Should Retirees Consider High-Yield Bonds?

High-yield bonds are a potential option for a retiree’s portfolio.

They have the potential to generate solid income.

It’s also important to note, however, that high-yield bonds doesn’t come with risks.

High-yield bonds are also referred to as junk bonds.

That’s because they’re rated below investment grade, or “junk” in Wall Street jargon.

A bond receives a below-investment-grade rating because the company that issued the bond is believed to have a higher chance of defaulting on its obligation to make timely interest and principal payments, thus resulting in more risk.

But even if the company doesn’t default, the prices of high-yield bonds can be volatile because the fact that a default could occur affects the price that investors are willing to pay for such bonds.

So how do you determine if high-yield bonds are suitable for you?

You need to look at more than the income potential.

Since it’s the combination of the income generated by the bond and any changes in the market value of the bond that determines the true return on your investment, you should consider “total return,”, a figure that combines both of these important factors.

If you look at the total return figure, you’ll soon see that in 2008, high-yield bonds took quite the pummeling.

The Credit Suisse High Yield Index lost 26.2% that year.

However, the index returned 37.43% between the beginning of 2009 and Aug. 31.

These swings show that high-yield bonds can fluctuate significantly.

In general, high-yield bonds can play a part in the portfolios of suitable retirees who understand what they’re getting into – but it should probably be a minor part.