Less Stocks and More Bonds? Maybe. But Which Ones?

The decision to adjust your portfolio allocation between stocks and bonds depends on various factors. Drozd Irina/Shutterstock

We couldn’t get enough of the roaring stock market in 2023 and 2024. Stocks were up double digits with some popular stocks doubling or even tripling. But in 2025, sticky inflation, trade wars, and excessive debt weigh on economic growth.

It may be time to mix down out of a rich allocation in stocks and increase your allocation in bonds. But which ones? There are so many to choose from.

Let’s look at the bond picture from a 30,000-foot view, so to speak, without getting too deep into the weeds of arcane finance-speak.

Bond Types

There are a number of types of bonds. They can be categorized either by issuer or characteristic, and in many cases, the categories will overlap.

By Issuer

• Government bonds: Issued by national governments and considered safe investments.
• Municipal bonds: Issued by local governments.
• Corporate bonds: Issued by companies.
• Foreign bonds: Issued by foreign governments or corporations.
• Agency bonds: Issued by government agencies or government-sponsored enterprises.
• Emerging market bonds: Issued by developing countries.

By Characteristic

• Floating-Rate Bonds: These bonds have interest rates that fluctuate periodically, usually based on a reference rate like the government rate. 
• High-yield bonds: Offer higher interest rates but come with higher risk.
• Zero-coupon bonds: Sold at a discount and pay no interest until maturity.
• Convertible bonds: Can be converted into company stock.
• Callable bonds: Can be redeemed by the issuer before maturity.
• Inflation-Linked Bonds: The principal or interest payments on these bonds are tied to inflation. An example of this is Treasury Inflation-Protected Securities (TIPS)

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Evaluating Bonds

Bonds are evaluated based on several criteria, depending on their type and the specific context of the evaluation. Here are some key factors to consider when evaluating various types of bonds:

Credit Quality: For corporate and municipal bonds, the issuer’s creditworthiness must be assessed. Credit rating agencies such as Moody’s, S&P, or Fitch all provide ratings based on the issuer’s financial health and ability to repay the debt. Higher-rated bonds (AAA) are considered safer, but offer lower yields, while lower-rated bonds (junk bonds) offer higher yields but come with greater risk.

Yield: The yield is the return an investor can expect to earn from a bond. It can be calculated in several ways, including current yield (annual interest payment divided by the current bond price) and yield to maturity (the total return expected if the bond is held to maturity).

Coupon Rate or Stated Rate: The coupon rate is the annual interest rate paid by the bond issuer. It is fixed and paid periodically (semi-annually). The coupon rate is the stated periodic interest payment due to the bondholder at specified times. The bond yield is the anticipated rate of return from the coupon payments alone, calculated by dividing the annual coupon payment by the bond’s current market price.

Bond Maturity: Bond maturities vary, from short-term (less than one year) to long-term. The maturity date is when the bond issuer repays the principal amount to the bondholders.

Interest Rate Risk: Bonds are sensitive to changes in interest rates. When interest rates rise, bond prices typically fall, and vice versa. This is more pronounced in long-term bonds, making it important to factor in the corresponding leverage risk when you buy bonds.

Inflation Risk: Inflation can erode the purchasing power of the bond’s interest payments. Inflation-indexed bonds, like Treasury Inflation-Protected Securities (TIPS), are designed to protect against this risk. We'll talk about TIPS more later.

Liquidity: Liquidity is the ease with which a bond can be bought or sold in the market without significantly affecting its price. Publicly traded and highly liquid bonds are easier to monetize when needed.

Call Risk: Some bonds are callable, meaning the issuer can repay the bond before its maturity date. This can be a disadvantage to investors if the bonds are called when interest rates are lower.

Treasury Inflation-Protected Securities (TIPS)

Yields on Treasury inflation-protected securities have recently approached their highest levels in at least two decades. Sticky inflation is driving investors into bonds that protect against price increases.

TIPS are bonds whose principal value adjusts with changes in consumer prices, ensuring that investors maintain and defend their purchasing power. Investors worried about tariffs and worsening deficits may opt for TIPS as an inflation hedge.

TIPS are U.S. government bonds, but with key differences. Most Treasury bonds have a set principal that reverts to the investor when the bond matures, but in the case of TIPS, the principal changes with the change in the consumer-price index (CPI). The principal (called par value or face value) of a TIPS goes up with inflation and down with deflation.

When a TIPS matures, you will receive either the increased (inflation-adjusted) price or the original principal, whichever is greater. You never receive less than the original principal. Add to that changing principal a fixed interest rate paid semiannually, and investors can be assured their bonds and interest will keep pace with the rising cost of living.

Currently, TIPS yields are at levels we haven’t seen since the late 2000s. But these bonds can also come with unexpected consequences that could mean losses. Like all government bonds, TIPS are volatile if interest rates move sharply.

Many investors who jumped on TIPS when inflation jumped in 2021 found themselves with unexpected value declines of about 12 percent when the Federal Reserve began hiking interest rates to tame inflation—which went from a high of just over 9 percent to around 3 percent today.

As performance turned negative, investors started to abandon TIPS funds in 2022, pulling $21.3 billion, and reducing the category 7 percent. In 2023, investors pulled another $20 billion from the category.

Investors pay federal taxes on interest payments from TIPS, as well as on their unrealized gains on the principal, even though they don’t receive those gains until they sell the bonds or wait for maturity (which could be years away). If your investment is in a tax-advantaged account (e.g. Roth IRA), however, that can defer the taxable impact.

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How to Buy TIPS

Consider building a “bond ladder” in your brokerage account.

As we’ve discussed previously, bond ladders are very effective in funding a future known spending need, such as a year of retirement income.

A bond ladder is essentially a series of bonds maturing at different times in the future. While this takes forethought and perhaps a financial adviser, there are websites offering “how to” advice, such as tipsladder.com and tipswatch.com.

If you can figure this out on your own, you may save yourself some mutual-fund fees, and holding to maturity negates the anxiety resulting from market changes in interest rates between the time of purchase and bond maturity.

You might also opt for TIPS in mutual or exchange-traded funds. These offer the advantage of diversifying across maturities in one fell swoop. These funds hold a vast array of bonds that don’t mature. But remember that if you do choose to hold individual bonds to maturity, you won’t need to worry about any unforeseen price swings.

U.S. Treasury bonds are considered safe investments, although worries about still rising deficits could end up hurting market value if the “safe” factor is reduced by regulatory agencies or just by market fears in general.

Though the United States has seldom defaulted on its debt obligations, the fear of doing so can be sufficient to dent the market price.

Summary

The decision to adjust your portfolio allocation between stocks and bonds depends on various factors, including your financial goals, risk tolerance, and market conditions.

Ultimately, it’s essential that you review your financial situation and consult with a financial adviser to make an informed decision. An adviser can provide personalized advice based on your specific circumstances and goals.

The Epoch Times copyright © 2025. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.