If Your Advisor Said to Add Bonds at 65, They Were Right (in 1995). Here’s What That Advice Should Sound Like Today.

Hindsight is 20/20, but in 1995, going long fixed-income duration really was the correct move.  Duration is essentially a measure of a bond portfolio’s sensitivity to changes in interest rates. The longer the duration, the more a bond’s price tends to move when rates change.

Back then, interest rates across much of the developed world were in a long secular decline. And when rates fall, bonds generally rise in price because their fixed coupon payments become more attractive relative to newly issued debt. In a falling-rate environment, long-duration bonds can deliver very strong capital appreciation on top of their coupon payments.

That dynamic helped create one of the greatest bond bull markets in history. It is also why investors like Bill Gross became legendary. Gross earned the nickname “Bond King” not because he simply clipped coupons for income, but because he actively traded duration, credit spreads, and interest rate cycles using what became known as a “total return” approach to fixed income investing.

But 2022 completely upended that relationship. As inflation surged across developed economies, central banks around the world hiked rates aggressively to combat it. Bonds suffered one of their worst years since the Volcker era of the early 1980s, and their negative correlation with stocks disappeared. The classic 60/40 portfolio suddenly did not provide the diversification retirees needed.

Now, I am not saying bonds no longer have a role. Personally, I still have a soft spot for municipal bonds in particular because of their federal and sometimes state tax advantages. And to be fair, a simple pairing like the Vanguard Total Stock Market ETF (NYSEARCA: VTI) alongside the Vanguard Total Bond Market ETF (NASDAQ:BND) still gives you tremendous diversification at an ultra-low blended expense ratio of around 0.03%.

But  I also think investors need to recognize that a higher-for-longer interest rate regime means stock-bond correlations can absolutely rise again. So, if I personally were 65 today and trying to lower portfolio risk, I would not blindly add more bonds the way advisors routinely recommended in the 1990s. I would think differently about risk management altogether.

Why Options Create More Defined Protection

Correlation simply measures how assets move relative to each other. A correlation of negative one means two assets move perfectly opposite one another. A correlation of positive one means they move together. The problem is that correlations are not stable. They can change dramatically during inflationary or stressed environments, which is exactly what investors discovered in 2022.

Options work differently. They rely less on historical correlations and more on explicitly defined payoff structures. For example, put options give investors the right, but not the obligation, to sell an underlying asset at a predetermined strike price. They effectively function as portfolio insurance.

The downside is that insurance costs money. Put options lose value over time through what options traders call theta decay. If the market does not decline, those puts gradually expire worthless, meaning the premium paid becomes a drag on returns.

One way investors offset that cost is by selling covered calls. When you combine a protective put with a covered call, you create what is called a collar strategy. The covered call helps finance the cost of the downside protection while simultaneously capping upside gains within a predefined range.

You are essentially exchanging some upside potential in return for more controlled downside risk. You can absolutely implement this manually yourself. But for investors who do not want to trade options directly, there are ETFs now doing a version of this automatically.

The Simplify ETF Solution

One ETF I think could serve as a viable alternative or complement to a traditional 60/40 portfolio is the Simplify Hedged Equity ETF (NYSEARCA: HEQT). Most of HEQT’s portfolio is invested in an iShares ETF tracking the S&P 500. Layered on top of that is what is known as a put spread collar strategy.

First, HEQT buys a 5% out-of-the-money put option. That establishes downside protection if the market falls. To partially finance that hedge, the ETF sells a 20% out-of-the-money put option. That generates premium income, but it also means investors begin participating in downside losses again if declines exceed 20%. In practice, that creates a protection band where the ETF is hedged against losses between roughly 5% and 20%.

However, selling the lower put alone does not fully pay for the protective put. So HEQT also sells covered calls, with strike prices varying depending on market conditions. This pays for the protection completely, but also caps upside appreciation potential.

Importantly, these option positions are laddered across three sequential monthly expirations. That means unlike many traditional buffer ETFs, HEQT does not depend heavily on when you happen to buy the ETF relative to a specific outcome period. Instead, it functions more like an evergreen hedging solution with ongoing downside protection and upside caps.

Historically, this approach has worked fairly well. According to Testfolio.io data covering November 2, 2021 through May 19, 2026, or roughly 4.54 years, HEQT delivered an 8.97% annualized return. A traditional 60/40 mix using VTI and BND lagged at 6.59%.

More importantly, HEQT dramatically reduced downside volatility during the 2022 bear market. The VTI/BND portfolio suffered a maximum drawdown of 21.56%, whereas HEQT’s worst drawdown was just 11.51%. Annualized volatility also fell significantly from 11.44% for the 60/40 portfolio down to 8.51% for HEQT.

Unsurprisingly, the ETF’s Sharpe ratio was substantially stronger at 0.60 versus just 0.28 for the traditional stock-bond mix. Moreover, one of the things I like most about HEQT is that it is not outrageously expensive. At a 0.43% net expense ratio, yes, it is significantly more expensive than a passive stock-and-bond portfolio.

But considering that investors are getting an actively managed hedging overlay with continuously laddered options protection, I actually think the pricing is fairly reasonable relative to its peer group, and especially compared to legacy hedged mutual funds.