Reprinted courtesy of MarketWatch.com.

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Arguably, the single most important thing successful investors do is understand risk and find ways to protect their assets. For most investors, and especially for retirees, this means owning bond funds.

Although they dont pay much, bonds provide an essential buffer for the ups and downs of the equity funds that most investors should also own.

I have at least one conversation a day with an investor who is worried about the terrible losses bond owners will suffer as interest rates rise — and they will. I find it interesting they are normally not worried about the risk of a 50% loss in the equity part of their portfolio. The historical outcome (1970 through 2012) of the bond approach I recommend below was at worst a 12-month loss of less than 5%. Painful? Yes. Catastrophic? No.

Heres the case in a nutshell: Most investment troubles stem from taking imprudent, unnecessary risks. Bonds reduce risk. Hence, you should probably own some. (Owning them via exchange-traded funds or mutual funds is the best way.)

Lets look at two important pieces of this prescription: What kind of bonds should you own? How much of your portfolio should be made up of bonds.

In giving my answers, I will assume we are talking about a portfolio that includes both stocks and bonds. In this portfolio, the stocks job is to provide long-term growth and inflation protection, and the bonds job is to reduce volatility while providing at least a minimum of income.

Opinions differ about the best kind of bonds for this, but I have become convinced that safety and lack of volatility are the most important traits. Hence I favor government bonds instead of corporate bonds and I favor short-term and medium-term bonds instead of long-term bonds.

My Vanguard fund recommendations for accounts subject to taxes call for intermediate-term and short-term U.S. Treasuries (and TIPS for tax-deferred or tax-free accounts).

The trickier question is what percentage of the whole portfolio should be in bonds. Let me start with three generalizations that you probably already know.

There is no perfect answer to this question. It’s a series of trade-offs.·

Younger people have less need for bonds than older people.

Nervous, conservative investors should own more in bonds than other investors.

Perhaps the most familiar formula is based on the idea that your age tells you how much of your portfolio should be in bonds. For example, if youre 40, then 40% of your portfolio is in bond funds.

For a 40-year-old investor, thats pretty good. But for a 70-year-old, this restricts the inflation-fighting equity funds to only 30%. Perhaps worse, this formula calls for 20% in bonds for a 20-year-old, who would have to lighten up on equity funds (and give up some long-term expected returns) with little, if any, benefit.

What is the best alternative? Remembering that this is an inexact science, here are five worth considering:

One:  Use the formula above but subtract 10 or 20 percentage points from the result. In other words, if the formula tells you to have 40% in bonds (for a 40-year-old), change that figure to 20% or 30%. This will give you more equities in the early years, when growth is what you need most, while automatically decreasing your stock exposure as you grow older.

Two:  Here is my own age-based formula: Keep 100% of your portfolio in equities until youre 35. At that time move 10% into bonds (if you consider yourself aggressive) or 20% (if you consider yourself conservative). Every five years after that, increase the percentage of bonds by five percentage points.

At 65, this leaves an aggressive investor with 40% in bonds and a conservative investor with 50%. Those are good allocations that many retirees can live with the rest of their lives.

Three:  Another legitimate allocation, especially for investors who like having professionals make the decisions, is to invest in a target-date retirement fund. These funds are ubiquitous, and this approach makes age-based allocation changes automatic.

These benefits come at a heavy price, however. I believe investors in these funds should expect to give up 1% to 2% in annual returns from these funds overly cautious stance and inadequate equity diversification.

Four:  For ultraconservative retirees who are spooked by the stock market, heres another approach: Hold enough of your portfolio in bonds to live entirely off the interest, then keep the rest in stock funds. When the bond interest is no longer enough, make up the difference by withdrawing money from your stock funds.

Five:  If a one-decision approach appeals to you, there is considerable merit in adopting a mix of 60% in stocks and 40% in bonds, no matter what your age, and maintaining that allocation for life. This may be too conservative for investors in their 20s and 30s, and uncomfortably aggressive for those in their 70s and older.

However, I have studied this one portfolio for life model with real returns going back to 1927. Based on all the evidence I can find, I believe this allocation will protect investors from the worst ravages of bear markets while giving them the growth they need before retirement and the inflation protection they need after they retire.

I have described five more ideas in my book 101 Investment Decisions Guaranteed to Change Your Financial Future, which you can download for free .

Each of these approaches will do the job. Theyre all imperfect, but each is much better than leaving this choice to whim or emotion or the urgings of salespeople.

Richard Buck contributed to this article.