Why Buy Bonds?

I bought bonds in December for the first time since I started managing my own portfolio. At a time when bond funds have a negative long term return why would I do this?

Driving a 2008 Pajero in 2025 is one way to maximize joy. Buying bonds is another.

I've been buying only VT (VWRA equivalent for Americans) for the past 7 years, before that I used a robo-advisor similar to Sarwa and I still have a small percentage in bonds from that time. By December, my portfolio had gotten to about 1.5% bonds and 98.5% stock.

I have been an advocate for 100% equity, so why the change? Well. My life has changed. I'm no longer actively investing as my income is significantly lower (by choice). I am now approaching the drawdown phase, though I won't need to start living on my investments for some time yet.

Now that my assets are sufficient, I no longer need substantial growth, but I do want downside protection. The difference between 9% growth and 10% growth isn't such a big deal for me now. I am much more concerned now with capital preservation than I was a few years ago.

As a teacher, I needed the growth of a mostly equity portfolio during accumulation. I wouldn't have gotten to FI so quickly if I had started with a 50/50 portfolio. Being a bit of a finance nerd, I was (and still am) very comfortable with volatility. Yet, I want more bonds in my portfolio now.

Why the change of heart? Because investing isn't about winning, it's about not losing.

Bonds aren't in my portfolio to grow. They're in there for the possible but not probable chance that there will be a long period in the near future where stocks underperform bonds. If stocks are underperforming while you're accumulating, as long as you stay the course you're good. Stocks on discount! But if stocks underperform while you're in the drawdown you're at risk of running out of money before you die.

The bonds are essentially insurance to decrease the risk of going broke in retirement.

This article by The White Coat Investor explains much of my reasoning for investing in almost 100% equities, and also for increasing (slightly) my bond allocation now that I'm nearing the drawdown phase.

While I only increased my bond allocation to about 3% in December (by reinvesting my end of year dividends). I am planning to get my bond allocation up to around 10% over time. I also feel good about buying bonds while they're cheap, knowing that those are there for downside protection in the off chance that stocks go very low for years on end.

But what about you? What should you do? If you're a new investor, I suggest starting off with at least 20% in bonds for the first two years. This is because when you first start, you don't yet have years of growth in your portfolio. Your entire portfolio value is money you saved up from your earnings. It's very difficult to watch that value fluctuate when it's your hard earned cash. Once you've been in the market for a while, you will likely have a few years of growth and a much better understanding of your actual risk tolerance. At that point feel free to increase your stock allocation as you see fit.

However, when you get closer to drawdown, you'll also want to reassess your risk tolerance as I have. This is lifecycle financial planning. Changing your asset allocation based on your life circumstances is a key part of staying the course over the long run.

If you want some help navigating what's best in your particular circumstances, why not schedule a free call with me to discuss?