Buy Corporate Junk Bonds?

Securities analysts and media pundits often love to warn buyers of corporate bonds with lower grade or “junk” status, to beware of potential defaults, especially when times are bad. That can sometimes be investment nonsense.

Financial media love to go to extremes, whether optimistic or pessimistic. Yes, defaults are bad. But potential defaults are always priced into the bond prices.

So when default rates sometimes go as high as 10% in recessions, interest rates accommodate, and the investor may still be way ahead of the game. So, the adjusted return could still be well ahead of other investment returns available.

The trick is to be fully diversified in a low cost index mutual fund or ETF, where the investor is alert to duration principles. I have commented quite a bit on the subject of duration. ( See the Earl J Weinreb NewsHole® comments.)