stocks vs bonds
Updated January 26, 2021

Why I Don’t Invest in Bonds


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Bonds are a pretty controversial topic in personal finance, and I’ve seen a lot of different strategies in terms of investing in bonds vs. stocks or even other assets. So I thought it would be helpful to cover my perspective on bonds, what I think the main benefits are, and why I personally don’t invest in bonds.

As with anything else in personal finance, this isn’t necessarily to say that you should never invest in bonds or anything like that. There really aren’t that many strategies that I would recommend to everyone—we all have different financial goals, we’re in different financial situations, and we’re at different ages. But at the same time I think a lot of people buy bonds when they probably shouldn’t simply because they’re the “safe option.”

For example there’s a kind of received wisdom that you should own your age in bonds, so if you’re 30 then you want 30 percent bonds, if you’re 50 you want 50 percent bonds, etc. And on one level that makes sense since you’ll want to shoot for safer returns as you get closer to retirement, and you’ll eventually get to the point where short-term fluctuations will have a greater impact on the value of your portfolio. Now that might be good advice for some people, again I’m not here to say that you’re wrong or anything like that, but personally I don’t own any bonds, and I know a lot of people who are starting to move to that kind of approach. So in this article I’m going to go over a couple reasons why I don’t personally invest in bonds.

1. Bonds don’t offer the same growth over a long time horizon

As I said, one of the main reasons that people typically recommend investing in bonds is that they’re perceived as a “safe” investment. So unlike stocks, which can vary pretty dramatically depending on the market conditions at any particular time, the theory goes that you’re usually going to avoid big losses in the short run if you put your money in bonds rather than stocks.

That’s actually true for the most part—the Vanguard Total Bond Market Index Fund, for example, peaked at the beginning of the COVID-19 crisis on Friday, March 6th at $11.63, and it bottomed out on Thursday, March 19th at $10.87, So that’s a decline of about 6.5%.

On the other hand, if you look at the Vanguard Total Stock Market Index Fund, you’ll see that the pre-crisis peak was on Wednesday, February 19th at $83.79, and the crisis low was on Monday, March 23rd at $54.49. So the stock market index fund dipped from its pre-crisis 2020 peak by 29.3%, and obviously that crash sounds a lot worse than the bond index fund crash of 6.5%.

Even if you go all the way back to the year 2000, so two full decades, the worst year that that Vanguard bond fund ever had was in 2013 when it dropped by just 2.26%. 2018 is the only other year since then where it lost value at all, and that was only about one-tenth of a percentage point. And that’s a big draw for bonds, you don’t have to worry about a big drop even during a bear market.

But as I said before that bond fund only lost value in two out of twenty years going back to the year two thousand, but it also hasn’t gained more than ten percent in a single year since it went up by eleven point three-nine percent in 2000. On the other hand the S&P 500 has had some really bad years, it went down by almost 40% in 2008 alone, but it also isn’t uncommon to have years of ten, twenty, even twenty-five or thirty percent growth.

So let’s say you lost a lot of money in 2008, you’re scared, and you swore off stocks, Maybe you decided to put your portfolio in bonds to avoid taking that kind of hit in the future. And if you’re primarily investing to avoid losses, you’ve done well over that period of time. In fact from 2009 to now you’ve gained an average of a little under 4% per year, which is a lot more than you would get from a savings account or something like that.

On the other hand, if you had kept your portfolio in stocks, say 100% in the S&P 500 just to keep things simple, then even though there were a couple bad years in there you still would have generated more than 13.6 percent per year, so over three times the annual returns. And when you consider the impact of compound growth, it actually turns out to be way more than three times more valuable.

Now an index fund doesn’t compound in the same way as a savings account or a certificate of deposit, but for an easy estimate you can just compound the gains from year to year. Let’s say you started out with an investment of $100,000 in bonds at the beginning of 2009. That would have grown to about $150,000 in 2020, which means that your money would have increased by about fifty percent.

And I think you know where this is going, but the same amount of money invested in the S&P 500 at the beginning of 2009 would be worth roughly $388,000 in 2020, which works out to a return on investment of almost 400%. Keep in mind that neither of these two calculations factor in reinvested earnings, which would add to those totals even further. Of course this reflects some particularly good years, but even if you include the losses from 2008, which again were close to 40%, you still come out way ahead in stocks over bond. So obviously in the short run your losses were minimized if you had bonds in 2008, but in the long run stocks still gave you a much greater return.

So my overall point here is that stocks come with more risk in any given quarter, in any particular year, and you might even get disappointing returns over a few years. But historical performance shows that bonds are unlikely to outperform stock index funds over any significant length of time, which is really what you should be thinking about if you’re saving for retirement or another long-term goal.

Personally I might start to put some money in bonds if I know I’m going to retire in the next few years, obviously I don’t want to have to sell my stocks low when I need money, but if you’re in your twenties, thirties, or even forties, then honestly I don’t see much of a reason to invest in bonds at all.

Again that’s just my opinion, but I think there were a lot of people who thought bonds were the safe investment after 2008, and what they didn’t realize is that safety means something different over a period of one or two or three years compared to a period of ten or twenty or thirty years. So to me it makes more sense to take the ups and downs—there’s no reason to worry about where the stock market is right now if you’re not retiring for another twenty years. Ultimately the smart bet is to keep buying as much as you can regardless of market conditions. Over a sufficiently long period of time, you’re probably going to get the results you’re looking for, which is more than I can say for bonds in most situations. When I get more money, until I’m buying a piece of real estate, I’m investing it in stocks.

2. You don’t want to sell stocks during a bear market

Another reason I see people advocate for investing in bonds is that if you invest in the stock market, there’s a chance that you’ll need the money right when it’s at its lowest value. If you had all your savings in stocks and you lost your job at the beginning of the pandemic, let’s say your state was screwing you over with unemployment, maybe they weren’t processing your claim quickly enough.

Of course you still need food, so you would be in a situation where you had to sell your stocks after taking a big loss. Unfortunately that means you would have to cash out at the worst possible time because you don’t really lose money in stocks until you sell, but once you sell, you’ve realized that loss, you’ve captured that loss, and capturing that loss in a down market isn’t ideal.

So there’s an intuitive appeal to this idea as well, and it’s true that bonds are probably going to help you prevent those specific situations from popping up. But at the same time, I’m not sure that it makes sense to pursue this strategy just to hedge your bets against a recession or something like that.

Again this comes down to the numbers. I’m sure there were a lot of people who were happy to have bonds when the market crashed in March, but that crash only represents a tiny snapshot of stock vs. bond performance over years and years and years.

Yes, if you invested in the S&P 500 right before it fell then you lost a lot of money, but even in that situation you would have gained it all back over the last six months assuming you didn’t get spooked and sell off. For me the problem with the logic of this argument for bonds is that people will invest in bonds to avoid market downturns, but they don’t realize that they’re also avoiding all the gains they could have made in an index fund on the upswing. So if you had stocks for the last ten years and your friend had bonds, sure you lost more money in March specifically on paper, but even after that loss you would still have done way better over the entire period of time, and the S&P 500 has actually done better than the bond fund even when you only look at 2020.

Now if you’re not familiar with timing the market, basically it’s a strategy where people try to buy or sell at particular times because they think stocks are going to trend in a particular way. So if you knew exactly how the market was going to go every day, you would always know when to buy and when to sell, which means you would get all of the gains and none of the losses.

A lot of people try to do this in their own investing. If you were worried about coronavirus, for example, you might have pulled your money out in January or February. That might have even worked out if you were lucky enough to buy and sell at the right times. But the reality is that the market is far too complex for anyone to make predictions like that on a consistent basis, and over time trying to time the market is only going to backfire. On top of that, when you sell stocks at a gain, you have to pay taxes, which presents a drag on your true gains, your after-tax gains.

This comes out really clearly in a pretty well-known example from a redditor named jerschneid who’s active in the financial independence subreddit. Basically what jerschneid did is look at three hypothetical investors who saved $200 per month for forty years going from 1979 to 2019. You can check out the original post if you’re interested in the details, but essentially the first investor saved their money and only invested it at the top of each market crash, the second one only invested at the bottom, and the third one put the two hundred dollars in every month regardless of how the market happened to be doing at each particular time.

And what jerschneid found is that even if you’re somehow lucky enough to buy at the bottom of each crash every single time, you still end up way worse off than you would have been by investing consistently and paying no attention to the market. So the person who invested at the worst times finished with $663,000, the next person — the one who saved their money and only invested during market bottoms — finished with $956,000, and the last person — the one who consistently invested two hundred dollars every month regardless of how the market was doing — finished with the most money at $1,386,000. And the reason for that is that they got all the gains between the crashes instead of sitting on a pile of cash and waiting for the market to drop.

Now obviously this is more about timing the market than it is about stocks vs. bonds specifically, but what it tells me is that investing in bonds so that you don’t lose money during a crash is going to hurt you more often than it helps, especially in the long run. So if you keep your entire savings in stocks, and you need cash and you don’t have an emergency fund, yes there might be times when you have to sell for a loss or at least a significantly reduced gain.

But, again assuming there are times in your life when you have to cash out of your stocks, which is not necessarily true, even then there are going to be more times when you sell for a gain, and you shouldn’t miss out on those gains just because you’re worried about the losses. Because ultimately the loss you might get from a particular crash is almost nothing compared to the loss you would get from investing in bonds for years and missing out on all the stock market gains that come in between the crashes.

All right everybody that’s all I have for you today, obviously you could get a lot of advice from different people on this topic, but these are the two main reasons why I personally avoid bonds and put my entire portfolio in stocks at this time, excluding real estate of course.

Now I mentioned this earlier, but again I want to emphasize that I’m not telling you to never invest in bonds for any reason. Obviously I’m in my thirties, my perspective on this is a lot different than somebody twice my age, I just want to give an alternative perspective because people often talk about bonds as a kind of common-sense choice.

Of course if you want to keep a little in bonds as an emergency fund or something like that then that might make sense. People usually recommend putting emergency funds in high-yield savings accounts, but as we’ve seen bonds have had pretty strong historical performance, and certainly a better average than what you’ll get from a high-yield savings account right now with all the major providers under one percent.

On the other hand, if you follow the “own your age in bonds” rule, then you could easily end up with tens or even hundreds of thousands of dollars that are just sitting there not gaining as much value as they could be just because you want to avoid risk. If you have your other financial ducks in a row, you probably shouldn’t have to worry about that risk as much as some people might tell you. So hopefully this piece gave you a better idea of the pros and cons of bonds vs. stocks and why I tend to be more in favor of a 100% stock allocation—especially for someone my age—than many other personal finance commentators. But of course this is just my opinion, I hope it’s helpful for you, and I look forward to reading other perspectives in the comments.

Logan Allec, CPA

Logan is a practicing CPA, Certified Student Loan Professional, and founder of Money Done Right, which he launched in 2017. After spending nearly a decade in the corporate world helping big businesses save money, he launched his blog with the goal of helping everyday Americans earn, save, and invest more money. Learn more about Logan.

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Caroline at Costa Rica FIRE
Caroline at Costa Rica FIRE
3 months ago

I think bonds will be a tough sell in this super low interest rate environment. Gains will just be eaten away by inflation. We haven’t been investing in bonds either, instead using rental real estate to build up cash flow that rises with inflation.