Corporate bonds are debt obligations offered by corporations to finance everything from day-to-day operations to massive corporate takeovers.
Upside: Historically, corporate bonds have offered higher yields than Treasuries and other types of government debt.
Downside: Corporate bonds are much riskier than Treasuries and other types of government debt because even big, established companies can fail, leaving bondholders holding the bag, Richelson says. Compounding the problem, corporate defaults are especially common in the type of difficult economic circumstances that cause your stock investments to fall, diminishing the capacity of those holdings to effectively diversify your portfolio.
Worse still, due to high demand, corporate bonds aren't paying much higher yields than Treasury bonds right now, Richelson says.Bottom line:
Corporate bonds aren't a great place to seek high yields at this time unless you buy risky bonds, often called junk bonds, and aren't likely to provide inflation protection or minimal risk, says Richelson.
Also, avoid foreign bonds, because the biggest component of gain or loss will be on currency fluctuations, not the bond's actual performance. Few types of investments are quite as risky or fee-laden as currency speculation, Richelson says.