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Are Bonds Riskier than Stocks? The Devil Thinks So.

  • Insights

Warren Buffett has said more than once that “risk comes from not knowing what you’re doing.”

So let’s take a look at a situation that arose from not completely understanding how things work due to details that might not be fully understood.

There is an underlying idea that permeates the financial world that says bonds are safer than stocks. And at the top of this “safety” structure US Treasury bonds reign supreme, as they are backed by the full faith and credit of the US government. US Treasury bonds are considered the safest investment by investors the world over, and most, if not all interest rate products (mortgages, credit cards, bank savings rates, etc.) are related in some way to what US Treasury bonds are paying.

So an investor who understands these ideas, decides that they wants to be super “safe” and invest in US Treasury bonds. And in doing so they also understand that there are U.S. Treasury funds available. Again, with the understanding that a fund adds diversity and can reduce risk further, this line of thinking makes intuitive sense.

Let’s recap:

  1. Investor wants super safe investment.
  2. US Treasuries are the safest investment in the world.
  3. Wants to diversify to reduce risk even further.
  4. Is a long-term investor.

With the above criteria, it wouldn’t be unreasonable to think that investing in a US Treasury bond fund such as VGLT (Vanguard Long-Term Treasury) makes sense.

If an investor bought this US Treasury bond fund just over 2 years ago (before the Federal Reserve started hiking interest rates), they would have experienced a -45% drawdown at one point, and would still be down over -37%. Ouch!

How did the “risky” stock market do during this same time period? The max drawdown was -25%, and as of today the stock market is down -14%.

So much for the blanket idea, that bonds are safe, and stocks are risky.

So are US Treasuries actually safe?

That’s a complicated question and answer. The devil truly is in the details, and why ALL medium to long-term bonds (not just US Treasuries) lost so much value.

-Paul R. Rossi