A Walk on the Wild Side

BONDS SHOULD BE BORING—and that’s how I usually manage my portfolio. My taste typically runs to low-cost short-term corporate-bond funds, supplemented with occasional purchases of certificates of deposit.

But there’s one major exception: I have roughly 3% of my overall portfolio in a low-cost emerging-market debt fund. This is not a low-risk investment. According to Morningstar, emerging-market bond funds lost an average 18% in 2008, before bouncing back 32% in 2009. Clearly, owning emerging-market debt is more akin to investing in stocks.

So why did I buy? The fund doesn’t fit neatly into my portfolio’s design and I doubt it’ll add much diversification. Still, here’s my (self) justification: The fund has a yield of almost 5% and—unlike, say, a high-yield junk-bond fund—I’m not so fearful of defaults. Indeed, I suspect the credit rating of emerging-market debt will be upgraded over time, as emerging-market economies continue to mature. Meanwhile, over the next 10 years, the 5% yield may rival the total return from blue-chip U.S. stocks, especially given today’s lofty stock-market valuations, plus I’m getting the return in relatively assured yield, rather counting on share-price gains. My hope: The fund will give me close to stock-market returns with somewhat lower risk.