Portfolio Defaults and Corporate Bonds

                   

Securities analysts and media pundits often 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. Especially if investors use low-cost bond mutual funds.

                       

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

                       

Therefore, when default rates sometimes go to 10% and higher in recessions, interest rates accommodate, and the investor may remain way ahead of the game. The adjusted return could still be well ahead of other investment returns available with those low-cost mutual funds or ETFs;

                                           

And most of all, diligently use Duration Principles. I have commented extensively on the explanation of duration. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)