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Author: howardgt One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35363  
Subject: Re: What is Your "C" List (C - Caa1) ? Date: 4/16/2011 3:52 AM
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Charlie,

I’d suggest that interest-rate risk is a tiny worry that is easily bypassed by holding to maturity.

I do not think this is completely correct. Holding to maturity preserves your principal, but you still suffer loss of potential increase in interest income. In a rising interest rate environment, the earlier you are able to roll over a maturing bond at the prevailing higher rate, the more interest income you will accrue.

There is an “opportunity cost” to holding longer duration bonds in a rising rate environment.

junk can be such a good investment, because it can provide a real rate of return after taxes and inflation, whereas the supposedly “safe” stuff never does

I agree, but I would also add that junk is NOT as safe today (with 3% annual default rate) as it was at the bottom of the recession (when default rates were > 20%). With junk selling closer to par today, it’s a long way down to the recovery rate (in the case of a default). But if you can buy at close to 50 cents on the dollar, like you can during recession, the upside potential is much greater than the downside risk. Pretty safe with or without inflation.

But I think junk may be risky now! I know that if a double dip occurs, I will take a big hit… but that’s ok, because happy days will return and I will have cash to keep accumulating. Maybe 2009 prices will return??

Howard
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