Are junk bonds advisable to be inside a bond portfolio that has the objective of generating stable income for a retiree?
Corporate bonds have gotten very complicated in the last 20 years to the point where individual investors are at significant disadvantages when lending money. Subordinated debentures, covenants, long maturities with short call features, opaque credit analysis, etc. Interest rates are so low now that investors (individual & professionals) are forced further out the risk & maturity spectrum for yield. It's a very crowded and busy street.....stay out of the traffic. Really you are better off owning a low cost bond fund that emulates the Barclays Corp/Gov index, or similar. That said, junk bonds may be useful to you if you can tolerate losing money when companies default....you've got to look in the mirror. Choose a fund that is diverse, Treasuries, agencies, corps both high and low.....and don't go for the highest yield. I let someone else pick and chose which junk bonds to buy and which to sell. So instead of holding individual bonds in my portfolio I hold an ETF that is managed by a man with a PHD and which buys junk bonds.   I get a yearly 15.5% ROI, paid monthly.  Buy and hold and you can get a good return for the rest of your life. It is only speculation when you sell. "Junk Bonds (aka High Yield bonds) are typically those bonds from issues with credit ratings below BBB-. Not all such companies are big risks. They are just less financially sound than other, higher rated, companies. If you are not comfortable doing the analysis yourself, you should consider investing in a mutual fund, ETF, or unit trust that invests in high yield bonds. You get access to ""better quality"" issues because a huge amount of the debt markets goes to the institutional channels, not to the retail markets. High yield (junk) bonds can make up a part of your portfolio, and are a good source of regular income. As always, you should diversify and not have everything you own in one asset class. There are no real rules of thumb for asset allocation -- it all depends on your risk tolerance, goals, time horizon, and needs. If you don't trust yourself to make wise decisions, consult with a professional whom you trust."
"Some investors worry about interest rate risk because they Additional reason is margin trading which is borrowing money to invest in capital markets. Since margin trading includes minimum margin requirements and maintenance margin to protect lender ""such as a broker""  , a decrease in the value of bonds might trigger a threat of a margin call There are other reasons why investors care about interest rate risk  such as spread trade investors who benefit from difference in short term/ long term interest rates. Such investors borrow short term loans -which enables them to pay low interest- and lend long term loans - which enables them to gain high interest-. Any disturbance between the interest rate spread between short term and long term bonds might affect investor's profit and might even lead to losses. In summary , it all depends on you investment objective and financial condition. You should consult with your financial adviser to help plan for your financial goals." In answer to your last formulation, no. In a perfectly efficient market, different investors still have different risk tolerances (or utility functions). They're maximizing expected utility, not expected value.  The portfolios that maximize expected utility for different risk preferences are different, and thus generally have different expected values. (Look up mean-variance utility for a simple-ish example.)  Suppose you have log utility for money, u(x) = log(x), and your choice is to invest all of your money in either the risk-free bond or in the risky bond. In the risky bond, you have a positive probability of losing everything, achieving utility u(0) = -\infty. Your expected utility after purchase of the risky bond is:  Pr(default)*u(default) + (1-Pr(default))*u(nominalValue).  Since u(default)= -\infty, your expected utility is also negative infinity, and you would never make this investment. Instead you would purchase the risk-free bond.  But another person might have linear utility, u(x) = x, and he would be indifferent between the risk-free and risky bonds at the prices you mention above and might therefore purchase some. (In fact you probably would have bid up the price of the risk-free bond, so that the other investor strictly prefers the risky one.) So two different investors' portfolios will have different expected returns, in general, because of their different risk preferences. Risk-averse investors get lower expected value. This should be very intuitive from portfolio theory in general: stocks have higher expected returns, but more variance. Risk-tolerant people can accept more stocks and more variance, risk-averse people purchase less stocks and more bonds. The more general question about risk premia requires an equilibrium price analysis, which requires assumptions about the distribution of risk preferences among other things. Maybe John Cochrane's book would help with that---I don't know anything about financial economics. I would think that in the setup above, if you have positive quantities of these two investor types, the risk-free bond will become more expensive, so that the risky one offers a higher expected return. This is the general thing that happens in portfolio theory. Anyway. I'm not a financial economist or anything.  Here's a standard introduction to expected utility theory: http://web.stanford.edu/~jdlevin/Econ%20202/Uncertainty.pdf tl,dr: I-bonds do not fit well into most personal finance plans. First the questions (succinct reference): I like your thought process weighing your liquidity and risk versus your return.  This is very important.  However, I think you might be sidetracked a bit by I-Bonds.  I-Bonds are not generally good for personal investment as they are not marketable when necessary, have redemption penalties and hold lower overall yields in general.  Finally, they are significantly harder to trade as you can buy and hold a TIPS ETF and get exposure to all maturities and get the current competitive rate all in one purchase. Inflation protection is in general an interesting problem.  While inflation-protected bonds sound like they are great for inflation protection (after all it is in the name), they may not be the best instruments for long/medium term protection.  It is really important to remember that inflation protected bonds have significantly lower returns and one form of inflation protection is to just have more money in the future.  TIPS really protect against large inflation changes as normal bonds have the future expected inflation already baked in their higher rates. Also, when you own a stock you own part of a company and inflation will increase the value of the company relative to the inflated currency.  Foreign stocks can give even more protection if you think inflation in your local currency is going to be higher then the foreign currency.  Stocks in the past have had significantly higher return overall than inflation protected bonds but have higher risk as well. As a medium term, low-risk portfolio, it is worth looking into some combination of TIPS, normal bonds and a small to medium allocation of local/foreign stocks all done through low-fee mutual funds or index ETFs. For most people, you don't want individual bonds. Unless you are investing very significant amounts of money, you are best off with bond funds (or ETFs). Here in Canada, I chose TDB909, a mutual fund which seeks to roughly track the DEX Universe Bond index. See the Canadian Couch Potato's recommended funds. Now, you live in the U.S. so would most likely want to look at a similar bond fund tracking U.S. bonds. You won't care much about Canadian bonds. In fact, you probably don't want to consider foreign bonds at all, due to currency risk. Most recommendations say you want to stick to your home country for your bond investments. Some people suggest investing in junk bonds, as these are likely to pay a higher rate of return, though with an increased risk of default. You could also do fancy stuff with bond maturities, too. But in general, if you are just looking at an 80/20 split, if you are just looking for fairly simple investments, you really shouldn't. Go for a bond fund that just mirrors a big, low-risk bond index in your home country. I mean, that's the implication when someone recommends a 60/40 split or an 80/20 split. Should you go with a bond mutual fund or with a bond ETF? That's a separate question, and the answer will likely be the same as for stock mutual funds vs stock ETFs, so I'll mostly ignore the question and just say stick with mutual funds unless you are investing at least $50,000 in bonds. "I find it interesting that you didn't include something like [Total Bond Market](http://stockcharts.com/freecharts/perf.html?VBMFX), or [Intermediate-Term Treasuries](http://stockcharts.com/freecharts/perf.html?VBIIX), in your graphic.   If someone were to have just invested in the DJI or SP500, then they would have ignored the tenants of the Modern Portfolio Theory and not diversified adequately.  I wouldn't have been able to stomach a portfolio of 100% stocks, commodities, or metals.  My vote goes for: 1.) picking an asset allocation that reflects your tolerance for risk (a good starting point is ""age in bonds,"" i.e. if you're 30, then hold 30% in bonds); 2.) save as if you're not expecting annualized returns of %10 (for example) and save more; 3.) don't try to pick the next winner, instead broadly invest in the market and hold it.  Maybe gold and silver are bubbles soon to burst -- I for one don't know.  I don't give the ""notion in the investment community"" much weight -- as it always is, someday someone will be right, I just don't know who that someone is." @bstpierre gave you an example of a portfolio similar to IFA's 70 portfolio. Please, look other variants of example portfolios there and investigate which would suit to you.  Although the example portfolios are not ETF-based, required by the op, you can rather easily check corresponding components with this tool here. Before deciding your portfolio, fire up a spreadsheet (samples here) and do calculations and do not underestimate things below: Bogleheads have already answered this type of questions so why not look there? Less reinventing the wheel: google retirement portfolios site:bogleheads.org. I am not making any recommendations like other replies because financial recommendations devalue. I hope I steered you to the right track, use less time to pick individual funds or stocks and use more time to do your research. "The problems with ratings and the interpretation of ratings is that they are retrospective, and most people read them as prospective. They basically tell you that debtor is solvent right now. What does that mean? It means that the ratings are based on the audited financial statements of a company, government or other organization issuing debt. So, in the best case scenario where the rating agency is acting properly, they are still dependent on folks with fiduciary responsibility telling the truth. And even if they are telling the ""truth"", accounting rules make it possible to obscure problems for years in some cases. Municipal goverments are a great example of this... the general obligation bonds cities and even states with deep structural budget problems still get good ratings, because they are solvent and have sufficient operating cash to meet obligations today. But towards the end of a 30-year bond's life, that may not be the case anymore unless they dramatically alter their budgets. At the end of the day, ratings are one aspect of due diligence. They are useful screening devices, but you need to understand who you are lending money to by purchasing bonds and diversify your holdings to protect your wealth.  The problem, of course, is when the trustees of your pension fund invests in garbage assets after getting a sales pitch on the beach in Hawaii, then conveniently place all of the blame for that bad investment on the rating agency. You unfortunately have zero control over that." You start taking on some big risks when go to absolute zero. Unlike your plane analogy, you don't have to fly or not fly - you can opt to take a safer hybrid form of transit. Or to extend the analogy: now you're driving or walking instead of flying, which, per mile traveled, is statistically more risky, even if the plane 'feels' and 'looks' riskier.  Consider reading up a bit on the risks of all-cash/bonds (including: shortfall and inflation). Yes, real estate is a hedge, but most of your portfolio is still exposed to inflation. Why not also buy some Treasury Inflation-Protected Securities via a bond fund? Why not put 25% in the stock market to help do well when the markets do well?  I think if you do some reading on this you'll find yourself shocked at the risks of being all-cash. FWIW, I'm a relatively conservative voice on investing subreddits - the guy who is usually saying 'hey be sure to keep some bonds!.' So I'm all about a safe/balanced portfolio, but tilt too far in either direction and you take on more risk, not less.  You mentioned a pension and real estate. Those are presumably good inflation hedges and relatively stable holdings. The pension especially suggests you can take more stock risk, since you have that stable, bond-like holding.  The weirdest thing to me is that you would be 'all in' during the good times. If you're this risk adverse when you see warning signs, I'm curious: were you 100% stocks before? Totally on/off like that seems kinda intense.