Diversifying within Your Bond Portfolio

Within the bond portion of your portfolio, you will also want to diversify your holdings. Here are two key factors to consider when determining your bond allocation:

Tax Bracket

Your tax bracket may influence how you allocate investments among taxable and tax-exempt bonds. If your current federal income tax bracket is 28% or higher, the tax savings on municipal bonds, for instance, may be worth considering. Tax calculators are available on the Web, including SIFMA's Investing in Bonds Web site, to help you determine how tax-exempt yields compare to taxable yields.

Risk Tolerance

Your risk tolerance depends on your own personal preferences as well as the number of years you have until retirement. If you can't sleep at night because you're worrying about a downgrade in a high-yield bond, then you'll want to consider lower-risk alternatives. You might consider diversifying your bond holdings by using a strategy called laddering.