Every time the market takes a sharp turn, many investors have the same reaction: Get out of stocks and move everything somewhere safer.
Joy Dow, wealth management advisor with WiseFit Wealth Management, a Northwestern Mutual affiliate, said bonds can be a valuable part of a portfolio, but moving everything into them isn’t usually the best solution.
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Smart Planning or Emotional Panic?
Shifting some money into bonds can make sense as retirement approaches, especially if you need a more predictable source of income to cover upcoming expenses. But there’s a difference between making a thoughtful adjustment and reacting out of fear.
“It becomes emotional panic when the decision is driven mainly by fear of a market decline rather than your timeline, income needs and risk tolerance,” Dow said.
Selling stocks after the market drops can turn paper losses into real ones, leaving you with less invested when the market eventually rebounds. Before making any big changes, Dow suggested taking a closer look at when you’ll need your money and how much income your portfolio needs to generate.
What a Bonds-Only Portfolio Really Looks Like
Dow offered a hypothetical example: A $1 million portfolio earning a 4% yield would generate about $40,000 a year before taxes, assuming the yield stayed the same. That figure represents income, not a guaranteed total return, and it doesn’t account for changes in the portfolio’s value.
Bonds aren’t risk-free, either.
“In 2022 we saw a negative bond market at the same time as a massive stock pullback,” Dow said. When interest rates rise, bond prices can fall. Inflation can also eat into the purchasing power of the income those bonds provide.
Whether $40,000 a year is enough depends on your expenses and other sources of income, including Social Security or a pension.
Why Interest Rates Shouldn’t Drive the Decision
Higher yields have made bonds more attractive for income than they were just a few years ago. Still, Dow cautioned against reshaping an entire portfolio based on interest rates alone. Cash or short-term, high-quality bonds can make sense for money you’ll need in the near future. But savings intended to support you for decades may still need the growth potential that stocks offer.
Bond duration is another factor worth considering.
“Longer-duration bonds generally have larger price swings when interest rates change,” Dow said.
