Do Bonds Deserve a Place in Long-Term Portfolios?

Advisor Journal Club 001

Do Bonds Deserve a Place in Long-Term Portfolios?

13 October 2026 | Asset Allocation · Diversification · Retirement Planning

The Question

We have been taught that bonds are an important component of a diversified portfolio. The conventional wisdom is that as investors grow older, they should gradually reduce their equity exposure and increase their allocation to bonds.

The argument is quite straightforward. Bonds generally have lower volatility than equities, and holding both assets should help reduce overall portfolio volatility.

But I wonder if we have been giving bonds too much credit.

Sure, bonds can reduce volatility. But does that necessarily translate into better financial outcomes? And what are investors giving up in exchange for that reduction?

What the Research Found

I reviewed three papers that challenged some of my understanding of bonds and their role in investment portfolios.

Paper 1: Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice (2026)

The authors found that equities historically delivered substantially higher real returns than government bonds. Interestingly, bonds also exhibited greater persistence in long-term returns, while international equities showed stronger evidence of mean reversion.

What caught my attention was their lifecycle simulation. The optimal portfolio consisted of approximately 34% domestic equities and 66% international equities, with no allocation to bonds, even during retirement.

The author did not simply maximise investment returns, their model considered lifetime consumption, withdrawals, longevity and bequests.

Paper 2: A Century of Stock-Bond Correlations (2014)

The authors examined the historical relationship between stock prices and government bond yields and found that the relationship changed across different periods.

The relationship of bond and stock return changes with regime.

Paper 3: Stock-Bond Correlation: Theory & Empirical Results (2024)

This paper explored how stock-bond return correlations changed over time.

Correlations were generally positive before 2000, became negative for much of the following two decades, and turned positive again from August 2022.

Interestingly, the authors also showed that a 50/50 portfolio performed better in nominal terms during 1980 to 1999, when correlations were positive, than during 2000 to 2019, when correlations were negative.

Their argument is that correlation primarily affects portfolio risk rather than expected arithmetic returns. Negative correlation is useful for managing portfolio volatility, but long term buy and hold investors may have less reason to be concerned about it.

My Learning & Reflections

1. Are bonds really safe?

I think we need to be more careful when describing bonds as safe investments.

Yes, bonds generally have lower volatility than equities. But lower volatility does not necessarily mean lower risk, especially over longer investment horizons.

There is still inflation risk, reinvestment risk and the possibility that the purchasing power of our money deteriorates over time.

Perhaps the more important question is, safe from what?

2. How much diversification are we actually getting?

One of the reasons we hold bonds is diversification. But the research suggests that the relationship between equities and bonds isn't constant.

There are periods when both assets move in opposite directions, and periods when they move together.

Another thing I learnt is that correlation alone doesn't tell us the magnitude of returns. A positive correlation doesn't mean equities and bonds must deliver similar returns, or even move in the same direction every single time.

So perhaps looking at historical correlations alone isn't sufficient to determine how useful bonds are in a portfolio.

3. Are we confusing lower volatility with better financial outcomes?

This is probably my biggest takeaway.

Let's say a 60/40 portfolio has lower volatility than a 100% equity portfolio. That is generally what we would expect.

But is lower volatility necessarily a better outcome?

If the investor has a sufficiently long investment horizon, and the reduction in volatility comes at the expense of expected returns, is that a worthwhile trade-off?

Of course, volatility matters when an investor needs to withdraw money or cannot tolerate substantial losses. But I think we need to establish why we are trying to reduce volatility in the first place.

Otherwise, we might be optimising something that doesn't necessarily improve the investor's financial outcome.

4. Should asset allocation change with economic regimes?

My initial thought after reading about changing stock-bond correlations was that perhaps we should adjust asset allocation depending on the economic regime.

But this creates another problem.

Am I assuming that I can reliably identify which regime we are in, or predict when the next regime will begin?

If I cannot, then perhaps it makes more sense to stick with a strategic asset allocation, rather than constantly trying to change them by anticipating regimes.

The idea of shifting SAA is as good as timing the market.

5. What if we replaced bonds with cash?

This is something I want to explore further.

If the purpose of bonds is to reduce volatility or preserve capital for near-term spending, could cash or short-term government securities do a better job?

Of course, cash comes with its own problems, particularly inflation and reinvestment risk. And bonds can still be useful when their cash flows match future liabilities.

But perhaps we should stop treating bonds as the default defensive allocation and instead ask what purpose that allocation is supposed to serve.

Implications for Financial Planning

I think the bigger lesson here is that we should not start portfolio construction with a conventional allocation like 60/40, or automatically increase bonds simply because an investor is getting older.

We should first ask what the investor is trying to achieve.

Is the objective to maximise lifetime consumption? Preserve capital for an upcoming expense? Reduce the possibility of running out of money during retirement?

These are different objectives, and they may require different portfolios.

Paper 1 certainly makes me reconsider whether an all equity portfolio could be appropriate even during retirement. But I wouldn't go as far as concluding that 100% equities are suitable for everyone based on one model.

What I want to be more deliberate about is understanding why each asset belongs in a client's portfolio.

If I am allocating 40% to bonds, I should be able to explain what those bonds are meant to achieve, and whether the benefits justify the expected-return trade-off.

Questions?

• Under what circumstances does adding bonds actually improve retirement outcomes compared with an all equity portfolio?
• Would an equity and cash portfolio be more effective than an equity and bond portfolio for certain financial objectives?
• How should guaranteed retirement income, such as CPF LIFE, influence the allocation of the remaining investment portfolio?

Final Thought

I don't think the question is whether bonds reduce volatility. We already know they generally do.

The question I am more interested in is whether reducing that volatility is worth the trade-off, and whether it actually helps investors achieve their financial goals.