[1] for your situation, there are only 3 catagories of bonds that you should consider – Treasury, GNMA and CA GO. Or spread money in these 3 catagories. [If you don’t know about them google or wikipedia them.] Default risk in everything else is too high.
[2] Do not expect miracles in investing in above catagories. I would expect returns of 3% or less going forward.
[3] Do not buy individual bonds (transaction costs may be too high and less diversification.) Consider low cost bond funds from Vanguard for example. I do not recommend bond ETFs because most of them do not have sufficient trading volume so that their price can diverge from NAV by a lot during periods of market stress (e.g. flash crash)
[4] You CAN lose money by investing in bonds – either because of default or because interest rates rise. You have reduced default probability by staying with above catagories. You can estimate the sensitivity of bond fund to interest rates changes by looking at its “duration”. For example, If “duration” is 5 years then 1% rise in rates translates into 5% loss of principal. Intermediate bond funds will typically have duration of 3-7 years.
[3] If you can not take risk of losing 5-10% ( to earn a return of ~3% per year) do not invest in bonds. ( Or you can buy gold & gun – someone is bound to suggest this sooner or later 🙂 ….)
