I believe in a simple portfolio allocation such as 60/40 stocks bonds, like Tad B has referenced a number of times in the last couple of years when he writes of Vanguard's 60/40 VBINX relatively fine performance in the last decade.
But I tend to think what David says above is true. Worse, it is hard to explain how, with interest rates at rock bottom (and AFAIC, in uncharted territory, historically speaking), investment grade (IG) bond funds will tend to see their NAVs lower as interest rates one day start to rise again. Yields will go up as NAV lowers, but one loses principal as the NAV declines.
ISTM the good and conventional wisdom is that the older one is, the more one should have in IG bonds. The thinking behind this has been to reduce risk so one's nest egg is safer. For many, "IG bonds" will mean IG bond funds. As much as I believe in buying and holding; sticking with an asset allocation plan; and staying the course, I find it very hard to tell someone today to make 40% of their portfolio an IG bond fund. Can folks chime in and explain the reasons for continuing with a high allocation in IG bond funds?
Note 1: I am not an adviser. It is more that I want to keep things straight in my mind. Granted in this odd interest rate environment there is maybe no keeping anything straight. Accepting the uncertainty (yet keeping a cool head, investing-wise) of the short-term is maybe the key.
Note 2: I have a sizable amount of Certificates of Deposit maturing in 2012, paying 4.5% right now. Naturally I would like to continue to keep this principal in a conservative place. I am resigned that I either have to throw it into relatively conservative, but by definition, riskier, blue chip stocks; take a much lower interest payment on new CDs; or keep it in cash and just relax. Responses to my query above will help reinforce (or not) my reasoning.