The second risk is called "interest rate risk." It is simply the risk that if you lend money for 20 or 30 years at a fixed rate, any future increase in the general level of interest rates -- because of inflation -- will make your bonds less attractive.

If you pay $1,000 today for a 20-year top-rated corporate bond paying 5 percent, and in a few years they sell more bonds, but with a 7 percent interest rate, then your old, lower-yielding bond is less attractive -- and worth less in the marketplace. It will still pay $1,000 at maturity, but in the meantime you'll settle for a lower interest rate than others are receiving.

One more basic: the longer the maturity of the bond, the greater the price swing. After all, if you're stuck with a low-yielding bond for many years, it's far more unattractive than holding a low-yielding bond with only a five-year maturity.

Bond reality

Over the long run, history says that a portfolio of stocks will far outperform a portfolio of bonds. But there have been some periods when bonds outperformed stocks. We're nearing the tail end of one of those periods!

According to financial forecaster John Maulden: "Starting at any time from 1980 up to 2008, an investor in 20-year Treasuries, rolling them over every year, beat the S&P 500 through January 2009."

That's because, in spite of the famous bull market in stocks that began in the early 1980s with the Dow trading around the 800 level, the bond market outperformed stocks as interest rates fell. In the early 1980s, amidst fears of massive inflation, yields on 20-year Treasury bonds were 15 percent. They've recently fallen to below 4 percent, creating tremendous profits along the way.

Remember, as interest rates fall, bond prices rise. And the reverse is true, as well. If interest rates were to rise sharply, amidst fears of future inflation, bond prices would fall.

So we're back to that old question of inflation vs. deflation. If you think the economy will remain slow, you can reach for slightly higher yields today on medium-term government or highly rated corporate bonds. But if you fear inflation, don't buy bonds with maturities of longer than five years -- or you'll take a loss if you must sell them before maturity.

If you can't afford that risk, then stick to short-term "chicken-money" CDs or money-market funds. A higher yield always offers a higher degree of risk. That's The Savage Truth.