What are bonds?
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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):
Source: Bloomberg, RBC Dominion Securities, Inc.
When we compare the historical returns from stocks and bonds in 2019 and 2020 from this source, we get the following results:
|Bonds (10 year treasury)||7.18%||10.01%|
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:
|Bonds (10 year treasury)||12.84%||2.67%||13.32%|
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.
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