How Risky is Investing in The Total U.S. Bond Market?

Let’s say that we use the Vanguard Total Bond Market Index Fund Investor Shares to measure the performance of the total U.S. bond market. In that case, if we combine all of the fund’s annual returns, then the total U.S. bond market has grown at an average rate of 5.06% each year.

Now, risk can be thought of as the amount of variation around this average rate of return, and the statistical term that is used to describe this variation is known as standard deviation. So, with that said, if we take all of the fund’s annual returns and plug them into the appropriate formula, the standard deviation of the total U.S. bond market is 5.43%.

Alright. With these two numbers, we can now start to get a sense of the risk that’s involved in investing in the total U.S. bond market.

So, first of all, you can expect that 68% of the time, the annual return of the total U.S. bond market will fall within one standard deviation. In other words, if you have an investment time horizon of 50 years, then you can expect that in 34 of those years, the rate of return for the total U.S. bond market will be between -0.37% (5.06% – 5.43%) and 10.49% (5.06% + 5.43%) each year.

At the same time, though, those aren’t the only results you can expect. You see, in addition to this, annual returns can also fall outside of one standard deviation, but within two standard deviations.

And in this case, returns will stay within two standard deviations 95% of the time. So, to put it another way, with the same investment timeframe of 50 years, you can expect that in about 47 of those years, the rate of return for the total U.S. bond market will be between -5.8% (5.06% – 2×5.43%) and 15.92% (5.06% + 2×5.43%) each year.

And on top of that, returns can even be outside of two standard deviations, but within three standard deviations. Here, results will fall within three standard deviations 99.7% of the time. So once again, if you have an investment time horizon of 50 years, you can expect that in about 49 of those 50 years, the rate of return for the total U.S. bond market will be within -11.23% (5.06% – 3×5.43%) and 21.35% (5.06% + 3×5.43%) each year.