What's Your Allocation to High Yield Bonds?

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LMK5
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What's Your Allocation to High Yield Bonds?

Post by LMK5 » Thu Dec 23, 2010 1:04 am

My allocation is 8% of my total portfolio. If you don't have an allocation at all, could you share your reasoning?

Larry

Jacobkg
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Post by Jacobkg » Thu Dec 23, 2010 1:10 am

0%

Larry Swedroe's writing on how high-yield is an inefficient investment vehicle does strike me as a reasonable argument for ignoring this sub asset class. Though, it is moot for me because there is no high-yield bond fund in my 401k plan.

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Post by scotts » Thu Dec 23, 2010 1:43 am

Also 0%. Larry Swedroe points out that they have risk more like stocks and writes that if your want the increased risk, just hold more stock. I used to own some Vanguard H/Y but it was volatile and after reading Larry's bond book, I sold all of it.

mikenz
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Post by mikenz » Thu Dec 23, 2010 2:31 am

I had 10% of my bonds in HY, but have simplified my portfolio, so now I have whatever % is in Total Bond, which makes up 50% of my bonds.

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stratton
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Post by stratton » Thu Dec 23, 2010 4:28 am

0.0%
...and then Buffy staked Edward. The end.

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SpringMan
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Post by SpringMan » Thu Dec 23, 2010 4:37 am

6.5% of total or 13% of bond portion (50/50 portfolio) using VWEAX, Vanguard's HY corp fund.
Best Wishes, SpringMan

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Post by JohnP » Thu Dec 23, 2010 7:00 am

Retired 8 years. Pensions cover all expenses.

12% of total portfolio in H-Y T-E fund VWALX (in taxable acct) and 4% in H-Y Corp VWEAX (in IRA). No other bonds.

JohnP

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Post by Beantown85 » Thu Dec 23, 2010 7:22 am

0%.
-Don't have a good 401k option
-I prefer my bonds to be safe. Take risks on the equity "side"

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nisiprius
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Post by nisiprius » Thu Dec 23, 2010 7:29 am

Zero. I just don't see any point to them whatsoever. They're neither fish, flesh, fowl nor good red herring.

If nothing else, by avoiding them I avoid the problem of deciding how to classify them! Anyone who includes non-investment-grade bonds in their bond allocation is definitely misleading themselves, as their characteristics and behavior are very different (and significantly riskier) than those of investment-grade bonds. Plot a growth chart for VWEHX together with those for investment-grade bonds and you will quickly see that "one of these things is not like the others, one of these things doesn't belong."

When I buy a bond, I am buying a contractual promise to do a certain, specific thing. I can imagine doing that in ordinary life.

When I buy a stock, I'm agreeing to become a business partner and ride along with whatever happens, good or bad. I can imagine doing that in ordinary life.

I just don't understand why I would want to accept a IOU from someone I know to be untrustworthy, when there's no upside to it at all. He's never going to pay me back more than the IOU says. I understand that there are undoubtedly clever people who can make money by buying sketchy IOUs at a discount. It just seems like a rather specialized and sophisticated thing to, nothing for amateurs and nothing I would ever do myself.
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Taylor Larimore
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High Yield (Junk) Bonds?

Post by Taylor Larimore » Thu Dec 23, 2010 7:53 am

LMK5 wrote:My allocation is 8% of my total portfolio. If you don't have an allocation at all, could you share your reasoning?

Larry
Hi Larry:

Bonds are primarily for safety. In 2008 Vanguard's Hi-Yield (Junk) Bond Fund fell -21%. Meanwhile Total Bond Market Index Fund gained +5%.

It is no fun watching your entire portfolio go down day after day--and not knowing when, or if, it will stop.

Hi Yield "bonds" often act more like tax-inefficient stocks but without the upside potential. They also add unnecessary complexity. I avoid them.
"Simplicity is the master key to financial success." -- Jack Bogle

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anthau
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Post by anthau » Thu Dec 23, 2010 8:01 am

5%, though I consider it to be part of my equity allocation, not fixed income.
mikenz wrote:I had 10% of my bonds in HY, but have simplified my portfolio, so now I have whatever % is in Total Bond, which makes up 50% of my bonds.
Not being critical (just FYI), but I'm fairly sure that there's 0% junk in Total Bond.
Best, | | Anth

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Post by Clumsum » Thu Dec 23, 2010 8:05 am

0%. I get my ups and downs with stocks. Bonds are for safety (I hope).

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TrustNoOne
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Post by TrustNoOne » Thu Dec 23, 2010 8:15 am

0%. I consider Junk Bonds as "Stocks Lite".

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Post by DaleMaley » Thu Dec 23, 2010 8:42 am

0%

I'm 50% Total Bond fund and 50% TIPS.

I agree with Taylor's rationale.
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Kenkat
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Post by Kenkat » Thu Dec 23, 2010 8:51 am

4%; 13% of my 30% bond allocation.

I personally don't buy into the "junk bonds are bad" line of thinking. I don't get how you can feel that the market is efficient and yet at the same time feel that certain asset classes are "bad".

And as far as the "bonds should be safe" argument, you can adjust your asset allocation such that you get the desired level of risk exposure.

Just my (minority) opinion!

Ken

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Post by Bob's not my name » Thu Dec 23, 2010 8:55 am

anthau wrote:I'm fairly sure that there's 0% junk in Total Bond.
Vanguard's High Yield Fund is 90% < Baa. Here is the <Baa content of other Vanguard funds:

TBM 0%
ST Investment Grade 2%
Intermediate Term Bond Index 0%
Wellington and Wellesley 0.2%

I have to admit to making a market timing bet on High Yield in late spring 2009. It was well within play money bounds and I dumped it after one year, happy with the 20% return but glad to be rid of it because the shame was too great. I've been clean for six months now.
Last edited by Bob's not my name on Thu Dec 23, 2010 9:02 am, edited 1 time in total.

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Post by matt » Thu Dec 23, 2010 8:56 am

85% of total portfolio in non-investment grade debt/preferred stock.

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Post by bikeguyken » Thu Dec 23, 2010 9:03 am

Might be a Ken thing--I have 10% of my bond allocation in Vanguard High Yield. I slide my equity allocation down a tad to account for its equity type risk.

Merry Christmas,
Ken

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Post by jeffyscott » Thu Dec 23, 2010 9:18 am

nisiprius wrote:It just seems like a rather specialized and sophisticated thing to, nothing for amateurs and nothing I would ever do myself.
I'd not do this myself either, which is why I have hired mutual fund managers to handle it.


My reason for owning them is to make money. According to M*, over the last 10 years, my high yield fund has turned $10,000 into $22,200 (8.32% return). I have increased and decreased allocation during that time, depending on the yields being offered.

I have only 2.24% in a high yield fund, but also have a couple "multisector" bond funds and some other funds that hold a bit, including those raises my allocation to to probably about 6% right now. (To simplify things, I am in the process of gradually turning the HY allocation decision over to my multisector bond fund managers.)
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englishgirl
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Post by englishgirl » Thu Dec 23, 2010 9:38 am

0%

I used to have an allocation to high yield bonds, REIT and small cap. I decided that I didn't have the stomach for high yield bonds or REIT (nor did I really understand them well enough) - I sat through too many years of high yield bonds doing nothing, and REITs gyrating up and down wildly. So I decided to simplify, and got rid of all three funds. Of course, I dumped high yield bonds right before they took off and made lots of money for everyone still holding them, but that just goes to show that I have absolutely no market timing ability and should stick to plain vanilla index funds!
Sarah

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kcyahoo
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Post by kcyahoo » Thu Dec 23, 2010 10:03 am

30% Stocks/ 70% Bonds/Cash
HiYld - 5.5% of Total, 7.9% of Bonds.
Retired @ 57, now 75 | was 50/45/5, then 42/54/04, now 35/60/5 | KC

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magellan
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Post by magellan » Thu Dec 23, 2010 10:34 am

I just hold Total Bond Market , although I'm sympathetic to the argument that High Yield is its own asset class and should be considered in a diversified portfolio. I'm very slow to change my AA and the last few years haven't seemed like a good time for a change, otherwise I may have added high yield by now.

The truth is, I don't subscribe at all to the thinking that bonds are for safety. As a famous and respected Boglehead often says, you can't consider an asset class in isolation - What matters is the riskiness of the overall portfolio, not the volatility of individual asset classes.

Despite rather anemic stock returns over the past decade, investor psychology has kept stock PE's at rather high levels. Historically, investor preference between holding equity and holding debt has ebbed and flowed and it seems reasonable that market PE's could revert to their mean. One way for that to happen would be if investors slowly decide (for whatever reason) that they'd prefer be lenders than owners.

That's not a prediction, only an observation that credit risk is not the same as equity risk. The fact that they've been correlated for long periods in the past doesn't mean they'll stay correlated. Fundamentally, stocks and bonds are completely different animals.

Jim

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Post by magneto » Thu Dec 23, 2010 11:05 am

5% in high yield bonds.

Found to be too correlated with stocks in recent past.

Is the long term relationship similar?

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Post by rwwoods » Thu Dec 23, 2010 11:07 am

Rick Ferri thinks junk bonds are acceptable. I am retired and have 8% in junk.
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Post by Wagnerjb » Thu Dec 23, 2010 11:09 am

0% high yield bonds

Like Dale, I am 50% TIPs and 50% regular bonds. Due to the limitations of my various accounts, the 50% regular bonds are in several different funds. About half is in the Short Term Treasury fund in IRAs (short-term and safe). Another portion is in Total Bond Market in a 529 account. I also have assets in the stable value fund (short-term and relatively safe) in my 401k. Finally, I have some in a taxable account in the Ltd Term Muni fund (relatively short-term and tax efficient).

Taylor explained the logic behind 0% in high yield very well.

Best wishes.
Andy

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Rick Ferri
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Post by Rick Ferri » Thu Dec 23, 2010 11:56 am

HY is 20% of my broadly diversified bond portfolio. I don't judge their 'worthiness' like Larry does, and I wouldn't exclude HY from a bond portfolio because they have more risk than T-notes any more than I would exclude electric utility stocks from a stock portfolio because they have less risk than the rest of the stock market.

Rick Ferri

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Post by Sam I Am » Thu Dec 23, 2010 12:11 pm

Message deleted.
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Post by steve roy » Thu Dec 23, 2010 12:29 pm

60% bonds, 40% equities.

I have a large slug of Vanguard TIPS, most of the rest is Vanguard Short Term Federal. Just yesterday I bought a chunk of AAA California General Obligation Tax Exempts paying 5.82%. (30 year bonds, callable after six.)

I've been in accumulation mode for a long time. Now that I am slipping into the Final Glide Path toward retirement, I will probably branch out into High Yields and longer durations, while keeping the majority of bond holdings in Vanguard Short Term bonds and Vanguard TIPS.

In other words, everything is still evolving. I know where I want to go, just haven't decided which goat path to use to get there.

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Post by dumbmoney » Thu Dec 23, 2010 1:00 pm

If junk were added to the Barclays Aggregate bond index, what % would it be?
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Post by abuss368 » Thu Dec 23, 2010 1:12 pm

Bonds are for safety.

We have 0% in High Yield Bonds.

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Rick Ferri
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Post by Rick Ferri » Thu Dec 23, 2010 1:51 pm

abuss368 wrote:Bonds are for safety.


Since bonds are for safety, you're 100% convinced there can be no such thing as a bond bubble, correct? You 'know' bonds, afterall, and they are always safe, correct?

Well, good luck with that. Memories from the late 1970s tell me bonds can be more risky than stocks at times. So, this idea to have less bond diversification creates a safer bond portfolio makes no sense at all.

Rick Ferri

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nisiprius
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Post by nisiprius » Thu Dec 23, 2010 2:23 pm

Rick Ferri wrote:Memories from the late 1970s tell me bonds can be more risky than stocks at times.
Not a rhetorical question: how did high yield bonds do in the late 1970s?
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Post by pteam » Thu Dec 23, 2010 2:47 pm

Are any of you counting emerging market bonds as high yield? EMBs often do not go down in nav value while paying yeilds and aren't "junk" like high yeild corporates.

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Post by tetractys » Thu Dec 23, 2010 2:53 pm

0% high yield.

I have yet to see convincing evidence of any benefit of high yield bonds to a long term buy and hold portfolio. If there is any it must be negligible at best, and therefore not worth the bother. -- Tet
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Post by Bob's not my name » Thu Dec 23, 2010 3:53 pm

nisiprius wrote:
Rick Ferri wrote:Memories from the late 1970s tell me bonds can be more risky than stocks at times.
Not a rhetorical question: how did high yield bonds do in the late 1970s?
Not really answerable, I think:
wiki wrote:Historically, most high-yield bonds were originally investment-grade bonds that were downgraded to junk status. The 1980's saw the widespread use of mezzanine financing in leveraged buy-outs and a dramatic expansion of the size of the junk market from $2.6B in 1977 to $227.8B in 1989 (Handbook of Fixed Income Securities, 1991).

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Post by likegarden » Thu Dec 23, 2010 4:18 pm

I try to simplify my portfolio. Years ago I sold my Vanguard high yield bond fund which I counted equivalent to equity funds in my Asset Allocation per Larry Swedroe. I replaced it with an equity index fund.

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Post by matt » Thu Dec 23, 2010 4:46 pm

nisiprius wrote:
Rick Ferri wrote:Memories from the late 1970s tell me bonds can be more risky than stocks at times.
Not a rhetorical question: how did high yield bonds do in the late 1970s?
I don't think any high yield bond indexes existed at the time. However, Moody's produces this splendid document each year detailing corporate bond defaults. http://www.moodys.com/cust/content/Cont ... _02_10.pdf

You can see on page 43 that from 1971-1981, the speculative grade default rate never exceeded 2%. So while interest rate risk was unfavorable, credit risk was well rewarded. It won't necessarily play out so well the next time inflation shows up, but high yield was okay in the 1970's.

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Post by Martinizer » Thu Dec 23, 2010 4:47 pm

Between 0% and 20% of my fixed income....depending on spreads. In the last 10 years, I've been at 0% when the spreads were unusually low. At the end of 2008, I was at the max 20%. I'm at 16% today.

I wouldn't bother with this asset class if I couldn't keep this portion in tax-sheltered accounts.

I also vary my TIPs (as a function of real yield). Remainder of my fixed income is split between short-term corporates (VFSTX), short-term bond index, and CD specials from my local bank.

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Post by DaleMaley » Thu Dec 23, 2010 4:58 pm

Here is an old posting I made in 2008 which compared the Swedroe versus Ferri approach to asset allocation....including the difference on high yield bonds:
I recently finished reading Larry Swedroe’s new book The Only Guide to a Winning Bond Strategy. I also just read Rick Ferri’s new book The ETF Book. Both books were excellent.

Swedroe’s book had a couple of surprises for me when I read it. The first surprise is that he does not recommend Vanguard’s Total Bond Fund (VBMFX) because it holds 33% mortgage backed securities (MBS). My understanding is that VBMFX mirrors the Lehman Brothers Bond Index, so Larry must be saying the Lehman Brothers Bond Index itself is flawed……because I assume the index has 33% MBS also. Maybe this a wrong assumption on my part.

I already knew that Larry is a fan of the commodities asset class, and Rick is not. From Larry’s book, I found out he is also not a fan of high yield (junk) bonds and emerging market bonds.

I thought it might be interesting to contrast and compare the differences between Larry’s and Rick’s recommended asset classes for asset allocation. Based upon reading their books and their postings to the Bogleheads, I constructed the chart below. My approach was to list the asset classes and Vanguard funds that Larry and Rick agree and disagree with. I used Vanguard funds because most people do not have access to DFA funds. I also used traditional mutual funds because I do not have all the ETF’s memorized yet. From what I can determine, Larry and Rick disagree on 4 asset classes or funds which are highlighted in yellow below:

Image

Of course the percentage allocations to each asset class vary depending on risk tolerance and whether you want simplicity or a complex slice-n-dice approach.

I really enjoy Larry’s saying in his book……and on the Boglehead’s web site…..
Do Not Take More Risk Than You Have the Ability, Willingness, or Need to Take.

I have found this saying to be very useful when trying to determine the stock to bond ratio of my own portfolio.
Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. – Warren Buffett

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Post by gkaplan » Thu Dec 23, 2010 5:17 pm

Zero
Gordon

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Post by chaz » Thu Dec 23, 2010 6:21 pm

gkaplan wrote:Zero
Me too.
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Post by Dadarkar » Thu Dec 23, 2010 6:30 pm

Zero.

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Post by detifoss » Thu Dec 23, 2010 6:35 pm

0%

more money has been lost chasing yield than at the point of a gun.

1.) The credit risk is not rewarded with enough premium.
2.) They mix very poorly with a high (75%) equity portfolio - they typically are strongly correlated with equities.
3.) Location problems - they are equity like bonds - bad for both taxable and tax deferred investing relative to other options.
4.) I take my risk on the equity side, where my risk is rewarded and my upside is unlimited.

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Post by matt » Thu Dec 23, 2010 6:45 pm

Why is it that almost everyone here takes the view that High Yield Bonds can only replace investment-grade bonds in a portfolio? Have you considered the possibility that they might replace equities instead?

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Post by detifoss » Thu Dec 23, 2010 6:46 pm

Rick Ferri wrote:
abuss368 wrote:Bonds are for safety.


Since bonds are for safety, you're 100% convinced there can be no such thing as a bond bubble, correct? You 'know' bonds, afterall, and they are always safe, correct?

Well, good luck with that. Memories from the late 1970s tell me bonds can be more risky than stocks at times. So, this idea to have less bond diversification creates a safer bond portfolio makes no sense at all.

Rick Ferri
major risks to bonds:
credit (downgrade/default)
inflation
real interest rate risk
term risk is embodied in both infation and real interest rate risks

TIPS - subject only to real interest rate risk
UST nominals: subject to both inflation and real interest rate risks
Corporates nominals: Subject to all of the above risks
High yield: highest exposure to credit risk, same real interest rate and inflation risks

if the argument is that the credit risk in high yield is being overstated, or that the credit risk (if there is any) in US Sovereigns, that's a different issue.

In the long run though, the risks of high yield are under all circumstances much higher than for UST nominals and of course compared to TIPS

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Post by Kemosabi » Thu Dec 23, 2010 6:48 pm

10% of my bonds, 3.5% of total.

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Post by beyou » Thu Dec 23, 2010 6:58 pm

mikenz wrote:I had 10% of my bonds in HY, but have simplified my portfolio, so now I have whatever % is in Total Bond, which makes up 50% of my bonds.
Total Bond on VG.com :

"This fund is designed to provide broad
exposure to U.S. investment grade bonds."

HY is non-investment grade or sub-investment grade.
You will find them in total bond only after an investment grade issuer
is downgraded to non-investment grade, but at the end of the month
this issuer will be sold/dropped from the index.

Note that HY bonds are very volatile.
If you are young and mainly investing in equities, might want to put HY in an IRA, but most 401Ks will not allow this. Do not put them into a taxable acct. Less upside than stocks, and very tax inefficient.

Personally I have never seen why people want to buy these bonds except institutional investors who can heavily research each issuer and find those that are "undervalued" for their tax exempt clients. This does not lend itself to indexing at all, as the selection of each issuer is crucial for HY bonds. This is an actively managed fund at VG and almost any fund complex would actively manage these.

I have only bought during times of panic in the market, such as late 2008
and then sold a year or so later after earning 40-60% return. This is a feat rarely repeated. I did consider it part of my EQUITY, not my FI, and I would treat as part of my more volatile small cap (ie riskier firms with lower survival probability).

I have a bit left, only for an unusual situation few will share.
Employer deferred comp plan actually let us pick a high yield/emerging markets fund to hold our deferred comp (amongst other more common choices). Picked this both due to the market rout in 2008, due to fax this is tax deferred income, and because dividends in deferred comp plans is immediately vested (principal is not). I'll take those high dividends now thank you. I treat deferred comp as found money since you lose it if you leave or are asked to leave :evil:
Recovered day trader.

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Post by Zander » Thu Dec 23, 2010 7:24 pm

Zero. Zip. Zilch. Nada.

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Post by MWCA » Thu Dec 23, 2010 7:47 pm

What do emerging market bonds qualify as? Junk? :?:
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Post by joe8d » Thu Dec 23, 2010 8:28 pm

1% of total portfolio.
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