When most people think of bonds, they think safety, steady income, protection during stock market downturns; and that’s exactly what bonds are supposed to be: the ballast in your ship. Just like the weight at the bottom of a vessel keeps it upright in stormy seas, bonds in your retirement portfolio provide stability. They cover your near-term spending needs so your long-term growth investments can stay the course.
But what if the boat maker didn’t provide a ballast. You thought you had a boat that was well balanced, but it wasn’t? Similarly, what if your “bond fund” is full of junk?
Example
I had a client from another advisor approach me with his portfolio results. He thought he was being conservative and couldn’t understand how his portfolio was so impacted with the market correction in 2022. His retirement account held a “Total Bond Market” fund. But when we looked deeper, nearly 40% of the fund was invested in junk bonds — debt rated below BBB, which carries a high likelihood of default. He asked me: “I thought bonds were supposed to be safe. Why does my ‘conservative’ bond fund feel like a gamble?” That’s the problem: The naming and marketing of bond funds, often hide what you really own.
The Problem: Junk Disguised as “High Yield”
- Bonds rated BBB- or higher are considered investment-grade.
- Anything below BBB is labeled “junk” because of the higher probability of default.
- Many funds rebrand junk as “high yield”, which sounds attractive when you want to squeeze every ounce out of your fund, but it’s just a marketing term for speculative debt.
- Some bond funds are 40–70% junk, even though only ~22% of the total bond market is junk-rated (McKinsey, 2018).
Investors think they’re conservative, but they’re actually holding risk where they expected stability.
The Bigger Risk: Interest Rates
Even if your bond fund is 100% investment-grade, you’re not out of the woods.
- In 2022, as interest rates rose from historic lows, bond funds had their worst performance in 50 years (Bloomberg, 2022).
- Why? Because unlike individual bonds, funds don’t let you hold to maturity. When rates rise, bond prices fall — and funds are forced to sell, locking in those losses.
- With individual bonds, you can simply hold to maturity and get your principal back (assuming no default). With bond funds, you have no such control.
The Smarter Alternative: Bond Ladders
A bond ladder means building a portfolio of individual bonds with staggered maturities — some maturing in 1 year, some in 3, some in 5, and so on.
Benefits of ladders:
- Control: You decide to hold to maturity, eliminating interest rate risk.
- Stability: Regular maturities give you predictable cash flow.
- Transparency: You know exactly what you own, and you can avoid junk if your goal is safety.
- Ballast: Like the weight at the bottom of a ship, bond ladders provide stability for your spending needs in retirement, keeping you upright while your long-term investments ride out the waves.
In Summary
Bonds should provide safety, stability, and balance to your portfolio — not surprise you with junk or expose you to risks you can’t control. With intentional bond ladders, you avoid junk, eliminate interest rate risk, and ensure your “ballast” keeps your retirement ship upright.
Let’s audit your portfolio. If you want real stability, let’s build a bond ladder that supports your spending needs.”
References
- McKinsey Global Institute (2018). Rising Corporate Debt: Peril or Promise?
- S&P Global Ratings: Bond Rating Scale (BBB and above = investment-grade; below BBB = junk).
- Bloomberg (2022). Bond Funds Suffer Worst Year in 50 Years as Rates Spike.