What are bonds?
What are bonds?
Reward: +10 XP 0 0 0
When we put bonds in the same table we used in chapter 3, you can see the differences in returns and risk vs preferred stocks and common stocks (equity):
When we compare the historical returns from stocks and bonds in 2019 and 2020 from this source, we get the following results:
| Year | 2019 | 2020 |
| Bonds (10 year treasury) | 7.18% | 10.01% |
| Stocks | 28.27% | 16.61% |
While stocks outperform bonds by a large amount, they are a great addition to your portfolio when the stock market crashes. Let’s have a look at the numbers when the market crashed during the internet bubble in 2000-2002:
| Year | 2000 | 2001 | 2002 |
| Bonds (10 year treasury) | 12.84% | 2.67% | 13.32% |
| Stocks | -12% | -14.27% | -23.18 |
If your portfolio existed of 50% stocks and 50% bonds during the internet bubble (2000) you would have minimized your losses. While if you were 100% in stocks you would have big losses three years in a row. But overall, stocks outperform bonds by a large margin.
Best thing to remember is that when stocks are performing badly due to a market crash, bonds will most likely flourish. And when the stock market is surging, bonds will have low returns. This is related to market interest rates which I will cover in-depth in later chapters.
In the next chapters I'll deepdive in all types of bonds and their characteristics.