High-yield bonds are an alternative investment involving investing in bonds issued by companies with low credit ratings or a high risk of default. These bonds are also known as “junk bonds” due to their high-risk profile. Here are some key takeaways about high-yield bonds as an alternative investment:
Key-Takeaway
- High-yield bonds are riskier than investment-grade bonds: High-yield bonds are issued by companies with lower credit ratings, which means they have a higher risk of default. As a result, they offer higher yields to compensate investors for the increased risk.
- High-yield bonds have historically provided higher returns than investment-grade bonds: Despite the higher risk, high-yield bonds have historically provided higher returns than investment-grade bonds. However, past performance is not a guarantee of future results.
- Interest rates and credit risk influence high-yield bond prices: High-yield bond prices are impacted by changes in interest rates, as well as changes in the perceived credit risk of the issuer.
- High-yield bond investments can be made through mutual funds or exchange-traded funds (ETFs): Investors can gain exposure to high-yield bonds through mutual funds or ETFs specializing in this asset class.
Tips
- Consider diversification: High-yield bonds should be considered part of a diversified investment portfolio that includes a range of asset classes.
- Understand the risks: Investors should carefully evaluate the risks associated with high-yield bonds and make sure they are comfortable with the potential for default.
- Consider investing through a fund: Investing in high-yield bonds through a mutual fund or ETF can provide diversification and professional management.
Advice
- Consider working with a financial advisor: Investors considering high-yield bonds may benefit from working with a financial advisor who can help them evaluate their risk tolerance and choose appropriate investments.
- Stay informed: Stay up-to-date on the credit rating of the issuers of high-yield bonds and changes in interest rates that may impact their prices.
Conclusion
High-yield bonds can offer higher returns than investment-grade bonds but also have a higher risk. Investors should carefully evaluate the risks associated with high-yield bonds and consider investing through a mutual fund or ETF specializing in this asset class. Additionally, investors should stay informed and consider working with a financial advisor to help them make informed investment decisions.