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Garbage Collectors

Junk bonds shed their dirty reputation.

So far, 1997 has been anything but a picnic for investors, unless you're rooting for the ants. Volatility in the stock and bond markets and unpredictable interest rate moves have made investing a party you might not want to be invited to. But if every cloud has a silver lining, every investment strategy has a secret weapon, and this one can be found at the bottom of the barrel--junk bonds.

Don't flip that page: Junk bonds have come a long way, baby. The last many investors heard about junk bonds or, as they're called in polite society, high-yield corporate bonds, might have been in connection with leveraged buyouts, corporate raiders, Drexel Burnham Lambert, the predator's ball and the infamous Michael Milken. The late 1980s and early 1990s saw the unraveling of the high-yield corporate bond market due to aggressive issuing of debt from the lowest ranks of corporate society. While millions of dollars were lost on those highly speculative issues, these bonds look as different now as Milken does without his toupee.

High-yield bonds are still subject to greater risk of loss of principal and interest than higher quality bonds; many investors avoid these securities, fearing default and spurred on by advice to put all their money in stocks. However, recent stock market ups and downs may warrant another look into the idea of diversification as the best investment policy. Diversification isn't just a mix of different investments but a combination of instruments that don't all move the same way when the market winds blow. History shows that junk bonds offer high returns relative to both stocks and bonds and, in a stock market correction, often perform better than equities. Investors in search of instruments of diversification would be well-advised to look into possibilities offered by high-yield securities.

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This article was originally published in the August 1997 print edition of Entrepreneur with the headline: Garbage Collectors.

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