We all love a good old fashioned “do it yourself” project. Whether it is repurposing an old item for a new use or getting a vintage score at your neighborhood thrift store, there is a sense of satisfaction in revitalizing worth.
In the financial market, approximately 15–20% of the overall corporate bond market are junk bonds. Junk bonds go by several names, including speculative-grade and high-yield. These bonds pay high-interest rates because of their lower credit ratings than their investment-grade counterparts. Corporations and governments issuing junk bonds are either up and coming and trying to improve their credit rating or have experienced financial struggles and are working on rebuilding. In both instances, these high-yield bonds are issued by organizations with an increased risk of defaulting (not paying their interest payments, or not repaying principal to their investors).
So why would you want to take a chance of turning a junk bond into a lucrative venture? The main reason is in the name: high-yields. Junk bonds have the potential of considerable price increases tied to the company’s financial situation. If you invest in a company that sees improvements in the finances, then you will see bigger payoffs on your end than if you had gone with a lower-risk investment. The bottom line is high yield bonds often end up with higher returns. Another “pro” of being a part of the junk bond market is high-yield bonds traditionally serve as a risk indicator for when investors are taking or avoiding risks in the market. For example, an active high yield market may warn that investors are becoming too comfortable with risk, which can signal a market slump.
A significant disadvantage in entering the junk bond market is the possibility of default risk. The primary way to protect against this risk is diversification. However, diversifying in this sector can increase fees and limit approaches with which investors may take.
With the bond market’s benefits and disadvantages, we know that a personalized look at your portfolio is necessary for success. A financial professional will be able to see if your long-term financial goals align with the opportunity of investing in the junk bond market. If you find that this sector of investing is a good fit for your goals, an advisor can assist you in making a plan to develop the benefits of this market and help lessen the disadvantages. You can soon be a DIY expert and know exactly how to turn this “junk” into wealth.
· The junk bond market can be an indicator of market downturns
· A financial advisor can help you decide if this portion of the investment market is a good fit for your long-term financial goals
Justin Martin is a Senior Wealth Advisor for Legacy Wealth Management, with his office based in the Salt Lake City area. Justin works with small business owners and doctors throughout the United States and is passionate about helping individuals prepare for a robust financial future. Justin completed his Master of Business Administration (MBA) at Texas A&M University and completed his undergraduate studies at Brigham Young University. Justin is FINRA series 65 licensed, has been working as a Wealth Advisor since 2006, and is currently a board member with the International Association of Registered Financial Consultants. He also works as an adjunct professor of microeconomics and loves studying financial systems. Justin and his wife Megan have four kids and love all things active and musical.
This document is provided for educational purposes only. All investment strategies have the potential for profit or loss. No investment strategy can guarantee positive returns. The information contained in this document should neither be construed as a provision of personalized investment advice nor as a guarantee that a certain level of results will be achieved. Under no circumstances should this information be construed as an offer to sell or a solicitation of an offer to buy any particular service or product.