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Friday, June 25, 2010

How to buy high yield bonds

Investors today are fearful of the stock market. After the downturn in 2008 and the recent weakness, they are piling into bonds and this has worked well - up to now, despite the continued predictions of a bond market bubble.

Still there is a great need for yield, and one place investors are looking is high yield bonds. High yield bonds are bonds that are rated below investment grade. Here is a list of high yield bonds from the Wall Street journal- CLICK TO ENLARGE.

Notice there are a couple of bonds on the list that yield more than 10%. The reason they have such "attractive" yields is because they are very risky - they may not pay off. This is called default risk. If you buy individual high yield bonds, you need to be well diversified because you will experience some defaults.

The better way to go is with exchange traded funds (ETFs) that are diversified and managed by professionals who have the resources to do the necessary research. There are two popular high yield ETFs: JNK ( note: high yield bonds are also called junk bonds!) and HYG. Put "JNK" or "HYG" into Google, and you'll come up with a number of sources to do further research on these ETFs.

I recommend that, in total, no more than 10% of investable assets be invested in this particular sector. It makes a good diversification for the bond portion of your assets.

The yield on JNK is 12%.

Disclosure: Investors should consult a professional or do their own research prior to investing. The information here is intended for educational purposes only.

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