UnThreaded | Threaded | Whole Thread (4) | Ignore Thread Prev | Next
Author: Crosenfield Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35400  
Subject: Re: Junk Bonds, Funds, Diversification Date: 5/30/2002 12:31 PM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 2
," how many issues would it take to be prudently diversified if one were attempting to put together a high-yield portfolio? (as opposed to an investment-grade one, where, presumably the threshold would be lower). "

Agreed.
If I wanted to participate in the debt of emerging markets, surely the way to go is a fund. The alternative is unthinkable.

Here's some numbers you already know, but let's look at them:

T. Rowe Price's high yield fund: 30 day yield 8.98%
Vanguard's high yield fund, 30 day yield 8.68%

T. Rowe Price's "US Bond index fund": 4.99%
Vanguard's total bond fund: 5.68%

We know Vanguard has lower expenses. Clearly T.Rowe Price is digging deeper into "junk" to get the higher yield.
It is not clear to me why there is so much difference in the bond index funds.

We see that for Vanguard, the high yield fund is paying 3% more than the index fund, and for T.Rowe Price, it is paying 4% more.

We accept a non-zero default rate in order to strive for a higher yield. If the default rate is less than the premium in interest, we may be earning a little more by accepting it. To get a 3% default rate, I'd think you must have 33 bonds, and preferably more.
The problem, apart from trading costs, is to find 33 different bonds you think are mis-rated. You will get each one by observing what the stock is doing, calling the company for a 10K and an annual report, etc. Then you hope to hold the bond for several years. To repeat this process more than 30 times....yuck! Let the fund manager do it, IMHO.
If I buy a bond issued by General Electric or IBM, I think I know what problems the industry is facing and can be in my own mind quite confident that the company will be around when the bond matures. My portfolio of investment grade issues has been built up over more than a decade; I own stock in most of the issuers of bonds I hold, so in that way can keep some tabs on the companies without making a lot of phone calls. In 1993 most of the bonds I then owned got called, and it looks like this year will be another dose of the same. What was once a portfolio I thought was adequately diversified is now...er, 6 corporates? Finding appropriate substitutes is tough. Last time I switched from corporates to municipals; this time I started out getting preferreds, but now have pretty much thrown up my hands even at those. What remains is go for a junk fund, just buy stock, or take the cue from Charlie and look at emerging market bond funds....and then there's the folks who would like to sell me oil-drilling partnerships...
It isn't gonna be easy being retired! If you can survive the low interest rates and the bonds getting called, then there will come inflation again rearing an ugly head.
Best wishes, Chris
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Print the post  
UnThreaded | Threaded | Whole Thread (4) | Ignore Thread Prev | Next

Announcements

Foolanthropy 2014!
By working with young, first-time moms, Nurse-Family Partnership is able to truly change lives – for generations to come.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Post of the Day:
Macro Economics

Economic Implications of Cuba
What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
Community Home
Speak Your Mind, Start Your Blog, Rate Your Stocks

Community Team Fools - who are those TMF's?
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and "#1 Media Company to Work For" (BusinessInsider 2011)! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.
Advertisement