Investing - Theory, News & General • `

That’s where I’ve put most of my fixed income allocation.

To chip in for @ChinchillaWhiplash, I had over a decade of jobs without retirement plans while also not meeting solo 401(k) requirements. So, despite maxing IRA contributions every year, my pre-tax and Roth are 100% bonds and I've actually somewhat more than that in taxable bonds. Being relatively recently back to having a retirement plan, I'm planning to max out pre-tax contributions until retirement. That'll let the Roth shift into stock and also helps with exchanging taxable bond positions into stocks.

Some in my circle had parents that lost money on these ‘safe bank bonds’ and a few older ones even tried dipping their foot in the junk pool later on and received a reminder in 1994 that yields come at a cost.

I recently inherited an investment advisor that'd lost some of his own money on junk. 30 years later he still wasn't over it. I found it difficult to miss the parallels with "safe" collateralized loans in 2008.

It seems fair to say today's junk indices (SPHY, USHY, recently VCHY) and conservative managed active junk funds (e.g. VWEAX, arguably VEGBX) offer something different from the 1990s. But if the Warsh fed proves less activist, presumably risk of the sector imploding again will increase due to the withdrawn fed put. While I'm not sure I'd expect something on the scale of the 1990s again junk does strike me as something of a uniquely vulnerable asset class.

I would recommend avoiding junk bonds, because you take the same extra risk but the IRS takes a larger portion of the reward.

If you check upthread you'll see I wrote much the same.

(The correct ratio may not be 50/50 depending on the risk level of the junk bond funds.)

To recap prior discussion for those not on earlier threads, endpoints and asset allocation are influential as well. With US equities it's potentially been 5-10% more stock lately to match putting a portfolio's entire bond holding into junk. 50%'s more of a long term average for junkier junk.

Beyond that, if your tax brackets put corporate in the money then, for example, today's SEC yields are

• 4.84% VCSH (short term investment grade, A- average credit rating)
• 5.39% VCIT (intermediate term investment grade, A-)
• 5.69% VGMS (multisector, BBB-)
• 6.27% VWEAX (junk, BB-)
• 7.18% VCHY (junk, B+)

so the amount of additional tax is rather variable depending how much junk you pick up, how junky it is, and the investment grade comparisons made. In many cases it looks to me taxes alone may not be enough of a difference to cross a tipping point in choosing bond asset classes to hold. (At least if the objective's total return rather than paying minimum tax.)

I haven't calculated equivalent pre-tax equity returns across the typical range of portfolios and tax situations people have (might do that sometime) but, FWIW, my marginal federal+state's about a third and, lately, I've been getting around 4-5% on equities as equivalent to taxable junk. Unappealing in a secular equities bull but perhaps of interest in a secular bear, and thus dependent on retirement portfolio design, outlook, and the amount of tax protected space available. If the bonds are in pre-tax then the usual discussion around their after tax value applies, also with its own nuances. Tax free compounding certainly leads to fuller capture of the risk premium but, unless it's junk in Roth, I'm not sure I'd say the spread's as large as described on that basis either.

While not the usual topic of discussion here, there's also non-retirement uses. If one's investment goals call for taxable bonds for purposes such as maintaining savings to buy back into the housing market, or bridging to 59½ over a long term loss of income without tapping Roth principal, then setting risk though asset allocation likely doesn't apply and maybe it's worth turning up the bond yield to lower opportunity costs. More generally these are examples of liability matching situations where the term's perhaps mobile but remains too short for equities to pose reasonable sequence risk.

This is all a bit niche, but that's rather to be expected as junk's a niche asset class.

Statistics: Posted by squirreltail — Wed Aug 12, 2026 8:09 pm