Why Invest in Bonds? Essay

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Why Invest in Bonds? Bonds are thought to be an investor's idea of a safe investment. When the stock market is in trouble, investors take their money from the equity market and put it into bonds. Also, investors feel bonds are perfect for a portfolio where they require some sort of fixed income. A bond's coupon payment would work nicely in this case. However, research may lead us to a different story. Is a bond a better overall investment during these two situations listed above, and many others like them? Peter Lynch, former fund manager at Fidelity for the Magellan Fund, and author of "Beating the Street", does not think so. Lynch feels that no matter what the circumstance, stocks will always outperform bonds (Lynch, 15).…show more content…
One of the main reasons that investors stay away from the stock market is that they are afraid of corrections, crashes, or bear markets. Sure, if you are a very wise investor with tremendous foresight, it makes perfect sense to take your money out of stocks and put it into bonds right before a correction, crash, or bear market begins. However, it also makes perfect sense to reinvest in stocks once the stock market has reached its low point in such a situation. This is the part that many investors do not understand: the fact that you will make the most return in the stock market right after a significant drop due to the bargains that exist. Lynch, who obviously does not think too highly of bonds, does not really consider even pulling the money out during corrections, crashes, or bear markets. He feels that in the long run, no matter how long something like a bear market may last, "sooner or later, a portfolio of stocks or stock mutual funds will turn out to be a lot more valuable than a portfolio of bonds or CDs or money market funds." Here, in order to persuade his readers, Lynch provides some evidence in the form of total returns using various investment vehicles. Table 1 - Average Annual Return (percent) 1920s* 1930s 1940s 1950s 1960s 1970s 1980s S&P 500 19.2 0.0 9.2 19.4 7.8 5.9
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