How To Invest In High Yield Bonds?

Answer 1

High yield bonds can entice investors with their juicy yields. But those yields come with risk. If you just go chasing after the highest yields there's a good chance you could find yourself experiencing some violent price swings. There's no questioning the fact that you really need to do your homework before jumping into high yield bonds.

Bonds that carry high yields do so because their financial prospects are poor and they need to pay up in order to get people to invest. Bonds with a poor backing can go south in a hurry though and the owner of such a bond can occasionally find themselves on the receiving end of a total loss.

But high yield bonds also have the potentially lowering the risk of your portfolio through diversification while at the same time increasing your returns. So you want to do it the right way. If you're looking to take the plunge there are a few routes you can take.

Your best bet for investing in high yield bonds will be leaving it to the professionals. Mutual funds give you diversification, professional management and a low cost entry into investing in high yield bonds. Most major mutual fund companies offer high yield bond funds and companies like Vanguard offer funds at a rock bottom expense ratio. That means more money in your pocket.

Another option is to invest using exchange traded funds. ETFs work similarly to how mutual funds work except that they're traded like stocks. ETFs usually offer an additional cost savings over mutual funds and they offer some additional flexibility by being available to trade throughout the day.

If you're really feeling like a gambler or you have a few specific issues you want to target, you can take a shot buying individual bonds. Individual bonds tend to carry higher costs to invest and may require a greater initial investment. Plus, you're placing all of your eggs in one basket.

High yield bonds can be lucrative but take care to invest wisely.