Bonds Should Protect You When Stocks Don't
While bonds may be boring, they can be a reliable source of security during times of economic and stock market uncertainty. Because adverse stock market conditions are largely unpredictable, it is always best to have a long-term allocation in safer investments, including high-quality bonds.
Why we own bonds in the first place
We believe the main reason to own bonds is to hedge the risk of stock market declines. They are the part of your portfolio that generally holds its value when stocks are falling.
While bond prices do ebb and flow, bonds are generally considered safer investments because they do not fluctuate in value as much as stocks. That belief shapes everything about how we build bond allocations. If a bond investment introduces risks that are highly correlated with the stock market, it defeats the purpose of owning it.
Broad diversification, high quality only
We use index funds for the bond portion of client portfolios. Broad-based market index funds give diversified exposure to the various components of the domestic bond market — government, corporate, and mortgage bonds. Across each of these sectors, we focus only on high-quality bonds.
We generally don’t use “high yield” or “sub-prime” instruments in our core bond portfolios, as they incur risks that are highly correlated to the stock market.
Keeping Costs and Complexity Where They Belong
Active bond management is even harder to justify than active stock management. The bond market is large, liquid, and well researched. The average active bond manager doesn’t reliably beat an index, and the ones who have often taken hidden risks to do it.
Bond index funds let us capture broad market returns at very low cost, without the risk of a manager making a concentrated bet that looks smart until it doesn’t.
Where bonds fit in your overall allocation
The right amount of bond exposure depends on your situation, time horizon, income needs, tax picture, and emotional reaction to stock market volatility. For most clients, bonds play a stabilizing role: less thrilling in a bull market but invaluable when stocks are down 30% or more.
We also think carefully about where to hold bonds — taxable or tax-deferred accounts — because that decision can meaningfully affect your lifetime tax bill. Most clients don’t need more taxable income, and sheltering bond interest in a retirement account is often the right call.
Let us show you how a disciplined bond approach fits into your overall plan.
Frequently Asked Questions
Do you use municipal bonds?
Yes, for clients in higher tax brackets where the after-tax yield on municipal bonds is competitive. We evaluate muni allocations based on each client’s tax situation rather than as a default. Asset location — holding the right bonds in the right accounts — is an important part of that analysis.
What about Treasury Inflation-Protected Securities (TIPS)?
While we won’t rule out TIPS, they usually aren’t a core part of our bond allocation. Despite their name, TIPS haven’t always had the best record of hedging inflation.
Aren't bonds risky when interest rates are rising?
They can lose value in the short term when rates rise — that’s a real risk. But we’re not trying to time interest rates, and neither should you. The role bonds play in reducing portfolio volatility and providing a counterweight to stocks doesn’t disappear when rates rise. We manage duration carefully to keep that risk within appropriate bounds.
Disclaimer: Investing in securities involves a risk of loss. Past performance is never a guarantee of future returns.