Expensive bag and attractive bonuses? How to rethink your FIRE portfolio after falls

After years in which many bonds offered a return close to zero, fixed income has once again become visible in a portfolio. This coincides with an equity market that has suffered rapid declines and rebounds, but continues to be based on high valuations in several segments. The combination invites a reasonable question: has the time come to give more weight to bonds versus the stock market?

My short opinion is this: yes, today there are better arguments for fixed income to form a relevant part of a portfolio than there were a few years ago; No, that is not the same as predicting an imminent stock market crash or abandoning equities. For a FIRE plan, the useful decision is not to guess the next quarter. It consists of aligning each euro with the date on which you will probably have to spend it.

Official organizations support caution, without stating that they know the next market movement. The ECB, in its Financial Stability Review of May 2026 noted that equity valuations remained demanding compared to their history and that corporate credit risk premiums remained compressed. The Federal Reserve, in its May 2026 financial stability report reached a similar reading: stock valuation measures remained high, while the estimated compensation for assuming stock market risk remained below its historical average.

That is not a sell signal. It is a sign that it is advisable to demand more discipline regarding profitability expectations and the size of each risk.

What recent declines and demanding valuations tell us

A market crash does not automatically make a stock or index cheap. The price may fall because expected profits worsen, because discount rates rise, or because risk perception changes. To assess whether something is attractive you have to look at both the price and what you expect to receive in return.

In May 2026, the ECB highlighted that stock markets and corporate bonds had recovered much of the initial correction caused by the geopolitical shock, leaving valuations still high in historical terms. He also warned that negative surprises on energy, inflation, growth, fiscal policy or benefits linked to artificial intelligence could cause sudden readjustments. The Fed noted that the forward P/E of the S&P 500 remained at the high end of its historical range and that the equity risk premium was low.

The lesson for an investor is not “sell because the P/E is high.” Multiples can remain high for years and companies can beat forecasts. The lesson is more humble: when you buy equities with a demanding valuation, a greater part of your future result depends on the good news coming true. There is less room for disappointment.

This matters especially if you are close to living off your wallet. In the accumulation phase, a regular monthly contribution converts drops into purchases at lower prices. In the retirement phase, a fall at the beginning of retirement may force you to sell depreciated shares to pay expenses. It’s sequence of returns risk: two portfolios with the same average return can end up in very different places if the losses come in different years.

Why fixed income is attractive again

A bond does not promise a fixed annual return on screen. Its price changes every day and if sold before expiration, it can lead to profit or loss. But it does offer something the stock market cannot: a contractual sequence of coupons and return of principal, as long as the issuer pays and you hold the bond to maturity.

In the current environment, there is once again nominal remuneration for lending to very solvent issuers in short terms. In July 2026, the ECB maintained its deposit facility at 2.25%. And in the July auctions, the Spanish Treasury Bills were awarded with average rates of 2.37% at 3 months, 2.39% at 6 months, 2.62% at 9 months and 2.50% at 12 months. They are specific data from a specific date, not a guarantee that future auctions will pay the same.

The difference compared to the zero rate stage is important. In the past, setting aside money for upcoming expenses almost always meant accepting a nominal loss due to inflation. Now, a prudent portion of the portfolio can produce measurable nominal income without taking on the full risk of a global stock market.

But “more attractive” does not mean “risk-free.” IMF, in its Global Financial Stability Report of April 2026 warned that inflationary pressures and upward revisions to inflation and rate expectations had raised bond yields, and that supply shocks could weaken the protection normally expected from the stock-bond combination. If rates rise again, existing bonds, especially long-duration ones, may fall in price.

There is no such thing as “the” fixed income: four risks that you must separate

Talking about fixed income as if it were a single thing leads to errors. A monetary fund, a six-month bill, a ten-year government bond and a high-yield corporate bond respond very differently to a crisis.

The duration deserves special attention. It is an approximate measure of how much the price of a bond can vary with a one percentage point change in yields. A high duration portfolio can be useful if inflation moderates and rates fall; It may also suffer if inflation expectations rise or the market demands more term premium.

Therefore, to cover nearby expenses it usually does not make sense to assume an enormous duration just to look for a few extra tenths of performance. A maturity ladder, or a combination of money funds and bonds of duration consistent with the spending schedule, turns fixed income into a planning tool rather than a bet on the central bank’s next move.

Fixed income vs. variable income? The correct comparison

The stock market and bonds do not compete for the same function when the horizon is long. Equities are a share of business profits that can grow above inflation for decades to come, with high volatility. Fixed income offers known payments in nominal terms and usually reduces the extent of a portfolio’s declines, although it does not always protect against inflation or a rise in rates.

The useful comparison is not “which asset will win this year?”, but this:

Current fixed income can be more competitive because its initial profitability is positive and observable. Equities are still necessary for the part of wealth that must grow over decades. Completely substituting one for the other with a one-off valuation often turns the strategic allocation into a market bet.

A FIRE Framework: Spending Cubes, Not Forecasts

For a FIRE plan, I prefer to think in temporal layers:

1. Liquidity layer: short-term expenses and emergency fund in low-risk and quick-access products.
2. Stability layer: high-quality bonds whose maturity approximately coincides with expected expenses in the coming years.
3. Growth Layer: Diversified global equities for long-term inflation protection and long-term expenses.

Imagine a family with €30,000 in annual spending and a portfolio of €750,000. There is no universal correct bonus percentage. But there is a powerful question: if the stock market falls 35% next year, how many years of expenses can that family cover without having to sell shares? If the answer is zero, a greater reserve of liquidity or short-term fixed income may have more value than trying to scratch the last tenth of expected profitability.

On the contrary, a 30-year-old saver who contributes every month and does not plan to withdraw money for two decades should not convert his entire portfolio into bills for fear of a possible correction. Your main risk is not achieving enough real growth. The horizon changes the appropriate instrument.

How to adjust your hypotheses in My FIRE Simulator

It is not necessary to guess the future level of the S&P 500 or the rates to improve a simulation. You can submit your plan to more realistic scenarios:

1. Reduce equity expectations. If you start from demanding valuations, test an average real return lower than the historical one and see how the probability of success changes.
2. Separate the short-term reserve. Don’t attribute the return and volatility of a global index to the same part of the portfolio if you need to spend it quickly.
3. Model inflation separately. A 2.5% bill can protect the nominal balance and still lose purchasing power if inflation is higher.
4. Try different bonus percentages. Compare the median result, but also the bad percentiles and the duration of the declines.
5. Define a rebalancing rule. Decide in advance when to sell part of what has risen to buy back what has fallen; Don’t wait to do it with the market in the red.

Simulation does not predict the future. It is used to check whether your plan survives plausible futures, including those in which stocks and bonds do not behave as you expected.

The conclusion: more useful fixed income, fewer apparent certainties

Recent declines do not prove that the stock market will crash, and current rates do not guarantee that bonds will rise in price. What has changed is the starting point: with equity valuations still demanding and sovereign bills once again offering positive nominal returns, fixed income is once again a serious alternative to finance upcoming expenses and cushion sequence risk.

The sensible answer for a FIRE portfolio is not to switch sides. It is assigning functions: liquidity to live, quality fixed income to stabilize and diversified variable income to grow. The closer you are to withdrawing from the portfolio, the more important it is that that structure is designed before the next decline, not during it.

Official sources consulted

• ECB: Financial Stability Review, May 2026
• ECB: monetary policy decision, July 23, 2026
• Public Treasury: results of the latest Bill auctions
• Federal Reserve: Financial Stability Report, May 2026
• IMF: Global Financial Stability Report, April 2026

This article is educational in nature and does not constitute financial advice. Before modifying your portfolio, consider your horizon, tax situation, need for liquidity and real risk tolerance.

My FIRE Simulator

Creator of My FIRE Simulator and index investing enthusiast. My goal is to help you achieve financial freedom with math and no false promises.