A Financial Advisor Explains Whether You Should Shift All Your Money Into Bonds

Whenever the market swings sharply, many investors feel the urge to abandon stocks and move everything into something they see as safer.

Joy Dow, a wealth management advisor with WiseFit Wealth Management, an affiliate of Northwestern Mutual, said bonds can play an important role in a portfolio, but putting all of your money into them is rarely the right answer.

When a Move Makes Sense — and When It Does Not

As retirement gets closer, directing some money into bonds can be reasonable, especially if you want a steadier income stream for upcoming expenses. But there is a big difference between a deliberate adjustment and a fear-based reaction.

“It becomes emotional panic when the decision is driven mainly by fear of a market decline rather than your timeline, income needs and risk tolerance,” Dow said.

She added that selling stocks after prices fall can lock in losses and leave you with less invested when the market eventually recovers. Before making major changes, she suggested reviewing when you will need the money and how much income your portfolio must produce.

What a Portfolio Made Only of Bonds Can Mean

Dow gave a hypothetical example: a $1 million portfolio earning a 4% yield would produce about $40,000 a year before taxes, assuming that yield remained unchanged. That amount is income, not a guaranteed total return, and it does not include changes in the portfolio’s value.

Bonds are not without risk.

“In 2022 we saw a negative bond market at the same time as a massive stock pullback,” Dow said. Rising interest rates can push bond prices lower, and inflation can reduce the buying power of the income those bonds generate.

Whether $40,000 a year is sufficient depends on your spending needs and on other income sources such as Social Security or a pension.

Why Interest Rates Should Not Be the Only Factor

Bond yields are higher than they were a few years ago, which has made bonds more appealing for income. Even so, Dow warned against redesigning an entire portfolio based only on interest rates. Cash or short-term, high-quality bonds may be appropriate for money you will need soon, but funds meant to last for decades may still require the growth potential of stocks.

Bond duration also matters.

“Longer-duration bonds generally have larger price swings when interest rates change,” Dow said.

Rather than guessing what rates will do next, she recommends organizing investments around your goals, your time horizon and your cash needs.

The Downsides of Going All In on Bonds

One of Dow’s biggest concerns is sacrificing long-term growth in exchange for short-term comfort. A portfolio made up entirely of bonds may feel calmer during a downturn, but it can also miss the rebound and leave retirement savings more exposed to inflation.

Getting back into stocks can be just as tricky. By the time the market feels stable again, prices may have already moved higher.

“The issue isn't that bonds are a bad choice; it's that a temporary defensive move can become a long-term strategy that doesn't support the investor's retirement needs,” she said.

A Balanced Approach for Worried Investors

If market volatility is making you uneasy, Dow suggests keeping a diversified mix of stocks, bonds and cash instead of making an all-or-nothing shift.

“The goal is to keep money needed soon relatively stable while allowing longer-term investments to keep growing,” Dow said.