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...ever, diversification is the key. Only the wealthiest and most sophisticated investors should dabble in individual junk-bond issues. The risk of any single company's failing is too great. But a diverse portfolio--easily obtained through junk-bond mutual funds--brings the investment risk way down and makes junk bonds suitable for most investors...

Author: /time Magazine | Title: Bad Times, Good Junk | 12/24/2001 | See Source »

Since 1985 junk-bond funds have returned an average annual 6.3%, according to fund tracker Morningstar. That's nowhere near the 14% from stocks in the same period. But it's unlikely that stocks will keep up such a torrid pace. Their long-run return is about 10% a year, and even that mark may be hard to achieve for a while. Yes, stocks have fallen sharply and are cheaper. But their recovery will be hampered because they remain expensive relative to earnings, dividends and book value...

Author: /time Magazine | Title: Bad Times, Good Junk | 12/24/2001 | See Source »

...Junk bonds, on the other hand, have rarely been so cheap. They carry an average yield of about 12.25%, vs. about 5% for the benchmark 10-year Treasury bond. The difference between those yields, known as the spread, represents a hefty premium of 7.25 percentage points. The long-run average spread of junk over T-bonds is just...

Author: /time Magazine | Title: Bad Times, Good Junk | 12/24/2001 | See Source »

...reason for the higher spread is that we're in a recession and junk-bond default rates have been rising well beyond the average 3.5% a year. Nearly 1 in 10 junk-bond issues has stopped paying interest, and Martin Fridson, chief high-yield strategist at Merrill Lynch, predicts the rate will rise further next year--probably narrowly topping the record default rate of 10.3%, in 1991. But that will be the worst of it, he says, and he notes that "the last time we had record default rates, we had record returns...

Author: /time Magazine | Title: Bad Times, Good Junk | 12/24/2001 | See Source »

...with the onset of a recession, the average junk-bond fund fell 10%. Then it surged 37%, 18% and 19% over the next three years. During a slowdown in 1994, junk-bond funds fell 4% but then rallied more than 12% in each of the next three years...

Author: /time Magazine | Title: Bad Times, Good Junk | 12/24/2001 | See Source »

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