Avoiding danger is no safer in the long run than outright exposure. The fearful are caught as often as the bold.—Helen Keller
I doubt that Helen Keller was thinking about bond investors when she wrote this, but she may as well have been. The safe haven trade hasn’t worked out too well since May. Bond investors sometimes think they have an extra measure of security versus stock investors. And it is true that most bonds are less volatile than stocks. Volatility, however, is a pretty poor way to measure risk. An alternative way to measure risk is to look at drawdown—and measured that way, bonds have had drawdowns in real returns that rival drawdowns in stocks.
In truth, bonds are securities just like stocks. They are subject to the same, sometimes irrational, swings in investor emotion. And given that bonds are priced based on the income they produce, they are very vulnerable to increases in interest rates and increases in inflation.
So I think that Helen Keller’s point is well taken—instead of pretending that you are safe, make sure you understand the exposures you have and make sure you take them on intentionally.
Source: Wikipedia (click on image to enlarge)