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Many investors consider bonds to be better cousins of stocks. Their prices rarely pop or drop. They usually provide little return, and — except for a charming cameo in a 1980s thriller Die Hard—They are not part of popular culture in the same way, say, GameStop or Tesla shares. However, they are a critical part of any good governance portfolioand to watch the stock market especially frothyit will be more true than ever.
On their face, bonds are simple: An investor lends money to a government or company and gets a guaranteed return with interest over a specified period of time. But compared to what they know about stocks, many investors are less sure about which bonds to buy, or how to buy or evaluate them. luck spoke to three experts who walked us through some of the basics around bonds, but also shared some lesser-known insights.
‘The shock absorber’
In 2025, the owners of Nvidia shares enjoyed a gain of nearly 39%—not quite the eye-popping 171% jump the stock recorded in 2024, but still pretty good return it’s all the same. Holders of the popular 10-year Treasury bill, meanwhile, are settling for an annual yield of around 4.5%. This illustration highlights the modest returns that come with bond investing, but it does not show years like 2008 and 2020, when the stock market declined by around 38% and 19% respectively, while bonds reliably deliver positive single-digit returns.
“Bonds are the shock absorber of the portfolio,” says Allan Roth, a former McKinsey consultant and founder of Wealth Logic, whose tagline is “Dare to be dull.” Roth recommends that every investor own bonds and, in particular, Treasury Inflation Protected Securities, or TIPS, whose payments fluctuate with the consumer price index to keep ahead of inflation.
Another advantage: There is a clear correlation between the interest rate, or “coupon,” of a bond, and the borrower’s creditworthiness: The greater the perceived risk of default, the higher the rate. Richard Carter, vice president of fixed-income products at Fidelity, says bonds bring more predictable benefits. “You know when the coupon is due and when the bond is due. That’s timeless and attractive, especially to people who are older in life looking for income.”
The bonds not completely predictableof course. Their prices can fall if the issuer’s finances weaken, creating problems for those who want to sell before the end of the term. If the issuer becomes insolvent, investors risk losing their capital. And then there are black swan years like 2022, when bonds have their worst year due to a sudden spike in inflation that outpaces the coupon rate on most bonds. (It’s worth noting, though, that stocks did worse that year.)
Most bonds, like stocks, are highly liquid and easy to buy. Investors can use brokerage platforms such as Fidelity and Schwab to buy bonds in the primary or secondary market at low or no cost. They can also buy ETFs with very low fees that invest in a mix of bonds, while those chasing higher returns may consider a more actively managed fund.
What bonds to buy?
Despite the recent concern that US debt levels are becoming unsustainableBond experts stress that Treasury bills remain solid investments and should be a cornerstone of any bond portfolio. While yields on 10-year Treasuries have fallen below the 5% or so they offered two years ago, they are still comfortably above inflation.
Roth at Wealth Logic advises investors to buy short- and medium-duration T-bills. Kathy Jones, Schwab’s chief fixed-income strategist, endorses the popular “laddering” strategy, which involves buying bonds that mature at different times to insulate the investor against fluctuating rates.
Treasury bills also offer an advantage that dividend stocks don’t: Their yields aren’t subject to local or state income taxes. That makes them especially attractive to residents of high-tax states like New York and California. And income from municipal bonds, or “munis,” issued by cities and other local authorities, is also generally exempt from federal income tax. For those looking to calculate the value of these savings, Fidelity and others provide online calculators that allow users to see how the tax yield compares to other fixed-income products.
While investors may balk at the thought of holding bonds from fiscal basket cases like Chicago or the state of Illinois, Jones says actual defaults are almost unheard of, because government entities don’t go out of business. The bigger concern for investors is that advertised yields for munis can be misleading. As Roth explains, brokerages that sell munis can take advantage of a regulatory loophole that allows them to tout excellent rates that reflect a portion of an investor’s initial capital in calculating a muni’s total yield. The result: The promised 6% annual return will be closer to 4%.
Finally, there are corporate bonds. Those looking for safe and secure returns can buy bonds from companies rated BBB or higher, or a fund that includes them as part of a broader portfolio; those with a higher appetite for risk may invest in higher-yielding but lower-rated “junk” bonds.
Jones said this is a particularly good time to consider corporate bonds because corporate earnings are particularly strong. The cautious Roth, however, warns that companies can be susceptible to sudden changes in fortune. “I remember back when GM was ‘as safe as America,'” he recalls, only declaring bankruptcy in 2009 during the financial crisis. He said investors should resist the temptation to chase extra yield: “Keep bonds the most boring part of your portfolio.”
Three basic bond buckets
Bonds can be the ultimate portfolio backstop, delivering reliable returns in good times and bad. But which bonds to buy? To play it safe, it is best to choose bonds whose credit ratings are BBB or better. Here are three popular options:
Treasury bills: The safest investment, the popular 10-year Treasury typically delivers yields well above the rate of inflation, while offering the added advantage of being exempt from state and local taxes. A better choice may be TIPS-Treasuries that offer a guaranteed rate above inflation.
Municipal bonds: “Munis” can offer higher returns than T-bills, while providing a sweeter upside: They’re not taxed at the state or federal level. But watch out for advertised rates from brokerages that often exaggerate real returns (see main article).
Corporate bonds: For many investors, the preference of Microsoft (AAA rated) and Apple (AA+ rated) looks better fiscally than many governments; their bonds also often give higher yields than “sovereigns.” But be careful: Unlike governments, any company can go out of business.
This article can be found at February/March 2026 issue of luck with the title “Learning to love bonds.”
This story was originally featured on Fortune.com
