Are Bonds Safe?

Bill Parrott |

I like bonds, but I'm struggling with their long-term performance. Bonds are inversely related to the direction of interest rates; when rates rise, prices fall like a see-saw in a park, and since the Federal Reserve started raising interest rates in 2022, the one-month US Treasury Bill rate has soared by more than 2,600%. As a result, the prices of bonds have fallen since 2022, wiping out decades of gains.

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The one-month US Treasury Bill is considered the safest investment in the world and has never lost money if held to maturity, and since 1926, it has produced an average annual return of 3.25%. A $1 investment is now worth $22.63. If you want a safe investment, look no further than the T-Bill. However, inflation averaged 2.95% during the same period, so your net gain was 0.30% before taxes.

Over the past decade, stocks have been on a wild ride, dealing with four significant corrections, including the COVID crash in 2020 and last year's down draft, where the S&P 500 fell by more than 18%. Despite the headwinds of COVID, war, inflation, rising interest rates, and multiple corrections, the index soared 171%, averaging 10.50% per year and outperforming bonds by 182%.

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The outperformance of stocks this past decade is not an anomaly. As I mentioned, a $1 investment in T-Bills in 1926 grew to $22. Investing that same dollar in the S&P 500 would be worth $13,474, or 612 times more than the safe investment. Stocks appear risky, but I believe they are safer than bonds over time.

Our clients with significant stock exposure have outperformed our conservative clients by a wide margin and recovered losses quickly. It has not been easy for our stock-oriented clients to remain invested, especially after last year's market performance, but they have stayed the course and are reaping the benefits of a rising stock market.

To maintain your lifestyle and protect your wealth, you must own stocks. There is no alternative.

What would life be if we had no courage to attempt anything? ~ Vincent Van Gogh

August 29, 2023

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren't suitable for every investor. Prices and yields are for today only and are subject to change without notice.