February 2, 2014 Admin | February 2, 2014 What is the true identity of a high yield bond fund? Why such a pretty name? Does it belong in your portfolio?
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A high yield bond fund deals with credit risk. Many of these types of bonds belong to companies that are not doing well and may fail. Since the companies are not doing well and may fail, they are required to provide a higher return; otherwise, nobody would buy them! High yield bond funds DO NOT belong in your portfolio if you are a wise investor. Wise investors buy no-load index mutual funds at a place like Vanguard.
A high yield bond fund is a junk bond fund. It gives you bonds with very low ratings that are from sickly companies. The reason that they use high yield as a name is because they are trying to put lipstick on a pig and hid how bad the product they are selling really is. You should never buy a high yield bond fund. You are much better off buying a short term or intermediate term bond fund that has a more stable and healthy mix in it.
You covered the topic quite well, Katherine. Let’s review.
A high yield bond fund = a junk bond fund. Sick companies must offer a higher interest rate on their debt to attract investors to their bonds. Few people would invest in a product that is deemed junk, hence the name high yield. There are many products (especially annuities) with lovely names flowing from many financial companies. Don’t be fooled. You can put lipstick on a pig all day long. It’s still a pig!
Does it belong in your portfolio? I agree with Katherine when she says no. Many experts agree and a few do not. Let’s review the basics here. Junk bonds tend to go up and down when stocks are going up or down. The correlation coefficient is minimal, which means when stocks go up, junk bonds go up. When stocks go down, junk bonds go down.
Stay away from junk bonds, you don’t need them. Stick with diversified no-load index stock mutual funds at Vanguard.com or and/or in your company retirement plan that provide you income throughout the globe. Knowledge is POWER!!!!!
Well said, Garrett. You are wise beyond your years my friend!