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Just to add on this... for most investors, they provide some backbone and counterweight to market cycles. In terms of safety, they are a safer investment choice

Just to add on this... for most investors, they provide some backbone and counterweight to market cycles. In terms of safety, they are a safer investment choice because they represent debt, not equity. This is a good example, graphed: https://www.google.com/search?tbm=fin&q=MUTF:+VBMFX&stick=H4sIAAAAAAAAAONgecRozi3w8sc9YSm9SWtOXmPU4OIKzsgvd80rySypFJLiYoOyBKT4uHj00_UNK8uTCsvzilN4FrFy-4aGuFkphDn5ukUAAJdCiW1KAAAA&biw=1440&bih=711#scso=_SBtfXJqwEOm0ggeplaqoCg2:0,_eBtfXJfiK-Gm_QbPo6HQBg2:0&smids=/g/1ywbr166m&wptab=COMPARE https://www.google.com/search?tbm=fin&q=MUTF:+VBMFX&stick=H4... Bonds Summarized: a) are less volatile compared to equities b) provide consistent and guaranteed returns, albeit at a lower rate compared to equities c) often work counter to market cycles: when interest rates rise, bonds fall in value, and when interest rates are cut, bonds rise. Depending on the depth of the fund, you may not see any changes at all. Generally speaking, stocks almost always perform significantly better than bonds over long periods. If you can handle the risk, in theory 100% stocks is a better investment. Bonds provide the "don't freak out and sell" part of your portfolio.

mruts 8y ago
A couple on interesting points: a) Bonds, as you said, were traditional seem as counter cyclical, when equities or rates went up, bonds went down, and vice-versa. Nowadays, it seems like this might not be true anymore. So much money is pouring into the US securities market that both often now move in tandem. In the past, in risk-off environments (when you want to lower your risk), investors would move out of equities and into bonds. But now, since so much money is foreign, you see outflows from both bonds and stocks is a risk-off environment. This makes bonds a worse hedge today against equities than in the past. b) It's true that 100% stocks almost always outperforms 100% bonds. But things get really interesting when you consider a mix of equities and bonds. Take an 100% equities portfolio of say 10 stocks: do a simulation in which you vary the weights of each position (the percentage of each stock that makes up your portfolio). Now graph the historical returns on Y axis and the historical volatility of all these simulated portfolios. What you'll see is called the "Markowitz Bullet"[1] The efficient frontier (EF), is all the portfolios that have the best risk adjusted returns (also known as the Sharpe ratio). Basically what that means is that those portfolios on the EF (the top "edge" of the bullet) have better risk/reward characteristics than any of the portfolios below them. so with a 100% equities portfolio, the best you can do to maximize your Sharpe ratio will be on the top edge of the curve. Now consider mixing in some bonds which are at the risk-free rate. 3 month US T-notes are traditionally considered to be the risk-free rate. That is, they have no volatility and a fixed return (say 2%). By adjusting your allocation of risk-free bonds and equities you can achieve a better Sharpe ratio than anything you could do with just equities alone. So now, with adding bonds, you can now beat the EF. The EF is now the line drawn between the risk-free point (0 variance, 2% returns) and tangent portfolio (the highest point on the curve). Check out the picture below for an illustration. But it gets even better! If you can borrow at the risk free rate, you can now your leverage returns (but also volatility) into outer space! Modern portfolio theory is based on this concept that adding the risk-free rate to your portfolio can actually make you achieve better risk-adjusted returns than you otherwise could with just equities alone. Seems pretty magical when you think about it (though it's predicated on the original sin of finance: that the risk-free rate actually exists) https://en.wikipedia.org/wiki/Modern_portfolio_theory#/media/File:Markowitz_frontier.jpg https://en.wikipedia.org/wiki/Modern_portfolio_theory#/media...

mruts 8y ago

A couple on interesting points: a) Bonds, as you said, were traditional seem as counter cyclical, when equities or rates went up, bonds went down, and vice-versa. Nowadays, it seems like this might not be true anymore. So much money is pouring into the US securities market that both often now move in tandem. In the past, in risk-off environments (when you want to lower your risk), investors would move out of equities and into bonds. But now, since so much money is foreign, you see outflows from both bonds and stocks is a risk-off environment. This makes bonds a worse hedge today against equities than in the past. b) It's true that 100% stocks almost always outperforms 100% bonds. But things get really interesting when you consider a mix of equities and bonds. Take an 100% equities portfolio of say 10 stocks: do a simulation in which you vary the weights of each position (the percentage of each stock that makes up your portfolio). Now graph the historical returns on Y axis and the historical volatility of all these simulated portfolios. What you'll see is called the "Markowitz Bullet"[1] The efficient frontier (EF), is all the portfolios that have the best risk adjusted returns (also known as the Sharpe ratio). Basically what that means is that those portfolios on the EF (the top "edge" of the bullet) have better risk/reward characteristics than any of the portfolios below them. so with a 100% equities portfolio, the best you can do to maximize your Sharpe ratio will be on the top edge of the curve. Now consider mixing in some bonds which are at the risk-free rate. 3 month US T-notes are traditionally considered to be the risk-free rate. That is, they have no volatility and a fixed return (say 2%). By adjusting your allocation of risk-free bonds and equities you can achieve a better Sharpe ratio than anything you could do with just equities alone. So now, with adding bonds, you can now beat the EF. The EF is now the line drawn between the risk-free point (0 variance, 2% returns) and tangent portfolio (the highest point on the curve). Check out the picture below for an illustration. But it gets even better! If you can borrow at the risk free rate, you can now your leverage returns (but also volatility) into outer space! Modern portfolio theory is based on this concept that adding the risk-free rate to your portfolio can actually make you achieve better risk-adjusted returns than you otherwise could with just equities alone. Seems pretty magical when you think about it (though it's predicated on the original sin of finance: that the risk-free rate actually exists) https://en.wikipedia.org/wiki/Modern_portfolio_theory#/media/File:Markowitz_frontier.jpg https://en.wikipedia.org/wiki/Modern_portfolio_theory#/media...