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The examples and case studies in this article are hypothetical but represent real situations I have encountered in my practice working with Washington State public employees. I was reviewing a client's DCP statement recently when she pointed at her bond fund and said, "This one is clearly the winner." She wasn't wrong, exactly. On paper, the bond fund had delivered the best return for the amount of risk taken. The smoothest ride of anything in her portfolio. But that number was telling her something incomplete. And it was pointing her toward a decision that could actually hurt her in retirement. The smoothest ride isn't always the best ride There's a common way to evaluate investments that basically asks: how much return did I get for the amount of volatility I had to endure? Financial professionals use it all the time. It’s called the Sharpe Ratio. And on the surface, it makes sense. Who doesn't want a smooth ride? But consider three hypothetical investments over the past 25 years. By that "smoothness" measure, a bond fund came out on top. A large cap stock fund came in second. And a small cap stock fund came in last.¹ Now look at what actually happened to a hypothetical $10,000 invested in each. The bond fund grew to roughly $29,000. The large cap stock fund grew to about $74,000. And the small cap fund, the "worst" performer by the smoothness measure, grew to nearly $97,000.¹ The smoothest ride left the most money on the table. I think about this a lot when I'm working with Washington State public employees who are retired or nearing retirement. They have a pension coming. They have years of contributions in their DCP 457(b). And they're trying to figure out how to position everything for a retirement that could last 30 or 35 years. A smoothness score doesn't know any of that. It just rewards low volatility. It doesn't care about your goals. Why I evaluate investments as a team, not as individuals Here's what I think matters more. How do your investments work together? Take someone like hypothetical Lisa. She's 53, a parks department supervisor with 24 years in PERS Plan 2. She has about $350,000 in her DCP account and another $180,000 in a Roth IRA she's been building. Lisa's PERS pension is going to provide a stable, predictable income floor for the rest of her life. That changes everything about how we should think about the rest of her portfolio. When you already have a pension, you don't need your bond allocation to generate income. You need it to do something different. You need it to protect your portfolio during the worst moments in the stock market, so you never have to sell stocks at a loss to pay your bills. This is where the type of bonds you own starts to matter more than most people realize. The bond choice most people don't think about Research from the Financial Planning Association examined how U.S. government bonds and corporate bonds each performed inside a diversified portfolio alongside stocks.² The findings were striking. When you look at corporate bonds and government bonds by themselves, corporate bonds have historically earned slightly higher returns. That makes sense. They carry more risk, so they should pay you more. But when you put them inside a portfolio with stocks, the picture flips. Government bonds have historically moved differently than stocks.² When stocks fall hard, government bonds tend to hold their value or even go up. Corporate bonds tend to fall right alongside stocks during the worst downturns.² The credit risk and liquidity risk in corporate bonds show up at exactly the wrong time. One analysis found that once you account for the higher trading costs, fund expenses, and taxes on corporate bond interest (Treasury interest is exempt from state and local taxes), the slim return advantage of corporate bonds essentially disappears.² Another study of 60/40 portfolios over more than 90 years found nearly identical returns whether you used corporate or government bonds, but the portfolio with Treasuries had a meaningfully smaller maximum drawdown.³ That last point is the one I keep coming back to. In retirement, the size of the drop matters just as much as the size of the gain. What this means for your retirement portfolio For someone like Lisa with a PERS pension as her income foundation, the role of bonds in her portfolio isn't to generate the highest possible return. It's to be the part of the portfolio she can draw from when stocks are down, without locking in losses. This is what I call the war chest approach. I typically suggest keeping roughly five years of portfolio withdrawals in high-quality, short-duration government bonds. Not because bonds are exciting. Not because they score well on any single metric. Because they do their job when you need them most. If you want higher returns in your portfolio, the research suggests it's more effective to adjust your stock allocation, rather than reaching for yield with riskier bonds.³ The pension does the heavy lifting on stability. The bonds protect you during bad markets. And the stocks drive long-term growth. Each piece has a role. And evaluating any one piece in isolation misses the whole point. What to think about from here If you're a Washington State public employee approaching retirement, take a look at what's actually inside your DCP bond funds. Are they holding mostly government bonds, or a mix that includes significant corporate bond exposure? Think about how your full picture fits together. Your PERS or TRS or LEOFF pension, your DCP, your IRAs, and Social Security. Each piece should complement the others. And be cautious about chasing the investment that looks best on any single measure. The best portfolio isn't the one with the smoothest individual pieces. It's the one you can stick with for 30 years because it's built to weather the storms that are guaranteed to come. Sources
-Seth Deal
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AuthorsBob Deal is a CPA with over 30 years of experience and been a financial planner for 25 years. Archives
June 2026
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