To illustrate Hank's point, suppose you bought a 10 year Treasury on Jan 5, 1973, and held it though Aug 23, 1974. So you'd have purchased a bond maturing on Jan 5, 1983. Assume that coupon matched market yield (newly minted bond).
The yield on that semi-annual bond was 6.42%. On Aug 23, 1974, the yield on 10 year Treasuries was 8.15% (probably slightly lower for this bond as it was now an 8.4 year bond).
http://www.macrotrends.net/2016/10-year-treasury-bond-rate-yield-chart
Using 8.15% YTM, 6.42% coupon, and a bond calculator here, we get an ending price of $88.81. That is, the bond dropped in price by about 11%.
The yield on that bond was 6.42%/year. So over the period of 1.63 years the interest was about 10.5%. That makes the net return on the bond about -0.5% (more or less a wash), while the S&P 500 dropped from 119.87 to 71.55 (-40.3%).
http://www.davemanuel.com/where-did-the-djia-nasdaq-sp500-trade-on.php
If we were to go through another period of stagflation now, with 10 year T's yielding around 2.5%, and a similar 1.73% rise in rates, the calculator shows the price declining by 13.3% (lower coupon = longer duration). Then there's the lower interest this time around. 2.5% for 1.63 years returns just 4.1%.
So this time, the same rise in interest rates (seven 1/4 pt hikes at a roughly quarterly pace) would produce a bond loss of about 9%, vs. the previous experience of a wash (including interest). Bonds as "ballast" have the potential to hasten a ship going down.
One can certainly quibble with my calculations - I've made approximations that somewhat exaggerate the losses. I've not reinvested coupons (i.e. I just computed simple interest), and I've not accounted for the shortening maturity of the bond. Making these adjustments won't significantly affect the total bond return. You'll still lose a lot.
The US employment market is much tighter than it has been the past several years. Throw a couple of trillion dollars at it in infrastructure spending and tax cuts (read: more borrowing), and you may see interest rates go up both because of increasing inflation (spurring Fed action) and the increased borrowing.
That's not a prediction of what the government or economy will do. It's simply a case study of how bonds can harm a portfolio in a 70s-like stagflation, where the key difference is, as Hank pointed out, lower starting bond yields.
http://www.businessinsider.com/wall-street-worried-trump-1970s-stagflation-2016-11

For what interest it might hold: "Is It Time To Rotate Out Of High-Yield CEFs?" posted today on SeekingAlpha by Left Banker
http://seekingalpha.com/article/4041447-time-rotate-high-yield-cefs?uprof=46&isDirectRoadblock=false

Hi Hank,
I suspect that sleeping well at night is tightly coupled to our confidence level in our investments. That confidence level must be correlated with our investment knowledge; the more, the better.
In my earlier post, I focused on the tradeoffs between major equity to bond portfolio asset allocations. I suggest we remain focused on that tradeoff because it is critical to a comfortable retirement with its direct impact on survivable portfolio withdrawal rates. The discussion of sleep is a distraction.
Bond elements reduce portfolo average annual returns, but they also reduce portfolio volatility (standard deviation). These are competing impacts that make an allocation decision more difficult. Also the dynamic correlation coefficient between stocks and bonds changes over time which further confuses the picture.
Much good work has been done that examines these tradeoffs. Here is a Link to one such study:
http://qvmgroup.com/invest/2013/07/30/historical-returns-for-us-stock_bond-allocations-and-choosing-your-allocation/
It's a rather long piece, but the subject is complex with no one size fits all solution. Enjoy the reference!
Best Wishes.

Hi @BobC
You noted: "OSTIX comes as close to buy-and-hold as any. Although it is not a high-yield fund, that is where M* puts it. It's downside protection is evident from its 2008 return vs the pure HY funds. I would not even want to own a pure HY fund because of this."
>>>My personal view of this fund from its current composition is a short-term high yield bond fund with a touch of AAA bond holdings and some form of "cash". My recall is during 2012 the composition of this fund moved away from a more diverse multi-sector bond fund. I do not have access to its composition from prior years. As to it being moved to HY within M*, they didn't have a "slot" to match, eh? OR that if most of the fund was moving to HY beginning in 2012, the proper slot may be appropriate.
For those wandering into this discussion and not familiar with prior years, I must presume that the downside protection you indicate in 2008 was from the fund having little exposure to HY bonds during most of or at the least during the last half of 2008.
From the current prospectus:
The Osterweis Strategic Income Fund invests primarily in income bearing securities. Osterweis Capital Management, LLC (the “Adviser”) takes a strategic approach and may invest in a wide array of fixed income securities of various credit qualities (e.g., investment grade or non-investment grade) and maturities (e.g., long term, immediate or short term). The Adviser seeks to control risk through rigorous credit analysis, economic analysis, interest rate forecasts and sector trend review, and is not constrained by any particular duration or credit quality targets. The Fund’s fixed income investments may include, but are not limited to, U.S. Federal and Agency obligations, investment grade corporate debt, domestic high yield debt or “junk bonds” (higher-risk, lower-rated fixed income securities such as those rated lower than BBB- by S&P or lower than Baa3 by Moody’s), floating-rate debt, convertible debt, collateralized debt, municipal debt, foreign debt (including emerging markets) and/or depositary receipts and preferred stock. The Fund may invest up to 100% of its net assets in dividend-paying equities of companies of any size – large, medium and small. Additionally, the Fund may also invest up to 100% of its assets in foreign debt (including emerging markets) and/or depositary receipts. The Fund’s investments in any one sector may exceed 25% of its net assets. The Fund’s allocation among various fixed income securities is based on the portfolio managers’ assessment of opportunities for total return relative to the risk of each type of investment.
As to M* categories in general. We all know not every fund will have a proper fit. Not unlike, FAGIX ; which is listed as a high yield bond fund. To the point of holding about 80% of the portfolio with HY bonds, this fund also usually has about 20% in equity and to further blend the mix; 15-20% of the total mix is also non-U.S.
FRIFX is another "stray" fund. Its performance will never show properly against the real estate category, as this fund maintains about a 50% mix of real estate related equity and bonds.
End of 2016 composition, OSTIX
The below is relative to the really nasty market melt period. Click onto OSTIX for the chart.
OSTIX SPHIX IEF Sept 11, 2008 thru Dec 18, 2008
Disclosure: our house is not invested in this fund
Anyone know how to find this funds holdings during 2008?
Regards,
Catch

MJG said, "I hope you sleep well tonight and other nights. I do."
One of the best ways to fall asleep at night is thinking about my investments. They are very boring.
But that's a terrible waste of restful time. Much prefer having Alexa read great books at night. (Just started The Grapes of Wrath.) Currently subscribe to Amazon's Audible Gold. For $15 monthly you get 1 or 2 new audio books every month and a subscription to featured stories from the WSJ or NYT. (Summaries are very well done and run about 45 minutes daily).
Humm ... In reading the board some days, I don't know how some people sleep at night! :)

@BobC,
My apologies for using M* charts and its limitations.
Using a different tool (Portfolio Visualizer) it looks like OSTIX under performed AGG for the two years you reference, but it has crushed AGG in many other years.

Yes, a good thread. bee, AGDYX is closed to new investors at Scottrade. I have traded it in past bull markets and you can't go wrong there. As for VWEHX vs PRHYX the reason I like Price better than Vanguard is Vanguard is run a bit too conservatively for my tastes. Also a very long term and underappreciated manager at Price. But even Price is a tad conservative but that is what I would want were I a long term investor. As for 2008 and junk bonds, few realize that worst bear of all time was completely recouped in early August of 2009 (the Merrill Lynch High Yield Master II index) Something that can't be said for equities.
I am not a fan of Larry Swedroe he of the managed futures funds and the interval funds where you don't have ready access to your funds. But I can see his point where junk bonds are a *flawed* investment. And that is because they are too correlated to equities and hence why not just hold the later.
The reason I *trade* junk corporate, junk muni, and bank loan mutual funds is because when they are in bull phases they are the most trend persistent low volatility things out there. That way I can trade them with 100% of my capital something I can't do with more volatile instruments. I am obsessive compulsive about losing and drawdowns. In the 90s where it was a straight up market I was just as obsessive but traded sector equity funds in the same way I now trade the bonds.

Some great comments from some great commenters...I appreciate @BobC downside concern, but my thought here is to employ a "buy and hold strictly for income" strategy. Certainly HY can have default risk, but from an income (taking coupon payments for income), is it possible to own a HY fund through these downturns and still come out the other side of these downturns with a uninterrupted income stream? Consider this as an alternative to an annuity; a monthly stream of income from dividends without touching the initial investment.
I also wonder if pairing OSTIX with a few other great bond funds would be another approach. Having a list of great bond funds is always helpful when diversifying a portfolio.
We are all told that holding individual bonds to maturity returns principal plus the coupon (outside of a default or haircut risk I would assume). I can imagine a low turnover, well managed (from default risk) bond fund coming pretty close to that scenario. The bond fund value will take a hit in a downturn, but so would an individual bond holding if sold during that downturn. The idea here is, as @Junkster points out, 25 years later his old girlfriend still wants to take him out to dinner. O.K. that might be a bit rich for Junkster's dietary requirements, maybe at least oatmeal at a diner.
Thanks @davidmoran with your choice FAGIX. I first heard of this fund from @Catch22. Great choice.
@Art, BUFHX is another good option. Could someone explain why most Buffalo Funds have an ER of 1.01% (probably my only knock). Could someone tell them .99% looks a hell of a lot cheaper.
No one yet has mentioned AGDYX (M*****,Bronze) which seems to be the out performer to many of the other recommendations made so far. Any opinions on AGDYX? HYB has also outperformed other HY bond fund compared below over the last 10 years.
HY Bonds (mentioned in this thread) over the last 17 years:

That article is 10y old. I think we probably are close to violent agreement. I do not argue against diversification in principle, and have been reading about the Lazy portfolios forever, longer than my following Israelsen, which has been a long time also. Defa likewise. I also hold no particular brief for Waggoner, and even he does not push the point too strongly. The thread got diverted because someone introduced EM a la DL.
So my point was only that foreign has not added a lot good or value for anyone's US equities portfolio in a looong time, which is indisputable. (See Bogle.) Whether one should do it anyway is almost a separate question, and based on their beliefs. When DLEUX becomes available to my accounts, assuming it does, I will certainly throw some money at it. But DSEEX / CAPE / auto-rebalancing SP500 does fine for many, has plenty of foreign exposure built in, as does say FLPSX, and therefore adding more foreign is a personal choice, as you say involving risk tolerance. If I were interested in rulebook quant approaches I would do Vang total market or total world approaches, or one of the handy AO_ family, as I have posted about before (AOA, AOR,AOM, AOK).

Hi Hank,
In your post you emphasized the rather low interest rate currently offered by bonds. I agree that will slightly dampen the benefits of a major bond allocation in a portfolio. But that is a secondary, perhaps even a tertiary, consideration during a market meltdown.
The primary benefit of a mixed portfolio is simply not having such a heavy commitment to stocks. To illustrate, consider a 100% stock portfolio and a 50/50 portfolio as an alternate. If the market tanks by 40%, the stock portfolio absorbs the entire downturn of 40%. The mixed portfolio only loses 20% even if the bond yield is zero. Bond diversification does wonders in a market meltdown by the direct impact of dilution.
I hope you sleep well tonight and other nights. I do.
Best Wishes.

Please take a look at page 25 of this Article. I am not attacking Waggoner, but I prefer a quantitative approach which includes risk parameters. No worries.
Kevin

Here is a Closed End Fund in the HY category managed by Baring/Babson Barings Global Short Duration High Yield Fund BGH. Good run with oil. I took some profits from BGH last week.
Oil And Gas 18.03%
http://www.barings.com/funds/closed-end-funds/barings-global-short-duration-high-yield-fund
I have a small position here.I think the fund has a good manager.
HYOAX
https://az768132.vo.msecnd.net/documents/22438_2017_01_20_08_08_21_867.gzip.pdf
@Junkster said, I put an old girlfriend in that fund in early 1992 and she still holds it and thanks me every time we talk
I'm guessing you get a lot of Valentine's wishes.Thanks for all your wisdom over the years.

I must have missed something. What sequential? (What was the sequence?) How much developed foreign? Where more than his wee sliver? Quantify and specify the risk reduction you say is taking place with their addition. Or do you just mean some volatility reduction / smoothing? I found only the 7Twelve stuff of interest, not the other equivocal articles, which actually seemed to mildly make Waggoner's point. What have I missed?
Also, go to M* and put in TWEIX, OAKIX, and LV. Compare the three from 1994 (max) and then 15y-14-13-10-5-3-1y. Note that only the 01-02-03 start points (= Israelsen) show foreign outperformance. Maybe there are other mfunds or etfs that would make the case better? I somehow doubt it. I guess this too is superficial, though.

@MJG - John Bogle likes the Total Stock Market Index better as being broader. I'm not into indexing, so your S&P figures are fine with me. I guess my point is still valid that some investors will do better than that 32% loss (plus fees) and some worse during the next "average" bear market.
Here's where I have a problem: You said "I certainly concur with your observation that a diversified portfolio that includes a major set of bond holdings would greatly soften the blow of a negative equity marketplace. I followed that practice for many years."
No. That's not what I said. My observation was that your past practice (holding bonds as defense) is of less value today. Here's why. At the start of the last "Great Recession" in late 2007 the 10-Year U.S. Treasury yielded around 5%. http://money.cnn.com/2007/06/07/markets/bondcenter/bonds/index.htm?postversion=2007060717
Not only did that coupon provide an income stream during the worst of the stock market debacle, but the face value of those bonds rose during that period as rates declined, further softening the blow to investors like yourself.
Today that same bond yields less than 2.5%. That's a big difference in yield. And it doesn't bode well for investors during the next recession. I'm not the first to note it. Ed Studzinski pointed it out over a year ago in one of his commentaries and voiced similar concerns about the inability of bonds in this day and age to mitigate an investor's stock declines. But I digress ...
Good night and good luck.

The Perennial Obsession With Constantly Predicting Recessions
James Picerno @ The Capital Spectator from 6/5/2016
According to a variety of “experts,” the US has been on the cusp of a new contraction ever since the last recession ended more than seven years ago. Yet the US economy has continued to expand,Predicting otherwise, continually, is a staple among the usual suspects. The projections, however, are conspicuous only for being wrong, so far. In time, a new recession will strike. But forever seeing a new downturn around the next corner is a short cut to failure, whether you’re managing an investment portfolio or running a business. Unless, of course, you’re in the media business or selling books and newsletters that traffic in disaster scenarios.
As for rolling the dice by reading the headlines du jour, well, let’s just say that history hasn’t been kind to this approach, as the following examples from recent history remind:
Included :recession predictions during the past several years from Bill Gross to Larry Summers including this one that still has 15+ months for a possible outcome.
If [Donald Trump] were elected, I would expect a protracted recession to begin within 18 months.
Larry Summers, former Treasury Secretary, via The Washington Post, Jun. 5, 2016
https://www.capitalspectator.com/the-perennial-obsession-with-constantly-predicting-recessions/

I just saw your mention of WHIYX the IVY High Yield fund. I hold that in the form of IVHIX but would advise against it. It is among the junkiest of high yield funds. The reason it has performed well the past year is because the lower rated junk bonds always lead in a new bull market. Besides having too much lower rated junk it also has too many retail bonds for my tastes. I have this on a very short leash. My problem is Scottrade has very little anymore in the way of mutual funds. That will be remedied though once they are integrated into TD Ameritrade later in the year.
If I could I would be in BXIYX a hybrid junk and bank loan fund or if I wanted a pure junk fund BXHYX. These are both Barings Global funds. They aren't available at Scottrade. Their bank loan fund - BXFYX - is however and I hold that and have been more than happy with its performance the past 6 months.
Edit: Even though I am trading less than ever I would never hold any of these funds for the long term. It's just they have been in such tight rising channels no need to do anything. As for junk bonds, according to Fitch, the default rate is predicted to drop considerably by year end 2017. I can't find that link right now though.
Edit #2 Actually I can answer about a good long term hold in junkland. PRHYX. I put an old girlfriend in that fund in early 1992 and she still holds it and thanks me every time we talk. Not all that much less of a return than the S&P but with a heck of a lot less volatility along the way.

Hi Hank,
Thank you for reading my contribution and for your comments.
I pulled the numbers I quoted from the Malkiel book that I referenced and added the 2007-2008 equity drawdown. On page 29 of the referenced work, Malkiel states that the returns are the S&P 500 records. I did not check that statement.
I certainly concur with your observation that a diversified portfolio that includes a major set of bond holdings would greatly soften the blow of a negative equity marketplace. I followed that practice for many years.
I would note that Buffett would disagree with the diversification that I practice. Recall that he recommended a 90/10 split in his favored portfolio with 90% committed to equity positions. That's not me, especially now.
Best Wishes and Good Luck

Thanks. Kinda weak articles and arguments, seemed to me, except the middle Israelsen one that starts in 01, bad case for US LC.
But sure for the 7Twelve. He is like Merriman and his Lazys.
Not sure how much deeper most need to go than this, though (Waggoner updated, from 2015):
... do international funds help your portfolio? In terms of return, it's hard to argue that they have, at least within most investors' experience. The past 25 years, large-cap U.S. funds have gained an average 691%, vs. 338% for international funds. U.S. funds have beaten international funds the past five, 10, 15, 20 and 25 years.
You could argue that European stocks are cheap, relative to U.S. stocks, which is quite true. But then again, they nearly always are, because they don't grow as rapidly. You could also argue that there are more foreign companies than there are U.S. companies, and that investing in them gives you broader market exposure. That's also true. Then again, companies in the S&P 500 get 46.2% of their earnings from overseas, and that's enough international exposure for anyone.
Why have U.S. investors rushed to international funds? In part because much of U.S. mutual fund purchases are controlled by financial advisers, and conventional wisdom is that a stock portfolio should have about 20% of its assets in international stocks. As of the end of November, about 25% of all garden-variety mutual funds were in international stocks, up from about 8.6% in 2000. Advisers have been doing their jobs.
Israelsen is one of those advisers, and his 01-15 data do look compelling. But who do you know (and who here?) who would want the same small amount in US LC as in REIT, cash, commodities, or NR?
Much less stick with it.
Not I.
And his is really an arg for very broad diversification, not for foreign, which is 17% of total (and note that that total = 93% of egg) and half of that foreign is EM.
(Trying to think what EM, NR, and commod vehicles there were in 2001.)

@MJG - You said, "In that historical timeframe, those 10 Bear markets declined an average of 32%"
You left me wondering which stock market(s) you are referring to. Is that the Total Stock Market Index (approximated by VTSMX), the Total World Stock Stock Index (approximated by VTWSX) or the S&P 500 Index (approximated by VFINX)? Perhaps it's an average of all three? Or, perhaps it refers to some other entirely different stock market index? Sorry if that's nit-picking, but not all bear markets follow the same pattern. Practically speaking, an individual's equity holdings might perform much better than that average 32% loss, or far worse - depending on the types of stocks held during the multiple year time-frame mentioned.
Another important consideration is that most investors' losses during past bear markets were to an extent mitigated as their bond holdings appreciated in value owing to falling interest rates which accompany most recessions. Coupon yields also contributed to the investor's total return. With the very low (actually extraordinarily low) yields on U.S. Treasuries today, that mitigating influence would be much less. Net-net, the "average" investor today would probably take a harder hit than he/she experienced during recent "average" past recessions. Of less significance, but worth noting, is that those "average" reported market losses exclude the additional hit from ongoing fund/investment fees, usually paid out of an investor's assets.
Your advice regarding keeping several years cash on hand is valid. I know other intelligent investors who do the same (though my approach varies somewhat). Thanks for sharing. Hope I haven't misrepresented your views or otherwise muddied the issue.

@davidrmoran,
I reread the Waggoner Article, and I think that one must dig a little deeper than he does.
Ferri's Take
Israelsen's Quantitative View (1970-2006)
Israelsen's Analysis 2001-2015

Forbes Article on the Israelsen Model
From the Israelsen data, I'm inclined to believe that it is beneficial to own foreign developed and EM equities.
Kevin