and you see what happens if things go bad, the value of the preferred will decline by a much greater percentage than that of the senior bond.
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Re: Stock that can act like bonds

Post by jebmke »

TheTimeLord wrote: Sun Aug 30, 2020 12:43 pm Seriously
Sarcasm, likely.
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Re: Stock that can act like bonds

Post by HawkeyePierce »

TANSTAAFL.

Low-vol stocks are still stocks. Better to choose an asset allocation including both stocks and bonds that meets your desired risk tolerance.
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Re: Stock that can act like bonds

Post by nisiprius »

ConfusedUKGuy wrote: Sun Aug 30, 2020 12:28 pm Hi - This question may not make sense but ill ask it anyway.

Are there stocks I could buy that act like bonds (in terms of stability). I am not looking to buy bonds for personal reasons and would like to provide the "right mix" for my investments with stock that may provide the same benefit.

Thank you!
No. Stocks are just not bonds.

I'm sorry if that isn't what you were hoping to hear.

Stocks represent voting shares in electing company board members. The board members are expected to look out for the rights of shareholders. This includes a strong expectation that stockholders will share in the business fortunes of the company, doing well when the company's business does well, growing when the company's business grows, doing poorly or losing money when the company's business does poorly. It represents sharing the business risk along with the business return. Even with the most stable company, you are still sharing the risk. And the company does not owe you any legal obligation to pay you any particular amount.

Bonds represent contracts that the company agrees to. The contract often calls for paying you specific numbers of dollars on specific calendar dates. Your interest payments are bills that the company must pay, like the employee payroll and the electric return. You don't get paid any less if the company has a bad year. You don't get paid any more if the company has a good year. You are not participating in the company's business, and you are almost independent of the company's business risk. The only connection is that if the company gets into such bad trouble that it can't pay its bills, it may default on its bonds. However, if they are rated "investment grade" bonds, the ratings agency thinks the company has enough of a cushion to keep paying its bills, even in a bad year.

You can see this very clearly for yourself if you simply look at some total return charts for stock and bond funds. In the chart below, I have plotted two stock funds/ETFs and two bond funds/ETFs.

One of the stock funds is the SPDR S&P 500 ETF, i.e. almost the whole stock market.
The other is SPLV, the Invesco S&P 500 Low Volatility ETF, SPLV, which invests only in stocks that are supposed to have lower volatility than the market as a whole.
One of the bond funds is the Vanguard Total Bond Market Index Fund, BND, which invests in almost every kind of investment-grade bonds.
The other is the iShares 7-10 year Treasury Bond ETF, IEF.

Try to see if you can figure out which are the stock funds and which are the bond funds without looking at the key. Then see if you can tell which stock fund is which, and which bond fund is which.


Source

Image

Here it is again, with the key to show you which is which. Did low-volatility stocks (SPLV) "act like bonds" in 2020?

Image
Last edited by nisiprius on Sun Aug 30, 2020 2:36 pm, edited 1 time in total.
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Re: Stock that can act like bonds

Post by HawkeyePierce »

Robot Monster wrote: Sun Aug 30, 2020 12:35 pm
Grt2bOutdoors wrote: Sun Aug 30, 2020 12:33 pm No. A bond is contractually guaranteed to pay back full principal and interest, a stock is dependent upon the good fortune of the company. If the company fails to pay the bond coupon or the principal they will be on default and a court can remedy that situation, if a stock fails to pay - tough luck Charlie...you sit last in line to get paid. First come the creditors, equity holders are dead last.
What about, like, preferred stocks?
I believe preferreds are pointless.

You can match the performance of preferred stock (in this case PFF) with a simple and *far* cheaper 50/50 mix of total stock and total bond funds.

Image

It's not a perfect match but it's close enough.

With PFF you're paying an ER of 0.46%. A 50/50 mix of VTI/BND has a weighted ER of 0.03%.
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Re: Stock that can act like bonds

Post by venkman »

ConfusedUKGuy wrote: Sun Aug 30, 2020 12:28 pm Are there stocks I could buy that act like bonds (in terms of stability). I am not looking to buy bonds for personal reasons and would like to provide the "right mix" for my investments with stock that may provide the same benefit.
Do you mean bonds specifically, or fixed income instruments in general?

If you're averse to all fixed income instruments, you might consider gold. It's just as volatile as stocks (if not moreso); but it's uncorrelated with stocks, so it could help dampen your overall portfolio volatility.
000
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Re: Stock that can act like bonds

Post by 000 »

One can make stock bond-like by buying protective puts and selling covered calls.

How much risk vs income one desires can be tuned with strike price selection.
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Re: Stock that can act like bonds

Post by ConfusedUKGuy »

The gold option may be best suited. The bonds I can’t really consider for religious purposes.

Thank you.
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Re: Stock that can act like bonds

Post by bck63 »

ConfusedUKGuy wrote: Sun Aug 30, 2020 12:28 pm Hi - This question may not make sense but ill ask it anyway.

Are there stocks I could buy that act like bonds (in terms of stability). I am not looking to buy bonds for personal reasons and would like to provide the "right mix" for my investments with stock that may provide the same benefit.

Thank you!
The consumer staples SPDR Fund XLP has a beta of 0.58 with a dividend yield of 2.76%. The Utilities SPDR Fund XLU has a beta of 0.42 with a yield of 3.44%. XLU went down a lot in March though. One of the presumed reasons was because of the law that was passed preventing utilities from turning off people's electricity during the lockdown.

I own both and am happy with them.
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Re: Stock that can act like bonds

Post by Valuethinker »

ConfusedUKGuy wrote: Wed Sep 16, 2020 12:14 pm The gold option may be best suited. The bonds I can’t really consider for religious purposes.

Thank you.
UK based?

You should not invest in US funds.

The UK has Sharia compliant funds

On the debt side you have an issue because bond equivalent are all based on interest. National Savings and bank deposits, largely.

There might be a Sharia compliant debt like fund. I have not looked.
Last edited by Valuethinker on Wed Sep 16, 2020 12:35 pm, edited 1 time in total.
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Re: Stock that can act like bonds

Post by willthrill81 »

ConfusedUKGuy wrote: Wed Sep 16, 2020 12:14 pm The gold option may be best suited.
For 70/30 allocations, there wasn't much difference from 1987-current from the 30% being in gold vs. total bond market.

https://www.portfoliovisualizer.com/bac ... tion3_2=30
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Re: Stock that can act like bonds

Post by Orbuculum Nongata »

ConfusedUKGuy wrote: Wed Sep 16, 2020 12:14 pm ... bonds I can’t really consider for religious purposes.

Thank you.
I'll be the first to admit I had no idea that owning bonds is frowned upon by a religion. Your post prompted me to read up on the subject. Thanks.
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Re: Stock that can act like bonds

Post by Ryzen »

T

Just note their financial house is on fire as they are facing a huge write-down from the DirecTV disaster and humongous debt load of recent acquisitions, and they are playing catch-up on their wireline assets since they didn't invest sufficiently to keep up with the CableCos when it comes to internet speed.

But, historically their stock is basically a bond.
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Re: Stock that can act like bonds

Post by arcticpineapplecorp. »

ConfusedUKGuy wrote: Sun Aug 30, 2020 12:28 pm Hi - This question may not make sense but ill ask it anyway.

Are there stocks I could buy that act like bonds (in terms of stability). I am not looking to buy bonds for personal reasons and would like to provide the "right mix" for my investments with stock that may provide the same benefit.

Thank you!
can you give us a rough idea of what these personal reasons might be?

the reason most don't want to own bonds is because of low yield (and or interest rate risk, meaning value of bonds will fall when interest rates rise. You should ask yourself if this should really be a concern depending upon your timeframe). Not sure if these are your "personal reasons" which is why I ask, but if those are some of the reasons...

so they often ask if they could invest in "less risky" stocks assuming they'll get higher returns than bonds, but somehow get less risk than stocks.

the risk/reward relationship tells us investing doesn't work that way.

since bonds pay low interest, they are low risk.

if you want higher interest, you have to take higher risk.

you're asking how to get higher returns without higher risk.

it doesn't work that way because risk and return are inextricably linked.

so if you want low risk, you have to accept the low returns that go with low risk.

wanting otherwise is to:
1. deny the fundamental relationship of risk/reward
2. think you can get a free lunch (something for nothing, return for no risk, etc).

ask yourself if there was a way to do this, why isn't everyone?
“More money has been lost reaching for yield than at the point of a gun.” Raymond DeVoe Jr.
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Re: Stock that can act like bonds

Post by patrick013 »

Without the recent trillion dollar bailout I think I'd be happy
with a tilt to VPU instead. :)

Maybe next time they won't do it. ex-Financials looks better
then.
age in bonds, buy-and-hold, 10 year business cycle
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Re: Stock that can act like bonds

Post by willthrill81 »

arcticpineapplecorp. wrote: Wed Sep 16, 2020 1:09 pm can you give us a rough idea of what these personal reasons might be?
He already said it was religion. Islam doesn't permit adherents to receive interest.
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Re: Stock that can act like bonds

Post by arcticpineapplecorp. »

Ryzen wrote: Wed Sep 16, 2020 12:56 pm T

Just note their financial house is on fire as they are facing a huge write-down from the DirecTV disaster and humongous debt load of recent acquisitions, and they are playing catch-up on their wireline assets since they didn't invest sufficiently to keep up with the CableCos when it comes to internet speed.

But, historically their stock is basically a bond.
to the OP: here's a comparison of Vanguard's total bond market index fund vs T (that's AT&T in case you wondered), total bond in blue below and AT&T in orange below (back to 12/11/1986, as far back as total bond goes):

Image

source:
http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D

do the two lines look in any way the same?

no.

so AT&T is not anything like a bond.

It's a stock.

Which means more volatility. You can see that right on the graph. The period specifically between 6/30/1999 and 9/30/2002 would not have felt much like you were holding a bond. That is, unless it was a high yield (junk) bond.

so let's see what kind of risk in numbers this bond? stock (AT&T) did:

from portfolio visualizer which goes back to Jan 1987:

Image

source:
https://www.portfoliovisualizer.com/bac ... ion2_2=100

that shows AT&T did only slightly better than total bond (6.19% CAGR vs 5.95%) but AT&T was WAY MORE RISKY than total bond (-64.33% loss worst year vs. -2.66%) and max drawdowns were (-81.49% vs -5.86%).

what do you think now of the bond like quality of AT&T stock?
It's "Stay" the course, not Stray the Course. Buy and Hold works. You should really try it sometime. Get a plan: www.bogleheads.org/wiki/Investment_policy_statement
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Re: Stock that can act like bonds

Post by asif408 »

I'll go one step farther than other posters, OP, and tell you that not only will stocks not act like high quality bonds in a true crisis, but many bonds (think junk bonds and emerging markets bonds) will not either.
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Re: Stock that can act like bonds

Post by Ryzen »

arcticpineapplecorp. wrote: Wed Sep 16, 2020 1:27 pm
Ryzen wrote: Wed Sep 16, 2020 12:56 pm
[snip]
what do you think now of the bond like quality of AT&T stock?
Not sure if the chart includes the dividends T has spit out quarterly for eternity, which is really what I was alluding to. Either way, as I mentioned I don't think it is a good comparison to a bond at all, because as I mentioned it has significant additional risk that a bond investor would be shielded from better than an equity investor.

No matter, T does have a very low beta and historically a consistently high dividend payout, making it one of the most bond-like equities.
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Re: Stock that can act like bonds

Post by Electron »

Hedging equity exposure might be an interesting possibility.

Take a look at the Merger Fund MERFX.

https://www.portfoliovisualizer.com/bac ... ion2_2=100
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Re: Stock that can act like bonds

Post by arcticpineapplecorp. »

Ryzen wrote: Wed Sep 16, 2020 1:42 pm
arcticpineapplecorp. wrote: Wed Sep 16, 2020 1:27 pm
Ryzen wrote: Wed Sep 16, 2020 12:56 pm
[snip]
what do you think now of the bond like quality of AT&T stock?
Not sure if the chart includes the dividends T has spit out quarterly for eternity, which is really what I was alluding to. Either way, as I mentioned I don't think it is a good comparison to a bond at all, because as I mentioned it has significant additional risk that a bond investor would be shielded from better than an equity investor.

No matter, T does have a very low beta and historically a consistently high dividend payout, making it one of the most bond-like equities.
the first chart is a growth chart, not sure about portfolio visualizer, but assumed so (others can correct that if not true). but the volatility is the point that stocks are nothing like bonds.
It's "Stay" the course, not Stray the Course. Buy and Hold works. You should really try it sometime. Get a plan: www.bogleheads.org/wiki/Investment_policy_statement
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Re: Stock that can act like bonds

Post by index245 »

In your situation, I would personally use cash for the "safe" portion of portfolio, and adjust equity portion upward (if needed) to reach desired risk tolerance.
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Re: Stock that can act like bonds

Post by CyclingDuo »

HawkeyePierce wrote: Sun Aug 30, 2020 1:33 pm
Robot Monster wrote: Sun Aug 30, 2020 12:35 pm
Grt2bOutdoors wrote: Sun Aug 30, 2020 12:33 pm No. A bond is contractually guaranteed to pay back full principal and interest, a stock is dependent upon the good fortune of the company. If the company fails to pay the bond coupon or the principal they will be on default and a court can remedy that situation, if a stock fails to pay - tough luck Charlie...you sit last in line to get paid. First come the creditors, equity holders are dead last.
What about, like, preferred stocks?
I believe preferreds are pointless.

You can match the performance of preferred stock (in this case PFF) with a simple and *far* cheaper 50/50 mix of total stock and total bond funds.

Image

It's not a perfect match but it's close enough.

With PFF you're paying an ER of 0.46%. A 50/50 mix of VTI/BND has a weighted ER of 0.03%.
Depends on if your 50/50 and PFF is held in a taxable account or not. PFF dividends are not all qualified, so for a taxable account there are other options.

I'd go PGF if held in taxable and I was able to mitigate taxable income to stay under the threshold and pay $0 taxes on the PGF dividends. That being said, it's not like there is much interest to pay on a bond fund right now in taxable.

CyclingDuo

Edited: PFF is not all qualified dividends, PGF is.
Last edited by CyclingDuo on Thu Sep 17, 2020 6:37 pm, edited 1 time in total.
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Re: Stock that can act like bonds

Post by balbrec2 »

CyclingDuo wrote: Wed Sep 16, 2020 2:29 pm
HawkeyePierce wrote: Sun Aug 30, 2020 1:33 pm
Robot Monster wrote: Sun Aug 30, 2020 12:35 pm
Grt2bOutdoors wrote: Sun Aug 30, 2020 12:33 pm No. A bond is contractually guaranteed to pay back full principal and interest, a stock is dependent upon the good fortune of the company. If the company fails to pay the bond coupon or the principal they will be on default and a court can remedy that situation, if a stock fails to pay - tough luck Charlie...you sit last in line to get paid. First come the creditors, equity holders are dead last.
What about, like, preferred stocks?
I believe preferreds are pointless.

You can match the performance of preferred stock (in this case PFF) with a simple and *far* cheaper 50/50 mix of total stock and total bond funds.

Image

It's not a perfect match but it's close enough.

With PFF you're paying an ER of 0.46%. A 50/50 mix of VTI/BND has a weighted ER of 0.03%.
Depends on if your 50/50 and PFF is held in a taxable account or not. I'd go PFF if held in taxable and I was able to mitigate taxable income to stay under the threshold and pay $0 taxes on the PFF dividends. That being said, it's not like there is much interest to pay on a bond fund right now in taxable.

CyclingDuo

The vast majority of preferred issues are held by corporations whom receive tax advantages for these holdings.
These advantages do not extend to individuals.
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Re: Stock that can act like bonds

Post by CyclingDuo »

balbrec2 wrote: Thu Sep 17, 2020 1:30 pmThe vast majority of preferred issues are held by corporations whom receive tax advantages for these holdings. These advantages do not extend to individuals.
Obviously, you want preferred stock funds that pay all QDI (such as Invesco's PGF), so be aware that some ETF's or funds also include a portion that is non-QDI and that portion will be taxed differently than the QDI portion.

However, if you own a fund of preferred stocks that are 100% QDI, then you will be taxed at the LTC rates which could be $0.

MFJ can have taxable income of up to $80K and pay $0 on the qualified dividends (QDI) from preferred stock shares.

Samples of figuring your taxable income to qualify for $0 tax on the dividends.

https://turbotax.intuit.com/tax-tips/in ... /L6gOMKT1W
https://retireby40.org/pay-no-tax-dividend-income/
https://www.wellsfargoadvisors.com/pdf/ ... me-tax.pdf

It does look as if PFF does not pay 100% QDI, so the portion of dividends that are non-qualified will indeed be taxed differently than the qualified dividends from that ETF. I would go with PGF if holding it in a taxable account and mitigate the taxes such as using the strategy shown at the those links. More ideal for those whose income is in the "sweet spot" to be able to do this.

CyclingDuo
"Save like a pessimist, invest like an optimist." - Morgan Housel
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ConfusedUKGuy
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Re: Stock that can act like bonds

Post by ConfusedUKGuy »

Valuethinker wrote: Wed Sep 16, 2020 12:35 pm
ConfusedUKGuy wrote: Wed Sep 16, 2020 12:14 pm The gold option may be best suited. The bonds I can’t really consider for religious purposes.

Thank you.
UK based?

You should not invest in US funds.

The UK has Sharia compliant funds

On the debt side you have an issue because bond equivalent are all based on interest. National Savings and bank deposits, largely.

There might be a Sharia compliant debt like fund. I have not looked.
I am US based but also a UK citizen...can I still get the sharia compliant funds?
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ConfusedUKGuy
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Re: Stock that can act like bonds

Post by ConfusedUKGuy »

arcticpineapplecorp. wrote: Wed Sep 16, 2020 1:09 pm
ConfusedUKGuy wrote: Sun Aug 30, 2020 12:28 pm Hi - This question may not make sense but ill ask it anyway.

Are there stocks I could buy that act like bonds (in terms of stability). I am not looking to buy bonds for personal reasons and would like to provide the "right mix" for my investments with stock that may provide the same benefit.

Thank you!
can you give us a rough idea of what these personal reasons might be?

the reason most don't want to own bonds is because of low yield (and or interest rate risk, meaning value of bonds will fall when interest rates rise. You should ask yourself if this should really be a concern depending upon your timeframe). Not sure if these are your "personal reasons" which is why I ask, but if those are some of the reasons...

so they often ask if they could invest in "less risky" stocks assuming they'll get higher returns than bonds, but somehow get less risk than stocks.

the risk/reward relationship tells us investing doesn't work that way.

since bonds pay low interest, they are low risk.

if you want higher interest, you have to take higher risk.

you're asking how to get higher returns without higher risk.

it doesn't work that way because risk and return are inextricably linked.

so if you want low risk, you have to accept the low returns that go with low risk.

wanting otherwise is to:
1. deny the fundamental relationship of risk/reward
2. think you can get a free lunch (something for nothing, return for no risk, etc).

ask yourself if there was a way to do this, why isn't everyone?
“More money has been lost reaching for yield than at the point of a gun.” Raymond DeVoe Jr.
Hi - It is for religious purposes. Isalmically I am not allowed to buy bonds.
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