Still, those categories you list as meeting satisfactory critera are solid. Roger Gibson, who literally wrote the book on asset allocation, Asset Allocation, is well-respected by his peers for his work in this area of investing. He suggests that a good portfolio will include seven major asset categories: short-term debt, intermediate/long U.S. bonds, non-U.S. bonds, U.S. stocks, non-U.S. stocks, real estate-linked securities (including hard ownership), and commodity-linked securities. Including these categories in a portfolio should help to both minimize risk and increase returns. As you noted, increasingly smaller incremental returns can be had by adding more subcategories under each category.

As to Mike’s suggestion that junk offers a good risk/return profile, consider that junk tends to be correlated with stocks, and bonds in general are high-tax securities. For most investors, bonds are not really meant to be high-return vehicles. They are chosen because they are relatively low in volatility and because they don’t correlate well with stocks.

Good post, Kyle

Think what you will of Cramer, but he can be entertaining from time to time.

Also, I would argue that Junk Bonds can offer adequate return for the risk. They’re somewhere between “investment grade” bonds and stocks. You can get much higher return than traditional bonds, but you still get something (in theory anyway, being that you have first dibs on any assets of the borrower) should the underlying borrower default whereas in if a company goes bankrupt, your stock is worth little more than the paper certificate is could once be redeemed for.