There's an old saying in the investing world: "You can eat well or sleep well."
The underlying premise of that quip is simple. If your goal is to get rich, buy stocks. But if you want peace of mind, buy bonds. Stock investments are meant to generate relatively big returns and build wealth over the long term -- but they come with a higher risk of losing you money instead. Bond investments are intended to keep your money safe (or at least, safer than stocks) and deliver reliable interest income.
For retail investors who want to diversify some of their portfolio out of stocks, the Vanguard Total Bond Market ETF (BND 0.04%) can be a good choice as a core bond holding. It has an ultra-low expense ratio of just 0.03%, and offers easy access to a diversified portfolio of more than 11,000 high-quality U.S. government bonds and investment-grade corporate bonds.
NASDAQ: BND
Key Data Points
Signs of recovery in the bond market
Recent times have been difficult for bond investors. Rising interest rates in 2022 drove bond prices down. Over the past five years, this Vanguard exchange-traded fund (ETF) has delivered average annualized returns of negative 0.23%. That included a painful decline of 13.2% in 2022.
But there are a few reasons to believe that the future could be brighter for bond investors. In the past year, this fund earned a total return of 6.7%. That's not as strong as the S&P 500 index's one-year gain of 15.8%, but it's a solid return for a fixed-income investment.
Vanguard's 2026 Economic and Market Outlook report rates bonds as a good investment for the next few years -- maybe even better than buying stocks, considering bonds' relatively better safety profile. Vanguard forecasts that U.S. bonds will earn average annualized returns in the 3.8% to 4.8% range over the next 10 years, while predicting only marginally better average returns of 4% to 5% for U.S. equities.
Image source: Getty Images.
Bond investments can cushion your portfolio against AI bubble risks
If you're concerned about the possibility that the AI sector is in a bubble that's eventually going to burst, adding bond investments to your portfolio could make sense. Although Vanguard economists are bullish on the chances for a future AI-based boom, they are cautious about the nearer-term outlook for AI stocks. The company's 2026 Economic and Market Outlook report notes that U.S. technology stocks are already priced for high earnings expectations, and warns that investors in AI stocks might be underestimating the risks of "creative destruction from new entrants into the sector."
If the AI boom turns out to be a bubble, or even if AI companies merely fall short of the lofty expectations baked into their share prices, the resulting declines could drag down returns for the broader U.S. stock market. Funds invested in the Vanguard Total Bond Market ETF could help your portfolio keep delivering steady gains amid that turbulence.
Still, investors should keep in mind that even bond ETFs are not risk-free. Bond prices can go down when interest rates go up or when credit quality goes down. But if you want to diversify or rebalance your portfolio in a way that reduces your dependence on the continuing outperformance of technology stocks, take a closer look at the Vanguard Total Bond Market ETF.
