The Little Book of Market Myths: How to Profit by Avoiding the Investing Mistakes Everyone Else Makes

Chapter One

Bonds Are Safer Than Stocks

“Everyone knows bonds are safer than stocks.”

You’ve heard that said so often, maybe it doesn’t seem worth investigating. With 2008 still fresh in most investors’ minds, it may seem sacrilegious to even question this. (Another odd behavioral quirk: Stocks were up huge in 2009 and 2010, flattish in 2011, and up again in 2012 as I write. Yet the bad returns five years back loom so much larger in our brains than the four subsequent years of overall big positive returns.)

But those beliefs that are so widely, broadly, universally held are often those that end up being utterly wrong—even backward.

Go ahead. Ask, “Are they?”

And initially, it may seem intuitive that plodding bonds are safer than stocks with their inherent wild wiggles. But I say, whether bonds are safer or not can depend on what you mean by “safe.”

There’s no technical definition—there’s huge room for interpretation. For example, one person might think “safe” means a low level of expected shorter-term volatility. No wiggles! Another person might think “safe” means an increased likelihood he achieves long-term goals, which may require a higher level of shorter-term volatility.

Bonds Are Volatile, Too

People often make the error of thinking bonds aren’t volatile. Not so. Bonds have price volatility, too. And their prices move in inverse relationship to interest rates. When interest rates rise, prices of currently issued bonds fall, and vice versa. So from year to year, as interest ...