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Suppose a person has retired. He would like to construct a bond portfolio that generates stable income for his remaining days. Is it advisable to include junk bonds in the bond portfolio for that extra yield? Are there rules of thumb in the construction of such a bond portfolio in personal finance?

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    There is a reason they are called junk bonds. That isn't investing, it's speculating. – keshlam Sep 23 '15 at 13:00
  • So, should the bond income portfolio strictly contain only risk-free government bonds? – curious Sep 23 '15 at 13:06
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    Risk-free government bonds are appropriate if they provide the necessary rate of return. If they don't, you have to take on additional risk. – Pete Becker Sep 23 '15 at 13:45
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    There is a huge space between government bonds and junk bonds. Pick something at the appropriate level of risk/return tradeoff. It may not be possible to hit the balance point you want with nothing but bonds. – keshlam Sep 23 '15 at 13:56
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    No, he means there are other bonds with lower return than junk, but with lower risk (and higher return and higher risk than government bonds). For example. A+ rated corporate bonds. – Peter K. Sep 23 '15 at 14:40
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Corporate bonds have gotten very complicated in the last 20 years to the point where individual investors are at significant disadvantages when lending money. Subordinated debentures, covenants, long maturities with short call features, opaque credit analysis, etc. Interest rates are so low now that investors (individual & professionals) are forced further out the risk & maturity spectrum for yield. It's a very crowded and busy street.....stay out of the traffic. Really you are better off owning a low cost bond fund that emulates the Barclays Corp/Gov index, or similar. That said, junk bonds may be useful to you if you can tolerate losing money when companies default....you've got to look in the mirror. Choose a fund that is diverse, Treasuries, agencies, corps both high and low.....and don't go for the highest yield.

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I let someone else pick and chose which junk bonds to buy and which to sell. So instead of holding individual bonds in my portfolio I hold an ETF that is managed by a man with a PHD and which buys junk bonds.

I get a yearly 15.5% ROI, paid monthly.

Buy and hold and you can get a good return for the rest of your life. It is only speculation when you sell.

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Junk Bonds (aka High Yield bonds) are typically those bonds from issues with credit ratings below BBB-. Not all such companies are big risks. They are just less financially sound than other, higher rated, companies.

If you are not comfortable doing the analysis yourself, you should consider investing in a mutual fund, ETF, or unit trust that invests in high yield bonds. You get access to "better quality" issues because a huge amount of the debt markets goes to the institutional channels, not to the retail markets.

High yield (junk) bonds can make up a part of your portfolio, and are a good source of regular income. As always, you should diversify and not have everything you own in one asset class. There are no real rules of thumb for asset allocation -- it all depends on your risk tolerance, goals, time horizon, and needs. If you don't trust yourself to make wise decisions, consult with a professional whom you trust.

  • Investopedia tells me that 'junk' starts at bonds graded BB. – Jack Swayze Sr Sep 24 '15 at 8:50
  • @JackSwayzeSr thanks for the comment. I updated my answer to avoid the distraction of a possible debate :) – Kent A. Sep 24 '15 at 12:37

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