Bonds: Not Quite Magic, But Useful

Now, listen closely. Most folks, if they want their money to grow – truly grow, like a beanstalk reaching for the clouds – they go chasing after stocks. Perfectly sensible, really. Centuries of evidence prove it. But let’s not dismiss the humble bond entirely, shall we? It’s not a thrilling adventure, mind you, but a rather sensible precaution, like packing a raincoat for a picnic.

Those clever chaps at Deutsche Bank, after peering into the mists of the past 200 years, discovered that U.S. stocks have been delivering a jolly 6.7% a year, adjusted for those pesky price rises. Bonds, however, chugged along at a rather modest 2.4%. And over the last century, bonds haven’t once managed to outrun stocks in a 25-year race. Not once! It’s a bit like a tortoise competing against a rocket ship, isn’t it?

Still, most sensible investors don’t want to put all their eggs in one basket, especially if that basket is swinging wildly from a particularly tall beanstalk. Bonds can be a calming influence, a sort of financial anchor. And if you’re worried about those prices creeping upwards – inflation, they call it – then a little dip into the Vanguard Total Bond Market ETF (BND +0.43%) might just be the ticket.

Why bother with Bonds?

The last few years have been a bit beastly for bond investors, I won’t lie. In 2021, prices decided to have a bit of a spree, leaping upwards at a frightful rate. Then 2022 came along and continued the mischief. The Federal Reserve, a rather stern-looking fellow with a penchant for raising interest rates, tried to put a stop to it. And it did, eventually, but not before giving bond prices a good shaking. The Vanguard Total Bond Market ETF lost a bit of fluff in both years – 1.7% in ’21 and a rather alarming 13.2% in ’22.

Over the last five years, this ETF has been losing money at a rate of 0.23% a year. And even over a decade, it’s only managed a measly 1.9% – not nearly enough to outrun inflation, even when it’s behaving itself.

So why bother? Well, some investors are a bit squeamish about putting everything into stocks, especially as they get closer to hanging up their boots. Bonds offer a steady trickle of income, and they don’t tend to bounce around quite as much. Plus, they have a curious habit of moving in the opposite direction to stocks. When stocks tumble, bonds often bob up, like a cork in a storm.

Vanguard Says Bonds Are Back (Perhaps)

Things have been looking up recently, thankfully. The Vanguard Total Bond Market ETF has earned a respectable 6.7% in the last year. That was more than enough to keep pace with inflation, which was a rather sluggish 2.6%. And those clever researchers at Vanguard, peering into their crystal ball, predict that bonds might have a good run for the next few years.

They’re forecasting a core inflation rate of 2.6% for 2026, and they believe that U.S. bonds could deliver annual returns of between 3.8% and 4.8% over the next decade. They even claim that high-quality U.S. fixed income offers the best risk-reward profile of all investments. That’s a rather bold claim, isn’t it?

If Vanguard is right – and they’re usually a fairly reliable bunch – and inflation stays under control, and interest rates remain at a decent level, then now might be a good time to take a nibble at the Vanguard Total Bond Market ETF. It holds over 11,000 U.S. government and investment-grade corporate bonds. And the fee for holding it is a ridiculously low 0.03%.

Of course, investing in bonds isn’t without its risks. If interest rates climb, bond prices will tumble. There’s no guarantee that even the best bond ETF will outrun inflation. But we might be entering a more favorable environment for bonds than we’ve seen in a decade, so it might be worth considering adding this ETF to your portfolio. Just don’t expect it to turn into a golden goose.

2026-02-06 15:22

Why bother with Bonds?

Vanguard Says Bonds Are Back (Perhaps)

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