Why Bonds Still Matter: A Guide for Pre-Retirees and Risk-Conscious Investors

It’s one of the most basic rules of investing: the closer you are to retirement, the more stability your portfolio needs. If you’re heavily invested in stocks but only a few years from needing your money, you could be taking on more risk than you realize.

So, what’s the alternative? For many investors—especially pre-retirees—the answer is bonds. Let’s break down why bonds still deserve a place in modern portfolios, how they work, and how to smartly invest in them.

Bonds Deserve a Second Look

At The Noble Group, we’ve worked with countless clients who initially resist the idea of shifting into bonds. One client—let’s call him Larry—was 64, investment-savvy, and holding 95% of his portfolio in stocks. He had done well with high-growth names like Nvidia and Tesla. But with retirement on the horizon at 65, we recommended lowering his equity exposure and reallocating some of his portfolio into bonds.

Larry was skeptical. Like many investors, he viewed bonds as boring, low-return, and unnecessary. But here’s why we strongly disagreed—and why our advice could apply to you too.

1. Bonds Offer Stability

Historically, stocks return around 11% annually, while bonds average about 4.8%. But it’s not just about averages—it’s about range.

• The S&P 500’s best year (1954) returned nearly +53%

• Its worst year (1931) plunged -44%

• Bonds? Their best year (1982) returned +33% and their worst (2022) was -17%

  
  

That’s a massive difference in volatility. For investors nearing retirement, a less bumpy ride is often worth a slightly lower average return.

2. Bonds Act as a Buffer in Tough Years

Since 1928, stocks have been up about 73% of the time and bonds 79% of the time. But here’s the kicker: only three years in nearly a century saw both asset classes decline simultaneously (1931, 1941, and 2022).

That low correlation means bonds can help stabilize your portfolio in rough markets. In uncertain times, investors often flock to less volatility—and bonds tend to benefit.

3. Adding Bonds = Lower Volatility, Minimal Return Loss

Shifting from a 100% stock portfolio to a 60/40 stock-bond mix reduces average returns by just 2.6%—but it lowers volatility by almost 30%. That’s a tradeoff many near-retirees are willing to make.

With 40% of your portfolio in bonds, the range of returns shrinks from a wild 79% to a much more predictable 55%. For those close to retirement like Larry, avoiding a big loss can be far more valuable than chasing every last bit of upside.

How Bonds Work: The Basics

At their core, bonds are loans. You’re the lender, and you receive interest in return. The value of a bond fluctuates with interest rates and something called duration—a measure of a bond’s sensitivity to rate changes.

• Higher duration = more interest rate sensitivity

• Longer-duration bonds generally pay higher yields (but carry more risk)

• A bond with 10-year duration would lose 10% in value if rates rise 1%, or gain 10% if rates drop 1%

  
  

Understanding your comfort with rate sensitivity is key when building a bond portfolio.

Not All Bonds Are Created Equal

Yes, some bonds offer high yields—but that doesn’t mean they’re smart investments.

• Credit risk is the danger that a borrower won’t pay back interest or principal.

• Ratings from agencies like Moody’s or S&P help assess creditworthiness.

• Investment-grade bonds (AAA to BBB-) are lower risk.

• Anything below that—“junk bonds”—carry higher default risk and are used sparingly in our client portfolios.

Ways to Invest in Bonds

Here are three strategies we often discuss with clients:

1. Individual Bonds

Buying bonds outright can work, but it typically requires a large investment to build proper diversification. Many bonds trade in large lot sizes and are illiquid.

2. Bond Funds or ETFs

These offer instant diversification and professional management. However, their prices fluctuate with the market, and you may face timing risks if you need to pull funds during a downturn.

3. Bond Ladders

This strategy involves buying bonds with staggered maturity dates. As short-term bonds mature, you reinvest in longer-dated ones. Bond ladders are especially useful for retirees needing steady, predictable cash flow—though liquidity can be an issue if you need funds early.

Final Thoughts: Bonds and Your Financial Plan

Successful bond investing isn’t about chasing yield—it’s about matching your strategy to your needs. Bonds can help balance risk, reduce volatility, and create predictability, especially as retirement approaches.

At The Noble Group, we help clients understand where bonds fit in their portfolio based on their time horizon, liquidity needs, and tax situation.

Disclosures:

This is a hypothetical example and is not representative of any specific situation. Your results will vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

Investing involves risk including loss of principal.  No strategy assures success or protects against loss.

Bonds are subject to credit, market, and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

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