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the case for quality bonds

the case for quality bonds

August 16, 2022

I just read an article in which the author suggested that it's important to own high quality bonds right now.  To some degree, I disagree!  I think it's always a good time to own high quality bonds - especially if we're purchasing individual bonds.  You might ask why someone might purchase a low-quality bond and the answer is the risk/return tradeoff.  The higher the risk an investor takes, the higher the return one should expect.  Of course, if a bond-issuing entity fails, the return could be 0!  There are investors who can handle the risk and fluctuations of lower quality bonds, but I don't think they're for most investors and it's very important to discuss all of the risk associated with them before investing.  

One way to take advantage of lower-quality bonds which pay a higher yield is to purchase a mutual fund that owns a number of them.  If one, or some, or the bonds held inside the fund perform poorly, the impact isn't as detrimental because your investment is spread out between a number of bonds.  These types of funds, which hold lower-quality bonds, are usually called high yield bond funds.  

In summary, when it comes to purchasing bonds, as with any investment, be sure to understand what you own and the associated risks.