The case against bonds is straightforward: stocks return more over the long run. Over virtually any 20-year period in U.S. history, a 100% equity portfolio has outperformed a portfolio with bond exposure. If you have a long enough time horizon, why dilute your returns with bonds?
Because investing is not just about maximizing expected return. It is about managing the risk that you sell at the wrong time — and history shows that investors who experience large drawdowns often do exactly that. Bonds do not make your portfolio perform better on average. They make it easier to stay invested when markets are down 30%.
What Bonds Actually Do in a Crash
In a typical equity market sell-off, investors flee risk assets and move into U.S. Treasury bonds as a safe haven. This flight to safety causes bond prices to rise as stock prices fall — a negative correlation that partially offsets portfolio losses. During the 2008 financial crisis, the S&P 500 fell approximately 37%. The U.S. Aggregate Bond Index gained approximately 5.2% over the same calendar year.
In the 2020 COVID crash, stocks fell 34% in 33 days. Long-term Treasuries gained roughly 20% over the March to May period as investors sought safety. A 60/40 portfolio lost significantly less than a 100% equity portfolio and recovered faster because the bond gains provided capital to rebalance into equities at lower prices.
The 2022 Exception — and What It Means
It is important to acknowledge that 2022 was an unusual year for bond investors. Both stocks and bonds fell simultaneously — the S&P 500 declined approximately 18% and the U.S. Aggregate Bond Index fell approximately 13%. This happened because the Federal Reserve raised interest rates at the fastest pace in 40 years to combat inflation, and rising interest rates push existing bond prices down.
The 2022 experience does not invalidate the case for bonds. It illustrates that bonds protect against equity risk, not interest rate risk. In environments of rapid rate increases, short-duration bonds or Treasury Inflation-Protected Securities (TIPS) provide better protection than long-duration bond funds. Investors should understand what their bond ETF holds and its average duration when considering rate sensitivity.
BND vs AGG: The Two Flagship Bond ETFs
BND (Vanguard Total Bond Market ETF) and AGG (iShares Core U.S. Aggregate Bond ETF) are functionally nearly identical. Both track the Bloomberg U.S. Aggregate Bond Index, hold approximately 10,000 investment-grade U.S. bonds across government, corporate, and mortgage-backed securities, and charge 0.03% annually.
The practical differences are negligible for most investors. BND has slightly higher average duration (about 6.5 years vs 6.2 years for AGG), meaning BND is marginally more sensitive to interest rate changes. Both distribute interest income monthly. Choose whichever is available at lower cost on your brokerage platform — at identical expense ratios, it almost never matters which you own.
How to Think About Bond Allocation by Age
A common starting framework is to hold your age in bonds — a 30-year-old holds 30% bonds, a 60-year-old holds 60% bonds. In practice, this is considered conservative by modern standards given longer life expectancies and the extended compounding runway even at retirement.
A more aggressive but reasonable alternative used by many target-date funds: hold (age minus 20)% in bonds. A 30-year-old would hold 10% bonds. A 50-year-old would hold 30% bonds. A 65-year-old would hold 45% bonds. This keeps more equity exposure during the higher-return earlier decades while progressively reducing sequence-of-returns risk as retirement approaches.
The Rebalancing Dividend
There is a frequently overlooked benefit of holding bonds alongside stocks: rebalancing. When stocks fall sharply and bonds hold steady or rise, your target allocation is violated — you become underweight stocks relative to your target. Rebalancing means selling bonds and buying stocks at depressed prices, systematically forcing a buy-low behavior that most investors find emotionally impossible to execute otherwise.
This rebalancing premium — the additional return generated by mechanically selling what has risen and buying what has fallen — has historically added 0.3% to 0.5% per year to long-run portfolio returns. It is not guaranteed, but it is one of the few documented ways to add value without incurring higher risk. You cannot capture this premium if you hold 100% equities.