Bonds just feel safe. The very name even implies safety—as in, “My word is my bond.” Far too many investors with long-term growth goals load up on bonds, presuming they’re safer than scary stocks. But are they? Depends largely on how you define “safe.”
Does “safe” mean a high probability of lower long-term returns with less near-term volatility? Or is “safe” increasing the probability your portfolio grows enough to satisfy your long-term growth and/or cash flow needs? If you need a certain amount of growth to maintain your lifestyle in retirement, you might not feel so “safe” when you discover having too little volatility risk for too many years later means you must subsequently dial back your lifestyle. And you may not feel “safe” when you must explain that to your spouse—particularly if in that future there is any huge inflation spurt (always possible).

Bonds Can Be Negative, Too

Yes, stocks can be pretty darn volatile and scary—near term. But people forget: Bonds do sometimes lose value in the near term too. In 2009, bonds not only suffered relative to stocks (world stocks were up 30 percent)1 but also absolutely—10-year US Treasuries fell 9.5 percent.2 Not what you’d expect from über-safety.
Still, stocks can and do fall much more—in 2008, world stocks were down 40.7 percent!3 But remember, these are all short-term returns. Stocks are generally riskier short-term because the expectation is they’ll have better returns long-term. And they ...

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