The Essential Duration Principle in Bond Investing

              

Here’s how professionals in the financial industry constantly get the bond market wrong.

                       

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

a lower level, the higher yield will more than make up for the risk. Yet, all the media will discuss is that risk of default and not the built-in compensation.

                       

I have previously commented how the media hardly discuss how you can avoid default loss, along with any inflation hit, with the proper use of bond duration. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole at Twitter.)