When it comes to balancing a portfolio and having junk bonds in the mix, there certainly are some mixed views about this, with investors and managers being on both sides. Here are some things to consider about junk bonds and why you may decide to keep them in your investment portfolio.
Junk Bonds Are High Risk
Part of the problem of including junk bonds, says Investopedia.com, is that these bonds are typically offered by companies that have “less-than-stellar credit ratings.” They also are high risk, which means that there is a good possibility that money could be lost rather than gained by investing in them. The opposite is also true, however, and that is that the high interest rate could make up for potential loss when there are real gains.
Junk Bonds Have Lower Interest Rates
Recently, most everything had lower interest rates than before when it comes to earnings, and junk bonds have not escaped this problem. The Wall Street Journal has reported that junk bonds have fallen to below six percent interest for the first time, which is below investment grade. This has never happened before, and you can see the problem when interest rates were as high as 8.70 percent one year ago.
Since that time, however, the rates have returned to about where they were a year ago, which frightened a lot of investors due to the quick change, says TIAA-CREF.org. Now investors have to decide if it is going to be stable enough to try investing in them again.
Junk Bonds Have Higher Interest Rates than Many Other Investment Forms
When it comes to getting a higher return on your money, there is really nothing that can give you the high returns you want other than junk bonds. While there is a potential for loss, there is also no other way to see the potentially higher gains that junk bonds can provide. In the same article above, the statement is made that the risk of loss and return is comparable to the middle ground between stocks and investment-grade bonds.
Bonds Can Provide a Rather Steady Increase
Other forms of investment, such as stocks, says FidelityAdvisor.com, are often considered to be a safer investment, but they do not always rise as desired. This means that putting your money largely in stocks alone may not give you the increase you want or expect. On the other hand, junk bonds do have a rather strong history of providing a degree of reliable income with a good rate of interest.
The Fed Will Keep on Investing in the Bond Market
Many people have been concerned about what will happen when the Fed reduces their investment into the bond market. USAToday.com just declared that the Fed is not going to reduce it until it is sure that the economy is truly on a solid road toward recovery. One thing it will look for is an unemployment rate that drops to 6.5%.
Every person needs to make up their own mind as to whether to use junk bonds in their portfolio. As you can see, there are some pros and cons to consider. Before using them, however, or any investment form, be sure to understand the possible risks, as well as what kinds of gains can honestly be expected.