The Ups and Downs of Bond Investments

Bonds are generally safer and less volatile than stocks but offer lower long-term returns. However, they can be risky in terms of price volatility, as was the case in 2022 when returns were negative. This highlights the inverse relationship between recent and expected returns, as low expected returns led to higher bond prices, making them unattractive for long-term investors. Despite poor returns in 2022, future expected returns improved as bond prices dropped, which was actually good news for long-term investors. Matching investment horizon to goals is crucial, as short-term investors in 2022 may have been disappointed, while long-term investors should see positive results as higher interest payments recover price declines over the long term.

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