The question
"I hold bonds so that when stocks fall, I'm cushioned. Does that always work?"
The idea
- It depends on the regime: whether inflation and interest rates are low and steady, or high and rising.When inflation is low and rates move little, bonds tend to hold their value while stocks fall. Fewer stocks, smaller loss.When inflation jumps and rates rise fast, bond prices fall too. When rates rise, new bonds pay more, so older bonds paying less sell for less (Bonds for income). Then stocks and bonds can fall together.
- Inflation also shrinks what any return buys (Inflation and real return).
Worked example
The 4 steps beside the drawing at the top work this through on ETFIQ data. Point at a step to light the part of the drawing it describes.
We'll compare two years when stocks fell, across ETFIQ's benchmarks from 0% to 95% stocks. Every return is a calendar year from the benchmark pages, prices to Nov 10, 2026, and hypothetical (each rule applied to past prices). Inflation is the change in the US consumer price index, December to December.
| 2018 | 2022 | |
|---|---|---|
| Prices rose (inflation) | 1.91% | 6.45% |
| 10-year Treasury yield, start to end | 2.40% to 2.69% | 1.52% to 3.88% |
| Stock share | 2018 | 2022 |
|---|---|---|
| 0% (US bonds) | −0.01% | −13.07% |
| 20% | −1.87% | −13.92% |
| 40% | −3.78% | −14.84% |
| 60% | −5.74% | −15.83% |
| 80% | −7.73% | −16.89% |
| 95% | −9.25% | −17.73% |
So in 2022 the all-bond mix lost almost as much buying power as the 60% mix.
A low-stock mix protects best when bonds hold, and that depends on inflation and rates.
The common mistake
"A bond loss of 13% means I lost 13%." The statement shows dollars, not what they buy. In 2022, US bonds lost 13.07% in dollars and 18.34% in buying power, because prices rose 6.45% the same year. In a high-inflation year, judge every return after inflation.
Check your understanding
Pick an answer to see why. Two of three right passes the lesson.
1. In which year did a lower stock share cut the loss the most?Answer: A. 2018. from 95% to 0% stocks the loss shrank 9.24 points in 2018 and 4.66 in 2022. Not B: in 2022 bonds fell too, so swapping stocks for bonds saved less.2. Next year, inflation is high and rates rise fast. Based on 2022, what is likely for a 20% stock mix?Answer: C. It can fall almost as much as a mostly stock mix. rising rates push bond prices down, so both parts can fall. Not A: in 2022 the 20% mix lost 13.92%.3. A fund returns −5% in a year when prices rose 5%. Roughly what happened to its buying power?Answer: B. About −9.5%. 0.95 ÷ 1.05 = 0.905, about a 9.5% loss. Not A: that ignores the rise in prices.
Takeaways
- Bonds cushion a stock fall best when inflation is low and rates are steady.
- When rates rise fast, stocks and bonds can fall together, and stock share matters less.
- Compare any year across ETFIQ's benchmarks, and read it after inflation.