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Author: crf01 Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75335  
Subject: Is Hi-Yield Bond a mistake? Date: 7/30/2007 3:19 PM
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I have approx. 18% of my 401(k) parked in Vanguard’s “High-Yield Corp Fund.” I started contributing to it 1.5 years ago and now have 22.5 years until I’m 59.5. My reasoning was it offers a high cash flow through dividends which are tax-deferred, and re-investing the dividends over will compound nicely over the time span.

Lately, the NAV has been plummeting and I’m now at an overall Net loss within this fund. However, the yield, as of today, is 8.13%... and seems to moving with the 10-year Treasury bond.

My gut tells me I should just remain calm and not pull the money out, I’ve got 22.5 years to wait and accumulate tax-free dividends, and the yield will probably keep going up.

But, I’ve read other sources that are very negative towards Hi-Yield Bond Funds given the current interest rate climate. It’s argued that as the underlying bonds get devalued due to rising interest rates, Fund share holders get spooked and sell off their individual shares, and forcing the fund to sell holdings at a loss. This causes a “real” loss in NAV that can only be recovered by an increase in the underlying Bond’s value (i.e. - a reduction in interest rates). Further, it’s concluded that the hi-yield is not enough to offset the “real” loss in value.

Please critique my assumptions and offer others angles I’ve missed… whether in my favor, or not.

Thanks a lot.
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