Corporate Junk Bonds and Duration

Securities analysts and media pundits often love to warn buyers of the danger of holding corporate bonds with lower grade or “junk” status. They usually advise the public to beware of potential defaults, especially when times are bad.

That can often be investment nonsense.

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

So when default rates sometimes go to 10% and higher 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.

And most of all, diligently use duration principles. I have commented quite a bit on the explanation of duration. ( See the Earl J Weinreb NewsHole® comments.)