Hello, YieldAlley readers! In this issue:

📈 Americans’ 401(k)s Are More Tied to Stocks Than Ever (WSJ)

💵 The Value Premium: Reports of Its Death Have Been Greatly Exaggerate (Larry Swedroe)

📵 Fake savings ads: ‘One of the most sophisticated scams we have seen’ (The Guardian)

🤖 Sam Altman Says ChatGPT Is on Track to Out-Talk Humanity (Wired)

📉 Here’s How to Avoid Dividend Traps (Morningstar)

The relationship between bond and stock volatility is one of the most fundamental concepts in investing. Using 96 years of data from 1928 through 2024, we can clearly see why bonds are considered less risky than stocks.

Treasury bonds exhibited an annual return standard deviation of 7.90%, while the S&P 500 demonstrated volatility of 19.39% - making bonds less than half as volatile as stocks. The worst single year for Treasury bonds was a loss of 17.83% in 2022, while the best year delivered gains of 32.81% in 1982. Compare this to stocks, where the worst year (1931) produced losses of 43.84% and the best year (1954) generated returns of 52.56%.

Looking at the chart above, you can clearly see this volatility difference in action. The orange line shows 10-year Treasury bond rates, which move relatively gradually over time. The blue line represents S&P 500 returns, which swing dramatically from year to year - sometimes plunging below -40% and other times soaring above 50%. The visual makes it immediately obvious why bonds are considered the stable foundation of a portfolio while stocks provide the growth engine.

Bond volatility primarily stems from interest rate changes, which tend to evolve gradually. Stock volatility reflects economic cycles, corporate earnings, market sentiment, and geopolitical events that can shift rapidly and unpredictably. This difference in underlying drivers explains why bonds provide more predictable returns over time.

The distinction between buy-and-hold investing and trading significantly affects how volatility impacts your actual returns. For investors who purchase individual bonds and hold them to maturity, much of the price volatility becomes irrelevant. These investors receive predictable interest payments throughout the bond's life and full principal repayment at maturity, regardless of interim price fluctuations. While a bond's market price might decline during periods of rising interest rates, a buy-and-hold investor faces no loss of principal, assuming no credit default.

Stock investors enjoy no such certainty. A declining stock price might never recover, and companies can reduce or eliminate dividends without warning. This fundamental difference explains why bonds are often called the "ballast" in a portfolio - they provide stability that stocks simply cannot match.

Bond funds and ETFs introduce different dynamics that investors should understand. Unlike individual bonds held to maturity, bond fund investors face ongoing price volatility without the certainty of principal return at a specific date. When interest rates rise, bond fund values decline and may not recover even if you hold for years.

The volatility differential between bonds and stocks forms the foundation of strategic asset allocation. The traditional 60/40 stock-bond allocation uses bonds to moderate portfolio volatility while maintaining exposure to stocks' higher return potential. During market stress periods, bonds often perform well while stocks decline, as investors seek safety and central banks reduce interest rates.

The optimal allocation depends on individual circumstances and timeline. Younger investors with decades until retirement might accept higher volatility for superior long-term returns. Older investors typically benefit more from bonds' stability and predictable income generation. Beyond lower volatility, bonds provide steady income that stocks cannot match - while companies can cut dividends, bond interest payments from quality issuers remain predictable.

Government Money Market Funds (7-Day Yields)

Brokered CD Rates (6-Month Rate)

ETFs (30-Day Yields)

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