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This chapter examines the investment performance of an index of long-term, high-grade bonds, using the same method of analysis as that appropriate for common stocks. It shows that long-term bonds have given both lower average return and more than proportionately lower dispersion than would have been obtained from holding a well-diversified portfolio of common stocks listed on the New York Stock Exchange. The chapter develops an optimal strategy for bond investments, given a definite time horizon. It analyses a strategy for taking advantage of the specificity of the promises of bonds to eliminate almost completely the riskiness of investments in high-grade bonds caused by unanticipated fluctuations in interest rates. The chapter also shows that an asset nearly free of risk from interest-rate fluctuations can be affected for holding periods of five, ten, and twenty years by appropriate use of high-grade bonds. It suggests that variability of bondholder's returns is, proportionately much less than the average variability of stockholder's returns. |
