A. Below we will show 2 reasons that you should not include corporate bond funds in your portfolio and stop chasing higher yields in corporate bonds.
1. Risk Not Rewarded Much by the Return
We all know that risks and returns go together in the investment world. However, in your portfolio, you should take risks on the equity part, not on the bond part, because in the long term, the market does not reward such risk taking much.
For example, from the start of 1926 to September 30, 2015, long term corporate bonds returned an annualized 6.00% on average, but the much safer U.S. government bonds also enjoyed 5.62% annualized return.
2. Risks Occurred at the Worst Time
Financial risk is not just about the possibility of a loss, it's also about such loss happens at the worst time - when you need the money the most. For example, in 2008, when the stock market crashed, you might hope the more conservative part of your portfolio could give you ammunition to take advantage of the low stock valuations, but corporate bonds showed positive correlation with equities and also down substantially.
For example, in 2008, a Barclays index of high-grade, intermediate-term corporate bonds returned negative 11.6%, a similar index that focuses on below investment grade bonds returned negative 23.7%! Chasing that higher yields could yield you very bad results at the worst time.
The Bottom Line
In your core portfolio, include a portion that is invested in the much safer Treasuries and Money Market funds, this part of your portfolio is not for high yields, it's for safety, so you can sleep at night and bottom fishing when the time comes.