Market Returns

Market Returns — Fixed Income

What we have referred to loosely as the market has been only stocks. However, there are many other financial instruments in addition to equities (stocks). There are bonds, preferred stocks, commodities, options, futures, etc. and even hybrid sub-categories of these. When others speak of the market, they may be speaking only of stocks or may be speaking of stocks plus other financial instruments. For purposes at hand, we shall concern ourselves only with the non-exotic — stocks and bonds. Thus, our “market” means stocks and bonds, unless otherwise noted.

Image Two below is that of another Vanguard Fund, the Total Bond Market Index Fund, VBMFX. Vanguard describes this fund as follows:“… the fund invests about 30% in corporate bonds and 70% in U.S. government bonds of all maturities (short-, intermediate-, and long-term issues).” It is a diversified bond fund.

(Click on image to enlarge)

Bond Returns

The top graph shows that $10,000 invested grew to $33,086, a compound annual growth rate of 4.90% per year. The return is substantially lower than that of stocks. Using our rule of 72 and comparing the two diversified funds, it will take stocks about 8 years to double in the Vanguard fund while it takes about 15 years to double your money in their bond fund.

Again, no special expertise or knowledge is required to achieve these bond returns. Merely by the fund and go about your life.

There are bond relationships which are useful for investors to know. These will be discussed in a later piece.

Bond Risk

Based on the return differential, it might be natural to ask why anyone would invest in bonds rather than stocks.

The smoothness of the growth in profits in the bond fund provides a clue. While returns are lower. they are less volatile. Note how smooth the earnings curve is compared to the stock earnings curve. Losses are incurred with bonds but only three times during the time frame. Furthermore, all are reasonably small.

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