Do you belong in bonds?

Analysis |

Returns on many types of bond mutual funds are so good right now, it's hard to answer "no."

But bonds mean risk as well as reward, so you need to understand some bond basics. The old rule of thumb that the percentage of your total portfolio that's in bonds should equal your age isn't foolish, but it isn't foolproof. How deep you dive into bonds depends on your risk tolerance and the amount of interest income you think you'll need.

The interest rate that bonds pay reflects risk, or how likely it is the bond issuer will be able to pay back the debt. U.S. Treasury bonds offer the least risk, but the government is issuing so much debt right now that risks — and yields — are rising.

Risk is also why emerging market and corporate "junk" bonds are offering such eye-popping returns.

Before you buy any long-term bond, ask whether you can stomach its fixed rate of return if inflation comes back and makes your return worth less than what you expect.