Using the Duration Principle With “Junk” Bonds

 Comments are always timely on how professionals in the financial industry constantly get the bond market wrong. The media does a poor job on this subject.

                       

Take high yield corporate bonds, called “junk” for an unfortunate reason having to do with lower ratings. The fact they have lower ratings is compensated by higher yields. If you buy them in a fully diversified, low-cost mutual fund or ETF, and you reinvest dividends, you have factored in risk.

                       

If the default rates of the holdings were to rise to an unusual high from lower level, the higher yields would more than make up for the risk. Yet, all the media will discuss is the risk of default and not the built-in compensation.

                       

I have previously commented how the media hardly discuss how you can avoid that loss, along with any inflation hit, with proper use of bond duration.

                       

This is possible with low-cost mutual funds and use of dividend reinvestment. The media, instead, offer superfluous discussions about such instruments as TIPS to avoid inflation hazards, which are expensive and not needed. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)