Bonds do a different job than stocks. Stocks are the growth engine. Bonds are the stability engine — the part of the portfolio that lets the rest of it do its work. This piece is the plain-language explanation of how we choose them, and why the answer isn't “just buy an index fund and forget it.”
What you'll find inside · 5 sections
Section 01
What bonds actually do
Three jobs. Stocks can't do any of them. That's why bonds exist in your plan.
Section 02
Three patterns that drive bond returns
Term, credit, and currency — the bond version of the size/value/profitability story.
Section 03
Three ways to invest in bonds
Interest-rate forecasters, index trackers, and a third approach that doesn't require predicting either.
Section 04
How we actually do it
Variable maturity, variable credit, variable currency — with the value-add numbers from Dimensional's research.
Section 05
What this means for retirement — and our five commitments
Where the bond design matters most: protecting the years you spend the money.
Forecasting interest rates is unreliable. Tracking an arbitrary bond index leaves money on the table. There is a third option, and your portfolio uses it.
— MPM Wealth Advisors · Investment Committee
01
Section 01
01
What bonds actually do
Three jobs. Stocks can't do any of them.
Before we talk about which bonds to own, we should be clear about why we own them. Bonds aren't a growth play. They're three other things, all of which matter more than people realize.
Job 01
Dampen the swings
A 100% stock portfolio is too volatile for most people to hold through a bad year — and clients who sell in the bad years lock in the loss. Bonds reduce the size of the drawdowns, which makes the plan actually possible to stick to.
Job 02
Pay reliable income
Bonds pay interest on a schedule. In retirement, that schedule becomes the source of regular spending money — without having to sell anything. The income comes whether the market is up or down that month.
Job 03
Match specific futures
If you'll need $80,000 in five years for a child's college, you don't want that money in stocks. A bond maturing in five years locks in the dollar amount — it's the financial equivalent of putting a specific dollar in a specific envelope for a specific purpose.
What bonds are not for: driving long-term growth. Over decades, stocks have outpaced bonds significantly — that's the price stocks pay you for the volatility you accept. If your time horizon is 30 years and you can stomach the swings, a heavier stock allocation will usually produce more wealth. Bonds aren't competing with stocks; they're doing a different job.
So why do we put any thought into them? Because the way the bond piece is built has a real impact on the two things bonds are supposed to do well: income and protection. Get the design right and your bonds quietly pay you more, with less risk of a bad surprise. Get it wrong and you're holding a low-yielding pile that doesn't help when you need it. The rest of this document is about getting the design right.
02
Section 02
02
Three patterns that drive bond returns
Three patterns. Fifty years of data.
Just as research has identified three patterns that drive higher returns in stocks (size, value, profitability), three corresponding patterns drive higher returns in bonds. They aren't speculative; they're documented across decades and across the developed world.
Pattern 01
Term: longer bonds
Bonds with longer maturities have, on average, paid more than short ones.
The intuition: locking up your money for 10 years is riskier than for 1 year. Investors demand extra return for the wait — and historically, they've gotten it. Average extra return: about 0.6 percentage points per year, US intermediate vs. short-term government bonds, 1976–2023.
+57 bps/yr · 1976–2023
Pattern 02
Credit: weaker borrowers
Bonds from less-creditworthy borrowers have paid more than the safest government bonds.
The intuition: a corporate bond carries a small chance the company can't pay you back. Investors demand extra yield for that risk — and on average, the extra yield has more than compensated. Average extra return: about 0.9 percentage points per year, US investment-grade corporate vs. government bonds, 1976–2023.
+93 bps/yr · 1976–2023
Pattern 03
Currency: where the bond is issued
Bonds issued in different currencies often have very different yields — for the same risk.
The intuition: at any given moment, German government bonds may offer a higher hedged yield than US Treasuries, or vice versa — reflecting where capital is flowing. Owning bonds from multiple countries, and tilting toward the highest yielders after hedging the currency back to dollars, has added meaningful return.
+41 bps/yr · 1985–2023
Plain-language footnote
You may hear these called term premium, credit premium, and currency premium. They mean the same thing as what's above. A “premium” in this context just means “the extra return on average from accepting a particular kind of risk.” The patterns are real, but they're not guarantees: there are years when long bonds underperform short ones, and years when corporate bonds lose money even as Treasuries gain.
Why these patterns matter: if all three are real and persistent, then a bond portfolio that moderately tilts toward longer, lower-credit, and higher-yielding-currency bonds should — on average, over time — out-earn a bond portfolio that doesn't. The question is whether we can capture them without taking on the kinds of risk that defeat the purpose of holding bonds in the first place.
Yes — carefully. The next section is about how.
03
Section 03
03
Three ways to invest in bonds
Forecasters, indexers, and a third option.
The same three-approach story we told for stocks plays out in bonds — with a twist. The first two approaches have well-documented flaws specific to fixed income.
Approach A
Active forecasters
Predict where interest rates are going, then position accordingly.
Buy long bonds if they think rates are about to fall
Buy short bonds if they think rates are about to rise
Bet on which company defaults won't happen
Track record: interest-rate forecasting is one of the most-studied and least-successful disciplines in finance
Track recordUnreliable
Approach B
Index trackers
Hold whatever a published bond index says to hold, in the weights the index says to hold them.
Lower cost than active forecasting
No reliance on predictions
Ignores info already in the yield curve about expected returns
Holds the index's weightings even when prices say otherwise
GoalMatch the index
Approach C · what we use
Systematic
Use the information already in current bond prices to tilt deliberately — without predicting anything.
Owns broadly diversified bonds across maturities, credit, and currencies
Tilts toward higher-yielding maturities when the term spread is wide
Tilts toward credit when the credit spread is wide
Tilts toward higher-yielding currencies (hedged to USD)
Track record+28 to +140 bps/yr
The key insight behind the systematic approach: the bond market's current yield curve already contains reliable information about which bonds offer the highest expected returns going forward. When long bonds are paying meaningfully more than short bonds — a wide “term spread” — that's been a reliable signal of a higher term premium ahead. When corporate bonds are paying meaningfully more than government bonds of the same maturity — a wide “credit spread” — that's been a reliable signal of a higher credit premium ahead.
The systematic approach doesn't try to predict where rates are going. It just reads what the market is already telling us about expected returns, and tilts the portfolio accordingly. No forecast required.
When the term spread is wide vs. narrow — the systematic response
Wide term spread
Long bonds pay much more than short. We increase exposure to longer bonds — up to 75% intermediate-term — capturing the bigger expected term premium.
Narrow term spread
Long bonds barely pay more than short. We reduce exposure to longer bonds — the extra interest-rate risk isn't being compensated.
04
Sections 04 & 05
04
How we actually do it
Variable maturity, credit, and currency — with the value-add to prove it.
Dimensional has published simulations of each systematic bond tilt over the longest periods data is available for. Each tilt, on its own, has added meaningful return at modest additional risk. Combined into a global core bond portfolio, the value-add is larger still.
Annualized value-add vs. benchmark · systematic fixed income simulations
Variable maturityLength of bonds, US, 1976–2023
+28 bps72% of years
Variable creditQuality of borrowers, US, 1973–2023
+45 bps78% of years
Variable currencyAcross developed countries, 1985–2023
+41 bps62% of years
US core (combined)Maturity + credit, 1999–2023
+41 bpsvs. Bloomberg US Agg
Global core (combined)All three, hedged to USD, 1999–2023
+140 bpsvs. Bloomberg Global Agg
The compounding matters. An extra 0.41% per year on a $1M bond allocation across 20 years adds roughly $87,000, all else equal. The numbers look small on a single year, large on a lifetime. Source: Dimensional, “The Case for Systematic Investing in Fixed Income,” 2024. Past performance does not guarantee future results.
05
What this means for retirement
Where the bond design matters most.
In your working years, bonds are 20–40% of the portfolio. The systematic tilts add a modest but real number to total return, and reduce the volatility of the overall portfolio — making it easier to stay invested when stocks have a bad year.
In retirement, bonds become the primary source of stability. They're what you live on while stocks recover from the inevitable bad stretches. The way they're designed determines whether your income holds up against two specific threats: unexpected inflation, which erodes the purchasing power of fixed payments, and falling rates, which reduce the income you can replace bonds with as they mature. Most plain bond portfolios are vulnerable to both. An income-focused design — using inflation-protected bonds and matching bond maturities to your actual cash-flow needs — addresses both.
MPM
Our five commitments to the bond piece
A
We don't forecast interest rates.Decades of research show it's unreliable, and the cost of being wrong is large. We use what current prices are already telling us instead.
B
We tilt deliberately, not aggressively.Our bond holdings stay broadly diversified across maturities, credit qualities, and countries. The tilts move within bounded ranges — never all-or-nothing.
C
We hedge currency back to dollars.Foreign-currency bond returns get swamped by exchange-rate noise. Hedging the currency back to USD lets us own bonds globally without taking on currency risk.
D
We use inflation protection where it matters.For the retirement income piece of your portfolio, we use inflation-protected Treasuries (TIPS) and other instruments that adjust with the cost of living — not bonds whose payments stay nominal while groceries rise.
E
We keep costs and turnover low.The same insight from stocks applies double for bonds: every basis point you don't pay in fees or trading costs is one you keep. We use funds in the lowest-cost tier of every category.
Plan. Invest. Thrive.
The bonds in your portfolio aren't boring —
they're doing one of the most important jobs in the plan. The way they're designed determines whether your spending money is there when you need it, whether your portfolio survives a bad market, and whether your purchasing power keeps up with inflation. Quiet, careful work. The kind that compounds.
Sources: Aabbhas Garg & Samuel Y. Wang, “The Case for Systematic Investing in Fixed Income” (Dimensional, May 2024); Matt Wicker & Kaitlin Hendrix, “Making Fixed Income More Flexible When Targeting Your Goals” (Dimensional, 2023); Kaitlin Hendrix, “Dimensional Models: Low Turnover plus Active Implementation” (2023) and “Three Reasons Why Dimensional Models Stand Out from the Pack” (2024); Mathieu Pellerin, “Researching Retirement: The Impact of Inflation, Interest Rates, and Market Risks” (2021). Underlying academic research: Fama (1984), Fama & Bliss (1987), Campbell & Shiller (1991), Duffee (2002), Lee/Rizova/Wang (2022), Dai & Schneller (2020). Past performance is no guarantee of future results. This material is for client education only and is not a recommendation to buy or sell any security.