No. of Recommendations: 3
Howard,

This is a summary of the buying I’ve done from Jan 08, 2009 through yesterday (Feb17, 2012), or roughly 3.11 years. In all, I added 237 positions ($542,000 face) at a cost of $378,638, at an average price of 69.559. That might seem like a lot of buying. But it averages out to only six new positions per month, which is hardly a demanding research pace. (On a monthly basis, the average person goes into a grocery store more often than I’m going in to the bond market.)

As I’ve said on many occasions, I don’t restrict my buying to invest-grade or to spec-grade. I’ll buy whatever I can access. Generally, that means Treasuries, Agencies, Munis, Corporates, and Foreign Sovereigns, but not Preferreds, MLPs, or trash like MBSs. Heck, I’ll even buy CDs (which are merely zero-coupon bonds) when they’re attractively priced. I’ve got to nothing against preferreds. It’s just not water I fish for already having plenty of other opportunities to keep me busy, which is the same reason I don’t do stocks, options, funds, etc.

My preferred weighting between invest-grade and spec-grade is about 60/40. But what one wants, and what one can have, aren’t often the same thing, and my current weighting (across the whole portfolio, not just the past three years of buying) is probably closer to 50/50, because creditworthiness bets (rather than interest-rate bets) have been what’s been available unless one wanted to something truly risky and stupid, like buy bonds offering less than a real-rate of return.

Factoring out the spec-grade portion of my recent buying (aka, anything rated by any of the three rating agencies as less than Baa3/BBB-, or is unrated but obviously would be junk) suggests that my CY from junk is a very modest 7.9%, and the YTM would be a more respectable 11.0%. So, clearly, you’re doing better than me by buying more selectively. (Among my junk holdings, I’ve got munis as well as corporates.)

For the invest-grade portion of my recent buying, the CY is a very modest 5.5% (because I’m holding a lot of zeros). But the YTM is a respectable 8.3%. So that’s the tradeoff I’m making. I’m buying enough of the invest-grade stuff to dampen the risks of the spec-grade stuff. But between the two, I’m achieving a positive return (after taxes are paid and inflation is subtracted), which has always been my investment objective, true preservation of purchasing-power against the time when I might need to spend some of those assets.

My current projections are that my investment net-worth will increase each year until I’m 119. At that point, I might have to increase my risk-seeking, or I could just choose to begin spending down the portfolio. A more likely scenario, of course, is that I’ll be dead long before then, which is why I intend to train my daughter to manage a junk bond portfolio. One of these days, she’s going to come into several hundred bond positions that she’ll need to know what to do with. And she needs to begin her learning now while she still has the time to make her mistakes. But like me when I was young, like all of us as we aged but kept putting off building assets for retirement, she's not rushing toward taking on the project. In time, it will happen, even if I have to fly her out to the West coast and sit her down next to me in front of a screen for a week or two while I teach her the game. But my preference would be to do the lessons one at a time, over the course of a full investment cycle, so that she'd have the time and opportunity to truly make it her own path.

Charlie
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