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Understanding investment types

Why bonds are likely here to stay

Learn how investing in bonds can help offset inflation and complement your long-term portfolio.
9.4 min read
March 05, 2024
Understanding investment types

When investing for the future, it's important to craft a sustainable and enduring plan. However, sticking to that plan isn't always easy, especially when economic factors drive us to make impulsive decisions or question our long-term investing strategy.

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.

Investing dos and don'ts

When the markets get rough, I take the time to revisit my clients' goals and make sure their portfolios remain appropriately balanced for their age, time horizon, and risk tolerance.


Create clear goals and choose a well-balanced mix of assets that aligns with your risk/return profile.

Maintain a long-term, disciplined investing approach.

Keep your costs low by investing in funds with low expense ratios and rebalancing your portfolio in a tax-efficient way.


Focus on investment fads or individual stocks or bonds, especially ones that are trending. 

Follow market-timing advice or try to make quick money in a short amount of time.

Rebalance too frequently—you could end up with more capital gains taxes than you bargained for.    


89% of our low-cost bond funds performed better than their peer-group averages over the past 10 years.1

Ready for a custom plan built to last? We're here to help you.

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.

Partnering with you to navigate difficult investment decisions

Working with Vanguard Personal Advisor® gives you anytime access to advisors who are fiduciaries, whose duty is to act in your best interest. 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 just talk things through.

Your goals are our goals

We're by your side to help you feel confident about your future.

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1For the 10-year period ended December 31, 2023, 6 of 6 Vanguard money market funds, 82 of 98 Vanguard bond funds, 21 of 23 Vanguard balanced funds, and 172 of 188 Vanguard stock funds—for a total of 281 of 315 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: Lipper, a Thomson Reuters Company. The competitive performance data shown represent past performance, which isn't a guarantee of future results. View fund performance


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.

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.

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.

Vanguard's advice services are provided by Vanguard Advisers, Inc. ("VAI"), a registered investment advisor, or by Vanguard National Trust Company ("VNTC"), a federally chartered, limited-purpose trust company.

The services provided to clients will vary based upon the service selected, including management, fees, eligibility, and access to an advisor. Find VAI's Form CRS and each program's advisory brochure here for an overview.

VAI and VNTC are subsidiaries of The Vanguard Group, Inc., and affiliates of Vanguard Marketing Corporation. Neither VAI, VNTC, nor its affiliates guarantee profits or protection from losses.

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