10 year risk adjusted returns

Source: Morningstar Inc., as of 12/31/18. Performance is historical and does not guarantee future results. Intermediate-term bonds are represented by the Bloomberg/Barclays U.S. Aggregate 7–10 year bond index. Short-term bonds are represented by the Bloomberg/Barclays U.S. Aggregate 1–3 year bond index and long-term bonds are represented by the Bloomberg/Barclays U.S. Aggregate 10+ year bond index. Maturity is the date on which a debt becomes due for payment. Index returns assume reinvestment of all distributions and do not reflect fees or expenses and it’s not possible to invest directly in an index.

In other words, short-term bonds simply do not have the same risk profile that we see in equities or longer-duration fixed income. While it is true that other asset classes have produced superior numbers on a raw return basis, taking risk into account should recalibrate the equation for investors.

What it comes down to is that short-term bonds have simply been more efficient for delivering returns per unit of risk to investors on a historical basis. This efficiency—particularly if markets remain volatile—could be valuable for investors, especially in the next market slump if historical trends hold into the future (also read Are markets becoming more volatile?)

Bottom line

The most recent market correction might be over, but it never hurts to contemplate what might happen to your portfolio the next time one hits. One way to consider potentially shielding yourself is with short-term bonds.

These securities have historically shown a strong ability to move independently of stocks, and have provided solid returns when adjusted for risks as well. Given this impressive history, it may be an interesting asset class to consider for those seeking a counterweight to any potential sell-offs that may hit equities this year or beyond.

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