Skip to main content
Other Assets

Bonds in a Portfolio

Pomegra Learn

Bonds in a Portfolio

The conventional wisdom says bonds are ballast. They're the dry powder in your portfolio—not exciting, not the source of your wealth, but essential for stability. This chapter explores whether that wisdom still holds and, if it does, how to size your bond allocation.

For most of the post-2000 era, bonds justified their place. When stocks crashed in 2008, 2015, 2018, and 2020, bonds either rallied or held steady. They provided the stability that allowed investors to rebalance at the bottom instead of panic-selling. The 60/40 portfolio (60% stocks, 40% bonds) became the default recommendation, and with good reason: it delivered about 8% annualized returns from 1980 to 2021, with roughly half the volatility of an all-stock portfolio.

But 2022 broke that narrative. Inflation surged, the Federal Reserve raised rates aggressively, and for the first time in two decades, stocks and bonds fell together. A 60/40 portfolio lost 16%. The ballast failed.

More subtly, bond yields have changed the math. In 2020, a 10-year Treasury yielded 0.5%. In 2025, it yields roughly 4.3%. Higher yields mean lower future bond returns, which means the return differential between stocks (8–10% expected) and bonds (4–5% expected) is widening. For a 40-year-old saver, that's a problem. For a 65-year-old retiree, it's a crisis—a 4% bond return can't sustain a 4% withdrawal rate.

This chapter is built around a central insight: bond allocation is not one-size-fits-all. It depends on your time horizon, your goals, your age, and your expectations for inflation and growth. A 25-year-old saving for retirement can afford to hold 10–20% bonds. A 65-year-old retiree should hold 40–50%, using bonds as a ballast and as a source of withdrawals. A 40-year-old saving for a house down payment in five years should hold 70–80% bonds.

We'll start with the role bonds play: why they reduce portfolio volatility and how that effect broke down in 2022. Then we'll explore how to size your bond allocation by age and by goal. We'll cover the three-asset framework (cash, bonds, equities) and when each makes sense. Finally, we'll work through the different regimes—deflation, inflation, and stagflation—and show how your bond allocation should adjust as your expectations for the economy change.

The goal is not to convince you that bonds are always essential. Rather, it's to help you build a portfolio that works across different futures—one that provides stability in normal times, protection in deflation, and flexibility to adapt if inflation or stagflation returns.

What's in this chapter​

How to read it​

Start with the first two articles: "Bonds as Portfolio Ballast" and "Bond-Equity Correlation." These establish the fundamental role bonds play and why that role changed in 2022. Then, skip to whichever article matches your situation.

If you're still accumulating (working, 20–50 years to retirement), read "Bond Allocation by Age" and "Bond Allocation by Goal." These will help you size your bond allocation as you save.

If you're retired or near retirement, read the same articles but interpret them through a withdrawal lens instead of a saving lens. Your bond allocation is both ballast and a cash source.

If you're interested in understanding different economic regimes, read the final three articles in order: "Bonds During Deflation," "Bonds During Inflation," and "Bonds During Stagflation." These show the full range of how bond allocations behave in different environments and will help you build mental models for decision-making when conditions shift.

The "Cash vs Bonds vs Equities" article is useful if you're trying to choose between holding money market funds, bond funds, or keeping your allocation in stocks while waiting for a better entry point. It provides the trade-off framework.

You don't need to read every article to get value from this chapter. Use the table of contents and read what's relevant to your situation.