What a bond allocation is actually for

Everything here earned its place by changing an outcome. Nothing about bonds in a portfolio is included to round the number up.

The purpose is behaviour, not yield

A bond allocation reduces the size of drawdowns, which makes a portfolio holdable through a decline. That is a behavioural benefit with a real financial value, because the alternative is often selling equities at the worst moment. Judging bonds on their return alone misses what they were included to do.

The same logic sets the size: an allocation chosen to make a portfolio holdable should be tested against the drawdown it is meant to soften, not against last year's return.

Duration is the main risk lever

Duration measures sensitivity to interest rate changes; longer duration means larger price moves for a given rate change. The sharp bond losses of recent rate-rising periods were a duration event rather than a credit one. Matching duration roughly to your horizon reduces that exposure.

Rising rates cut the price of existing bonds and raise the income earned on everything reinvested afterwards, so a fall in a bond fund is partly a transfer of return from now to later for anyone who keeps holding it.

Credit quality is a separate axis

Government bonds from stable issuers carry low credit risk; corporate and high-yield bonds carry progressively more. High-yield bonds tend to behave more like equities in a crisis, which undermines the reason for holding bonds at all. For the defensive part of a portfolio, higher credit quality is usually the point.

Government bonds carry low credit risk rather than none, and which governments count as stable is a judgment that has changed within living memory and differs by the currency the debt is issued in.

The correlation is not a guarantee

Bonds and equities have often moved in opposite directions, and in some periods they have fallen together. Assuming a permanent negative correlation is an assumption rather than a property. This is an argument for holding some genuinely short-dated or cash-like assets for near-term needs.

Put simply, the periods in which the two fall together have tended to be those driven by inflation rather than by weak growth, which is a mechanism rather than a coincidence and a reason not to treat the relationship as permanent.

Near-term money belongs here

Anything needed within a few years sits naturally in cash or short-dated bonds regardless of the rest of the allocation. That removes the need to sell equities on a schedule set by your spending rather than by the market. It is the simplest available protection against sequence risk.

Put simply, whether to hedge foreign currency matters more for bonds than for equities, because unhedged currency movement can be larger than the entire return the bonds were held to produce.

If that does not fit your week, it is not a failure of willpower.

Funds, individual bonds and the difference between them

An individual bond held to maturity pays its face value on a known date, so a fall in its price along the way is temporary for a holder who waits. A bond fund has no maturity date and continually replaces its holdings, so its price can stay lower after a rate rise even while the income it distributes has risen. Neither is inherently better, and the choice turns on whether you have a date you need the money on, which is the same question that set the duration in the first place.

Where it helps most, for a defined near-term need, a bond or deposit maturing when the money is wanted does something a fund cannot promise, and the price of that is less flexibility in the meantime.

Everything above, in order of what to do first

1. The purpose is behaviour, not yield. A bond allocation reduces the size of drawdowns, which makes a portfolio holdable through a decline.
2. Duration is the main risk lever. Duration measures sensitivity to interest rate changes; longer duration means larger price moves for a given rate change.
3. Credit quality is a separate axis. Government bonds from stable issuers carry low credit risk; corporate and high-yield bonds carry progressively more.
4. The correlation is not a guarantee. Bonds and equities have often moved in opposite directions, and in some periods they have fallen together.
5. Near-term money belongs here. Anything needed within a few years sits naturally in cash or short-dated bonds regardless of the rest of the allocation.
6. Funds, individual bonds and the difference between them. An individual bond held to maturity pays its face value on a known date, so a fall in its price along the way is temporary for a holder who waits.

The takeaway

Hold bonds for how the portfolio behaves in a bad year, and keep the duration honest.

The version you keep doing is the version that works.