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Safety Myth

When it comes to asset classes volatility, there is a commonly accepted myth that claims bonds are a safer investment that equities. When we put those words in the context of modern portfolio theory, where volatility is how we measure risk, being safer implies that bond volatility is lower than that of equities. But if you look at the chart below, that is not necessarily a true statement. Since 1900, bonds have experienced large episodes of equity like drawdowns, even higher, in some instances, such as 2022. Because bonds are legal contracts, and they have a stated maturity where capital needs to be returned, permanent impairment is much less frequent in bonds than equities, but when it comes to modeling portfolios, running the assumption that bonds will lower volatility on a portfolio is not necessarily true, and that has big implications for a traditional 60/40 or 100% fixed income portfolios.


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Chart source: UBS



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