Alternatives to Bonds: Stocks, Real Estate, and More

Hi Jessica. It’s understandable that someone might advise caution about buying bond ETFs right now. Recent five-year returns for many bond funds haven’t been strong, interest rates remain elevated relative to recent history, and there’s uncertainty about future rate moves. Meanwhile, equity markets have delivered strong returns, which tempts some investors to reduce their fixed-income allocation and take on more risk.

Looking back at historical pre-tax bond returns highlights how variable bond performance can be over long stretches. Those patterns matter when you’re deciding whether to keep 40% of your portfolio in bonds or seek alternatives.

U.S. government bond returns

Time Period	Annualized Return
	Before Inflation	After Inflation
1926–2024	4.9%	1.9%
1926–1980	3%	0.1%
1980–2020	9.1%	5.9%
2020–2024	-5.8%	-9.6%

That history shows long periods when bonds outperformed and times when they struggled. From 1980 to 2020, a long decline in interest rates helped bond returns; the recent multi-year period through 2024 has been much less favorable. Given this, it’s reasonable to ask: why hold bonds today?

I’m reminded of Rick Van Ness’s book Why Bother with Bonds?, which outlines four main reasons to own bonds. Below I’ll summarize those reasons and explain how they might apply to your balanced portfolio and your 40% fixed-income allocation.

1. Stocks are risky

It’s commonly said that equities become “safer” the longer you hold them because the probability of positive returns increases over long horizons. That’s true statistically, but it ignores the practical reality of large short- to medium-term drawdowns. If your portfolio drops from $100,000 to $60,000 during a market sell-off, the immediate loss matters—it’s real money you may need for spending or that could trigger panic decisions.

If you’re drawing income or plan to spend from your portfolio in the near term, bonds (or a suitable alternative) can protect capital you intend to use soon. Equities are better suited to preserving and growing long-term purchasing power, while fixed income helps preserve short-term capital.

2. Bonds make risk more palatable

Bonds act as a stabilizer. When your portfolio is diversified with fixed income, a severe equity drop is less likely to force you into selling at a low point out of fear. Panic selling is one of the biggest risks to long-term investment success: investors who sell during downturns often wait too long to return and end up buying back at higher prices.

Holding bonds doesn’t eliminate volatility, but it can reduce how far the portfolio falls and make it easier to stay invested through market cycles. Liquidity is helpful, but the core benefit here is behavioral: bonds help you avoid decisions that lock in losses.

3. Bonds can be a safe bet

A bond is essentially an interest-bearing loan: you lend money to a government or company, they pay interest, and at maturity they return your principal. Bonds carry risks—interest-rate risk, credit risk, and liquidity risk among them—but they are generally better at preserving capital than equities.

Ask yourself whether any bond alternative you consider is genuinely as safe as a bond for the portion of your portfolio you want to protect. If capital preservation is a priority for that 40%, define how much safety you need and match the investment accordingly.

4. Bonds can be an attractive diversifier

Bonds don’t move in perfect lockstep with stocks. That imperfect correlation smooths returns and reduces overall portfolio volatility. If you replace bonds with assets that move similarly to equities, you lose that diversification benefit.

So if you decide against traditional bonds, be explicit about what will provide diversification. REIT ETFs are usually considered equity-like because real estate investment trusts often correlate with stocks; MBS ETFs can behave differently but be sure you understand the specific exposure, liquidity and credit characteristics.

Given your comment about a 60/40 split, consider the underlying reason for that allocation. Is the 40% fixed income there for capital stability, liquidity for spending, behavioral protection against panic selling, or because a questionnaire suggested it? Your objectives matter.

If you don’t need the full 40% in traditional bonds, there are alternatives that address some of the same goals: high-interest savings and money market funds offer liquidity and capital protection, while certain alternative-asset ETFs can provide diversification and lower correlation with equities. Each option has trade-offs—returns, fees, liquidity and risk profiles differ—so match the choice to the purpose that portion of your portfolio must serve.

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