For some investors, this asymmetry creates a case for holding government bond funds, because as a new paper by Magnus Dahlquist at the Stockholm School of Economics and colleagues show, such funds can protect us against asymmetric risks.
They do so in two ways. First, he says, government bond returns, unlike equities', are positively skewed; whereas equities have a significant chance of big losses, this is less true for bonds. Secondly, bonds are likely to do well in very bad times for equities, because heightened risk aversion and the threat of recession causes a flight to quality.
On both counts, says Mr Dahlquist, bond funds are attractive to disappointment-averse investors - those for whom a given loss gives more pain than a similar-sized gain gives pleasure. Such investors, he says, can use bond funds to protect against asymmetric risk.
There are, however, three caveats here.
First, this only applies to investors who would be disappointed if returns fall short of modest expectations. If you'll be disappointed with anything less than, say, a 10 per cent annual return, you need a massive weighting in equities. (You also need to reduce your expectations - but that's another story.)
Secondly, this only applies to top quality bond funds - those investing in gilts and AAA-rated bonds. Lower quality bonds are negatively skewed because they face big losses if credit risk increases - as would happen in a recession - or if a sell-off in southern European bonds causes investors to dump second-rate bonds generally.
Thirdly, this protection from downside risk comes at a price. For one thing, bonds would probably suffer if short-term interest rates rise more sharply than expected. In this sense, bond funds are especially unsuitable for investors who hold lots of floating rate debt - such as buy-to-let mortgages - as they would compound losses in other areas of your portfolio. Also, although top quality bonds would probably do well in the event of a financial crisis - whether triggered by a Greek exit or anything else - there are many scenarios in which bonds could do badly at the same time as equities.
In this sense, bond funds do offer insurance - but like all forms of insurance, this comes at a price.
