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Predictable and Stable

Updated: May 10, 2021

Bonds are known to be predictable and stable. What does that mean to me, as an investor?

Highlights:

  • Bonds are debts, no different than a student loan, auto loan, or home mortgage.

  • Bonds are predictable by design with a well-defined schedule for payments and return of your money.

  • History has proven that a bond is stable compared to a stock due to the inherent nature of predictable payments and return of principal.

 

A bond is a debt or a promise to pay. The borrower could be the US government, a corporation like Apple, or your local fire department. As a bond investor, however, you are the lender, not the borrower.

We know intuitively from our own lives how bonds work. Like a student loan, car loan, or mortgage, you pay a monthly fixed payment to your bank or lender. Then, at maturity, you're finally done paying off your loan.


Because you're the lender, you receive these payments on a fixed schedule, either monthly, quarterly, or semi-annually (fancy word for every six months), and you can count on those payments until you are paid off. Hence, your bond investment is highly predictable.


The word stable/stability means something totally different in the investment world. Stability refers to the ride you go through every day watching how your investments perform. There is a metric in finance for this, and it's called volatility. Bonds are unequivocally less volatile than stocks; bonds generally have fewer ups and downs with higher-lows and lower-highs.


This picture compares monthly returns for the bond and the stock market. Stocks look like a roller coaster compared to bonds. Unfortunately, when it comes to your investments, roller coasters aren't that much fun.


Because bonds are predictable and stable, you can anticipate your future cash flow needs, plan accordingly, and sleep soundly.


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