The understanding is not so much about bonds but about the very concept of correlation. Also there is complexity and nuance in both stocks and bonds because returns present to the investor as statistical variables and the investor would want to understand them as such.Thanks to those who replied. Yes, I think I have an inaccurate understanding of bonds. I thought when stocks are down bonds are up and vice versa and that’s why Jack Bogel recommended a total stock and total bond fund both be held. Looks like there is much more complexity and nuance in bonds that I didn’t appreciate. I’ll endeavor to read more and continue to learn. My goal with bonds was to have something that wasn’t correlated with stocks. Do TIPS, CD’s and Money Market Funds achieve that goal?
Thanks again!
Atticus713
I don't know if this is a good article or not, but you can read and Google on the subject: https://en.wikipedia.org/wiki/Correlation
Take a look at the figures. I don't think you need to worry about the mathematical formulation per se.
Here is what the (simple theoretical) formulation of the return properties of a portfolio comprising two assets (stocks and bonds) looks like. The point is the portfolio average return is the weighted average of the average returns of the components but the portfolio standard deviation is a more complicated function of the standard deviations of the components and the correlation between the returns of the components. You can test what happens when the correlation is +1, 0, or -1. You can also recognize that possible values for the numbers are stock returns 10% with a 20% standard deviation and bond returns are 5% with a 10% standard deviation, and the correlation is 0, just for a rough illustration. You can then see what happens at different weights of the two assets.
https://financetrain.com/expected-retur ... -portfolio
I realize there is some statistical depth here but having some familiarity with some mathematics that models roughly how investments work is helpful to seeing why a person would or would not design a portfolio in certain ways.
Statistics: Posted by dbr — Wed Jan 01, 2025 3:40 pm — Replies 13 — Views 985