Conventional wisdom says that as you save for retirement, you should gradually increase your investment in bonds.
Bonds are supposed to be safe, predictable and boring — the perfect antidote to fickle stocks.
But bonds have been far from safe lately: Between August 2020 and October 2022, the Bloomberg Bond Index plunged 18%. Even now, the index remains about 10% below its 2020 high.
The bond market crash has some investors wondering whether it’s time to rewrite the rules of retirement savings.
“It’s been a really tough decade,” says Ashley Folkes, a certified financial planner in Birmingham, Alabama.
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Recently, Folkes has seen clients pull out of the bond market and opt for alternative investments that he sees as safer and less likely to lose value with each passing month.
Bonds betrayed investors in 2022
Bonds are supposed to provide a hedge against stocks: when stocks fall, bonds rise — or at least, not by as much.
Financial markets seemed to turn upside down in 2022. Stocks fell 18.6% that year, as measured by the S&P 500 index, while bonds fell 13.7%, according to the Vanguard Total Bond Market Index. Inflation pushed that figure up to 20%, the worst bond return in 1997, according to a Nasdaq analysis.
The decline in bond values ​​has raised the question in the financial world: “Is the 60/40 rule dead?”
The rules dictate that workers nearing retirement or those looking for investment stability should aim to have 60% of their holdings in stocks and 40% in bonds.
Stocks provide a solid return, while bonds provide a modest but steady income and act as a buffer when stock prices fall.
Most advisers say the rule isn’t dead, even after the events of 2022.
“The rules still apply. 2022 was the exception,” said Jonathan Lee, senior portfolio manager at U.S. Bank.
2024 is a ‘good time to hold bonds’
In fact, investment advisors are saying now is a good time for bonds. For the same reasons that bonds felt like a bad investment in 2022, experts say they’re also a good investment in 2024.
That year, the Federal Reserve embarked on a dramatic campaign of interest rate hikes in response to inflation that had reached its highest level in 40 years.
Bond funds tend to fall in value when interest rates rise or inflation spikes.
“The aggressive nature of these rate hikes has led to a sharp decline in bond values,” Lee said.
When interest rates rise, the yields on new bonds tend to rise as well, making older bonds less attractive because they offer lower yields. This cycle causes bond funds to fall in value.
As inflation rises, bonds become less attractive because their value falls. If a bond’s interest rate is 4% and inflation reaches 5%, the bond’s effective rate of return becomes negative.
The bond market looks very different today: Inflation is moderating, interest rates remain high, and yields on new bonds are stable.
“With bond rates outpacing inflation for the first time in years, this is a really good time to be in bonds,” said Maria Bruno, senior financial planning strategist at Vanguard.
Many forecasters expect the Federal Reserve to begin cutting interest rates later this year, where they are at their highest in 23 years.
When interest rates fall, new bonds generally become less attractive than older ones. This tension should give bond funds a boost.
“There’s a lot of unrealized value in these funds,” Lee said.
Theodore Haley, a certified financial planner in Beaverton, Oregon, put it more emphatically: “Bonds are more attractive than they’ve been in more than a decade.”
Bruno said Vanguard expects the bond market to rise about 5% annually over the next decade.
In other words, analysts are predicting how the bond market will perform over the next few years.
“For those approaching retirement or who have retired, bonds are likely to be more attractive now than they would be before 2022,” Lee said.
Bonds are a retiree’s best friend, advisers say
Bonds has long enjoyed a reputation as an ally of retirees.
Investment advisers typically advise Americans to invest heavily in stocks when they’re younger and then gradually shift to bonds as they approach retirement.
The theory is this: stocks will outperform bonds over the long term but will be more volatile; bonds will provide lower but more stable returns.
“The point of bonds is stability and providing income through interest payments,” said Todd Jablonski, global head of multi-asset investing at Principal Asset Management. “That’s not the same as growth, so your expectations are going to be different.”
Jablonski suggests precise targets for bond holdings in your investment portfolio based on age: 21% bonds at age 50, 43% bonds at age 60, and 59% bonds at age 70.
Some investors buy individual bonds. Many of us invest in the bond market through mutual funds or exchange-traded funds, buying shares in a bond-biased investment pool. Another option is a target retirement fund, which is usually set up to gradually increase its bond holdings over time.
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Not all investors are the same. The rules don’t apply to everyone.
But investment advisors warn that not all investors are the same, so the 60-40 rule and the portfolio goals suggested above may not work for everyone.
Experts say people who count on large sources of income in retirement, such as a workplace pension or apartment rental business, can probably get away with having fewer bonds in their retirement accounts.
Similarly, billionaires who expect to pass on the bulk of their family fortunes to their children can probably afford to rely heavily on stocks.
And certain types of aggressive, risk-tolerant investors wait until retirement to start moving their savings into bonds. This strategy can maximize stock market returns. But it can also backfire, especially if you retire when stocks are falling.
“You can’t wait until you retire to be more conservative,” says Keith Singer, a certified financial planner in South Florida.
