"Don't fight the Fed" is an old Wall Street mantra, reminding investors that betting against Federal Reserve policy is often futile. But over the next four years, a more fitting maxim might be: "Don't fight Trump."
Case in point: Uncertainty surrounding the Trump administration's tariffs and trade policies has rattled markets. The S&P 500 briefly entered correction territory in early March – this after soaring more than 23% in 2024, marking the first back-to-back years of 20%+ gains since the late 1990s.
For those who spent the past few years asking, "Why own anything but big growth stocks?", the market is serving up an answer.
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Tech giants like Nvidia (NVDA), Apple (AAPL) and Amazon (AMZN) fueled the latest bull market, leading many investors to question the need for more conservative assets like bonds. But as volatility rises, those same investors may start to rethink their allocations.
"I think we got spoiled over the past 15 years," says Charles Weeks, CFP Board Ambassador and founding partner of Barrister. "Some investors forgot what it's like to suddenly lose 30% in six months."
So, is this bonds' time to shine? Or will inflation and a cautious Fed limit their appeal?
It's probably time for many investors to reacquaint themselves with bonds while also remembering another investing truth: tune out the noise and let reason – not emotions – guide your decisions.
Getting reacquainted with bonds
To understand their potential value right now, it helps to start with the basics. Bonds are loans to governments, agencies or corporations that pay regular interest and return principal at maturity.
They offer a steady income stream, with U.S. Treasury bonds considered the safest and corporate bonds carrying more risk but offering higher potential returns.
A key factor in bond investing is the relationship between interest rates and bond prices.
"Think of it like a seesaw," Weeks explains. "When interest rates rise, bond prices fall. When rates drop, bond prices go up."
That's why bonds struggled when rates climbed. But with the Fed cutting rates three times at the end of 2024 – and signaling the potential for two more rate cuts this year – they have become a more attractive option.
When it comes to bonds, Weeks urges investors to consider the yield curve and duration.
A steep yield curve suggests higher long-term rates, while an inverted curve can warn of economic trouble. Duration measures how much a bond's price moves when rates change. The longer the duration, the more sensitive it is.
For investors seeking stability, bonds provide reliable income and act as a hedge against stock market swings. While they lack the excitement of soaring stocks, their ability to smooth volatility could prove especially valuable in the years ahead.
The case for bonds in the current market
"Bonds are quite attractive now for a variety of reasons," says Scott Ward, CFP Board Ambassador and Wealth Advisor for Compound Planning. "First, they can offer investors competitive yields."
So far this year, bonds have done spectacularly well as a diversifier and a risk-off safe haven. Morningstar reports that core bonds have outperformed stocks.
With inflation stabilizing – at least for now – bonds have regained appeal. Weeks points out that money market funds are yielding around 4%, providing a solid place to park cash. If the Fed lowers rates further, bond investors could see price appreciation.
At the same time, the Trump administration, which has frequently noted the country's debt problems and committed to slashing costs, has a strong incentive to bring the 10-year Treasury yield lower to ease government borrowing costs.
Still, the economic landscape is uncertain. Tariffs could drive inflation higher, eroding bond returns, but if inflation continues to cool, rate cuts could boost bond prices.
But even as market conditions shift, bonds remain a steady force in portfolios.
"Taken together in a diversified portfolio, bonds can provide shock absorption during volatile periods," Ward says.
Weeks agrees, making the case that "There's always a reason to have bonds, even for younger investors. When stocks zig, bonds often zag, helping smooth volatility."
While some investors may chase short-term gains, bonds' true value lies in income, diversification and downside protection – qualities that could prove especially valuable in the years ahead.
How to gain exposure to bonds
Investors can buy individual bonds across various sectors and hold them to maturity, but for most, that's impractical. Bond funds, including ETFs and mutual funds, offer the easiest and most diversified way to gain exposure.
"For most investors, ETFs and mutual funds are the best way to own bonds," Weeks says. "Unless you're buying U.S. Treasuries or T-bills directly, I wouldn't recommend purchasing individual corporate or municipal bonds due to default risk."
Even highly rated corporate bonds carry the risk of unexpected events, such as accounting scandals. While municipal bonds were once considered extremely safe, some local governments have defaulted.
Weeks prefers bond ETFs over individual securities for this reason. "Think about Enron – it was once a market darling, then turned out to be one of the biggest frauds in history. Why take that risk when you can diversify with a fund?"
Experts say how much an investor should allocate to bonds depends on risk tolerance, time horizon and financial goals. Older and more conservative investors typically hold more bonds, while younger investors might allocate as little as 10% to fixed income.
Ultimately, uncertainty is just a part of investing. Trying to time the stock or bond market rarely pays off. Instead, focus on your own financial needs and not on what a president may or may not do next.
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