Why bonds are likely here to stay

I saw this come to life in several ways over the past few years. As the real estate market skyrocketed, there were reports of homeowners waiving inspections, leading to buyer's remorse. And in the rising interest rate environment, investors unaccustomed to the dynamics of bond returns reconsidered their fixed income investments over concerns bonds may be losing real value. Despite yields within bond funds and ETFs (exchange-traded funds) also surging, it was no consolation for those seeing losses materialize in their portfolios.

No matter what's going on in the markets, it's always worthwhile to return to your investment plan. As a leader on our Portfolio Construction & Markets team and partner with our advisors, one of the ways I help our clients stay the course is by reminding them of the role a diversified bond approach plays in a well-balanced portfolio.

Here are 4 timeless strategies that may help ease your bond concerns and keep you aligned with your long-term goals.

Understand how bonds fit into your plan

Bonds play an important role in your total portfolio as both a key source of stability, or ballast, as well as a source of income compared with stocks. But like stocks, it's important to make sure bonds are appropriately diversified to reduce risk.

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. True, there have been recent counterexamples, but the exception doesn't invalidate the rule. 

When stock prices are down, bonds can offer shock absorption

When markets are unsteady, investors often want to move from stocks to bonds or even cash. And when market confidence is high, they may consider flooding back to stocks. This is part of the reason for the observed inverse relationship between stock and bond prices, but like so much else in investing, it's not a firm rule.

Diversification is important and can help absorb shocks from a volatile market. Bonds spread out your portfolio's risk and help reduce the overall chance of loss. Higher bond yields can offer a softer cushion on the downside and a stronger base to grow on the upside. Bond yields tend to hold up better than cash yields when interest rates start declining given their longer time to maturity.

Bond returns offer more secure inflation protection than cash

Some investors might consider selling bonds to move into "safer" cash when yields rise and bond prices drop. But before you take any action, remember the importance of each asset class in your target asset 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. Investment returns exceeding inflation is key to preserving real wealth over time.

Check out these portfolio allocation models to help you decide how much to invest in bonds and stocks.

Focus on diversification to manage risk

One of my jobs on the Portfolio Construction & Markets team is to be a student of the markets and educate investors on the value of bonds over time and the importance of diversification to manage portfolio risk. This is why I often encourage clients to spread investments across and within asset classes.

For example, what if you had a diversified stock portfolio but only individual bonds for fixed income assets? In this scenario, I might suggest you supplement your portfolio with bond funds diversified among different issuers, qualities, and maturities while also carefully considering your tax circumstances.

It can take time and capital to build a well-diversified portfolio of individual bonds. And those individual bonds will fluctuate in value much like a mutual fund or ETF. Broad-based bond funds are a simple and effective way to get broad exposure to the U.S. and international bond markets. Investors may consider either passively managed index strategies or opt for active solutions in search of a slight edge.

Check out our bond funds

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 our clients express concern about these things, I encourage them to take a step back, look at the bigger picture, and consider why they'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 and built to weather whatever market conditions come your way.

Keep your eyes on the road ahead

When you're driving down the highway, you need to keep your eyes on the road ahead.

The same idea applies to investing. Instead of reacting to market volatility, news, and trends, it's important to keep your long-term goals in sight and make sure your portfolio stays aligned with your target asset mix.

Too often, we hear market-timing success stories—a friend or family member bought a hot stock and reaped the benefits. These stories can leave us feeling like we missed the latest investment trend. But we rarely hear about investment misses, and they're numerous. Maybe that same friend put all their money into a few stocks and lost a portion of their funds because they didn't have a well-balanced portfolio.

When stock and bond values are down, you may be tempted to abandon diversification or rebalancing your portfolio because they "didn't work." However, straying from your asset mix in times like these can compromise your portfolio's long-term strategy.

To ensure our clients remain aligned with their target mix and risk appetites, we continually monitor their portfolios and rebalance when necessary. This involves buying stocks or bonds when the allocation moves too far away from the target. We also emphasize the importance of consistently adding to the portfolio during the accumulation years.

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 or hinder your progress toward your goals.

Not sure if you need to rebalance your portfolio?

Looking for a framework to navigate current 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.