Bond ETFs as a means to achieve risk parity
How is it possible that long term treasury bonds, which the government has never defaulted on, can hold more risk as an ETF then the stock market index? The risk from long-term bonds isn't that the government defaults, but that interest rates go up before you get paid, so investors want bonds issued more recently at higher interest rates, rather than your older bonds that pay at a lower rate (so the price for your bonds goes down). This is usually caused by higher inflation rates which reduce the value of the interest that you will be paid. Do you assume more risk investing in bond ETFs than you would investing in individual bonds? If you are choosing the right ETFs, there should be a lower amount of risk because the ETFs are taking care of the difficult work of buying a variety of bonds.  Are bond ETFs an appropriate investment vehicle for risk diversification? Yes, if you are investing in bonds, exchange traded funds are an appropriate way to buy them. The markets for ETFs are usually very liquid.
There are very strict regulations that requires the assets which a fund buys on behalf of its investors to be kept completely separate from the fund's own assets (which it uses to pay its expenses), except for the published fees. Funds are typically audited regularly to ensure this is the case. So the only way in which a default of the fund could cause a loss of invstor money would be if the fund managers broke the regulations and committed various crimes. I've never heard of this actually happening to a normal mutual fund. There is of course also a default risk when a fund buys bonds or other non-equity securities, and this may sometimes be non-obvious. For example, some ETFs which are nominally based on a stock index don't actually buy stocks; instead they buy or sell options on those stocks, which involves a counterparty risk. The ETF may or may not have rules that limit the exposure to any one counterparty. Bond MF/ETF comes in many flavour, one way to look at them is corporate, govt. (gilt/sovreign), money market (short term, overnight lending etc.), govt. backed bonds. The ETF/MFs that invest money in these are also different types. One way to evaluate an ETF/MF is to see where they invest your money. Corporate debts are by the highest coupon paying bonds, however, the chance of default is also greater, if you wish to invest in these, it is preferable to look at the ETF/MF's debt portfolio financial ratings (Moodies etc.). Govt. bonds are more stable and unless the govt. defaults (which happens more often than we would like to think), here also look for higher rating bonds portfolio that the fund/scheme carries. The govt. backed bonds are somewhat similar to sovreign bonds, however, these are issuesd by institutions which are backed by govt. (e.g. national railways, municipal bodies etc.), any fund/scheme that invests in these bonds could also be considered and similarly measured. The last are the short term money market related, which provides the least return but are very liquid. It is very difficult to answer how you should invest large sum on ETF/MFs that are bond oriented. However, from any investment perspective, it is better to spread your money. If I take your hypthetical case of 1M$, I would divide it into 100K$ pieces and invest in 10 different ETF/MF schemes of different flavour: Hope this helps. "(Real) interest rates are so low because governments want people to use their money to improve the economy by spending or investing rather than saving. Their idea is that by consuming or investing you will help to create jobs that will employ people who will spend or invest their pay, and so on. If you want to keep this money for the future you don't want to spend it and interest rates make saving unrewarding therefore you ought to invest. That was the why, now the how. Inflation protected securities, mentioned in another answer, are the least risk way to do this. These are government guaranteed and very unlikely to default. On the other hand deflation will cause bigger problems for you and the returns will be pitiful compared with historical interest rates. So what else can be done? Investing in companies is one way of improving returns but risk starts to increase so you need to decide what risk profile is right for you.  Investing in companies does not mean having to put money into the stock market either directly or indirectly (through funds) although index tracker funds have good returns and low risk. The corporate bond market is lower risk for a lesser reward than the stock market but with better returns than current interest rates. Investment grade bonds are very low risk, especially in the current economic climate and there are exchange traded funds (ETFs) to diversify more risk away. Since you don't mention willingness to take risk or the kind of amounts that you have to save I've tried to give some low risk options beyond ""buy something inflation linked"" but you need to take care to understand the risks  of any product you buy or use, be they a bank account, TIPS, bond investments or whatever. Avoid anything that you don't fully understand." "First, it's an exaggeration to say ""every"" dollar. Traditional mutual funds, including money-market funds, keep a small fraction of their assets in cash for day-to-day transactions, maybe 1%. If you invest $1, they put that in the cash bucket and issue you a share. If you and 999 other people invest $100 each,  not offset by people redeeming, they take the aggregated $100,000 and buy a bond or two. Conversely, if you redeem one share it comes out of cash, but if lots of people redeem  they sell some bond(s) to cover those redemptions -- which works as long as the bond(s) can in fact be sold for close enough to their recorded value. And this doesn't mean they ""can't fail"". Even though they are (almost totally) invested in securities  that are thought to be among the safest and most liquid available,  in sufficiently extreme circumstances those investments can fall in market value,  or they can become illiquid and unavailable to cover ""withdrawals"" (redemptions). ETFs are also fully invested, but the process is less direct. You don't just send money to the fund company. Instead: Thus as long as the underlyings for your ETF hold their value, which for a money market they are designed to, and the markets are open and the market maker firms are operating, your ETF shares are well backed. See https://en.wikipedia.org/wiki/Exchange-traded_fund for more." The article links to William Bernstein’s plan that he outlined for Business Insider, which says: Modelling this investment strategy Picking three funds from Google and running some numbers. The international stock index only goes back to April 29th 1996, so a run of 21 years was modelled.  Based on 15% of a salary of $550 per month with various annual raises: Broadly speaking, this investment doubles the value of the contributions over two decades. Note:  Rebalancing fees are not included in the simulation. Below is the code used to run the simulation.  If you have Mathematica you can try with different funds.    Notice above how the bond index (VBMFX) preserves value during the 2008 crash.  This illustrates the rationale for diversifying across different fund types. I think the dividend fund may not be what youre looking for. You mentioned you want growth, not income. But I think of dividend stocks as income stocks, not growth. They pay a dividend because these are established companies that do not need to invest so much in capex anymore, so they return it to shareholders. In other words, they are past their growth phase. These are what you want to hold when you have a large nest egg, you are ready to retire, and just want to make a couple percent a year without having to worry as much about market fluctuations. The Russel ETF you mentioned and other small caps are I think what you are after. I recently made a post here about the difference between index funds and active funds. The difference is very small. That is, in any given year, many active ETFs will beat them, many wont. It depends entirely on the market conditions at the time. Under certain conditions the small caps will outperform the S&P, definitely. However, under other conditioned, such as global growth slowdown, they are typically the first to fall. Based on your comments, like how you mentioned you dont want to sell, I think index funds should make up a decent size portion of your portfolio. They are the safest bet, long term, for someone who just wants to buy and hold. Thats not to say they need be all. Do a mixture. Diversification is good. As time goes on dont be afraid to add bond ETFs either. This will protect you during downturns as bond prices typically rise under slow growth conditions (and sometimes even under normal conditions, like last year when TLT beat the S&P...) "Not a bond holder, but when we get dividends we usually just buy up a benchmark index tracking ETF unless/until we're ready to rebalance our portfolio. Most of the trades in the day are earmarked with the reason ""spending cash"". I'd assume it's similar for bond holders and coupons." "Question 1: How do I start? or ""the broker"" problem Get an online broker.  You can do a wire transfer to fund the account from your bank. Question 2: What criticism do you have for my plan? Dividend investing is smart.  The only problem is that everyone's currently doing it.  There is an insatiable demand for yield, not just individual investors but investment firms and pension funds that need to generate income to fund retirements for their clients.  As more investors purchase the shares of dividend paying securities, the share price goes up.  As the share price goes up, the dividend yield goes down.  Same for bonds.  For example, if a stock pays $1 per year in dividends, and you purchase the shares at $20/each, then your yearly return (not including share price fluctuations) would be 1/20 = 5%.  But if you end up having to pay $30 per share, then your yearly return would be 1/30 or 3.3% yield.  The more money you invest, the bigger this difference becomes; with $100K invested you'd make about $1.6K more at 5%.  (BTW, don't put all your money in any small group of stocks, you want to diversify).  ETFs work the same way, where new investors buying the shares cause the custodian to purchase more shares of the underlying securities, thus driving up the price up and yield down.  Instead of ETFs, I'd have a look at something called closed end funds, or CEFs which also hold an underlying basket of securities but often trade at a discount to their net asset value, unlike ETFs.  CEFs usually have higher yields than their ETF counterparts.  I can't fully describe the ins and outs here in this space, but you'll definately want to do some research on them to better understand what you're buying, and HOW to successfully buy (ie make sure you're buying at a historically steep discount to NAV [https://seekingalpha.com/article/1116411-the-closed-end-fund-trifecta-how-to-analyze-a-cef] and where to screen [https://www.cefconnect.com/closed-end-funds-screener] Regardless of whether you decide to buy stocks, bonds, ETFs, CEFs, sell puts, or some mix, the best advice I can give is to a) diversify (personally, with a single RARE exception, I never let any one holding account for more than 2% of my total portfolio value), and b) space out your purchases over time.  b) is important because we've been in a low interest rate environment since about 2009, and when the risk free rate of return is very low, investors purchase stocks and bonds which results in lower yields.  As the risk free rate of return is expected to finally start slowly rising in 2017 and gradually over time, there should be gradual downward pressure (ie selling) on the prices of dividend stocks and especially bonds meaning you'll get better yields if you wait.  Then again, we could hit a recession and the central banks actually lower rates which is why I say you want to space your purchases out."