Should You Own Bonds While Building Wealth?

If you’re in the wealth accumulation stage (Still earning money and building your investment portfolio), you might wonder if there are any good reasons to own bonds.

While owning stocks has historically created more wealth than bonds, there are some reasons that I believe wealth builders might want to own some bonds.

Stocks vs. Bonds

Before diving in, let's clarify the fundamental difference between stocks and bonds. As Nick Murray perfectly puts it, you want to be an "owner of assets, not a loaner."

When you own stocks, you're an equity owner with partial ownership of a business. This means you participate in the upside appreciation of that business with theoretically unlimited growth potential.

When you own bonds, you're a lender who anticipates getting your money back plus the interest rate.

As an owner, you demand higher expected returns because you take on more risk than a loaner.

And history demonstrates this…

Being an asset owner (stocks) has provided greater long-term real returns than being a lender (bonds)—approximately 8% for stocks versus 3% for bonds. Over the decades, this difference can dramatically impact your wealth accumulation. And these are the returns after inflation, which are the only returns that matter.

Why Would Wealth Builders Want Bonds?

For those still in their peak earning years with a long timeframe until financial independence, here are three reasons you may want to own some bonds.

1. Midterm Flexibility

At my practice, we use a timeline and goals-based approach when building investment allocations.

Retirement accounts (Roth IRAs, traditional IRAs, 401(k)s) represent long-term investment dollars that won't be touched for 20-30 years. Given this extended time horizon, these accounts can be invested more aggressively in equities to maximize growth potential.

However, brokerage accounts can serve as excellent accounts for midterm flexibility – covering goals that may arise between now and retirement. These may not be necessarily tied to specific goals, but provide options for unexpected opportunities or even challenges.

Adding some bonds to these midterm accounts creates liquidity and stability. If something comes up, clients know they can access funds that haven't experienced the same volatility as their long-term equity investments.

This midterm "bucket" gives clients confidence to keep their longer-term investments intact, regardless of market conditions.

2. Behavioral Insurance

The math might suggest that owning a 100% equity portfolio is best for long-term wealth building, but human psychology matters, too.

If a 100% equity-based portfolio causes anxiety that might lead you to abandon your long-term plan during market turbulence, it's perfectly acceptable to hold some bonds as behavioral insurance.

The best investment allocation isn't the one that maximizes theoretical returns – it's the one you can stick with through market cycles. If reducing portfolio risk by adding bonds means accepting slightly lower long-term returns but significantly increasing your ability to maintain course during volatility, that's a good trade-off.

Just ensure your overall allocation can still provide the returns necessary to achieve your financial goals.

3. Short-Term Cash Alternative

For goals in the 2-4 year range, bonds can offer a sweet spot between savings accounts and equity investments.

If you have excess cash beyond your emergency fund and short-term needs already covered in high-yield savings, short-term bonds or bond funds can potentially provide higher yields while still matching your timeline.

This approach works particularly well for specific goals with somewhat flexible timing in the near future, where you want potential for slightly better returns than cash without the volatility of stocks.

While equities remain the primary growth engine for long-term wealth accumulation, bonds can help enhance your overall financial plan through increased flexibility, behavioral stability, and optimized short-term money.

Go invest in yourself,

Travis Gatzemeier, CFP®

Founder & Financial Planner

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