“If bonds are so dangerous, why not buy stocks?”

Bonds are about as unattractive as they’ve ever been and I am in the consensus that believes bonds have  higher risk and lower future returns. So why own bonds at all, especially if you are retired and need income and/or returns to live off of?

The reason is that the above statement about bond risk is within the context of bonds. To say bonds look risky is very different from saying stocks look risky; the risks are of entirely different magnitudes.

To illustrate this, just take a look at the monthly returns of an investment-grade bond index (red line) versus a domestic stock market index (blue line). Stocks have often been down -5 or -10% in a single month, while the worst monthly losses in bonds rarely breach 5%.

Blue = Stocks, Red = Bonds; Source: Federal Reserve, see page here

Blue = StocksRed = Bonds; Source: Federal Reserve, see page here

Disclosure: All investments are subject to risks. Investments in bonds are subject to interest rate, credit, and inflation risk.

Full Disclosure: The information provided here is for educational purposes only. Nothing in this article should be construed as a tax advice, solicitation or offer, or recommendation, to buy or sell any security. There is a potential for loss as well as gain. Actual investors may experience different results from the results shown. Past performance is no guarantee of future results.