The Bond Myth: Why We Believe Bonds Protect Less Than Investors Are Told

Introduction

For decades, bonds have been the bedrock of traditional portfolios. Investors have relied on them to reduce volatility and produce steady income, a belief rooted in Modern Portfolio Theory (MPT). In our view, that belief deserves a harder look. Bonds haven't always behaved as a hedge, their interest is often taxed at ordinary income rates, and after inflation and taxes, what's left can be modest.

At Jones Fiduciary Wealth Management (JFWM), we build portfolios around what we believe are better tools for managing risk and after-tax results, rather than what's easiest for large firms to implement.

Shaun M. Jones, CFP®, CFS®, founder of JFWM, has spent more than 25 years in the industry. In his view, one of the biggest sources of distrust between clients and the financial industry is the continued use of bonds to "reduce risk" (quotation marks added by Shaun). Investors are often told bonds will protect them in downturns. 2022 tested that idea: the Bloomberg U.S. Aggregate Bond Index fell 13.0% in a year when the S&P 500 fell about 18%, and long-term Treasuries fell about 29%.¹

When bonds are positioned as a safe haven and then fall alongside stocks, it can erode trust in the advice investors receive.

The historical role of bonds

The traditional 60/40 portfolio (60% stocks, 40% bonds) became the standard model after the development of MPT in the 1950s. Harry Markowitz showed that diversifying across asset classes can improve the return for a given level of risk (Markowitz, 1952).⁶ The assumption was that bonds provided stability and a counterbalance to stocks.

During the late 20th century, that worked well. Treasury yields reached double digits in the early 1980s. As rates fell over the following decades, bond prices rose, giving investors both income and capital gains while dampening portfolio swings. In our view, today's environment is different.

1. Bonds are a less reliable hedge than investors assume

For most of the last century, stocks and bonds tended to move together.² The two decades after 2000, when bonds reliably rose as stocks fell, were the exception. That relationship broke down in 2022, when inflation and interest rates rose: the S&P 500 fell about 18% and the Bloomberg U.S. Aggregate Bond Index fell 13.0%.¹ When stocks fall because of inflation and rising rates, bonds have tended to fall with them, as they did in 1969 and 2022. When stocks fall because of a crash or recession, bonds have usually held up: 10-year Treasuries had positive returns in 21 of the 26 calendar years since 1928 when the S&P 500 fell.³ In our view, that makes relying on bonds alone to buffer stock losses less dependable than many investors assume, especially when inflation is the risk.

2. Bond income after inflation and taxes

Bond yields are higher today than for most of the 2010s. The 10-year Treasury yield was 5.00% as of October 26, 2026.⁴ What matters is what's left after inflation and taxes. For example (illustrative only):

1. Inflation: if inflation is 3% and a bond pays 5%, the real return before taxes is about 2%.
2. Taxes: interest from taxable bonds held in a taxable account is taxed at ordinary income rates, up to 37% federally, plus the 3.8% net investment income tax for high earners. Qualified dividends and long-term capital gains are taxed at 0–20% (plus the 3.8% tax where it applies).

Municipal bonds and bonds held in IRAs or 401(k)s are taxed differently, so the drag depends on what you own and where you hold it. For high-bracket investors holding taxable bonds in taxable accounts, we believe the after-tax, after-inflation income is often modest.

3. Rising interest rates hurt bond prices

Bond prices move inversely to interest rates: when rates rise, bond values fall. That was evident in 2022, when the Federal Reserve raised rates aggressively and bonds posted steep losses. Unlike the decades when falling rates boosted bond returns, investors now face both:

1. Lower prices for existing bonds when rates rise
2. Reinvestment risk, as new bonds may not keep up with inflation

Morningstar's annual retirement income research shows how much this matters for retirees. Its suggested starting withdrawal rate for a balanced portfolio was 3.3% in its 2021 report, 3.8% in 2022, 4.0% in 2023 and 3.7% in its 2024 report, driven largely by changes in bond yields and expected returns.⁵ In our view, a retirement plan whose safe withdrawal rate moves that much with bond yields deserves a closer look.

Why traditional firms still use bonds

Despite these issues, most large investment firms still use bonds as their default tool for reducing risk. It's hard to know for sure why, but here are Shaun's best guesses:

1. Easy to manage at scale. A stock-bond portfolio is simple to automate. In Shaun's view, some firms favor efficiency over client outcomes.
2. Industry norms. Many firms use MPT-based model portfolios as their standard, and advisors may be expected to use a "balanced" portfolio even when, in Shaun's view, it isn't the best fit for a client.
3. Limited alternatives. Some firms don't offer alternative investments, because of compliance restrictions or limited expertise beyond stocks and bonds.

Change is also hard and expensive for large firms.

The trade-offs

In our view, bonds don't belong in the portfolios we build, and we rarely use them. That's our approach, not a universal rule: many advisors and investors use bonds for near-term spending needs or ready access to cash, and your situation may call for something different. The alternatives we use instead, such as structured notes and private investments, carry their own risks, including issuer credit risk, illiquidity, built-in costs and the possibility of loss. Whether this approach fits you depends on your goals, time horizon and tax situation.

Conclusion: a better way to think about bonds

In our view, the era of bonds as a reliable safe haven is over, at least for now. At JFWM, we invest client money the same way Shaun invests his own. If you'd like to talk through how your portfolio uses bonds, schedule a conversation.

Sources

1. Calendar-year 2022 total returns. S&P 500 Index: about −18%. Bloomberg U.S. Aggregate Bond Index: −13.01%. Bloomberg U.S. Long Treasury Index: −29.3%. Sources: Flat Fee Advisors, "What Happened to Stocks and Bond ETFs in 2022" (Raman Singh, CFP®, EA, Oct. 5, 2026); CNBC, "2022 was the worst-ever year for U.S. bonds," Jan. 7, 2023.
2. Brixton, Brooks, Hecht, Ilmanen, Maloney & McQuinn, "A Changing Stock–Bond Correlation: Drivers and Implications," Journal of Portfolio Management 49(4): 64–80, 2023, AQR Capital Management.
3. Aswath Damodaran, NYU Stern, "Historical Returns on Stocks, Bonds and Bills: 1928–2025" (updated Jan. 5, 2026), S&P 500 with dividends and 10-year U.S. Treasury bond, calendar-year total returns. JFWM analysis.
4. Board of Governors of the Federal Reserve System, "Market Yield on U.S. Treasury Securities at 10-Year Constant Maturity" (DGS10), via FRED, Federal Reserve Bank of St. Louis: 5.00% on Oct. 26, 2026.
5. Morningstar, "What's a Safe Retirement Spending Rate for 2025?" (data as of Sept. 30, 2024).
6. Markowitz, H. (1952). "Portfolio Selection." The Journal of Finance, 7(1), 77–91.

DISCLOSURE: Prepared by Jones Fiduciary Wealth Management, LLC ("JFWM"), a registered investment adviser (CRD #311956), for informational and educational purposes only. Nothing herein constitutes investment, legal, or tax advice or a solicitation to buy or sell any security. All investments involve risk, including possible loss of principal. Past performance is not indicative of future results. Individual circumstances vary; consult a qualified professional before acting on any information. Views are those of JFWM as of the date published and subject to change.

STRATEGY-SPECIFIC NOTICE: The investment strategy described herein reflects the general philosophy and methodology of JFWM. Actual client portfolios may differ materially based on individual circumstances, investment objectives, account restrictions, tax situation, and other factors. The strategy described is not suitable for all investors. Performance will vary across individual accounts and over time. JFWM reserves the right to modify its investment approach without prior notice.

Indexes are unmanaged and cannot be invested in directly. Index returns do not reflect fees or expenses. Index funds are subject to the same risks as the indexes they track, and their returns are reduced by fees, expenses, and tracking error.

Any tax-related discussion is general and informational in nature. It does not constitute tax advice. JFWM does not provide legal or tax advice. Consult a qualified tax professional regarding your specific situation. Tax laws are complex and subject to frequent change.

Alternative investments, including private real estate funds, limited partnerships, private placements, and non-traded REITs, involve significant risks, including illiquidity and the absence of a secondary market, limited access to capital, dependence on the manager, limited regulatory oversight, complex tax treatment, and the potential for total loss. They are suitable only for eligible investors who can bear the full risk of loss. JFWM-affiliated private funds are closed to new investment. Nothing herein is an offer; any offering is made only through applicable offering documents.