How to Invest in Junk Bonds
In this article I'd like to talk about several tips, tricks, and tactics that anybody can use to invest in junk bonds.
As an investor you're always looking for different ways to diversify your portfolio.
Normally you would put a certain percentage of your portfolio in stocks, divided into several different sectors of stocks, and also bonds and precious metals.
When we think about investing in bonds for a retirement account, we often think of high-grade corporate bonds or safe government bonds but there are other options as well including junk bonds and that's what I'm going to talk about today in this article.
First of all I suppose we should really define what a junk bond is.
When you get right down to it, they really aren't anything other than a regular bond exactly the same as any other bond.
The only difference is that they are issued by companies that are less financially sound than others.
Because of this, junks must pay a higher yield in order to entice you to take the risk.
What exactly is the risk? When it comes to junk bonds, the main risk is that the company will default or go into bankruptcy and not be able to pay back its bondholders.
The more likely this is the happen, the higher the rate of interest the company will have to pay to its bondholders in order to convince them to buy the bonds.
Who should buy junks? You should only buy junk bonds if you really know what you're doing because there is a huge chance that you can lose all of your money.
Junk bonds should only be purchased by people who already have a solid stock portfolio that is well diversified and who may have some extra money left over to play with.
Junk bonds should never be a cornerstone of your retirement investment account because they are incredibly risky.
So how do you invest in them? There are a couple different ways.
Of course you can buy them directly from a company, or you could invest in a mutual fund that purchases many different bonds from many different companies and in fact this may be the best bet for the individual investor who doesn't have a whole lot of experience in this area.
Before choosing a fund you should always look carefully at the manager of the fund to see whatever record they have had in the past.
Consider only investing in mutual funds whose managers have consistently performed in the top half of all junk bond funds over the past 3 to 5 years or so.
You can find information like this usually for free at Morningstar.
So there you have several tips on how and why one might invest in junk bonds.
They can be a lot of fun because they offer higher rewards, but remember the risk is much greater as well.
Think of them more like gambling at a casino then true investments and you should do okay.
As an investor you're always looking for different ways to diversify your portfolio.
Normally you would put a certain percentage of your portfolio in stocks, divided into several different sectors of stocks, and also bonds and precious metals.
When we think about investing in bonds for a retirement account, we often think of high-grade corporate bonds or safe government bonds but there are other options as well including junk bonds and that's what I'm going to talk about today in this article.
First of all I suppose we should really define what a junk bond is.
When you get right down to it, they really aren't anything other than a regular bond exactly the same as any other bond.
The only difference is that they are issued by companies that are less financially sound than others.
Because of this, junks must pay a higher yield in order to entice you to take the risk.
What exactly is the risk? When it comes to junk bonds, the main risk is that the company will default or go into bankruptcy and not be able to pay back its bondholders.
The more likely this is the happen, the higher the rate of interest the company will have to pay to its bondholders in order to convince them to buy the bonds.
Who should buy junks? You should only buy junk bonds if you really know what you're doing because there is a huge chance that you can lose all of your money.
Junk bonds should only be purchased by people who already have a solid stock portfolio that is well diversified and who may have some extra money left over to play with.
Junk bonds should never be a cornerstone of your retirement investment account because they are incredibly risky.
So how do you invest in them? There are a couple different ways.
Of course you can buy them directly from a company, or you could invest in a mutual fund that purchases many different bonds from many different companies and in fact this may be the best bet for the individual investor who doesn't have a whole lot of experience in this area.
Before choosing a fund you should always look carefully at the manager of the fund to see whatever record they have had in the past.
Consider only investing in mutual funds whose managers have consistently performed in the top half of all junk bond funds over the past 3 to 5 years or so.
You can find information like this usually for free at Morningstar.
So there you have several tips on how and why one might invest in junk bonds.
They can be a lot of fun because they offer higher rewards, but remember the risk is much greater as well.
Think of them more like gambling at a casino then true investments and you should do okay.
