Why Buy Bonds When Stocks Have a Higher Expected Return?

It is true that stocks have a higher expected rate of return over long periods.  It is not true for each period.  Stocks will sometimes do better and sometimes worse than bonds. 

The fluctuation is risk.  If bonds are steady (they actually are not but lets assume so for this question), the back and forth of stocks is risk.  Finance people measure this roller coaster using standard deviation.  How scary do you want your roller coaster to be.  Adjusting the ratio of stocks vs bonds changes the total portfolio risk.

Not all risk levels are appropriate for all investors.  My 92 year old mother in a retirement home can not wait for a market recovery if there is a down fluctuation.  The money is necessary now.  I have her portfolio at about 2/3 short term bonds.  I am in my late 50’s.  I can handle much more fluctuation as I have many more years left.  I have my portfolio at about 40% short term bonds and 60% stocks.  I would have a young adult at nearly all stocks.

More risk means more profit but not necessarily when you want it to be there.

As I’m writing these to help my readers, I would be very appreciative of any input in regards to what I should write next. If you want me to write about a particular topic, please contact me. If you would like to submit a post to my blog, please contact me.

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Questions for the comments

Did my explanation make sense? Do you agree or disagree with what I said?

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