Summary
Learn how investing in bonds can help offset inflation and complement your long-term portfolio.
How bonds can strengthen your portfolio
When investing for future goals, it's important to craft an enduring plan that inspires confidence and discipline. However, sticking to that plan isn't always easy, especially when economic factors tempt us to make impulsive decisions or question our long-term investing strategy. Recall 2022—when the Federal Reserve raised interest rates to combat high inflation. Bond investors experienced losses as yields rose and bond prices fell. Some may have adjusted their portfolios in response, seeking either more stability or potentially higher returns in other asset classes.
It's more common for investors to experience volatility in stocks—and they may be more prepared to stomach those ups and downs—but much less so when it comes to bonds. But each asset class has a role in a diversified portfolio. Understanding and incorporating this principle can help you maintain a long-term perspective and stick with your investment strategy.
Here are 4 reminders about the value of bonds that can keep you aligned with your long-term goals.
1. Bonds play an important role as a source of both stability and income
Bond prices tend to move in the opposite direction of stock prices. When stock prices are down, bond prices tend to be up, and vice versa. Bonds spread out your portfolio's risk and help reduce the overall chance of loss. Higher bond yields can offer a “coupon wall” to soften the downside and a stronger base to grow on the upside. Just as with any other asset class, it's important to make sure your bond holdings are appropriately diversified to reduce risk.
2. Bond returns may offer more secure inflation protection than cash
In 2022, many investors sold bonds to move into "safer" cash when yields rose and bond prices dropped. But keep in mind that each asset class has a part to play in your target portfolio mix. In addition to offering more balance against stocks, bonds have shown themselves to be much better at keeping up with inflation over time compared with cash.
Since 1975—50 years—annual bond total returns have beat inflation 71% of the time compared to only 57% of the time for cash. The after-inflation return for bonds averaged 3.1% versus only 0.6% from cash.1
Check out these portfolio allocation models to help you decide how much to invest in bonds and stocks.
3. Diversifying your bond portfolio can help manage risk
Broad-based bond funds and ETFs are a simple and effective way to get exposure to the U.S. and international bond markets. A single bond fund may hold hundreds—or thousands—of individual bonds, potentially offering diversification across different issuers, qualities, and maturities. Investors may consider either passively managed index strategies, actively managed funds, or a mix of both.
It can take time and capital to build a well-diversified portfolio of individual bonds. If you only have individual bonds for fixed income assets, you might consider supplementing your portfolio with bond mutual funds or ETFs.
4. Focus on what you can control
It's natural for economic factors to test your resilience and discipline, but market volatility shouldn't drive major changes to your portfolio. When you're concerned, take a step back, look at the bigger picture, and consider why you're investing in the first place.
You can't control the economy, but you can control your asset allocation. Stick to Vanguard's Principles for Investing Success (PDF) and focus on a balanced portfolio aligned to your personal goals.
Advice to navigate difficult investment decisions
At Vanguard, we stress-test your portfolio against thousands of market scenarios and offer one-on-one support whenever you need to discuss life changes or talk things through.
Investing dos and don'ts
When the markets get rough, take the time to revisit your goals and make sure your portfolio remains appropriately balanced.
74%
74% of our low-cost bond funds performed better than their peer-group averages over the past 10 years.2
Ready for a custom plan that can help you withstand market uncertainty? We're here to help you.
Keep your eyes on the road ahead
When stock and bond values are down, you may be tempted to abandon diversification or skip rebalancing your portfolio because they "didn't work." However, straying from your asset mix at those times can compromise your portfolio's long-term strategy.
This is why it's so important to take advantage of rebalancing and reinvestment opportunities—so you don't miss out when markets turn around and hinder your progress toward your goals.
Not sure if you need to rebalance your portfolio?
Looking for a framework to navigate market volatility? Vanguard's Portfolio Watch tool can help you determine if you've drifted from your target mix. You can access it directly by logging in to your Vanguard account and selecting Portfolio Watch.
You can also include non-Vanguard funds to get a more holistic view of your accounts and determine whether you need to make any adjustments. To do this, select Add an outside investment at the bottom of your Holdings page.
Gain insights from Vanguard experts
1Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index. Bonds are represented by the Bloomberg U.S. Government/Credit Intermediate-Term Index for 1975 and the Bloomberg US Aggregate Bond Index from 1976 to present. Cash is represented by the U.S. Treasury T-Bill 90-Day Static Index. Sources: Vanguard calculations, using data from Morningstar, Bloomberg, and the U.S. Treasury as of December 31, 2024.
2For the 10-year period ended June 30, 2025, 6 of 6 Vanguard money market funds, 75 of 102 Vanguard bond funds, 21 of 23 Vanguard balanced funds, and 171 of 193 Vanguard stock funds—for a total of 273 of 324 Vanguard funds—outperformed their Lipper peer-group averages. Results will vary for other time periods. Only mutual funds and ETFs (exchange-traded funds) with a minimum 10-year history were included in the comparison. Source: LSEG Lipper The competitive performance data shown represent past performance, which isn't a guarantee of future results. View fund performance
For more information about Vanguard mutual funds or Vanguard ETFs, obtain a mutual fund or an ETF prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information are contained in the prospectus; read and consider it carefully before investing.
All investing is subject to risk, including the possible loss of the money you invest. Diversification doesn't ensure a profit or protect against a loss.
Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.
Bond funds are subject to interest rate risk, which is the chance bond prices overall will decline because of rising interest rates, and credit risk, which is the chance a bond issuer will fail to pay interest and principal in a timely manner or that negative perceptions of the issuer's ability to make such payments will cause the price of that bond to decline.
Neither Vanguard nor its financial advisors provide tax and/or legal advice. This information is general and educational in nature and should not be considered tax and/or legal advice. Any tax-related information discussed herein is based on tax laws, regulations, judicial opinions, and other guidance that are complex and subject to change. Additional tax rules not discussed herein may also be applicable to your situation. Vanguard makes no warranties regarding such information, or the results obtained by its use, and disclaims any liability arising out of your use of, or any tax positions taken in reliance on, such information. We recommend that you consult a tax, legal, and/or financial advisor about your individual situation.
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