What are bonds?

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:

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:

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.