Please be open to feedback and constructive criticism from others, and consider their suggestions and advice when making decisions or forming opinions.
- Manlobbi
Investment Strategies / Bond Investing
No. of Recommendations: 2
One quote about bond investing that has stuck with me is: buy stocks for speed (growth) and buy bonds for ballast (stability).
Translation into practical advice: don't chase yield.
If you want higher returns, buy stock in a good company (or better, a quality ETF), rather than a bond issued by a bad company. High yield bond funds are nothing but a collection of bad bonds. Avoid.
You might think that since everyone knows this, junk bond funds would be appropriately priced to yield the same risk-adjusted returns as treasury funds or investment grade corporate bond funds. But they are not. Something about that high yield number causes people to suspend judgment, in the same way that investors perennially overpay for growth stocks (even after accounting for their very real high growth).
Don't be one of them, is all I am saying.
Ben Graham said it too so I am in good company.
No. of Recommendations: 0
Trust me, this was a good post. Recommend it.
"Please clap." -Jeb Bush in 2016 Republican primaries campaign.
No. of Recommendations: 2
If you want higher returns, buy stock in a good company (or better, a quality ETF), rather than a bond issued by a bad company. High yield bond funds are nothing but a collection of bad bonds. Avoid.
I agree in general--it's why I buy preferred stocks and hold until called, rather than...trading...them. But I tend to disagree regarding "high yield bond funds." I've long used Vanguard's high yield bond fund--their junk bond fund--to good effect as a place to park medium-term cash when I'm out of the market. Individual junk bonds are a bad risk, certainly. But a well-run fund, like Vanguard, Fidelity, some others, spreads the likelihood of failure of one or another individual--or even a few--holdings across the entire inventory of holdings, so that those one or a few failures don't materially hurt the fund or an investor in the fund.
Certainly the fund's NAV varies, and it gets hurt--some--by an individual or a few failures, but the accumulation of dividends the fund pays while I'm holding it more than makes up for any NAV movement down between the time I buy the fund to park cash and when I sell the fund to reinvest the cash.
Of course, others' mileage may vary.
Eric Hines
No. of Recommendations: 0
ndividual junk bonds are a bad risk, certainly. But a well-run fund, like Vanguard, Fidelity, some others, spreads the likelihood of failure of one or another individual--or even a few--holdings across the entire inventory of holdings, so that those one or a few failures don't materially hurt the fund or an investor in the fund.
There are good statistics online that detail default rates for various classes of bonds.
Of course, a bond "default" does not mean a 100% loss. Nonetheless:
- investment grade (AAA to BBB) bond default rate is 3-4%, climbing to 10-12% for lower (junk / high yield) bonds.
- more money will be recovered if an investment grade bond defaults, as opposed to a junk bond.
What you say has been true in the recent past before the cycle of rate hikes. Junk bond yields, defaults and spreads against treasuries all have been low. If interest rates remain high, all will climb sharply IMO. A couple of percentage points in yield are not worth it.
