Bond Advice for Today's Market: Think Big Picture
A bad day for stocks is often worse than a bad YEAR for bonds. Investors need to remember that right about now.


There is an old joke that some statisticians tell, that “a person with their head in an oven and their feet in the freezer is comfortable — on average.” Statisticians are not known for their sense of humor (clearly), but the joke is an effective warning about some of the shortcomings of relying on averages.
Statistically, a simple average camouflages extremes within its sample data. And, while the statistician’s joke is somewhat extreme, it is no less extreme than the actual returns in the long-run average annual returns for stocks and bonds that set many investors’ return expectations.
What’s an 'average' annual return anyway?
If quizzed, it is likely that many investors would estimate the average annualized returns for U.S. stocks and bonds to be about 10% and 5%, respectively. Those averages are composed of decades of returns and describe history perfectly. However, although they describe the average annualized returns, they are a far cry from the typical or "average" experience. In fact, in only two years from 1926 through 2020 did both the stock and bond market deliver returns within 2% (+/-) of their historical averages (see Figure 1).

Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Figure 1: Annual stock and bond returns, 1926-2020
In 2021, U.S. stocks gained 25.7%, while U.S. bonds lost 1.5%.* While it is fair to say that it was a great year for stocks, is it fair to say that it was a bad year for bonds because they didn’t return their 5.7%* average? Probably not. The only thing rarer than a year with “average” returns might be a year that investors appreciate their bond allocations amid a bull market for stocks.
For those of you thinking about abandoning bonds, here are some ideas that may help:
A bad day for stocks is often much worse than a bad year for bonds.
While investors prefer gains to losses, they also prefer small losses to big losses. While far from being predictive, Figure 1 demonstrates that negative returns in bonds have tended to be both infrequent and modest. In fact, the bond market’s worst annual return was a loss of 5.1% in 1994. However, the stocks of the S&P 500 index have posted daily losses that bad or worse 25 times since 1926.
Sometimes, the further the distance, the clearer the picture.
Often, it’s hard for investors to see the benefits that high-quality bonds can add to their portfolios, especially when the returns they are posting are modest — or even modestly negative. And today, concerns for higher interest rates due to higher-than-expected inflation are making it even more challenging for investors to ignore some pundits’ suggestions that holding bonds is a bad idea.
I was given a magnifying glass when I was young, and I started looking at everything through it. Eventually, I looked at the Sunday comics and realized that for all I saw, I wasn’t seeing everything. The cartoons were nothing but a variety of colored dots! Magazine photos, too. It made me wonder how much else I was missing because I wasn’t looking closely enough. Now, I realize that when I was close enough to see the dots, I missed the bigger picture – literally.
Similarly, the dots in Figure 1 paint a picture that’s easy to overlook when you’re too narrowly focused: The principal benefit of investment-grade bonds isn’t their frequency of positive returns but the infrequency of large, negative returns. And, yes, if the returns in Figure 1 were inflation-adjusted, the frequency of negative returns for both bonds and stocks would increase. However, that would not change what Figure 1 tells us: High-quality bonds in a portfolio can help moderate the volatility of stocks.
The bottom line: Keep your eye on the big picture.
A well-diversified portfolio can benefit from bonds: More likely than not, a bad year for bonds will be much better than a bad day for stocks. While that certainly won’t insure your portfolio against losses, it can certainly help moderate the losses when the markets turn intemperate.
Having a well-diversified portfolio that includes an allocation to high-quality bonds can help keep a bad day in the stock market from turning into a bad year for your portfolio.
* Stock performance as measured by the CRSP U.S. Total Market Index. Bond performance as measured by the Bloomberg U.S. Aggregate Float Adjusted Index. Bond average is a geometric mean return for the Ibbotson® SBBI® U.S. Intermediate-term (5-Year) Government Bonds (Total return).

Don Bennyhoff, CFA®, serves as the Chairman of the Investment Committee and Director of Investor Education at Liberty Wealth Advisors, a $1.7B RIA. An industry expert who spent over 22 years at The Vanguard Group, Don was a Founding Member of Vanguard’s Investment Strategy Group, and served as a Senior Investment Strategist.
-
2024 Election: Tax Plans of the Presidential Candidates
Tax Letter Joy Taylor reviews the tax plans of the 2024 election candidates. With a raft of tax provisions due to expire in 2025, the tax stakes couldn't be higher.
By Joy Taylor Published
-
Tennis Channel To Serve Up New Streaming Service Next Year
The Tennis Channel's direct-to-consumer streaming service will include live and on-demand matches as well as original programming.
By Joey Solitro Published
-
Year-End Tax Planning for a Financially Healthier Retirement
Getting your tax ducks in a row for the end of the year can decrease your tax liability and make the most of your income, now and in retirement.
By Ryan Marston, Investment Adviser Representative Published
-
Where to Start Financially After a Life-Changing Diagnosis
Dealing with an illness, yours or your child’s or that of another loved one, is hard enough without adding financial duress. Here are some considerations and suggestions for covering expenses.
By Stephen B. Dunbar III, JD, CLU Published
-
Six Ways to Prepare for Widowhood and Protect the Surviving Spouse
No one wants to have to plan for losing their spouse, but having plans in place and knowing what to do when the time comes can alleviate at least some of the stress.
By Tyler Hill, Investment Adviser Representative Published
-
Creating a Blended Family? Three Key Steps to Consider
Blended families can make your finances and estate extra complicated, but you can head off some of those issues with careful planning.
By Adam Frank Published
-
Do You Need Disability Insurance?
If you work for a living, the answer is yes, so don’t overlook protecting your biggest asset. Open enrollment season is the perfect time to assess your options.
By Frank J. Legan Published
-
Retirement Planning in a Time of Inflation and High Interest Rates
Today’s challenges make retirement planning even more complicated than usual, but it’s not all doom and gloom.
By Ken Moraif, MBA, CFP®, CRPC® Published
-
Not Confident About Retirement Despite Financial Success?
You’re not alone. Uncertainty related to interest rates, government debt, long-term care and market volatility is making everyone uneasy. What can you do about it?
By Barry H. Spencer, Registered Investment Adviser Published
-
Risk vs Reward: Understanding This Intricate Investing Dance
The stock market can be unpredictable and complex, so having a good grasp on how to mitigate risk is essential.
By Kerim Derhalli Published