“I’m worried about the bond market,” a friend who’s close to retirement texted the other day. After reading the hard-to-miss headlines about the weakness in global bonds, she was concerned about the fixed-income allocation that she has been building out over the past several years at the urging of her advisor.
I didn’t respond, “You’re doing it wrong!” But the exchange did make me wonder if some people might have misguided ideas about bonds.
Volatility Is Much Lower Than for Stocks
For one thing, notwithstanding the recent headlines, bonds’ volatility is almost always going to be mild alongside the fluctuations that stocks experience. For example, on Sept. 1, 2026, a day when bonds grabbed the top headline on The Wall Street Journal’s website, total bond market index funds were down about half a percentage point. Returns for the year to date were just barely in the red. As the saying goes, “A bad year in the bond market is like a bad day in the stock market.”
Of course, the 2022 bond rout is fresh in everyone’s minds: Amid the Federal Reserve’s seven interest rate increases that year, the typical intermediate-term bond fund shed about 13%, and long-term Treasury bonds dropped nearly 30%. But those were the worst bond market losses in history, exacerbated by the fact that starting yields were so low at the time of the selloff. When bond yields go up, hurting prices of already-existing bonds with lower yields attached to them, investors still receive whatever interest the bond pays; those interest payments help offset price declines. But with 10-year Treasury yields of about 1.5% in early 2022, yields provided limited cover for the interest rate-related losses in bond prices. In 2026, with 10-year Treasury yields at roughly 4.8%, bond investors have more protection in the form of higher yields.
The Goal Is Return of Capital, Not Return on Capital
Another point that can get lost in the shuffle is why you hold bonds in the first place. Stocks are your growth engine, but bonds and cash are the sleep-at-night portion of your portfolio, designed to hold their value or lose just a bit when stocks are down. So, if the potential for losses in your bond portfolio is stressing you out, that can be a sound reason to change it up so that it doesn’t. You might give up some return potential in the process, but that’s OK. Your goal for your bond portfolio is “return of capital, not return on capital,” as the saying goes. Sure, you probably hope to earn a bit of return on your bonds, perhaps enough to outrun inflation. But return on capital is why you hold stocks.
One of the simplest ways to help ensure that your bond holdings will land in the black in the runup to a specific spending need is to use individual bonds, especially Treasury bonds and Treasury Inflation-Protected Securities, and hold them to maturity. This approach also allows you to lock in a specific yield, whereas bond mutual funds’ yields will ebb and flow based on prevailing market yields. Building a laddered portfolio of Treasury Inflation-Protected Securities is a popular strategy to address retiree spending needs.
Alternatively, you can use mutual funds or exchange-traded funds for the job. That approach doesn’t provide the same type of principal protection as buying and holding individual bonds to maturity, but it’s less rigid and can make sense for people with less precise spending goals.
If you go with bond funds, the best way to ensure their “sleep-at-night” functionality is to be willing to give up some return potential in exchange for more stability. That means that for money you’ll need to spend within the next few years, stick with cash instruments like money market funds or high-yield savings accounts. For spending horizons of three to 10 years, short- and intermediate-term high-quality bond funds are a solid option. They have some potential for losses, but if you match the bond fund’s duration to your anticipated holding period, your bond fund is likely to be in the black when it comes time to needing your money.
Note that my model portfolios don’t include allocations to long-term bonds. The reason is that the portfolios all consist of mutual funds and ETFs, and long-term bond funds carry substantially higher volatility than intermediate-term bond funds. That can make them difficult to own. In a similar vein, my model portfolios also emphasize high-quality fixed-income investments for Bucket 2. Allocations to lower-quality bond types like high-yield and bank loans, while offering higher yields than high-quality investments, tend to exhibit more sensitivity to the economy and the equity market than higher-quality bonds.
This Is Not the Spot to Be a Tactician
Finally, a persistent misconception with bonds is that this is a reasonable spot to be tactical. Even as investors seem to have come around to not timing their entrance and exit from stocks, I’ve often heard from financial advisors and individual investors who are inclined to make tactical moves: shifting into shorter-term bonds or even cash when it appears higher rates are in the offing, or back into longer-duration bonds when they think yields are at a high-water mark.
My advice: Get out of the timing business. Most professional bond-fund managers don’t make active bets regarding their portfolios’ interest rate sensitivity, so it’s hard to see why individual investors would be able to gain an advantage with those types of activities.
Morningstar’s “Mind the Gap” research provides a stark reminder that investors in higher-risk asset classes—sector funds, crypto, and so on—aren’t the only ones who give up returns due to ill-conceived timing decisions; bond investors do, too. And in a relatively low-returning asset class like bonds, those poor timing decisions can take an even bigger bite out of returns, on a percentage basis, than is the case with higher-returning assets like stocks.
For the 10-year period through December 2025, for example, the typical taxable bond fund earned 3.0%, but the typical investor in such a fund earned just 2.1%. (Investors in taxable-bond ETFs fared even worse!) That’s not to say that investors’ bad luck timing bond funds had a tactical underpinning; they may have wanted to derisk for the long term, but their entry points were ill-timed. But focusing on your individual situation and not taking more risk than you need to are key ways to avoid unforced errors with your bond portfolio.
