Why Not Buy Corporate Junk Bonds When the Media Pundits Say No?

Securities analysts love to warn buyers or holders of corporate bonds, especially those with lower grade or “junk” status, to beware of potential defaults when times are bad. That is investment nonsense.

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

So whether default rates go from 5% to 10%, when interest rates are as high as 10%, the investor is still way ahead of the game. So, the adjusted return will still be way ahead of other investment returns available.

The trick is to diversify against default risk of any corporate bond issues. You do that by investing in low cost bond mutual funds that may hold a hundred or more bonds.