How to Reduce Risk in High-Yield Bonds
High-yield bond investors require a tolerance for risk, along with the patience to weather periodic market downturns or unexpected events that negatively impact individual issues. In addition to risk tolerance, you need access to information or professional guidance in selecting and monitoring specific issues. Some techniques for reducing the special risks of this market are to:
Diversify across issuers and industry segments You should not put all your assets in one high-yield bond. Spreading money among several issuers and industries can help reduce the risk of price declines or defaults caused by industry-specific situations/circumstances.
Adjust portfolios over economic and market cycles One of the best times to own high-yield bonds is during the expansion phase of an economic cycle, when financial measures are increasing along with consumer confidence. The worst time is during a recession, when financial measures deteriorate and investors become increasingly anxious about holding higher risk securities.
Monitor rating agencies Follow the publications of the rating agencies, which may indicate advance warnings of market difficulties. Prior to downgrading the rating of an issuer, agencies often place the company on a â€ścreditwatchâ€ť list.
Monitor company and industry news You should follow an industry or an issuer closelyâ€”just as you would follow equitiesâ€”to help anticipate factors that may impact the credit rating or the price of a bond.