Refresh May 06, 2024 7:48 PM ET
Who Needs Bonds?
from SmartMoney University
Let's face it, bonds have never been as sexy as stocks. They're confusing, arcane, and downright dowdy when it comes to investment returns. While stocks have averaged 11% annual growth over the last 70 years, bonds have slogged along at less than 6%.
But in 2000, investors learned why dowdy can sometimes be a good thing.
After five years of 20%-plus gains, the S&P 500 finally took a dive as 1999 faded from view. The Nasdaq Composite index and its go-go technology stocks fared even worse. But while stocks fell in 2000, U.S. Treasury Bonds rose -- as they often do in times of turmoil on Wall Street. When all was said and done, more than a few aggressive equity investor had learned the hard way why diversification counts.
When stocks are in decline, even a 6% gain elsewhere in your portfolio can do a lot to ease the pain. Check out our applet: From September to early December 2000, the S&P 500 dropped by 11%, as investors feared an economic slowdown and the country was waiting in limbo for a new President. But if you click the bond button, you'll see that faced with the same news, the bond market produced a 5% gain. Now, if you click the 65/35 mix button, you'll see what a boon this was for diversified investors. A portfolio of 100% stocks dropped almost twice as much as a portfolio with a mix of stocks and bonds.
The lesson is clear: Unless you're 40 or younger and have lots of time to make up for short-term losses in the stock market, you'd be silly not to diversify your portfolio with at least some exposure to bonds. It's true that figuring out how a bond really works is only slightly less confounding than quantum physics. But this section will help by giving you the basic background you'll need to invest in the fixed-income market wisely.
