High Yield and World Bond Fund Classifications
Q: I have some money in World and HighYield bonds (lists specific funds). What SMI categories should I put these in?
A: As a whole, the World and High Yield bond groups have higher risk than the other SMI bond categories, but still less than the stock categories. However, your specific risk can vary depending on the specific bond investments you own.
In 2003 when SMI switched to indexing our bond holdings, we also eliminated what had been a 4th bond risk category devoted to high yield bonds. On our risk ladder, this 4th bond category fell between long-term bonds and large/value stocks. High yield bonds (also known as junk bonds) are a bump up in risk from long-term bonds, but not a huge one. Over the past 10 years, the standard deviation of the average high yield bond fund tracked by Morningstar has been 7.40, whereas long-term bond funds have averaged 6.80. Those fit neatly together considering the next rung down the risk ladder, intermediate-term bonds, have averaged 3.70 while the next step up the risk ladder, large/value stock funds, have averaged 14.1. In other words, high yield bonds and long-term bonds have been close enough risk-wise to lump them together in the long-term bond category.
As a group, World bonds also fit nicely within the long-term bond category, as they've averaged a 6.00 standard deviation over the past 10 years. However, when you mix in an emerging markets bond fund, that changes the picture. The SEI Emerging Markets fund you mention has a standard deviation of 17.5, which is actually in line with the risk level of the foreign stock risk category.
To summarize, most high-yield and world bonds can go in SMI's long-term bond risk category. Since our long-term bond allocation is currently 0%, including those holdings is going to create a more aggressive (i.e., higher risk) bond allocation than our recommendations. But if you're including specialized funds like an emerging markets bond fund, your risk may spike to the top of the risk ladder. Accordingly, you'd want to classify those in the higher risk categories. 
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