Bonds are boring. The returns are low. So why do all investment professionals say every portfolio needs them? [1]
What Are Bonds?
A bond is a debt instrument. It’s a promise by a government or corporation to borrow money and pay interest [1]. If stocks represent ownership of a company, bonds are loans to it.
Why Bonds Belong in a Portfolio
1. Volatility Buffer
When stocks crash, bonds typically stay stable or rise. During the 2008 financial crisis, US Treasuries returned +5.2% while the S&P 500 fell -37% [2].
2. Predictable Income
Coupon interest is paid on a regular schedule. Useful as living expenses in retirement.
3. Rebalancing Effect
Selling bonds to buy stocks during a stock market decline — rebalancing — improves long-term returns [3].
Which Bonds to Buy?
- US Treasuries — Safest option
- Investment-grade corporate bonds — Slightly higher yield
- TIPS — Inflation-linked
- Bond index fund (BND) — Diversification + low cost
What Bond Allocation for a 30-Year-Old Teacher?
An aggressive formula: age minus 20 = bond allocation percentage. At 30, that’s 10%. For a conservative approach, use your age (30%). Since a teacher’s pension is effectively a bond-like asset, I maintain only 15% in bonds in my personal investments.
References
- Bogle, J. C. (2017). The Little Book of Common Sense Investing. Wiley.
- Vanguard Research. (2019). Asset allocation and portfolio construction.
- Bernstein, W. J. (2010). The Investor’s Manifesto. Wiley.
Disclaimer: This article is for educational purposes only and does not constitute financial advice. Investment decisions should be made with the guidance of a qualified financial advisor.