3 November 2025
First published June, 2025
Updated September, 2026
What role do bonds play in an investment portfolio?
The level of bonds in an investment portfolio will be determined by your asset allocation strategy combined with risk preferences and income needs.
By Damon Frith, Wealth Editor, NAB Private Wealth
Key takeaways
- Asset allocation is one of the most important drivers of long-term investment outcomes.
- Diversification across asset classes can help reduce portfolio risk.
- Bonds can provide income, potential capital appreciation, and portfolio stability.
- Bonds offer exposure to governments, companies, industries, and international markets.
- The appropriate allocation to bonds depends on your goals, risk appetite, and stage of life.
- Asset allocation should be reviewed regularly rather than left unchanged.
Allocation forms the backbone of portfolio construction
Setting your asset allocation among different asset classes is widely considered the most crucial aspect of portfolio construction. It’s the foundation for achieving your investment goals, managing risk, and protecting wealth over the long term.
It influences:
- Potential portfolio returns
- Portfolio volatility
- Income generation
- Risk management
- Long-term wealth creation
Put simply, asset allocation is the proportion of funds placed into various asset classes, taking into account an investor’s risk appetite, personal situation, and long-term goals.
What assets can be included in a diversified portfolio?
Growth assets
Growth assets generally aim to increase wealth over time and may include:
- Australian shares
- International shares
- Property
- Commodities
- Private market investments
Income and defensive assets
These assets are often included to provide income and help manage risk:
- Bonds and fixed interest securities
- Cash
- Infrastructure investments
- Government securities
A diversified portfolio typically combines multiple asset classes rather than relying heavily on a single investment type.
Historically, Australian’s have tended to place a strong emphasis on local equities and property when building an investment portfolio. However, over the past 20 years there has been a significant and increasing shift towards the diversification of portfolios, both geographically and by asset class.
Over concentration in a single asset or sector may lead to short term gains, but this may come at the risk of affecting long-term portfolio performance, as a major event has the potential to wipe out a lot of wealth if a portfolio isn’t diversified. For example, sector crashs, such as the 2000 tech bubble and the boom-bust cycle of the resources industry, or world rattling events such as the 2008-09 global financial crisis and the 2019 COVID-19 pandemic.
A carefully weighted portfolio is more likely to outperform in the long term and offer better protection against market crashes or downturns.
How can bonds improve portfolio diversification?
Many investors associate bonds with Australian government securities, but the bond market is considerably broader.
Investors can gain exposure to:
- Government bonds: Issued by national or state governments to raise capital.
- Corporate bonds: Issued by companies seeking funding for business activities.
- International bonds: Offering access to different economies, interest-rate environments, and currencies.
- Thematic bond opportunities: Bond portfolios can also provide exposure to sectors such as:
- Technology
- Healthcare
- Financial services
- Infrastructure
By incorporating different issuers, industries, regions and duration, bonds can provide another layer of diversification.
Asset allocation is not a "set and forget" exercise.
While it’s tempting to stick with a winner, assets will perform differently over time. Yesterday’s winners may not be tomorrow’s winners, and over time, strong-performing assets may become a larger proportion of a portfolio than initially intended. This can alter the portfolio's risk profile.
Regular reviews may help investors:
- Maintain their desired level of risk
- Rebalance asset allocations
- Take profits from outperforming assets
- Keep portfolios aligned with long-term goals
Investors’ asset allocation may also need to be adjusted over time to suit different stages of their life. Generally, as you get older your portfolio will become more risk averse, to protect the wealth that has been generated by compound interest and smart investing.
A well-constructed portfolio, initiated by asset allocation, will help avoid mistakes or rash decisions, and will aim towards long term goals rather than short term hunches.
A disciplined asset allocation framework can help investors:
- Avoid emotional investment decisions
- Maintain diversification
- Focus on long-term objectives
- Manage volatility more effectively
Frequently Asked Questions
What are bonds?
Bonds are fixed-interest investments that involve lending money to a government, company, or other issuer in exchange for regular interest payments and the return of capital at maturity.
Why are bonds considered less risky than shares?
While bonds are not risk-free, they have historically experienced lower volatility than shares and may provide a more predictable income stream.
How much of a portfolio should be invested in bonds?
There is no single answer. The appropriate allocation depends on an investor's risk tolerance, income needs, investment timeframe, and financial goals.
Are bonds only for retirees?
No. Bonds can play a role for investors at various life stages by helping diversify portfolios and manage risk.
Can bonds help during market downturns?
Bonds have historically helped many portfolios manage volatility during periods of market stress, although performance can vary depending on interest rates, credit conditions, and economic circumstances.
What is the difference between government and corporate bonds?
Government bonds are issued by governments, while corporate bonds are issued by companies. Corporate bonds often offer higher yields but typically involve higher credit risk.
How often should asset allocation be reviewed?
Many investment professionals recommend reviewing asset allocation regularly or when a significant life event occurs to ensure the portfolio remains aligned with financial goals.
To discover more call 1300 683 106 or email us on investordesk@nab.com.au
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