Are bonds less risky than stocks?

Are bonds less risky than stocks?

Are bonds less risky than stocks? For many investors the question is central when deciding how to balance safety, income and long‑term growth. This article explains what stocks and bonds are, the main ways risk is measured, historical patterns of returns and volatility, and practical rules for choosing between—or combining—these asset types. You will learn when bonds typically look less risky than stocks, when that conclusion can reverse, and how to evaluate which is less risky for your goals.

Note: this article focuses on conventional U.S. and developed‑market stocks and bonds and does not cover cryptocurrencies or tokenized debt. For custody or trading access, consider using Bitget and Bitget Wallet for regulated, user‑friendly interfaces.

Definitions

What is a stock (equity)?

A stock (or equity) is a share of ownership in a corporation. Stockholders participate in a company’s capital appreciation and may receive dividends when profits are distributed. Equity returns come from price appreciation and dividends, and shareholders sit behind creditors in the claim hierarchy: in liquidation, bondholders and other creditors are paid before equity holders.

What is a bond (fixed income)?

A bond is a debt instrument: the issuer borrows money and promises periodic coupon (interest) payments and to repay principal at maturity. Bonds can be issued by governments, municipalities, and corporations. Bondholders are creditors and have priority over equity holders in bankruptcy, which is one reason bonds are often described as "safer" in capital‑preservation contexts.

Types and categories

Types of stocks

• Common vs. preferred: common stock gives voting rights; preferred stock typically pays fixed dividends and has priority over common equity in liquidation but usually lacks voting rights.
• Large‑cap vs. small‑cap: size affects risk/return—small caps historically show higher long‑term returns but more volatility.
• Growth vs. value: growth stocks prioritize earnings expansion; value stocks appear cheaper on fundamentals and can behave differently by cycle.
• Domestic vs. international: geographic exposure affects currency, political and economic risks.

Types of bonds

• Government (Treasuries): sovereign debt generally considered lowest credit risk in a given currency (e.g., U.S. Treasuries for USD investors).
• Municipal: issued by local governments, often tax‑exempt for resident investors.
• Corporate: issued by companies; credit quality ranges from investment‑grade to high‑yield (junk).
• Investment‑grade vs. high‑yield: rating agencies mark credit risk; high‑yield bonds pay higher coupons to compensate for greater default risk.
• TIPS (Treasury Inflation‑Protected Securities): principal adjusts with inflation to protect real purchasing power.
• Callable/convertible bonds: features can add call risk (issuer can redeem early) or convertibility (can convert to stock), altering risk characteristics.
• Short vs. long duration: maturity and coupon structure determine sensitivity to interest‑rate changes.

Dimensions of risk (how "risk" is measured)

When asking "are bonds less risky than stocks?" it helps to specify which risks matter. Different investors prioritize different risk types: price volatility, default probability, inflation risk, liquidity and others.

Market risk / price volatility

Price volatility measures how much an asset’s price swings over time (commonly quantified by standard deviation). Historically, broad equity indices show materially higher volatility than broad bond indices. That greater price volatility is a core reason equities are generally seen as riskier in the short term.

Credit/default risk

Credit risk is the chance an issuer cannot meet interest or principal payments. Corporate and lower‑rated bonds carry higher credit/default risk. Stocks face company failure risk too, but creditors typically recover more in bankruptcy, so bonds of a given issuer can be "safer" in claim priority terms.

Interest rate risk and duration

Bond prices move inversely with interest rates. Duration summarizes price sensitivity: long‑duration bonds fall more when rates rise. In a rising‑rate environment, certain bonds can suffer significant capital losses—temporarily or permanently if held to sale rather than maturity.

Inflation risk

Fixed coupon payments can lose purchasing power when inflation rises. Stocks can provide some inflation hedge via pricing power and earnings growth, while fixed‑rate bonds may underperform in real terms if inflation exceeds expectations. TIPS are designed to reduce inflation risk.

Liquidity risk

Major U.S. equities trade on deep exchanges with high intraday volume. Many bonds trade over‑the‑counter; some corporate, municipal, or small issue bonds can be less liquid. Bond funds and ETFs offer liquidity but introduce daily pricing and market‑level risks.

Reinvestment and call risk (bonds)

Coupons and matured principal often must be reinvested at prevailing rates; if rates are lower, reinvestment returns decline (reinvestment risk). Callable bonds give issuers the right to redeem early, which can hurt investors when rates fall and issuers refinance at lower cost.

Concentration and idiosyncratic risk (stocks)

Owning individual equities exposes investors to company‑specific shocks (fraud, management failure, disruption). Diversification reduces but does not eliminate idiosyncratic risk; broad equity indices diversify company risk but still face market risk.

Historical returns and empirical evidence

Long‑term average returns (equities vs. bonds)

Historically, broad equities have offered higher long‑term nominal returns than broad bond portfolios, reflecting an equity premium for bearing higher expected volatility and growth risk. Long‑run data for U.S. markets often cite average nominal returns near 9–11% annually for large‑cap equities over the past century and roughly 4–6% for aggregated bond indices, though exact figures depend on sample period, index definitions, and whether dividends/coupons are included.

These long‑term averages mean that, over decades, stocks have generally outpaced bonds in total return, but past performance is not a guarantee of future results and depends on valuation, yields and macro conditions.

Short‑term volatility and sequence‑of‑returns risk

In the short to medium term, equities routinely experience larger drawdowns (e.g., 20%+ corrections), while diversified bond portfolios typically show smaller interim losses. Sequence‑of‑returns risk matters for withdrawals: retirees selling assets after a large equity drawdown lock in losses. For short horizons or immediate liabilities, bonds are often less risky because of lower price volatility and higher capital‑preservation probability.

Periods and exceptions

There are historical windows when bonds outperformed equities for long stretches—often when interest rates fell substantially and bonds issued at higher coupons enjoyed price appreciation, or during severe equity bear markets. Therefore, the general rule (equities higher‑return/higher‑risk) has exceptions depending on start and end dates and macro regimes.

How time horizon changes the risk comparison

Time horizon is central. For short horizons (months to a few years), bonds generally present lower downside volatility and are often viewed as less risky. For long horizons (decades), equities historically offer higher expected real returns that can overcome interim volatility, making them preferable for growth goals like retirement for younger investors.

Put another way: if you need funds within a short window, bonds often reduce the probability of needing to sell at a loss. If you have a long horizon and can tolerate interim volatility, equities typically provide higher expected compound returns.

Correlation and portfolio diversification

Bonds and stocks tend to have low or negative correlations in many market environments, which is why bonds serve as an effective diversifier. In equity downturns, high‑quality government bonds often rally as investors seek safety, reducing portfolio drawdowns. However, correlations increase in some stress episodes (liquidity crises) and certain bond types—high‑yield corporate bonds—may fall alongside stocks when credit spreads widen.

Combining assets with different risk‑return profiles improves risk‑adjusted returns and reduces volatility for a given expected return.

Factors that change the relative risk today

Interest rate environment

When yields are very low, bonds’ income is small and long‑duration exposure is more sensitive to rate rises—making bonds appear relatively riskier in price terms. Conversely, when yields are higher, bonds offer more attractive income and cushion against price drops.

Credit cycle and economic conditions

A weakening economy elevates default risk for corporate borrowers and can widen credit spreads, causing corporate bonds to underperform. Equities may also suffer, but the impact can vary by sector and valuation.

Valuations and expected returns

Current equity valuations (e.g., price‑to‑earnings ratios) and bond yields shape expected future returns. High equity valuations with low bond yields compress the expected excess return of stocks over bonds and affect the perceived risk‑reward tradeoff.

Practical considerations for investors

Goals, risk tolerance and time horizon

Decide whether your primary objective is growth, income, or capital preservation. If capital preservation and low volatility are paramount and your horizon is short, bonds or short‑term fixed income usually represent lower risk. If long‑term growth is the goal and you can accept volatility, equities typically offer better expected outcomes.

Asset allocation and target‑date rules

Common rules like the 60/40 (60% equities, 40% bonds) balance growth and stability. Age‑based heuristics (e.g., percentage in bonds roughly equal to age) are simple starting points but should be tailored to personal circumstances and goals. Regular rebalancing helps maintain target risk exposure.

Choosing between individual bonds, bond funds, and bond ETFs

• Individual bonds: if held to maturity, they provide predictable cash flows and return of principal (absent default), which reduces market‑price risk but requires capital for diversification.
• Bond funds/ETFs: provide diversification and liquidity but trade at market prices daily; their net asset value fluctuates, and there is no maturity guarantee.

Decide based on desired cash‑flow certainty, diversification needs, and liquidity preferences.

Taxes and special bond features

Municipal bonds may offer tax‑exempt interest for residents, improving after‑tax yield for certain investors. Corporate bonds are generally taxable. Consider after‑tax returns, and consult tax guidance for your jurisdiction.

Investment strategies that use both asset classes

Core‑satellite portfolios and liability matching

Use bonds as a core to preserve capital and match known liabilities (e.g., planned spending), while satellites of equities provide growth. Liability‑matching (immunization) strategies use bonds to lock in future cash needs.

Laddering and duration management

A bond ladder staggers maturities across time to reduce reinvestment and interest‑rate risk—when one bond matures, it is reinvested at current yields. Duration management (shorten duration when rates are expected to rise) actively controls sensitivity to rate moves.

Tactical and strategic shifts

Investors may overweight bonds temporarily for defensive reasons (e.g., very high equity valuations, attractive bond yields) or overweight equities for long‑term growth if valuations and macro conditions are favorable. Tactical shifts should be intentional and consistent with risk tolerance.

Common misconceptions and debates

"Bonds are risk‑free"

Only certain sovereign debt in its own currency (e.g., U.S. Treasuries for USD liabilities) approaches the notion of "risk‑free" in default terms. Even so, Treasuries carry interest‑rate and inflation risk. Other bonds (corporate, municipal, high yield) are not risk‑free.

"Stocks are always riskier than bonds"

Risk depends on the metric. Stocks are typically more volatile and more likely to have deep interim drawdowns, but over very long horizons they may better preserve and grow purchasing power. In rare macro scenarios—hyperinflation or sudden and persistent rate spikes—bonds can suffer catastrophic real losses relative to equities.

Risk measurement matters

Volatility (price swings) is not the same as permanent loss of capital or purchasing‑power risk. Which matter most depends on investor goals—short‑term liquidity needs emphasize volatility; long‑term preservation emphasizes real return vs. inflation.

How to evaluate which is "less risky" for you

Practical steps:

• Define your time horizon and liquidity needs.
• Identify your primary objective (growth, income, preservation).
• Stress‑test scenarios: rising rates, recession, inflation, credit stress.
• Check credit quality and issuer characteristics for bonds.
• Diversify across issuers, sectors and maturities; for equities diversify by market cap and geography.
• Consider allocation rules (e.g., target‑date funds or age‑based split) and rebalancing discipline.
• If unsure, consult a licensed professional for personalized advice.

Summary and key takeaways

• Are bonds less risky than stocks? Generally, yes in terms of short‑term price volatility and creditor claim priority: bonds typically show lower day‑to‑day price swings and bondholders are ahead of equity holders in bankruptcy.
• Bonds are not risk‑free: they carry credit, interest‑rate, inflation and liquidity risks, and certain bond types (long‑duration, high‑yield) can be quite volatile.
• Stocks generally offer higher long‑term expected returns to compensate for greater volatility and company failure risk, making them the usual choice for long‑term growth objectives.
• Your horizon, goals and tolerance determine which is "less risky" for you. For near‑term liabilities and capital preservation, bonds often reduce the probability of forced losses. For long‑term growth, equities usually provide better expected outcomes.
• Combining stocks and bonds can reduce portfolio volatility through diversification; use asset allocation, duration management and active rebalancing to match risk to goals.

For secure trading and custody of traditional investment products and ETFs, consider Bitget for a regulated, accessible platform and Bitget Wallet for secure custody solutions.

References and further reading

As of 2026-01-14, according to the following trusted sources:

• NerdWallet — Bonds vs. Stocks: A Beginner's Guide (NerdWallet explains basic tradeoffs between bonds and equities and when investors might favor each).
• Wealthify — Are bonds less risky than shares? (Wealthify discusses risk dimensions and investor horizons.)
• Carson Wealth — Your Guide to Understanding Stocks vs. Bonds (Carson Wealth on allocation and retirement implications).
• Capital Group — Pros and cons of stocks and bonds (Capital Group on diversification and market cycles).
• Synchrony — Stocks vs. Bonds: Key Differences and Strategies Explained (Synchrony on duration, yields and risk management).
• U.S. News / Money — Bonds vs. Stocks: Differences in Risk and Reward (U.S. News on historical returns and tax considerations).
• WealthPursuits — Why Are Bonds Considered Lower Risk Than Stocks? (WealthPursuits on creditor priority and volatility).
• InvestorsFriend — Are Stocks Really Riskier Than Bonds? (Investor perspectives on risk definitions.)
• TheMoneyKnowHow — Are Bonds Safer Than Stocks? (Practical investor guidance.)
• Investopedia — Understanding the Difference Between Bond and Stock Markets (Investopedia on markets, returns and risk metrics).

For more detailed data and academic studies, consult central bank reports, credit‑rating agencies and historical return datasets (e.g., Ibbotson/Dimson/Global Returns).