ETFnerd

Bond Market Needs Revolutionary Change For Investors' Sake

My feelings are exactly the opposite to the ones posed above. I think (most) bonds are stodgy out-of-date relics of very limited use.

It may comfort you that you can calculate on day 1 how many dollars you will have in day 365, but how much will those dollars be worth? How much purchasing power will you have?

Individual bonds with a fixed coupon expose you to interest rate risk. There is a real opportunity cost here that is often ignored. Even if you buy floaters, you have to be careful that you match the reference rate to your holding period and not to the duration or maturity of the bond. Otherwise you are exposed to reversals in the yield curve. Even if you hold to maturity, there is inflation risk in floaters unless you are holding TIPS or a similar product.

Equities tend to address partially the interest rate and inflation risks as these are baked into the price.

They are sexier for good reason. Bonds are relics that haven't kept up with the times. That's the reason why there has been a bubble-like explosion of credit derivatives - in order to make the risks correspond to those demanded in the marketplace. Default swaps, bond insurance, IR and FX swaps all serve to address shortcomings in bonds.

Lastly, and maybe most importantly, look at the long-term expected return of the asset classes. This is the reason that for someone with assets with a reasonably long investment horizon, bonds cannot compete with equities.